Countries around the world have introduced lockdowns to slow the spread of the Covid-19 virus but to varying degrees. Has this affected FDI levels? (Photo by Asanka Ratnayake/Getty Images)

Covid-19 has reached almost every corner of the world, resulting in more than 185 million cases and more than four million deaths. Virtually every country has implemented some form of restriction to slow the spread of the virus and prevent strain on health systems.

Restrictions have varied in severity from government to government. Lockdowns have been imposed at different times and various strategies have been enforced from mandatory mask-wearing, social distancing and quarantining to school closures and curfews.

Although lockdowns have proved necessary, they come at a heavy economic cost. According to data from the World Bank, global GDP contracted by 3.6% between 2019 and 2020. Figures published by the UN Conference on Trade and Development (UNCTAD) show that global foreign direct investment (FDI) flows dropped by 35% to $1trn from $1.5trn in 2019. This is almost 20% below the 2009 trough after the global financial crisis.

In addition, worldwide greenfield FDI fell by almost 30%. Governments worldwide must consider various health, social and economic concerns when it comes to easing restrictions, but did countries with stricter Covid-19 measures become less attractive to investors than those with softer measures, and did more lenient countries attract a larger share of FDI?

Latin American countries have strictest lockdowns

According to calculations by Investment Monitor based on Our World in Data’s Covid-19 Stringency Index, Honduras implemented the severest Covid-19 measures worldwide. It recorded an average score of 89 out of 100 between March and December 2020. The index is based on nine response indicators including school and workplace closures, with a value of 100 the strictest. The US and UK stood at a respective 68.2 and 65.5 in comparison.

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Honduras went into lockdown in March 2020. Restrictions on freedom of movement were implemented as well as border closures and a nationwide curfew. Measures eased slightly in August, but a national state of emergency remained in place and the night-time curfew was extended in November. Despite this, the country was one of 22 locations that saw an increase in FDI projects in 2020, up 14.3% from the previous year.

Honduras was followed by Libya (84.5), Venezuela (83.4), Bolivia (83.3) and Peru (83.2) in terms of strictness of lockdowns. Each saw a decline in greenfield FDI in 2020 apart from Venezuela, which recorded the same number of projects. However, it should be noted that these are not destinations that would typically attract high volumes of FDI, even pre-pandemic.

Nicaragua, Liechtenstein, Taiwan prove the most lenient

Nicaragua had the least strict Covid-19 regulations between March and December 2020 with an average score of 14.6. The government dismissed the use of lockdowns as impractical and instead focused on the roll-out of an education programme. Health professionals and volunteers visited 1.2 million households in late March 2020 and distributed information through TV and other media. Critics have claimed that the government downplayed the severity of the virus.

There is a clear lack of correlation between restrictiveness and FDI performance. Glenn Barklie, Investment Monitor

Despite this ‘business as usual’ approach, greenfield FDI project numbers into Nicaragua fell by 75% and capital investment by 54.6% in 2020.

Liechtenstein was the second most lenient country with a score of 20.6, followed by Taiwan (24.7), Tanzania (26.6) and Macau (29.7). Each of these countries experienced a decline in project numbers in 2020 apart from Macau, which saw a 14.3% rise.

Macau imposed severe containment measures following its first recorded case in January 2020. These included the closure of schools, mandatory remote working and cancellation of large-scale events. A temporary entry ban on foreign visitors was also set up in March 2020. The success of this lockdown meant the country could begin easing measures in May of the same year.

Glenn Barklie, principal economist at Investment Monitor, says: “There is a clear lack of correlation between restrictiveness and FDI performance.” He argues this is largely due to the world being restricted, adding: “Restrictions implemented in one country impact other countries. For example, travel bans have meant companies are unable to visit locations to conduct site selections. Theoretically, if I am unable to leave my heavily restricted country, I cannot invest in another country, even if it had zero restrictions.”

FDI declined in more than 140 countries

Figures published in the latest World Investment Report from UNCTAD revealed that greenfield FDI projects fell globally by 29% between 2019 and 2020. Over 140 countries experienced a decline in project numbers.

Among those that suffered the biggest losses were Uganda (-96.6%), Kazakhstan (-83.3%) and Pakistan (-73.3%). The number of FDI projects in China more than halved from 835 to 412 while India’s dropped by more than 40%. FDI in the UK shrank by one-third and the US by one-fifth.

Given that most countries suffered a steep decline in FDI regardless of the harshness of their restrictions, investors seem more likely to delay their prospective projects than invest in a country with lighter measures.

The top ten destination countries for FDI remained largely the same in 2019 and 2020 (albeit in a different order) apart from Mexico dropping off the list and the addition of Australia.

However, there were more than 20 countries that improved their FDI performance in 2020 despite the impact of the pandemic. Germany saw project numbers grow by 12.9% from 860 to 971.

Ireland also experienced a 5.7% increase from 228 to 241 despite having one of the strictest and more prolonged lockdowns in Europe.

Norway, Ecuador, and Poland also attracted more FDI projects despite mid to high average scores on Our World in Data’s Stringency Index (50.3, 74.2 and 56.6, respectively).

Lockdown disparity set to widen further

Following the roll-out of mass vaccination programmes starting in late 2020, the variation in lockdown measures has widened even further. Territories with higher vaccination rates are shifting their focus to living with the virus rather than containing it.

In mid-May 2021, the US Center for Disease Control and Prevention eased mask-wearing guidance. Fully vaccinated people in the US are permitted to stop wearing masks outdoors in crowds and in most indoor settings. On 19 July 2021, Boris Johnson will cancel hundreds of Covid regulations requiring face masks, social distancing and working from home, making England the most unrestricted society in Europe.

Meanwhile, concern over the Delta variant has triggered lockdowns across the Asia-Pacific region, including in Malaysia, which recently extended its national lockdown. More than 20% of Malaysia’s population has received at least one dose of the Covid-19 vaccine, compared with 66.9% in the UK. In Bangladesh, where the vaccination rate is just 3.5%, soldiers have been deployed to enforce stay-at-home orders as the number of new cases skyrockets.

In its 2021 World Investment Report, UNCTAD was optimistic about the prospect for rising levels of investment in 2021. It predicted that FDI flows would increase by 10–15% this year, although they are not forecast to hit pre-pandemic levels until 2022. It remains to be seen if these targets will be met, but as the vaccine roll-out continues and helps to restore investor confidence, countries with lower vaccination rates may continue to struggle.