Businesses will likely cut their overseas investments by between 5% and 15% this year in response to the coronavirus outbreak, but there may also be a longer-lasting movement of production back to their home countries, the United Nations said Friday.
In a report, the United Nations Conference on Trade and Development said businesses will likely hold back on planned investments in the countries most severely affected by the spread of the virus, such as China, and economies with which it has close links.
“The entire East Asia, not only China but also Japan and Korea, will bear the brunt of the decline of FDI inflows,” said James Zhan, director of Unctad’s investment and enterprise division. “Covid-19 will also affect cross-border investment flows in the 10 Southeast Asian countries, as the subregion has been deeply integrated into the international production networks.”
Mr. Zhan said global foreign direct investment could fall to its lowest level since the 2008 financial crisis.
Unctad said that of the 100 largest companies that operate across a number of countries, 41 have issued profit warnings, with 10 seeing lower sales, 12 expecting production to be disrupted, and 19 expecting to face both problems.
It added that a majority of the largest 5,000 companies by revenues had revised their earnings expectations over the past month, and lowered their projections by 9% on average.
“Expected earnings were revised downwards, especially in the energy, basic-materials and consumer-cyclical sectors; the automotive and the travel and tourism industries have been among the worst hit,” Unctad said. “Companies in these sectors and industries are normally important capital investors.”
In addition to cuts in investment that reflect less upbeat profit expectations, there are likely to be longer-term consequences for foreign investment as businesses reconsider their supply chains.
Over recent decades, many companies have moved some of their production to countries where wages are lower, while others have relied on other companies based in those countries to make parts for their finished products.
Those shifts have created what are known as global supply chains. While they can cut down on costs, they leave businesses vulnerable to disruptions at any point on the chain. Shutdowns in China designed to contain the spread of the virus are likely to prove to be one of the most severe disruptions yet.
“The Covid-19 outbreak will potentially accelerate existing trends of decoupling and reshoring driven by the desire…to make supply chains more resilient,” Unctad said.
If FDI flows were to fall in 2020, it would mark a fifth straight year of decline. In 2019, overseas investments fell to $1.39 trillion from $1.41 trillion in 2018.
Over recent years, higher tariffs and the threat of new trade disputes between the U.S. and a variety of countries has raised questions about the reliability of the supply chains on which globalization depends. In addition, government scrutiny of takeovers by foreign companies has also increased, with a sharper focus on the implications for national security and technological advantage.
