FDI flows are expected to fall by more than 30% in 2020 even under the most optimistic scenario for the success ofthe public health and economic support policy measures taken by governments to address the COVID-19 pandemic and the resulting recession.FDI flows to developing countries are expected to drop even more because sectors that have been severely impacted by the pandemic, including the primary and manufacturing sectors, account for a larger share of their FDI than in developed economies.FDI could play an important role in supporting economies during and after the crisis through financial support to their affiliates, assisting governments in addressing the pandemic, and through linkages with local firms. FDI flows have steadily declined over the past five years, and they could remain below pre-crisis levels throughout 2021 if the public health measures and economic support policies are not effective.
Many governments have taken stringent public health measures to limit the spread of the COVID-19 pandemic. These public health measures have caused severe economic disruptions that impact the foreign direct investment (FDI) decisions of firms. Governments have also taken significant economic policy actions to forestall, or cushion, the economic consequences of the public health crisis. The eventual impact on FDI flows will depend on the success of boththese public health and economic policy responses.FDI could play an important role in supporting economies during the economic recovery following the pandemic. Evidence from past crises has shown that foreign-owned affiliates, including small and medium enterprises,can show greater resilience during crises thanks to their linkages with, and access to the financial resources of, their parent companies (e.g. Alfaro and Chen, 2012; Desai et al., 2008). FDI could be particularly important for emerging and developing economies given that other sources of international financing, including portfolio investment, have fled these economies (see OECD Investment policy responses to COVID-19. Unfortunately, it appears that the impacts of the pandemic on FDI flows to these economies may be particularly severe. For example, the primary and manufacturing sectors, whichaccount for a larger share of FDI in many of these economies than in most developed economies, have been particularly hard hit by the pandemic(see forthcoming OECD note on implications of the COVID-19 public health and economic crisis on development finance).
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