China overtakes US to become world’s most favorite FDI destination

By Rahul Vaimal, Associate Editor
China Image
Representational Image

As the COVID-19 pandemic boosted an eastward shift in the center of gravity of the global economy, China overtook the US as the world’s top destination for new foreign direct investment (FDI) in 2020.

New investments by overseas businesses into the US, which held the No. 1 spot for decades, fell 49 percent in 2020, according to United Nations’ figures released recently. This is a result of the struggle that US faces to curb the spread of the new coronavirus and consequent slump in economic output.

Efficient management of the pandemic

China, which was in the second position for a long time, saw direct investments by foreign companies climb 4 percent, the United Nations Conference on Trade and Development (Unctad) said.

The country used strict lockdowns to largely contain COVID-19 after the disease first emerged in a central Chinese city, and China’s gross domestic product (GDP) grew even as most other major economies contracted last year.

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

While China attracted more new inflows last year, the total stock of foreign investment in the US remains much larger, reflecting the decades it has spent as the most attractive location for foreign businesses looking to expand outside their home markets.

Foreign investment in the US peaked in 2016 at $472 billion, when foreign investment in China was $134 billion. Since then, investment in China has continued to rise, while in the US it has fallen each year since 2017.

Trump administration’s moves

The Trump administration encouraged American companies to leave China and re-establish operations in the US. It also put Chinese investors on notice that acquisitions in the US would face new scrutiny on national security grounds, reducing Chinese interest in American deal making.

Foreign direct investment captures things like foreign companies’ building new factories or expanding existing operations in a country or their acquisitions of local companies.

In China, the flow of investments by multinational companies continued despite the upheavals of the pandemic, with companies from US industrial giant Honeywell International Inc. and German sportswear maker Adidas AG expanding their operations there.

Unctad doesn’t expect to see a significant revival of foreign direct investment this year, globally or in countries that saw falls in 2020. “Investors are likely to remain cautious in committing capital,” said James Zhan, Unctad’s director of investment and enterprise. He doesn’t expect a real rebound to come until 2022. Even then, he said, “the road to full FDI recovery will be bumpy.”

East Vs. West

The Unctad numbers show a stark divide between East and West in the global economy. In 2020, East Asia attracted a third of all foreign investment globally, its largest share since records began in the 1980s. India saw a 13 percent increase, driven largely by rising demand for digital services.

In the West, the European Union suffered a 71 percent drop. The UK and Italy, which have suffered high mortality rates and deep economic contractions, attracted no new investment. Germany, which has fared better on both counts, saw a 61 percent drop.

When the pandemic first struck at the beginning of last year, Unctad expected China to experience a large drop in foreign investment and the US to be largely unscathed. But China’s economy reopened in April just as the US and Europe started a series of continuing lockdowns and disruptions.

Unctad

The United Nations Conference on Trade and Development was established in 1964 as a permanent intergovernmental body. UNCTAD is the part of the United Nations Secretariat dealing with trade, investment, and development issues.

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