Pandemic Distorts FDI Trends For China And The US

THE HEADLINE FROM the initial estimates of foreign direct investment (FDI) flows last year by the UN Conference on Trade and Development (UNCTAD) is that China overtook the United States as the primary destination for FDI.

While that is consistent with a long-term trend — that the world’s centre of gravity is shifting eastwards — a peep behind the headlines is warranted.

Last year was exceptional. Global FDI fell by 42% to $859 billion. That was a plunge 30% steeper than followed the global financial crisis in 2008 and took FDI worldwide back to the levels of the 1990s. The pandemic shaped the winners and losers, both by geography and sectors (IT and pharma were among the winners).

Yet so did geopolitics.

With the then Trump administration in the United States pursuing the denial of US capital and technology to Chinese firms, FDI to the United States almost halved to $134 billion in 2020 from $251 billion the previous year, with cross-border mergers and acquisitions particularly hard hit. And 2019 was way below the giddy heights of 2015-16 before Beijing reined in Chinese companies’ exuberant global aspirations, largely focused on US assets.

At the same time, FDI into China, the only large economy to grow last year, rose to $163 billion in 2020 from USD140 billion the previous year, a rise of 16%.

China will likely continue to attract more FDI than the United States during the recovery, which the new mutations of Covid-19 may well extend. US plans to use infrastructure investment, including in digital infrastructure, and the development of renewable energy as the backbone of economic recovery will likely cause FDI in the United States to snap back. However, this will take time and FDI worldwide this year is likely to remain weak.

In contrast, China’s needs to move its economy up the value chain and drive for technological self-sufficiency will sustain its inward FDI on a steady but more modest growth path.

The combination of the two will put FDI patterns back on their historical paths.

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Filed under China-U.S., Economy

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