03.04.2020 | Pademic redrawing global investment landscape

Covid-19 expected to trigger plunge in foreign direct investment and reinforce protectionist policies among leading recipients.

Click here to read the Alaco article in International Investment.

 

By Yigal Chazan


Coronavirus looks set to have a huge impact on foreign direct investment (FDI) worldwide with forecasts of a major downturn in flows likely made more acute by increasing efforts to control FDI in two of its main destinations, Europe and the US, to protect strategically-important companies from overseas takeovers.

Beijing’s position as a major provider and recipient of FDI is expected to be affected significantly by the pandemic, which may increase developed world nervousness over predatory Chinese investment and China’s value as a major manufacturing hub. 

Last week the UN trade, development and investment agency, UNCTAD, forecast that the pandemic could cause global FDI to fall by up to 40 per cent this year through to next. The announcement came a day after Europe expressed heightened concern about the vulnerability of companies to acquisition by foreign investors, as share prices tumble, with EU member states called upon to step up screening of inward investment.  

The UN forecast for FDI falls, more than double an estimate in early March, assessed that the pandemic, coupled with government lockdown measures, would put severe pressure on FDI worldwide, with the worst-hit sectors including energy-related industries, airlines and car-manufacturing.

According to the UN, the closure of businesses, manufacturing plants and construction sites is causing immediate delays in the implementation of investment projects; while completions of merger and acquisitions are running into delays that could result in cancellations. It reported a large slump in the number of such deals in recent months, from an average of 1,200 a month last year to 385 in March (as of March 20).

In the developing world some supply chain hubs have been particularly badly hit with FDI investments in China falling by 25.6% in February, as the government’s draconian lockdown measures brought services and manufacturing to a halt, severely disrupting the global value chain. Such is the concern over falling FDI in China that Premier Li Keqiang took the unusual step of congratulating Starbucks for a recent multi-million dollar investment, while central and local authorities in China have sought to assist big foreign investors in getting through the crisis.

Rising labour costs in China and the punitive tariffs imposed in the trade war with the US have already prompted many global manufacturers to switch some or all of their production facilities to other parts of Asia. Beijing is concerned that the coronavirus could expedite this trend. Yet the pandemic may even force multi-nationals to look beyond South-East Asian countries for manufacturing capacity since they are themselves reliant on China for inputs. That could open the way for the expansion of production hubs in jurisdictions such as Eastern Europe, Turkey and Mexico, as the benefits of being geographically close to China recede.

But it is not just China’s prospects as an FDI recipient that have been hit by the coronavirus. The country’s inevitable economic recession is likely to further squeeze its overseas-bound FDI, which at its peak in 2016 amounted to over $200 billion, nearly 2% of the country’s GDP. Chinese investment flows were subsequently hit by Beijing’s efforts to curb capital flight along with the emerging protectionism of some advanced economies. From 2018 China saw outward FDI drop around 50% over two years.

Even before the current health crisis, Chinese investment flows into Europe had experienced substantial reductions and a further decline seems likely – although some of the finance shortfall will be offset by business assistance packages. The European Bank for Reconstruction and Development has set up a one billion euro ‘Solidarity Package’ to help companies impacted by the pandemic across the region, and says it stands ready to do more when needed.

Last week the head of the European Commission, Ursula von der Leyen, urged member states to screen potential outside investors carefully to counter takeovers of companies with reduced market capitalisation, particular those in sectors such as security, public health, medical research and strategic infrastructure. Her appeal coincided with the launch of new guidelines  on the screening of inbound FDI, including the types of measures that can be taken to restrict capital movements when justified.

Von der Leyen’s warning comes as a new EU-wide screening regime, aimed at safeguarding the bloc’s strategic assets, is expected to be fully applied across the Union later this year.

The policy includes a new mechanism that enables member states and the Commission to exchange information and raise concerns related to specific foreign investments, especially those that are deemed to pose a threat to more than one EU country, or undermine a project or programme of interest to the bloc as a whole.

This comes as a number of European countries, seeking extra protections against foreign takeovers that potentially undermine their national interests, introduce their own inbound FDI regulations. Countries toughening their foreign investment scrutiny policies include Italy, France and Germany. German Finance Minister Olaf Scholz recently expressed concern that Beijing might exploit the pandemic to acquire more cheap European assets.

In America, where economic nationalism under President Trump has made it less accommodating than the EU to Chinese investment, efforts to vet incoming FDI deemed to threaten national interests were already increasing before the current pandemic. In 2018 Congress enacted the Foreign Investment Risk Review Modernisation Act – the most comprehensive revision of the scrutiny process for over a decade. The law widened the scope of the Committee on Foreign Investment in the United States (CFIUS), which assists the US president with reviews of transactions for potential national security risks. The reform came amid an acceleration of CFIUS’s investigative activities – with much of its attention focused on acquisition bids by Chinese investors.

A worldwide FDI recovery will clearly depend on the efficacy of governmental crisis-mitigation measures, in tackling the spread of the virus and supporting business. But when that recovery comes, the foreign investment landscape may have changed markedly.