Foreign Direct Investment (FDI) Inflow

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).

International FDI Trend in 2019

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).

Reasons for downturn

 Large repatriations of accumulated foreign earnings by multinational enterprises (MNEs)
in the United States
 Tax reforms introduced at the end of 2017
 Insufficient compensation from upward trends in the second half of the year.
 From the above chart, it can be clearly observed that net inflows of FDI has been witnessing ups
and downs in recent years. While 2015 and 2016 experienced the better performances, other
years experienced lower rate of investment. It can be observed that while Asia region has shown
consistent performance in attracting FDIs, other regions are shown volatile with ups and downs
during various phases.

b. Developing Economies Trend

Africa witnessed an increase in FDI trend in the year 2018 which amounted to $45.9 Billion
which is 10.9% increment from the previous year. With its share of 3.5% in the world, Africa is
turning out to be an effective destination for many investing countries across the world.
Morocco attracted the FDI worth $3.6 Billion which was more than 35% more than the previous
year. Similarly, South Africa attracted FDI worth more than $5.3 Billion which is more than 165%
more than the previous year. However, few countries like Egypt, Ethiopia and Congo witnessed
a decrease in FDI trend compared to the previous year. However, these five countries remained
to be the top 5 host economies in terms of attracting FDIs. Countries like France, USA, China,
India, Netherlands, UK, Italy, Singapore are the major investors in the African region. Similarly, in
context to outflow of FDI from Africa, South Africa leads the chart followed by Nigeria, Algeria,
Morocco and Egypt (UNCTAD, 2019).
In the above picture, it can be clearly illustrated that, North Africa, West Africa and Southern
Africa are the major point of attraction for FDI inflow whereas East Arica and Central Africa have
comparatively a lower figure. Meanwhile, in context to outflows, North Africa and Southern
Africa are the major investors outside the region whereas East Africa, West Africa and Central
Africa have low figures.

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.

c. Developed Economies Trend

Developed economies were able to attract $556.9 Billion in the year 2018 which 26.7% lower
compared to the previous year and has share of 42.9% in the world. However, the region with
the strongest economies in the world is not only a region with ability to introduce FDIs but also
able to invest in countries outside its local territory. Irrespective of which continent these
country belong from, they are categorized according to their economic performance. While
United States and Netherlands were most successful to attract FDIs worth $251.8 Billion and
$69.7 Billion, UK, Australia and Spain too were successful to be amongst the top 5 economies
amongst the nations to be able to attract FDI with $64.5 Billion, $60.4 Billion and $43.6 Billion
 respectively. However, in context to the outflow of FDI from the region, Japan leads the chart
with $143.2 Billion followed by France, Germany, Netherlands and Canada with $102.4 Billion,
$77.1 Billion, $59.0 Billion and $50.5 Billion respectively (UNCTAD, 2019).

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.

d. Transition Economies Trend

Transition economies were able to attract $34.2 Billion in the year 2018 which 28% lower
compared to the previous year and has share of 2.6% in the world. However, the region still has
the potential when it comes to investment opportunities. While Russia and Serbia were most
successful to attract FDIs worth $13.3 Billion and $4.1 Billion, Kazakhstan, Ukraine and
Turkmenistan too were successful to be amongst the top 5 economies in the region to be able to
attract FDI with $3.8 Billion, $2.4 Billion and $2.0 Billion respectively. However, in context to the
outflow of FDI from the region, Russia leads the chart with $36.4 Billion followed by Azerbaijan,
Serbia, Georgia and Montenegro with $1.8 Billion, $0.4 Billion, $0.3 Billion and $0.1 Billion
respectively.
 It can be observed from the above picture that commonwealth of Independent States and
South-East Europe were the most attractive regions for the purpose of investment i.e. inflow of
FDIs. Similarly, commonwealth of Independent States was successful to make investments
outside their respective territory by investing in other countries.

Current FDI Trend in 2019

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

b. FDI and other cross-border capital flows

Cross border capital flow too witnessed a negative downturn resulting which FDI, portfolio
investment and other investment reduced to 5.9% of global GDP. It was observed that
developing economies received one third of global cross- border capital flows. However,
developed economies during the period witnessed the decrease by 27%. Considering the
increment in the amount of FDI inflow in the developing nations, it is undoubtedly true that it
holds a prominent position as a source of investment and capital formation in the country.
Potential Factors for the observation of recent trends

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

Latin America and The Caribbean

 Investments in Oil, Gas and Mining sector

 Development in on- metallic mineral products
 Investment in automotive sector
 Expansion in mining, health sector and electricity production
 Increase in Merger and Acquisition deals

Transition Economies

 Investment in automotive sector

 Investment in oil and gas
 Increase in Mergers and Acquisition deals

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

 Tax reforms and intrafirm financial flows

 Decrease in Intra-Europe Merger and Acquisition activities
 Difficult and stringent processes related to reviewing for foreign investments in Europe

America

 Decrease in Intra-company loans and equity investment

 Absence of cross border deals and merger and acquisition deals

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).

UK Automotive Industry Facts

1. Economy and Financial Facts

 Investment in 2019- £3.1 billion

 Turnover in 2019- £78.9 billion
 Investment in R&D- £3.72 billion
 Addition to UK Economy- £15.3 billion
 Suppliers- Above 2400
 New Cars Registered in 2019- 2,311,140

2. Manufacturing and Production Facts

 Commercial Vehicle Manufacturers- 4
 Premium and Sports Car Manufacturers- 7
 Bus and Coach Manufacturers- 8
 Engine Manufacturers- 11
 Mainstream Car Manufacturers- 6
 Specialist Car Manufacturers- Above 60
 Design Centers- 5
 Research and Development Centers- 20
 Total Cars Built in 2019- 1,303,135
 Commercial Vehicles Built in 2019- 78,270
 Engines Built in 2019- 2,520,165

3. International Trade Facts

 Export- £42.4 billion
 Contribution in total UK Export- 13%
 Countries Importing UK Built Cars 2019- Above 150
 Cars exported in 2019- 1,055,997

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.

Recommendation to minimize the risk

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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