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FDI FACING THE IMPACT OF A DOUBLE WHAMMY

YB WEB DESK. Dated: 7/8/2020 1:59:10 PM

Ishita Tripathy | Anuradha Guru Almost all aspects of world economics and finance today are affected by the ongoing pandemic. Economic growth is faltering, businesses are struggling to stay afloat, what with supply chains disrupted and demand nosediving, stock markets are erratic and capital is drying up. Foreign investors are also sitting on the fence watching how things unfold before moving. The health crisis has translated into an economic one, of dimensions being compared to the Great Depression of 1929 and the sub-prime crisis of 2008. While the global financial systems are said to be better-equipped to handle economic destruction of such magnitude as the 2008 crisis, the challenge today is the uncertainty of the virus’ containment and its ramifications. There is strong empirical evidence that Foreign Direct Investment (FDI) flows are less volatile than other forms of capital flows. However, at present they are also showing pessimism. It would be instructive to juxtapose the COVID-19 pandemic with the financial crisis of 2008 in terms of FDI movements to draw similarities and differences. To begin with, the factors due to which the two crises emanated are different. Also at variance is the fact that the global financial malaise had spread from the developed to developing economies, while the spread of the present health crisis has not hinged upon the level of development of economies. What is common is that the entire world has been engulfed by the two crises. With the collapse of Lehman Brothers on September 15, 2008, the global banking crisis that had grown into a worldwide financial crisis eventually turned into a world economic crisis and its repercussions were felt globally within a few months. Especially in those economies which had a high degree of integration with the global one. The United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report, 2009 pointed out that due to the world economic crisis, after five years of continued growth, global FDI flows had fallen from a historical high of around $2 trillion in 2007 — which was the peak of a four-year upward trend in FDI flows — by around 29 per cent to $1.2 trillion in 2008-09, primarily because of a fall in cross-border mergers and acquisitions. This decline was further attributed to liquidity constraints for transnational corporations (TNCs), declining economic growth in majority of countries and risk aversion by TNCs. The decline was recorded in all three components of FDI, viz. equity, other capital and reinvested earnings. The dip in the flows was evident in developed countries first, followed by a decline in developing nations, too. Business-cycle-sensitive sectors such as metal and manufacturing were affected the worst. There was a degree of protectionism in the FDI policies of some countries, in the form of requirements of higher domestic content in Government procurement, discouraging banks from lending for foreign operations and so on. Looking at the present times, even before the global spread of the pandemic, UNCTAD’s Investment Trends Monitor had predicted in January 2020 that FDI flows, which stood at $1.3 trillion in 2019, would rise marginally in 2020. According to estimates by the Organisation for Economic Co-operation and Development (OCED), as a consequence of the global economic slowdown.