Global foreign direct investment (FDI) flows in 2021 were $1.58 trillion, up 64 per cent from the exceptionally low level of $1 trillion in 2020. FDI flows showed significant rebound momentum with booming merger and acquisition (M&A) markets and rapid growth in international project finance because of loose financing conditions and major infrastructure stimulus packages.
However, the global environment for international business and cross-border investment changed dramatically in 2022. Russia’s war against Ukraine – on top of the lingering effects of the pandemic – is causing a triple food, fuel and finance crisis in many countries around the world. The resulting investor uncertainty could put significant downward pressure on global FDI in 2022.
Other factors that will affect FDI negatively in 2022 include the flare-up of COVID-19 in China, with renewed lockdowns in areas that play a major role in global value chains (GVCs). This could further depress new greenfield investment in GVC-intensive industries. The expected interest rate increases in major economies that are seeing significant rises in inflation will slow down M&A markets and dampen the growth of international project finance. Negative financial market sentiment and signs of a looming recession could accelerate an FDI downturn. Besides the large public support packages adopted for infrastructure investment, with multiple-year implementation periods, could provide a floor under international project finance.
However, overall, the 2021 growth momentum is unlikely to be sustained. Global FDI flows in 2022 will likely move on a downward trajectory, at best remaining flat. Experts argue that new project activity is already showing signs of increased risk aversion among investors (that means the investors tend to put their money in less risky projects with lower returns). Preliminary data for Q1 2022 show greenfield project numbers down 21% and international project finance deals down 4%.
Regional inflows trends
The 2021 FDI recovery brought growth in all regions. However, almost 75% of the global increase was due to the upswing in developed countries, where inflows reached $746 billion – more than double the 2020 level.
The increase was mostly caused by M&A transactions and high levels of retained earnings of MNEs that were the result of record MNE profits. According to UNCTAD, the profitability of the largest 5,000 MNEs doubled to more than 8% of sales. Profits were high especially in developed countries because of the release of pent-up demand, low financing costs and significant government support.
Despite high profits, the appetite of MNEs for investing in new productive assets overseas remained weak. While infrastructure-oriented international project finance was up 68% and cross-border M&As were up 43% in 2021, greenfield investment numbers increased by only 11%, still 20% below pre-pandemic levels. The value of greenfield announcements overall rose by 15% to $659 billion but remained flat in developing countries at $259 billion – at the lowest level ever recorded. This is a concern, as new investments in industry are crucial for economic growth and development prospects.
FDI flows to developing economies grew more slowly than those to developed regions but still increased by 30%, to $837 billion. The increase was mainly the result of strong growth performance in Asia ($619 billion), a partial recovery in Latin America and the Caribbean ($134 billion), and an upswing in Africa ($83 billion). The share of developing countries in global flows remained just above 50%. As of 2021, top 5 FDI inflows host economies include the US ($367 bln), China ($181 bln), Hong-Kong ($141 bln), Singapore ($99 bln), Canada ($60 bln).
Regional outflows trends
In 2021, MNEs from developed economies more than doubled their investment abroad from $0.5 to $1.3 trillion. Much of the increase was driven by record reinvested earnings and high levels of M&A activity. Aggregate outward investment by European MNEs rebounded from the anomalously low level in 2020 of -$21 billion to $552 billion. Outflows from North America reached a record $493 billion. MNEs from the United States increased their investment abroad by 72%, to $403 billion. Outward FDI from other developed countries rose by 52% to $225 billion, mainly because of increases from Japanese and Korean MNEs. Developing Asia remained a major source of investment even during the pandemic. Outward FDI from the region rose 4 % to $394 billion, contributing to almost a quarter of global outflows in 2021. As of 2021, top 5 FDI outflows home economies include US ($403 bln), Germany ($152 bln), Japan ($147 bln), China ($145 bln), UK ($108 bln). SDGs investment trends International investment in sectors relevant for the Sustainable Development Goals (SDGs) in developing countries increased substantially in 2021, by 70%. The combined value of greenfield announcements and international project finance deals in SDG sectors exceeded the pre-pandemic level by almost 20 %. However, most of the growth went to renewable energy. Investment activity saw only a partial recovery in other SDG-related sectors – as measured by project numbers and compared with pre-pandemic levels – including infrastructure (-11%), food and agriculture (-35%), health (-25%), and Water, sanitation and hygiene -WASH (-9%). In LDCs, the SDG investment trend is less favourable than in other developing economies, and the detrimental impact of the pandemic persists. The share of total SDG investment in developing countries (both greenfield and international project finance values) that went to LDCs decreased from 19% in 2020 to 15% in 2021.
Renewable energy and energy-efficiency projects represent the bulk of climate change investments. More than 60% is invested in developed countries, where 85 % of projects are purely privately financed. In contrast, almost half of the projects in developing countries require some form of public sector participation. International project finance is increasingly important for SDG and climate change investment. The strong growth performance of international project finance can be explained by favourable financing conditions, infrastructure stimulus and significant interest on the part of financial market investors to participate in large-scale projects that require multiple financiers. The instrument also enables governments to leverage public investment through private finance participation.
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