Pradeep Kumar Panda

The World Investment Report 2022 shows that the structure of global foreign direct investment (FDI) flows has been affected significantly by the pandemic. The report brought out by the United Nations Conference on Trade and Development (UNCTAD) indicates that global FDI inflows staged a smart recovery in 2021 rising by a substantial 64.3% to touch $1.58 trillion, thus surpassing the pre-pandemic flows. This is in sharp contrast to the 35% fall in FDI inflows to $963 billion in 2020.

A major consequence of the pandemic was that the share of FDI inflows to developed economies slipped to just around one-third in 2020, the lowest recorded. Though the FDI inflows to developed economies more than doubled to $746 billion in 2021, its share in global FDI inflows still remained lower than that of the developing economies. A major reason for the shrinking share of developed economies in global FDI inflows is the decline of inflows into the European Union (EU) for two consecutive years, which reduced its share in global FDI inflows from around a quarter to less than a tenth.

Another major consequence of the pandemic was that FDI outflows from developed countries rose sharply from around two-thirds of the global outflows in the pre-pandemic years to around three-fourths in 2021. This surge was mainly powered by the United States (US), which now emerged as the largest source of FDIs. The US now accounts for close to a quarter of global FDI outflows, marginally exceeding even that of the EU. Another major change noticed after the pandemic was that, for the first time, in many years, the global outflows of FDI from almost all major developed countries were higher than their FDI inflows.

Similarly, another major fallout of the pandemic was that the developing countries have now become the dominant beneficiaries of global FDI inflows with their share exceeding that of developed countries both in 2020 and 2021. However, the pickup in FDI inflows to developing economies was sharply skewed. While FDI inflows to Africa more than doubled to $82.9 billion in 2021 and that to South America surged by three-fourths to $88 billion, both flows were probably buoyed up by the global commodity boom. However, FDI inflows into Asia barely grew by around one-fifth. And this was also highly skewed. While inflows increased by around half in South East Asia and West Asia, it declined by a quarter in South Asia.

What is surprising is that the disruption of supply chains and the setback to globalisation during the pandemic seem to have had no significant impact on the geographical distribution of FDI inflows. Though many developed countries repeatedly promised to reduce the global dependence on China’s exports and ward off trade vulnerabilities by diverting investments to other areas, these initiatives seem to have floundered. In fact, the trends show that the result has been the opposite with FDI inflows to China accelerating even as FDI inflows to other developing countries like India falter badly.

Consequently, between 2019 and 2021, the share of FDI inflows to China (including that to Hong Kong) went up from 14.5% to 20.3%, while that to India shrunk from 3.4% to 2.8%. Certainly, India seems to have failed to take advantage of the new opportunities offered by the pandemic. The efforts to persuade the world to bring in an increasingly larger share of the FDI flows within its shores and diversify the global supply chains have apparently not borne fruit. Similarly, the slowdown in the economy has also affected FDI outflows from India with its share in global FDI outflows slumping down to 2.8%, the lowest level across the last four years.

The Government of India’s data on the FDI shows that equity inflows have declined by around one-fifth to $51.3 billion in 2021. However, the decline was not uniform. While FDI inflows from Mauritius, the largest contributor to the cumulative FDI inflows into India, more than doubled to $8.7 billion in 2021, that from Germany and Japan increased by around a quarter. However, FDI inflows from almost all other major investor nations declined. While FDI from Singapore, the US, the Netherlands, and United Arab Emirates fell by more than a quarter, that from the United Kingdom and the Cayman Islands fell by around one-fifth.

However, the bulk of the decline in FDI flows in 2021 was due to the fall in investments in computer software and hardware, the biggest segment, which fell by half to $12 billion. Similarly, FDI inflows into infrastructure and construction sectors also declined by half. Surprisingly, FDI inflows to services (that include finance, banking, insurance, research and development, and others), which account for more than a tenth of the total FDI inflows, rose by a quarter to touch $6.5 billion in 2021. In manufacturing, the improvement in FDI inflows was largely confined to automobiles, drugs and pharmaceuticals. Clearly, India still has a long way to go to emerge as a manufacturing hub in the global economy.

The steady decline of FDI outflows from the EU is a major setback for India, more so because India has failed to tap the potential for increasing inflows from the US, which has emerged as the largest source of FDI outflows. The consequent slump in the share of FDI inflows into India should set alarm bells ringing in the government. Certainly, it is still not too late to woo new investments to reduce global supply chain vulnerabilities and the excessive dependence on China.

(Writer is an economist based in New Delhi. Views are personal)

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