COVID-19: How the disruption in global supply chains is impacting FDI in developing countries

The COVID-19 pandemic has not only been a health crisis but also an economic one, with supply chains around the world being severely distorted and massive capital flight experienced. This disruption has had a massive impact on foreign direct investment (FDI) flows to developing countries, with a significant decline expected in 2020 and beyond. Richard Bolwijn, Head of Investment Research, Division on Investment & Enterprise at the United Nations Conference on Trade and Development (UNCTAD) shared insights on the impact of the pandemic on FDI during a recent interview on CNBC Africa. Bolwijn highlighted that at the global level, a staggering minus 40 percent decline in global foreign direct investment is expected this year, with developing countries bearing the brunt of the impact. FDI in developing countries tends to be more Global Value Chain (GVC) intensive, particularly in manufacturing industries that have been severely affected by the COVID-19 crisis and supply chain disruptions. Additionally, resource-dependent investments, such as those in oil, have also been negatively impacted by the drop in oil prices, further exacerbating the situation for developing countries. In Africa, the first quarter of 2020 alone witnessed a 70 percent drop in inflows through mergers and acquisitions and a 25 percent decline in new greenfield investments. The ongoing trend of declining FDI inflows in Africa, which experienced a 10 percent drop last year, has been further worsened by the current crisis. The expected 40 percent decline in FDI for 2020 is likely to persist into 2021, with an additional 5 to 10 percent drop anticipated for next year. Bolwijn emphasized that FDI reacts to recessions with a delay, and as the world enters a global economic recession as a result of the pandemic, the outlook for FDI remains bleak. While some sectors may see a V-shaped recovery, FDI is more likely to experience a U-shaped recovery, with a return to pre-pandemic levels not expected until 2022. The pandemic has also raised concerns about the future of global trade and the sustainability of the current multilateral trade system. Economic nationalism, protectionism, and other existing trends have been amplified by the crisis, prompting countries to reconsider the structure of their supply chains. Bolwijn highlighted the need for investment authorities and promotion agencies to adapt to these changing dynamics and consider new scenarios for international production. While some manufacturing activities may be reshored to countries like the United States and Europe, there are also opportunities for diversification of supply chains to enhance resilience. The digital economy and higher-tech sectors are expected to continue growing, presenting new investment opportunities that require different approaches to attract capital. As the world navigates through the economic challenges posed by the pandemic, the future of FDI in developing countries remains uncertain. While the current outlook appears grim, proactive measures and strategic investments in key sectors could help mitigate the impact and pave the way for a more resilient and sustainable recovery.