Foreign Direct Investment Up 3.2% YoY in Q1... "Real Crisis Starting from Q2"

Ministry of Industry Announces Q1 2020 Foreign Direct Investment Trends
Global FDI to Decline 30-40% by Next Year... Energy, Aviation, and Automobile Sectors Hit Hard
"Strengthening Investment Attraction in E-commerce, Digital Devices, Data, Networks, and Artificial Intelligence"

[Asia Economy Reporter Moon Chae-seok] Foreign Direct Investment (FDI) in the first quarter reached $3.27 billion, marking a 3.2% increase compared to the same period last year. The government stated that despite the challenges posed by the novel coronavirus disease (COVID-19), the performance was solid, but the real crisis is expected to begin from the second quarter.

On the 9th, the Ministry of Trade, Industry and Energy announced the first quarter FDI trends reflecting this information. Based on reported figures, it was $3.27 billion, a 3.2% increase compared to the same period last year. Based on actual arrivals, it was $2.41 billion, a 17.8% decrease compared to the same period last year.

The reported basis refers to the amount foreign investors declared they would invest, while the arrival basis refers to the actual amount of money that came in.

According to the Ministry of Trade, Industry and Energy, the recovery trend of FDI that began in the second half of last year continued through the first quarter. Thanks to this, the year-on-year growth was maintained for three consecutive quarters: 4.7% in the third quarter of last year, 27.9% in the fourth quarter, and 3.2% in the first quarter of this year.

However, from the second quarter, looking at countries such as the United States and the European Union (EU), the U.S. recorded $370 million based on reported figures, a 136.8% increase year-on-year, showing that the impact of COVID-19 was limited. The EU (including the UK) recorded $750 million, a 24.4% decrease compared to the previous year.

By industry, the service sector recorded $2.65 billion, a 37.8% increase year-on-year, indicating that COVID-19 did not severely impact first quarter FDI. The manufacturing sector attracted $620 million in investment, down 48.7% year-on-year.

The Ministry of Trade, Industry and Energy cited the main characteristics of first quarter FDI as ▲ attracting investment in core materials, parts, and equipment to secure supply stability ▲ expanding investment in new industries such as e-commerce platforms and bio-healthcare ▲ expanding investment in new industries such as e-commerce platforms and bio-healthcare.

For example, Company D from the U.S. invested $28 million in EUV photoresist, one of Japan’s three major export-restricted items, showing active investment in materials, parts, and equipment.

With the expansion of non-face-to-face services due to COVID-19, online transactions increased, leading to the expansion of e-commerce service platforms that analyze big data in various forms.

From the second quarter, as the impact of COVID-19 hits major investing countries, the situation of FDI inflows into South Korea is expected to become challenging. The government forecasts that global FDI will decrease by 30-40% over two years from this year to next year due to COVID-19.

One month ago, on the 8th of last month, the forecast was a 5-15% decrease globally, affecting only East Asia, but this was revised. The Ministry of Trade, Industry and Energy expects that ultimately the extent of FDI decline will be determined by the duration of COVID-19 spread, government policy directions, and scale.

Therefore, new and increased greenfield investments and M&A transactions are expected to inevitably decrease. Cross-border mergers and acquisitions (M&A) averaged 1,200 cases per month last year, but have sharply declined to 874 cases in February this year and 385 cases last month.

A survey of 5,000 multinational companies showed profitability dropped by 30%. Accordingly, reinvestment of retained earnings is also expected to decrease. Particularly, the energy (-208%), aviation (-116%), and automotive (-47%) sectors are severely affected.

The Ministry of Trade, Industry and Energy plans to explore ways to utilize COVID-19 by increasing non-face-to-face investment attraction. Using overseas trade offices, they will identify 'target companies,' switch negotiation methods online, increase non-face-to-face reporting, and provide investment reporting and post-support.

With the expected increase in non-face-to-face demand after COVID-19, they plan to strengthen investment attraction activities in high-growth potential fields such as e-commerce, digital devices, and DNA (Data, Network, Artificial Intelligence).