Global FDI rebounds strongly in 2021, but recovery uneven

Money

Geneva, 20 Jan (Kanaga Raja) – Global foreign direct investment (FDI) flows reached an estimated $1.65 trillion in 2021, an increase of 77% from the $929 billion recorded in 2020, surpassing their pre-COVID-19 level, the UN Conference on Trade and Development (UNCTAD) has said.

In its latest Investment Trends Monitor (Issue No. 40), UNCTAD said that the outlook for global FDI in 2022 is positive.

It said the rebound in the growth rate of global FDI in 2021 is unlikely to be repeated, adding that the underlying trend – net of conduit flows, one-off transactions and intra-firm financial flows – will remain relatively muted, as in 2021.

International project finance in infrastructure sectors will continue to provide growth momentum, said UNCTAD.

“The protracted duration of the health crisis with successive new waves of the pandemic continues to be a major downside risk.”

UNCTAD said the pace of vaccinations, especially in developing countries, as well as the speed of implementation of infrastructure investment stimulus, remain important factors of uncertainty.

Other important risks, including labour and supply chain bottlenecks, energy prices and inflationary pressures will also affect results, it added.

“Recovery of investment flows to developing countries is encouraging, but stagnation of new investment in least developed countries in industries important for productive capacities, and key Sustainable Development Goals (SDG) sectors – such as electricity, food or health – is a major cause for concern,” said Ms Rebeca Grynspan, the Secretary-General of UNCTAD.

“New investment in manufacturing and GVCs (global value chains) remains at a low level, partly because the world has been in waves of the COVID-19 pandemic and due to the escalation of geopolitical tensions,” said Mr James Zhan, Director of the UNCTAD Division on Investment and Enterprise.

“Besides, it takes time for new investment to take place. There is normally a time lag between economic recovery and the recovery of new investment in manufacturing and supply chains,” he added.

According to the report, developed economies saw the biggest rise by far, with FDI reaching an estimated $777 billion in 2021 – three times the exceptionally low level in 2020.

In Europe, more than 80% of the increase in flows was due to large swings in conduit economies, said UNCTAD.

Inflows in the United States more than doubled, with the increase entirely accounted for by a surge in cross-border mergers and acquisitions (M&As).

FDI flows in developing economies increased by 30% to nearly $870 billion, with a growth acceleration in East and South-East Asia (+20%), a recovery to near pre-pandemic levels in Latin America and the Caribbean, and an up-tick in West Asia.

Inflows in Africa also rose, with most recipients across the continent seeing a moderate rise in FDI, said UNCTAD.

The total for the region more than doubled, inflated by a single intra-firm financial transaction in South Africa in the second half of 2021.

Of the total increase in global FDI flows in 2021 ($718 billion), more than $500 billion, or almost three quarters, was recorded in developed economies, said the report.

On the other hand, the developing economies, especially the least developed countries (LDCs), saw more modest recovery growth.

“Investor confidence is strong in infrastructure sectors, supported by favourable long-term financing conditions, recovery stimulus packages, and overseas investment programmes,” said UNCTAD.

International project finance deals were up 53% in number and 91% in value, with sizeable increases in most high- income regions and in Asia and Latin America and the Caribbean.

In contrast, investor confidence in industry and global value chains remains weak, said the report.

It said greenfield investment project announcements were practically flat (-1% in number, +7% in value), while the number of new projects in GVC-intensive industries (e.g. electronics) fell further.

UNCTAD said greenfield investment activity remains 30% below pre-pandemic levels on average across industrial sectors, adding that only information and communication (the digital sector) has fully recovered.

Project finance in infrastructure now exceeds pre-pandemic levels across most sectors. Project numbers are up most in renewable energy and industrial real estate, it added.

It said the boom in cross-border M&As is most pronounced in services, with the number of deals in information and communication increasing by more than 50% to a quarter of the total.

Highlighting trends in FDI flows in some selected economies, UNCTAD reported that FDI in the United States – the largest host economy – increased by 114% to $323 billion, while cross-border M&As almost tripled in value to $285 billion.

FDI in the European Union was up 8%, with flows in the largest economies remaining well below pre-pandemic levels.

China saw a record $179 billion of inflows, or a 20% increase, driven by strong services FDI, said UNCTAD.

Brazil saw FDI double to $58 billion from a low level in 2020, with inflows remaining just below pre-pandemic levels.

The Association of South-East Asian Nations (ASEAN) resumed its role as an engine of growth for FDI in Asia and globally, with inflows up 35% and increases across most members, said the report.

It said flows to India were 26% lower, mainly because large M&A deals recorded in 2020 were not repeated, while inflows to Saudi Arabia quadrupled to $23 billion, in part due to an increase in cross-border M&As.

Flows to South Africa jumped to $41 billion (from $3 billion in 2020) due to the $46 billion share swap between the South African multinational Naspers and its Dutch-listed investment unit Prosus.

UNCTAD said that the recovery of investment flows to the SDG-relevant sectors in developing economies, which suffered significantly during the pandemic with double-digit declines across almost all sectors, remains fragile.

It said the combined value of announced greenfield investments and project finance deals rose by 55%, but mostly because of a small number of very large deals in the renewables sector.

The number of SDG-relevant investment projects in developing economies rose by only 11%, it added.

Renewable energy and utilities continue to be the strongest growth sectors, especially through international project finance.

However, UNCTAD said the trend in SDG-relevant investment is less favourable in the least developed countries (LDCs).

SDG investment project numbers in LDCs declined by a further 17%, after the 30% fall in 2020, while total project values increased by about 20% due to a single large renewable energy project.

“Looking at investment trends in LDCs through the lens of productive capacity development highlights structural weaknesses and shows that several sectors have been hard hit by the pandemic,” said UNCTAD.

It said investment projects important for private sector development and structural change have partly dried up – exacerbating the downturn in natural capital (extractive) projects, traditionally an important part of investment in many LDCs.