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Declining Global FDI Points to Slowdown in Globalization


Posted: Wednesday, November 4th, 2020

Estimated Reading Time: 3 minutes

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After China was accepted into the World Trade Organization (WTO), globalization, as measured by global Foreign Direct Investment (FDI), grew exponentially. For instance, only the European FDI into China in the period between 2001-2011 grew by 469%.

Moreover, the rise in global FDI led to multinational corporations and large firms to widen the EBITDA margin gap over small firms. Therefore, globalization led to large firms posting as much as 2.4 times EBITDA margin over small companies. As such, large companies’ profit continued to outpace the profit generated by small and medium-sized businesses.

However, the last years saw a massive decline in global FDI. Globalization seems to take a step back, as seen in the last several years. More precisely, between 2015-2019, global FCI declined dramatically. Moreover, the outlook appears uncertain. Global FDI will drop up to 40% this year alone, and 2021 and 2022 pose similar threats.

Global FDI

Going Locally – Challenges to Globalization

The U.S. elections are on everyone’s lips. As we speak, the United States continues to count the votes. Any of the two candidates may still win, but one, in particular, played a key role in the declining role of globalization in international trade.

First, let us focus on the benefits of trade. When two countries are opened to trade, the focus shifts on the countries’ comparative advantage. India, for instance, has a comparative advantage in textile manufacturing, while Spain in wine production. As such, the two countries will benefit if the trade is open as the welfare of their citizens increases.

However, barriers to trade, such as tariffs, dampen the welfare achieved by trade. Protectionism and isolationism are responsible for de-globalization, not to mention the global pandemic that hit the world in 2020.

This is good news for small and medium-sized businesses that benefit from their size to better compete locally. At the same time, the challenges imposed by the rise in ESG investment make large companies thinking twice about where to invest next.

Global FDI to Further Decline

Second, ever since the 2008-2009 Global financial crisis, globalization took a step back. If in the late 90s early 00s, all large corporations eyed a joint-venture in China, things changed dramatically.

A similar phenomenon took place in the aftermath of the Great Depression or at the start of the 20th century. De-globalization lasted all the way until the end of the Second World War.

Globalization

When measured by the world exports to GDP ratio, globalization declined only during the period between the Great Depression and the Second World War. As soon as the wars ended, trade reignited.

As such, one may argue without a shadow of a doubt that trade and globalization are responsible for much of the economic growth in the world in the last three-quarters of a century. Even the oil shock and high inflation years in the 70s and 80s were not enough to dampen trade.

However, protectionism and isolationism can. Coupled with a pandemic, the effects on global FDI and globalization may have dramatic effects.

Truth be told, the decline in global FDI or the de-globalization trend seen in the last years started well before the pandemic did. The United States played a key role, with the U.S.- China trade war the perfect example for it.

According to the World Investment Report for 2020, the global FDI flows in 2021 will show a 60% decline since 2015. More precisely, from over $2 trillion to less than $900 billion. Furthermore, the outlook beyond 2021 remains highly uncertain.

As the chart above shows, the sooner de-globalization ends, the better. Or else, the world is at risk of decades-long economic slowdown.

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