Investment flows to developing Asia defy COVID-19, grow by 4%

Foreign direct investment (FDI) flows to developing countries in Asia increased by 4% to USD535 billion in 2020, reflecting resilience amid the global FDI contraction, according to UNCTAD’s World Investment Report 2021 published in June.

The region, already the world’s largest FDI recipient in 2019, was the only region that recorded growth in foreign investment in 2020, accounting for more than half of global inward and outward flows. The growth was driven by China, Hong Kong (China), India and the United Arab Emirates.

Elsewhere in the region, FDI contracted. In economies where FDI is concentrated in tourism or manufacturing, contractions were particularly severe.

“Despite the pandemic, FDI to and from the region remained resilient in 2020. Developing Asia is the only region recording FDI growth, accounting for more than half of global inward and outward FDI flows,” said UNCTAD’s director of investment and enterprise James Zhan.

“FDI prospects in 2021 for Asia are more favourable than the global average, because of recovery in trade, manufacturing activities and a strong GDP growth forecast,” he added.

Flows to East Asia rose by 21% to $292 billion, inflated by the FDI recovery in Hong Kong (China), which surged by 62% to USD119 billion, after a sharp fall of FDI in 2019 and due to corporate reconfigurations by multinational enterprises (MNEs) headquartered in the economy.

In China, FDI growth picked up pace in 2020 – growing by 6% to USD149 billion – reflecting the country’s success in containing the pandemic and its rapid GDP growth recovery. The growth was driven by technology-related industries, e-commerce and research and development.

In the Republic of Korea, FDI declined by 4% to USD9 billion. Though the country was among the earliest to contain the COVID-19 outbreak and economic growth remained strong, a large drop in cross-border mergers and acquisitions (M&As) due to large divestments led to a decline in investment.

South-East Asia, an engine of global FDI growth for the past decade, recorded a 25% FDI contraction to USD136 billion. Singapore, Indonesia and Vietnam, the region’s largest FDI recipients in that order, all recorded FDI declines. FDI to Singapore fell by 21% to USD91 billion, to Indonesia by 22% to USD19 billion and to Vietnam by 2% to USD16 billion.

Lockdown measures, successive waves of COVID-19 infection, supply chain disruption, falling corporate earnings, economic uncertainties and delayed investment plans were key reasons for the contraction.

In Thailand, FDI sank to -USD6 billion, driven by the divestment of UK supermarket Tesco to a Thai investor group for USD10 billion. In Malaysia, FDI fell by 55% to USD3 billion. FDI in Cambodia was flat at USD3.6 billion thanks to inflows in finance. In Myanmar, FDI dropped 34% to USD1.8 billion.

FDI in South Asia rose by 20% to USD71 billion, driven mainly by a 27% rise in FDI in India to USD64 billion. In India, robust investment in ICT and construction bolstered FDI inflows. Cross-border M&As surged 83% to USD27 billion, with major deals involving ICT, health, infrastructure and energy.

FDI fell in other South Asian economies that rely on export-oriented garment manufacturing. Inflows in Bangladesh and Sri Lanka contracted by 11% and 43% respectively. In Pakistan, FDI was down by 6% to USD2.1 billion, cushioned by continued investments in power generation and telecommunication industries.

FDI flows in West Asia increased by 9% to USD37 billion in 2020, driven by marked increase in M&As (60% to USD21 billion) in natural resource-related projects. FDI in the UAE rose by 11% to USD20 billion because of significant acquisitions in the energy sector.

FDI in Saudi Arabia remained robust; inflows increased by 20% to USD5.5 billion, with investments concentrating in financial services, retail, e-commerce and ICT. FDI in Turkey, however, decreased by 15% to USD7.9 billion. Investment picked up towards the end of the year (USD2.3 billion in Q4), preventing a steeper decline.

Outward FDI (OFDI) from Asia increased by 7% to USD389 billion – again, the only region recording expansion in outflows. This underscores the region’s prominence as an important investor for the developing region.

The growth was driven by strong investment from Hong Kong (China) and Thailand. China, the largest investor country in 2020, saw OFDI stabilising at USD133 billion. The country’s tighter screening of OFDI, added to heightened scrutiny by the US of investments originating from China, weighed on the country’s OFDI since 2017. Continued expansion of Chinese MNEs and active M&A purchases abroad underpinned the stabilisation in 2020.

FDI prospects for the region are more favourable than the global outlook, with a projected growth of 5% to 10%, thanks to resilient intraregional value chains and strong economic growth prospects. Signs of trade and industrial production recovering in the second half of 2020 provide a strong foundation for FDI growth in 2021.

Manufacturing, an important FDI sector for the region, already showed signs of recovery in the second half of 2020. However, in smaller economies oriented towards services and labour-intensive industries, particularly hospitality, tourism and garments, FDI could decline further in 2021.

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