As Covid-19 continues to ravage global economies, there is no doubt foreign direct investment (FDI) will be impacted negatively. The only question is the degree of the decline.

On 9 March, the UN Conference on Trade and Development (Unctad) estimated that global FDI flows would shrink by between 5% and 15% during 2020 and 2021. In just under a month, that estimate had been changed to an alarming 30% to 40%.

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“The outbreak and spread of Covid-19 will cause a dramatic drop in global FDI flows,” says James Zhan, director of investment and enterprise at Unctad.

As a result of the economic uncertainty unleashed by the global pandemic, multinational enterprises (MNEs) are restricting capital expenditures, directly hitting FDI flows. As MNEs will have to contend with lower profits in their foreign affiliates, there will be less profit for reinvesting. Unctad reports that reinvested earnings make up approximately 40% of total FDI inflows within the economies hardest hit by Covid-19, including the US, EU and Australia.

Furthermore, Unctad reports that the top 5,000 MNEs, which are collectively responsible for a substantial proportion of global FDI, have on average suffered downward revisions of 30% for 2020 earnings estimates. Downward revisions of earnings estimates are more serious in developed countries, which are major sources of outbound FDI. Developed country MNE profit guidance has been revised downwards by 35%, compared with 20% in developing economies. Average downward revisions have been particularly strong in the US (projected profits halved) due to the weighting of energy sector MNEs. Downward revisions in Europe have now also exceeded those in Asia.

The pandemic is also affecting different modes of entry for foreign investors, Mr Zhan says. Greenfield investment and expansions as well as cross-border merger and acquisitions (M&As) are being delayed, and in some cases cancelled.

Hardest hit sectors

As the lockdown on people and industries continues, so does the drop in economic activity, creating an uneven impact across sectors. Those hardest hit by downward earnings revisions include the energy and basic materials industries (-208% for energy), airlines (-116%), and the automotive industry (-47%), according to Unctad.

“Other sectors that are hit by the decline in demand will be next,” says Mr Zhan.

With international travel bans imposed, airlines suffered a rapid decline, with drastic downward earnings revisions across the industry. easyJet announced on 30 March that its entire fleet was to be grounded, and Air Canada and British Airways have furloughed many thousands of staff members.

Covid-19 is exposing how crucial tourism is to the world’s economy, with the sector accounting for 10.4% of global GDP ($8.8trn) in 2019, according to the World Travel and Tourism Council (WTTC), and for one out of every five jobs created between 2014 and 2019.

The automotive sector is facing myriad challenges – supply chain restrictions, workforce safety, warehouse shutdowns and a decrease in demand. In Europe and North America during the week ending 6 April, GlobalData estimates that approximately 3.2 million light vehicles have been dropped from production at a cost of $101.8bn in lost revenue.

Automakers are putting emergency procedures in place, with FCA, Toyota, Daimler, Ford and GM turning to capital markets in a bid to secure credit lines worth a combined $55bn to stay afloat.

Another sector that is suffering is construction. GlobalData expects global construction output to contract by 1.4% in 2020.

“Although the construction industry has in some cases been exempt from restrictions on business activity, few major markets will manage to record an increase in construction output in 2020,” a briefing report from GlobalData states. “Despite the huge stimulus packages, sharp cuts in interest rates, and other unprecedented policy measures across all major markets, the construction industry will be heavily affected by the expected widespread disruption to economic activity and a likely drop in investment, with planned projects being delayed or cancelled.”


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GlobalData expects the commercial and industrial sectors to be hit hardest, although the residential sector also will struggle as economic activity weakens and unemployment rises, despite low interest rates and government assistance.

“There is a high risk that a considerable proportion of the early stage projects in these sectors will be cancelled or at least pushed back, with few new projects starting in the second quarter of 2020 as firms review their expansion plans,” the report predicts.

Mirroring the global financial crisis of 2008, commodity prices have dropped and the situation is being aggravated by disagreements on recovery strategy among the main oil producers.

Meanwhile, there are concerns surrounding medical supply chains, with multiple pharmaceutical companies closing manufacturing plants in China. If clinical trials are delayed, licensing deal valuations for biotech companies could drop due to weakened asset and company valuations.

Turning the corner

On a more positive note, GlobalData has reported that although concern over Covid-19 ranks high with businesses, they remain optimistic with regards to their companies’ future growth prospects. Of the 10,906 companies surveyed as of 6 April, 50% said that they were feeling optimistic about their future growth despite Covid-19 concerns, with only 35% leaning towards a more pessimistic position.

A survey conducted between 26 February and 3 March by the China-Britain Business Council (CBBC) further substantiated this. As China’s manufacturing sector slowly begins to recover from the coronavirus crisis, the survey showed that only 3% of exporters are planning to re-evaluate long-term China investment strategies.

“British businesses are keeping their eyes on the horizon while weathering a number of significant impacts from the Covid-19 outbreak,” said CBBC chief executive Matthew Rous.

GlobalData also reports that the Asia-Pacific region is beginning to bounce back. The number of deals – including M&A, private equity, venture financing, partnerships and equity offerings – in the region increased by 56.7% during the week ending 5 April 2020, compared with the previous week. In that week, China saw an increase in deal volume of 52.3%, while the rises in Japan, India and South Korea were 68.6%, 93.3% and 38.9%, respectively.

IPA actions

For government agencies charged with attracting FDI, the crisis has made their tasks infinitely more difficult, and experts are urging an urgent recalibration in their strategies.

“The support and preparedness of investment promotion agencies (IPAs) throughout the crisis and recovery might have a lasting effect on their relations with investors,” says Mr Zhan. “In the past weeks, agencies all over the world have been changing their modus operandi, quickly responding to the fast-changing needs of their clients and reassuring investors that they are there to support them. Many IPAs have had their offices and staff working from home. Client services have moved online, and websites and social media have become the main platforms of communication.”

Unctad monitored IPA responses through a survey of 174 national IPAs websites in the critical period between 23 March and 3 April 2020. Most IPAs (64%) responded rapidly to the pandemic-related challenge, and are quickly catching up and developing innovative means and tools to service their clients, Unctad found. While European IPAs are ahead of the curve, in Africa many IPAs are still struggling to move their services online. In Asia and Pacific regions, there was a contrasted IPA response with examples of best practice and a relatively large number of agencies with an inadequate response. Many IPAs in North, Central and South America and the Caribbean have reacted quickly.

“Actions by IPAs vary widely and there are lessons to be learned,” says Mr Zhan. “IPAs are seeing a significant decrease in the new investor enquiries and lead generation, and some IPAs are struggling to redefine their daily activities online. Increased focus by IPAs on investment facilitation and aftercare requires them to keep abreast of policy developments while at the same time understanding the evolving needs of investors. Some IPAs are starting to plan for the post-pandemic period by reviewing their value propositions and target sectors for investments.”

The policy advocacy role of some IPAs has been reinforced during the pandemic crisis, he says, adding that IPAs and MNEs have been key players in national efforts to source equipment and materials in support of combatting Covid-19.