China topped the world in FDI in 2020

China was the world's largest recipient of foreign direct investment (FDI) in 2020, as flows rose by 4 percent to $163 billion, followed by the United States, a report by the United Nations Conference on Trade and Development (UNCTAD) showed Sunday.

While the news was good for China, overall global FDI dropped by 42 percent last year, and the outlook remains weak, the report said.

UNCTAD says uncertainty about the COVID-19 pandemic's path and the global investment policy environment will continue to affect FDI in 2021. For developing countries, the prospects for 2021 are a major concern.

The last time FDI was this low was in the 1990s, and it is now more than 30 percent below the investment trough that followed the 2008-09 global financial crisis.

Despite projections for the world economy to recover in 2021, UNCTAD expects FDI flows to remain weak as the pandemic persists.

"The effects of the pandemic on investment will linger," said James Zhan, director of UNCTAD's investment division. "Investors are likely to remain cautious in committing capital to new overseas productive assets."

The decline in FDI was concentrated in developed countries, where flows fell by 69 percent to $229 billion.

Flows to North America slumped by 46 percent to $166 billion, with cross-border mergers and acquisitions (M&A) down by 43 percent. Announced greenfield investment projects also fell 29 percent, and project finance deals declined by 2 percent.

The United States recorded a 49 percent drop in FDI in 2020, falling to an estimated $134 billion. In 2019, the United States had received $251 billion in inflows while China received $140 billion.

China's GDP grew 2.3 percent in 2020, making it the only major economy in the world not to contract in 2020.

"US and other foreign firms will continue to invest in China as it remains one of the most resilient economies during the global pandemic and as future growth potential there remains stronger than most other major economies," Adam Lysenko, an analyst at Rhodium Group, told bloomberg.com last month.

Foreign investment in the US peaked in 2016 at $472 billion, when foreign investment in China was $134 billion, according to The Wall Street Journal.

Since then, investment in China has risen, while in the US it has fallen each year since 2017. The two countries also have been enmeshed in a trade and tariff conflict for more than two years.

In the US, the decline occurred in wholesale trade, financial services and manufacturing. Cross-border M&A sales of US assets to foreign investors fell by 41 percent.

Investment in Europe also shrunk. Flows fell by two-thirds to -$4 billion. In the United Kingdom, FDI fell to zero.

There were some bright spots in Europe, though. Sweden saw flows double from $12 billion to $29 billion. In Spain, FDI rose 52 percent, thanks to several acquisitions.

Among other developed economies, flows to Australia fell (-46 percent to $22 billion) but increased for Israel (from $18 billion to $26 billion) and Japan (from $15 billion to $17 billion).

Although FDI to developing economies decreased by 12 percent to an estimated $616 billion, they accounted for 72 percent of global FDI — the highest share on record.

While developing countries in Asia performed well as a group, attracting an estimated $476 billion in FDI in 2020, flows to members of the Association of Southeast Asian Nations (ASEAN) contracted by 31 percent to $107 billion.

High-tech industries in China saw an increase of 11 percent in 2020, and cross-border M&A rose by 54 percent, mostly in the information and communications technology and pharmaceutical industries.

"The 2020 investment numbers underline China's move toward the center of a global economy long dominated by the US — a shift accelerated during the pandemic as China has cemented its position as the world's factory floor and expanded its share of global trade," the WSJ wrote.

"Companies are reassessing their policies about global supply chains, about foreign markets, about their own use of technology," Joseph Joyce, professor of international relations and economics at Wellesley College, told the Journal. "The pandemic is making all these companies rethink the most basic assumption about where they are located."

India, another major emerging economy, also recorded positive growth (13 percent), boosted by investments in the digital sector.

But the report warns that "the far more limited capacity of developing countries to roll out economic support packages to stimulate investment in infrastructure will result in an asymmetric recovery of project-finance-driven FDI".

UNCTAD expects any increases in global FDI flows in 2021 to come not from new investment in productive assets but from cross-border M&A, especially in technology and healthcare — two industries affected differently by the pandemic.

"Although their investment activity slowed down initially in 2020, they are now set to take advantage of low interest rates and increasing market values to acquire assets in overseas markets for expansion, as well as rivals and smaller innovative companies affected by the crisis," the report said.