FDI in infrastructure and productive assets declines in developing countries

Lack of investment could hinder their recovery from the Covid-19 pandemic, new UN report says

Investment in infrastructure and productive assets declines in developing countries amid Covid-19 pandemic, according to a new report from the United Nations. Bloomberg

Foreign direct investment in infrastructure and productive assets fell "significantly" in developing countries last year, hindering their recovery prospects from the coronavirus pandemic, according to a new report by the United Nations.

However, overall FDI flows to developing economies remained relatively resilient and fell 12 per cent in 2020 compared with a 69 per cent decline recorded by richer economies.

“These investment types are crucial for productive capacity and infrastructure development and thus for sustainable recovery prospects,” James Zhan, director of investment and enterprise development at the Geneva-based United Nations Conference on Trade and Development, said.

Productive capacities include entrepreneurial capabilities and production linkages, which determine the capacity of a country to produce goods and services to help it to grow and develop.

“Without investment in the productive sectors of the economy, developing countries will struggle to rebuild from the effects of the pandemic,” Mr Zhan added.

The Covid-19 pandemic, which upended global trade and disrupted the travel and tourism sector, tipped the world’s economy into the deepest recession since the 1930s. Global output is set to expand 5.2 per cent in 2021 after contracting 4.4 per cent last year, according to the International Monetary Fund’s projections.

Global funding for greenfield projects – when a company plans to invest in new production facilities in a foreign country – also declined by 35 per cent in 2020 to an estimated $547 billion.

The decline was steeper in developing economies, dropping 63 per cent in Africa and 51 per cent in Latin America and the Caribbean, according to the report. Even developing economies in Asia – the continent that has best weathered the coronavirus-induced FDI storm – saw a 38 per cent drop in greenfield announcements.

The biggest drop in international project finance in developing economies occurred in the second half of the year and bucks the global trend, the Unctad report said.

“The data suggests that the slide in developing economies is not yet over,” Mr Zhan said. “It sends a worrying signal that project finance in 2021 will be skewed towards developed economies, and that any increase in FDI flows is more likely to come from cross-border mergers and acquisitions than from new investment in productive assets.”

Cross-border merger and acquisition deals dropped 10 per cent in 2020, but rebounded in the second half of the year due to technology and healthcare deals, according to the report.