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Why are FDI Inflows decreasing?

In these ever-changing times, we now see a worldwide decrease in FDI? But firstly, what even is FDI? FDI, foreign direct investment, is the purchase of an interest in a company by another company or investor outside its borders. Generally, the term describes a business decision to acquire a substantial stake in a foreign business or buy it outright to expand its operations to a new region.

FDI flows plunged globally by 35% in 2020, to $1 trillion from $1.5 trillion the previous year. Lockdowns caused by the COVID-19 pandemic around the world stalled the existing investment projects, and the prospects of a recession led multinational enterprises (MNEs) to reassess new projects. The fall was heavily skewed towards developed economies, where FDI fell by 58%, mainly due to corporate restructuring and intrafirm financial flows.FDI in developing economies was relatively resilient, dipping by 8%, primarily because of robust flows in Asia. As a result, developing economies accounted for two-thirds of global FDI, up from just under half in 2019.

FDI inflows dropped by 30% to $45 billion in 2021. A proximate cause is that big-ticket mergers and acquisitions (M&As) were not repeated. In 2020, cross-border M&As streamed 83% to $27 billion in ICT, health, infrastructure and energy to boost overall FDI to $64 billion. In the forthcoming year, cross-border M&As decreased by a massive 70% to $8 billion, which impacted overall flows to the country. Nevertheless, India remains among the top 10 global FDI recipients.

From $54 billion in 2018, they plunged to $30 billion in 2019, $24 billion in 2020 and $15.7 billion in 2021. These estimates are also consistent with those of FDI Markets of the Financial Times Group and point to difficulties in doing business on the ground, especially in various states, regulatory uncertainty and land acquisition problems. For example, land acquisition was a noteworthy factor behind a big-ticket FDI steel project in Odisha being shelved 7 years ago.

After abandoning plans for green-field steel factories in Odisha, Jharkhand and Karnataka, the world’s largest steel manufacturer, ArcelorMittal, alongside Nippon Steel, finally succeeded in establishing a footprint with a $6 billion bid to acquire Essar Steel.

Last December, Union Commerce Minister, Piyush Goyal provided another corroborative evidence of diminishing foreign on the floor of Parliament. Between 2014 and November 2021, 2,783 foreign companies with registered offices or subsidiaries in India closed down operations out of 12,458 active foreign subsidiaries operating in the country. Reasons for the same include culmination of business objectives and projects, restructuring by the parent company, amalgamation, further management decisions, uncertainties over the policy environment and regulatory hassles. Foreign investors exiting rather than staying arise as a cause of concern.

In conclusion, FDI inflows to India are decreasing continuously. For it to contribute to India's growth, incentivising inflows towards building green field factories like industrial parks is the need of the hour. since these depend on a more stable policy and regulatory framework, they can go on to enhance India's ranking.


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