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Foreign Direct Investment (FDI) Inflow: Reasons For Downturn
Foreign Direct Investment (FDI) Inflow: Reasons For Downturn
Foreign Direct Investments (FDIs) without doubt has a very significant role in context to the
development of economies. No matter whether the economy is developed economy, developing
economy or under developed economy, FDI plays vital role for their economic development and as well
as employment generation opportunity. FDI comes in various aspects which varies from transfer of
technology, generation of skills, sharing of innovation to international trades and practices. It in fact,
helps promote the domestic capital as well with the introduction of international market practice in the
domestic environment. Thus, no matter what the political ideologies or national priority of the country
may be, every single economy in the world require and expect to introduce FDI to their respective
countries. FDI likewise, equally helps in gaining economies of scale for the domestic producers and as
well as enhance opportunity to improve other aspects of the economic system. It is the cost of
incentives which is able to attract foreign direct investment which also depends upon market size,
technology level and absorptive capacity (Dogan et al., 2017). In return, foreign direct investment also
helps in promoting the social change and as well as attain the economic development (Kobrin, 1976).
a. World in Total
Foreign direct investment (FDI) showed a downturn in 2018 during which falling was observed
by 13% to $1.3 trillion. While the developing nation witnessed an upward trend, transition
economies and developed economies still witnessed a downturn. Similarly, majority portion of
FDI was poured in developing nations followed by investment in developed nation and transition
economy (UNCTAD, 2019).
Asia, with many developing economies received $511.7 Billion in the year 2018 which 3.9%
increase compared to the previous year and has share of 39.4% in the world. Thus, it can be
believing that Asia has emerged as the region with highest potential when it comes to
investment opportunities. While China and Hong Kong were most successful to attract FDIs
worth $139 Billion and $115.7 Billion, India, Singapore and India too were successful to be
amongst the top 5 economies in the region to be able to attract FDI with $42.3 Billion, $77.6
Billion and $22 Billion respectively. However, in context to the outflow of FDI from Asia, China
leads the chart with $129.8 Billion followed by Hong Kong, South Korea, Singapore and Saudi
Arabia with $85.2 Billion, $38.9 Billion, $37.1 Billion and $21.2 Billion respectively.
It can be observed from the above picture that East Asia and South- East Asia were the most
attractive regions for the purpose of investment i.e. inflow of FDIs. Similarly, the same regions
were too successful to make investments outside their respective territory by investing in other
countries.
Latin America and the Caribbean region as the another developing economy, was able to attract
total FDI of $146.7 Billion in the year 2018 which is 11.3% share in the world FDI transaction.
However, the total value is 5.6% decrease compared to the performance from the previous year.
In terms of monetary value, Brazil was able to attract total FDIs worth $61.2 Billion followed by
Mexico at $31.6 Billion, Argentina at $12.2 Billion, Columbia at $11.0 Billion and Chile at $7.2
Billion. However, except Chile and Argentina, other countries experienced negative downturn
when it came to attracting FDI. However, in context to outflow of FDI, Mexico leads the table
with $6.9 Billion followed by Colombia at $5.1 Billion, Chile at $3.0 Billion, Argentina at $1.9
Billion and Venezuela at $1.7 Billion respectively.
It can be observed from the above picture that South America and Central America were the
most attractive regions for the purpose of investment i.e. inflow of FDIs. Similarly, the same
regions were too successful to make investments outside their respective territory by investing
in other countries.
It can be observed from the above picture that European region and North American region
were the most attractive regions for the purpose of investment i.e. inflow of FDIs. Similarly, the
same regions were too successful to make investments outside their respective territory by
investing in other countries.
a. Trends by Geography
Amongst all the regions in the world, European region witnessed the most decrease in FDI
followed by Latin American and the Caribbean region. Host countries like Ireland and
Switzerland, registered negative inflows of -$66 billion and -$87 billion and as well as United
Kingdom also witnesses decline by 36 per cent to $64 billion. However, African region witnessed
an increase. In overall, while the transition economies and developed economies witnessed
decreases, developing economies witnessed increment. United States observed FDI inflows
decline by 9 percent, to $252 billion and Australia’s FDI inflow reached $60 billion (UNCTAD,
2019).
Trend according to Economies
The figures from the charts can be well studied to draw a conclusion that FDI rate is increasing in the
reason, however, there are ups and downs which have been witnessed on a continuous basis. While the
Asia region have been performing well, African, Transition and Developed economies are witnessing
negative downturn. There may be various factors leading to such trends, however, few are detailed
below in context to Developing Economies and Developed Economies.
Developing Economies
The trend in the developing economies sector witnesses an increase in FDIs compared to other reasons.
It is because of increase of opportunities in sectors like oil, gas, mining, production, technologies,
mergers and acquisition deals etc. Thus, the foreign investors identified the developing ground to be
more fruitful while comparing to other regions.
Below are different continents falling under the developing economies with reasons explaining the
potential increase in FDI trend.
