Foreign Investment Rebounds but Strained Factories Miss Out

Foreign investment by businesses around the world surged in the first six months of 2021 as rich economies rebounded strongly from the effects of the pandemic, but fresh bets on manufacturing fell despite widespread signs that capacity isn’t up to meeting resurgent demand.

The United Nations on Monday said businesses made new overseas investments valued at $852 billion in the first half of this year, an increase of $373 billion from the same period a year earlier. Of that total, three-quarters went to rich countries as businesses responding to the prospect of a speedy recovery driven by the rapid deployment of effective Covid-19 vaccines.

The U.N. Conference on Trade and Development said the rebound was stronger than expected, although uneven. While foreign investment in rich countries more than doubled compared with the first half of 2020—with investment in the U.S. up 88%—businesses cut their new commitments in the world’s poorest countries by 9%.

That divergence reflects prospects for economic growth this year, with poor countries set for a weaker recovery as a consequence of their limited access to vaccines. Foreign investment in East and Southeast Asia—which is dominated by China and has greater access to vaccines than the poorest countries—rose 25%.

“The dreadful pandemic has apparently ceased to be a major drag on the economic performance of the advanced world,” said Holger Schmieding, chief economist at Germany’s Berenberg Bank. “Short of a nasty new shock such as the emergency of a vaccine-resistant variant of the virus, we expect Europe and the U.S. to get through the autumn and winter without major new lockdowns.”

In the years leading up to the pandemic, developing countries had claimed an increasing share of global foreign direct investment. However, 2021 may prove to be a blip, since rich countries suffered a larger drop in new investments during 2020.

Investment in the U.S. surged in the first half. Pictured, vehicles and containers at a port in Bayonne, N.J.

Photo: Spencer Platt/Getty Images

Unctad said it is now likely that the flow of foreign investment this year will exceed pre-pandemic levels. The agency previously had expected that to happen in 2022 or later.

However, most of the rapid rebound was driven by businesses buying or merging with overseas rivals. While that is a form of foreign investment in a country, it doesn’t increase the world’s overall capacity to supply goods and services.

That capacity is boosted by what are known as greenfield investments—for example, a new factory or an expansion of an existing facility. But greenfield investments in industry over the first nine months of this year were down 11% from 2020, with larger falls recorded in the automotive, electronic and chemicals sectors.

Satellite images show the scale of the backlog at ports in California, as ongoing supply chain issues now threaten the holiday shopping season. WSJ’s Jennifer Smith explains what’s causing the holdups for ships and cargo. Photo: Planet Labs Inc.

That suggests that businesses aren’t quickly adding capacity to meet the surge in demand that has pushed consumer prices higher this year. In most rich countries, central bankers have said they expect those supply shortfalls, and the pickup in inflation they have generated, to be temporary.

By contrast, Unctad said foreign investment in infrastructure projects had increased sharply in most rich countries, Asia and South America. It attributed that revival to government stimulus programs and low borrowing costs.

Corrections & Amplifications
Foreign direct investment in the U.S. was up 88% in the first half of 2021. An earlier version of this article incorrectly said that it had increased by 95%. (Corrected on Oct. 18)

Write to Paul Hannon at paul.hannon@wsj.com

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