Global foreign direct investment (FDI) flows showed a strong rebound in 2021, up 77% to an estimated $1.65 trillion, from $929 billion in 2020, surpassing their pre-Covid-19 level, according to UNCTAD’s Investment Trends Monitor.
“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 UNCTAD Secretary-General Rebeca Grynspan.
Biggest rise in developed economies
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, the report shows.
In Europe, more than 80% of the increase in flows was due to large swings in conduit economies. 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 uptick in West Asia.
Inflows in Africa also rose. Most recipients across the continent saw a moderate rise in FDI; 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. Developing economies, especially least developed countries (LDCs), saw more modest recovery growth.
Strong investor confidence in infrastructure sectors
The report says investor confidence is strong in infrastructure sectors (see the above figure), supported by favourable long-term financing conditions, recovery stimulus packages and overseas investment programmes.
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. Greenfield investment project announcements were practically flat (-1% in number, +7% in value). The number of new projects in global value chains (GVCs)-intensive industries such as electronics fell further.
In other sectoral trends, Greenfield investment activity remains 30% below pre-pandemic levels on average across industrial sectors. Only the information and communication (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.
The boom in cross-border mergers and acquisitions (M&As) is most pronounced in services. The number of deals in information and communication increased by more than 50% to a quarter of the total.
Positive outlook for 2022
The outlook for global FDI in 2022 is positive, according to the report. The 2021 rebound growth rate is unlikely to be repeated.
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, the report projects.
“New investment in manufacturing and GVCs 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 James Zhan, director of investment and enterprise at UNCTAD.
“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,” Zhan added.
The protracted duration of the health crisis with successive new waves of the pandemic continues to be a major downside risk.
The pace of vaccinations, especially in developing countries, as well as the speed of implementation of infrastructure investment stimulus, remains important factors of uncertainty.
Other important risks, including labour and supply chain bottlenecks, energy prices and inflationary pressures will also affect results. – TradeArabia News Service