Africa
Significant discoveries of offshore gas reserves attracted investments in Oil and gas industry
Stable economic performance and a diversified economy
Opportunities in oil and gas exploration and agriculture
Establishment of industrial plants including manufacturing, chemicals, hospitality
Exploration of minerals
Changes in fiscal policies and monetary policies like intracompany loans
Asia
Establishment and as well as expansion of industrial sectors
Development in finance, wholesale, retail, real estate, communication and digital sector
Establishment and functioning of newly established SEZs
Cheap labor for production
Exploration of oil and gas
Transition Economies
Developed Economies
Developed economies witnessed increase in FDIs until 2015 following which the trends started
experiencing a decreasing trend. While, outflow of FDI from these countries may be on the higher side,
the inflow of FDI showed a reducing trend. However, the share of FDI in world market of the developed
countries is still highest making it attractive place for foreign investors. Below are different regions and
respective explanations provided to show the reasons for decreasing in FDI trend.
Europe
America
UK Automotive Industry
UK Automotive industry plays an important role in the economic growth of the country which is worth
more than £78.9 billion turnover. It not only contributes significant amount of money into country’s
treasury but also has employed more than 864,300 people across the country out of which 180,300 are
directly involved in the manufacturing process. UK is the 16 th largest automotive manufacturer in the
world in 2019 which is led by China and 5 th largest automotive manufacturer in European market in 2018
which was led by Germany (THE SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED,
2021).
The mentioned facts and figures show that UK automotive market is a huge market and has been
contributing significantly in the economic development and as well as employment generation in the
national level. It is not only a leading manufacturer in Europe or across the world but is also a major
exporter.
Impact of COVID-19 in Car Production Sector in UK
COVID-19 resulted in drastic reduction in production of cars in UK which declined by 29.3% to 920,928
units which is the worst performance since 1984 (United Kingdom Car Production | 1977-2020 Data |
2021-2023 Forecast | Calendar, 2021). Owing to continuous lockdowns and inability of people to go to
their job resulted in drastic effect in manufacturing sector which disrupted the sector throughout 2020.
People were forced to stay inside while the pandemic was taking a toll across the world. The production
output of car industry in UK dropped by 30.4% which is more than the average in the world. However,
the UK still managed to export 8 of 10 cars manufactured in country for which the EU remained to be
UK’s biggest market despite sales decreased by 30.8%. Since all the plants were forced to close resulting
in closure of production and sales cycle which ultimately closed the showrooms as well which vanished
the consumer confidence (THE IMPACT OF COVID-19 ON THE AUTOMOTIVE INDUSTRY, 2021). It is
estimated that the UK government lost more than £1.1 Billion earnings in the form of VAT (Buckley,
2020). Meanwhile, the increase in abnormal debt levels in the sector owing to shut down of factories
due to the pandemic also emerged as a major concern as there existed high chances of insolvency as the
sector may take time to bounce back from the losses (Taylor, 2020).
(Source: www.tradingeconomics.com)
In the above chart, it can be clearly observed that 2020 witnessed the lowest production ratio during the
period of pandemic.
Effects of Pandemic
Decrease in production
Decrease in sales
Shutdown of plants and showrooms
Decrease in demand of the product
Increase in sale of Tesla
Decrease of VAT collected by the government
Thus, more than any other sectors, UK car industry got hit mostly by the pandemic however, owing to
the limited movement of the people and shut down of the factories.
UK car industry is one of the strongest sector in the country and is in fact, the major exporter of
products outside the country. Thus, though the pandemic hit the sector hard, there still lies strong
ability for the industry to bounce back owing to strong foundation it built in past years. Therefore, it is
necessary for the industry to continue their operations and as well as carry on other obligations to
enhance the efficient functioning of the organizing. Below are the recommendations to the industry to
sustain during the hard times and until a smooth operation can be carried out.
Production with limited staffs and workers so that the production site does not get affected by
the presence of large group of people.
Online sales of cars as showrooms may not be able to be opened soon which may boost the sale
though the figures may show low.
The surge in demand is not the result of negative fiscal policy or monetary policy rather due to
non- economic reasons which is why demand shall grow back to normal point leading to
increase in sales of cars.
To focus on manufacturing cars which are more preferred by the customers and has fast moving
ability rather than the cars which is expensive and has low moving capability.
UK cars are still trusted by the foreigners and despite of the surge in demand, the demand from
across the borders still managed to top the sales which is why focus should be on exporting.
Since, the time is difficult for all the sectors to perform well, UK car industry will only have to survive
the existing blow which shall help the economy in days to come. Likewise, it is important for the
card industry to continue with its research and development and betterment of the product.
Conclusion
World FDI market is witnessing ups and downs owing to the places or regions they come from.
While the FDI flow in the developed countries have decreased in terms of percentage, the FDI shows
increased patter in developing economies which suggests that there are plenty of underlying
opportunities in the area. Despite of the fact that the world got stunned by the pandemic, the
region was well ahead in context to recovering of the economy. Therefore, car industry in the UK
has a great potentially exporting the products these market or in fact even setup a plant to continue
the production from outside the regular zone which may lead to understanding and gaining of
economies of scale in the long term.
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