Multinational enterprises (MNEs) and foreign direct investment ( FDI) in developed countries have been seriously affected by the coronavirus (COVID-19) pandemic, compromising the contributions of these businesses to critical growth outcomes. MNEs are main drivers of foreign trade, accounting for about 80 percent of overall exports, in addition to providing resources to developing countries. By implementing new innovations and best practices in developed countries, FDI will accelerate economic reforms.
Because of trade and investment policy instability, flagging economic growth, declining commodity prices, and increasing protectionism, the pre-COVID-19 global climate for FDI was already characterized by eroding investor confidence. The COVID-19 crisis poses a new, unparalleled threat to MNEs against this backdrop: the pandemic has destroyed traditional global value chains (GVCs) on which many MNEs depend, and a variety of supply and demand disruptions are threatening the competitiveness of many firms.
According to the UN Conference on Trade and Development (UNCTAD), global FDI flows are expected to contract between 30 to 40% during 2020/21.
Present situation:Rapid decrease in FDI for the first half of 2020
The profits of big MNEs are projected to decrease in the first and second quarters of 2020, but the effect varies widely across industries. Reinvested dividends, contributing for more than halves of FDI inflows throughout 2019, have been an increasingly significant part of FDI flows. The amount of reinvested earnings is determined by two factors: the earnings of direct investment enterprises and the percentage the direct investor decides to reinvest. These trends are projected to substantially decrease the earnings of direct investment companies in the first half of 2020, considering the essential role that the primary sector and manufacturing play in FDI. Due to the higher proportion of the primary sector and production in their FDI, FDIs in emerging and developing economies are expected to be more severely affected than in advanced economies where services perform a much more significant role.
Possible scenarios
● Optimistic scenario: In the next 2 to 3 months, public health steps have been taken; therapies have been identified to mitigate the virus; and experiments have been extended. Economic policy policies are very successful in mitigating significant systemic disruption to the economy , especially those areas of the economy most affected by steps taken in the area of public health (small and medium-sized businesses, transport, tourism and energy sectors, for example). In this model, economic activity resumes in the second half of the year and, by the end of 2021, returns to pre-crisis stages.
● Middle scenario: Initially, public health measures have been successful in containing the current outbreak in the next 2 to 3 months, but future outbreaks are occurring so that strict public health measures will be imposed in specific countries/regions until a vaccine is developed and widely administered by mid-2021. Economic policy measures are partly, but not entirely, successful, and the economic recovery is still inconsistent and slow.
● Pessimistic scenario: Current public health initiatives are insufficient to adequately eradicate the epidemic, causing strict measures to stay in effect for a prolonged time in certain nations. Economic policy interventions are insufficient to compensate for economic harm and markets are settling into a prolonged recession; insolvencies and defaults are more frequent than in other cases.
Economic measures to reduce the detrimental implications of the contraction of FDI
● It is important to implement and further improve steps and support systems to help local businesses resolve supply-side constraints. Specifically, in this regard, two types of initiatives may be fruitful in the longer term, both for the establishment of stronger ties between local and international companies and for the enhancement of the competitiveness of local industrial structures: the development of a quality certification framework which is sometimes needed to join foreign firms' supply chains and the improvement of digital infrastructure.
● Export processing zones (EPZs), which in many developed countries have become an effective tool for attracting FDI, should be built in a way that connects them to the domestic economy. This calls for EPZ legislation to encourage the creation of local supplier relationships, including the implementation of supplier production programs that facilitate the process of matchmaking between international companies and local suppliers.
● During and after the pandemic, foreign efforts to help countries need to pay special attention to the least developing countries. These countries face especially severe budget restrictions and are therefore limited to adopting policies that rely mainly on initiatives to encourage investment, simply because they do not have the capacity to provide their private sector businesses with more substantial funding.
REFERENCES
Foreign direct investment flows in the time of COVID-19. (n.d.). OECD. https://www.oecd.org/coronavirus/policy-responses/foreign-direct-investment-flows-in-the-time-of-covid-19-a2fa20c4/
Foreign direct investments could contract by 40% this year, hitting developing countries hardest. (n.d.). World Economic Forum. https://www.weforum.org/agenda/2020/06/coronavirus-covid19-economics-fdi-investment-united-nations/
The impact of the coronavirus on foreign investors: Early evidence from a global pulse survey. (2020, June 30). World Bank Blogs. https://blogs.worldbank.org/psd/impact-coronavirus-foreign-investors-early-evidence-global-pulse-survey
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