FDI in developing Asia grew 4% in 2020 amid global contraction

FDI in developing Asia grew 4% in 2020 amid global contraction

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  • Developing Asia is the only region to record growth in foreign investment in 2020, accounting for more than half of global inward and outward flows
  • The region, already the world’s largest FDI recipient in 2019, received US$535 billion in 2020, more than half of global FDI last year
  • Growth was driven by China, Hong Kong, India and the United Arab Emirates; elsewhere in the region, FDI contracted
  • FDI in the region is project to grow 5% to 10% this year, thanks to resilient intraregional value chains and strong economic growth prospects

Foreign direct investment (FDI) flows to developing Asia rose by 4% in 2020 on the back of strong flows to East and South Asia, and FDI prospects for this year remain favorable, according to a new United Nations Conference on Trade and Development (UNCTAD) report.

The World Investment Report 2021 said the region, the world’s largest FDI recipient in 2019, received US$535 billion in 2020, more than half of global FDI last year.

Growth was driven by China, Hong Kong, India and the United Arab Emirates. Elsewhere in the region, FDI contracted, particularly in economies where FDI is concentrated in tourism or manufacturing.

“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.

By region, flows to East Asia rose by 21% to $292 billion, inflated by the FDI recovery in Hong Kong, where FDI surged by 62% to $119 billion. In China, FDI grew by 6% to $149 billion, reflecting the country’s success in containing the pandemic and its rapid GDP growth recovery.

In South Korea, FDI declined by 4% to $9 billion as a large drop in cross-border mergers and acquisitions (M&As) due to large divestments led to a decline in investment.

The Southeast Asian region, an engine of global FDI growth for the past decade, recorded a 25% FDI contraction to $136 billion.

Singapore, Indonesia and Vietnam, the subregion’s largest FDI recipients in that order, all recorded FDI declines. FDI in Singapore fell by 21% to $91 billion, in Indonesia by 22% to $19 billion, and in Vietnam by 2% to $16 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 -$6 billion, while in Malaysia, FDI fell by 55% to $3 billion. FDI in Cambodia was flat at $3.6 billion thanks to inflows in finance. In Myanmar, FDI dropped 34% to $1.8 billion.

FDI in South Asia, meanwhile, rose by 20% to $71 billion, driven mainly by a 27% rise in FDI in India to $64 billion.

FDI fell in other South Asian economies that rely on export-oriented garment manufacturing. Inflows to Bangladesh and Sri Lanka contracted by 11% and 43%, respectively. In Pakistan, FDI was down by 6% to $2.1 billion, cushioned by continued investments in power generation and telecommunication industries.

FDI flows to West Asia increased by 9% to $37 billion in 2020, driven by marked increase in M&As (60% to $21 billion) in natural resource-related projects.

FDI in the United Arab Emirates rose by 11% to $20 billion because of significant acquisitions in the energy sector. FDI in Turkey decreased by 15% to $7.9 billion.

Outward FDI (OFDI) from Asia increased by 7% to $389 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 and Thailand. FDI prospects for the region are more favorable than the global outlook, with a projected growth of 5% to 10%, thanks to resilient intra-regional 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, said UNCTAD.

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 labor-intensive industries, particularly hospitality, tourism and garments, FDI could decline further in 2021.

Photo by fruit pat on Unsplash

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