Foreign direct investment (FDI) has fallen sharply throughout the world. However, there is one exception – China. An analysis of changes in foreign investment tells us that countries have experienced large decreases in FDI since the start of the year. China, to many analysts’ surprise, has not. This is being termed as another “fresh sign” that mainland China has not succumbed to the negative externalities which have arisen due to the rise of Covid-19. Or, at the very least they have not been impacted to such a large extent.
Across Europe, and in the U.S., investment inflows have dropped by almost half compared to the average monthly new investments in 2019. This is the biggest drop on record since globalisation and the subsequent formulation of FDI. A recent study states that China’s investment inflows over the first half of this year only decreased by 4%. America has seen a 61% decrease while the EU shed 29%. This occurrence has been met with astonishment, due to the U.S. long being the most sought after destination for direct investment. Although China has held on to second position in this regard, the divergence throughout the first six months of 2020 makes for interesting reading.
Foreign direct investment has become a vital external resource for countries far and wide. There is a raft of literature that studies the relationship between investment inflows and increased economic growth. Many of these studies point to the positive impact that such investment can have in the host country. With the increase in capital, knowledge, and transfer of skill and technology, such a worrying trend cannot be downplayed.
What is even more disconcerting is the fact that a country such as the U.S. is less reliant on FDI; but a developing nation certainly is. Thus, the current decreases in FDI across the globe will have far-reaching consequences as long as this stays a trend. Without steady investment inflows, countries will begin to feel strain. Investment spurs domestic expansion in a number of industries. Without it, many will be left lagging far behind.
There have been a number of hypotheses which state that investment inflows have a direct correlation with stock market development. If this were to be the case, countries experiencing a massive reduction in FDI would be looking at their stock markets to see what the impact is going to be.
However, this hypothesis has been discarded to a great extent. Thus, the sudden fall investment inflows into the States will not impact the stock market to a great extent. FDI may act as a substitute to inadequate stock markets in the short run – something which is not a concern when looking at the U.S. stock market. As such, investors do not need to change their market sentiment on the back of this revelation.
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