Foreign investors repatriated cash and earnings from conduit countries in Europe at record pace in the first half of 2020 as they reacted to the pandemic and reassessed their long-term strategies. 

“Multinational companies (MNEs) are still in a stage of response, rather than recovery and resilience building,” James Zhan, the director of Investment and Enterprise at the United Nations Conference on Trade and Development (Unctad) tells fDi. 

“Overall, we don’t see massive restructuring of production systems coming up yet. What we have seen is existing projects being put on pause and new investment projects being reviewed. And we have seen some MNEs trying to repatriate cash back home or closer to home. That’s why foreign investment in some conduit countries drastically declined.” 

Conduit offshore financial centres (OFCs) are intermediate destinations used by MNEs to route international investments and enable the transfer of capital with little taxation and scrutiny towards sink OFCs, where the capital is stored and retained. Conduit countries facilitate the movement of capital in and out of tax havens that would otherwise fall foul of more stringent domestic regulations. 

Some four European countries feature among the world’s five largest conduit countries, by value flowing through them, according to 2017 research published in Scientific Reports. They are, from highest to lowest, the Netherlands, the UK, Switzerland, Singapore and Ireland. 

Most of these countries experienced strong volatility and net outflows of capital — which happens when the overall amount of the capital flowing out of a country exceeds the overall amount of capital flowing in —  in the first half of 2020, according to Unctad data.

The Netherlands experienced a net outflow of foreign investment of $86bn in the first half of 2020; the UK had a net outflow of $30bn and Switzerland had $98bn net outflow. Ireland was the only one of the four to experience a positive net inflow of foreign investment ($75bn in the first half of 2020). 

This capital outflow from conduit countries is a symptom of the current wait-and-see mode of major global investors, Mr Zhan believes. 

“They are not going to invest in the region, nor [are they] planning to expand existing operations of their affiliates, so they are moving cash back home or closer to home.” 

Investors may also be repositioning to anticipate possible tax hikes by European governments whose fiscal budgets will have to be replenished to continue their current expansionary policies. 

“At this stage, the [European] governments considering stimulus packages are also looking for ways to fund then. Any possibility for new taxation may have some implication [in the minds of investors], which therefore decide to take the cash back. It’s a risk-aversion behaviour,” Mr Zhan says. 

The capital outflow from conduit countries caused overall net foreign investment into Europe to drop to a net negative for the first time since Unctad started collecting FDI data in the 1970s. The region saw a net outflow of capital of $7bn in the first half of 2020, compared with a net inflow of $202bn in the same period of 2019, Unctad data show.