Flows of foreign direct investment (FDI) recovered to pre-pandemic levels last year, hitting nearly $1.6 trillion but the prospects for this year are grimmer, the latest UNCTAD World Investment Report said.
The report entitled "International tax reforms and sustainable investment" said that to cope with an environment of uncertainty and risk aversion, developing countries must get significant help from the international community.
Developing Asia, which receives 40% of global FDI, saw flows rise in 2021 for the third straight year to an all-time high of $619 billion.
FDI in China grew 21% and in Southeast Asia by 44% but South Asia went the other way, falling 26% as flows to India shrank to $45 billion.
"The need for investment in productive capacity, in the Sustainable Development Goals (SDGs) and in climate change mitigation and adaptation is enormous. Current investment trends in these areas are not unanimously positive," said Rebeca Grynspan, Secretary-General of United Nations Conference on Trade and Development (UNCTAD).
"It is important that we act now. Even though countries face very alarming immediate problems stemming from the cost-of-living crisis, it is important we are able to invest in the long term."
Coming off a low base in 2020, global FDI flows rose 64 percent to $1.58 trillion last year with momentum from booming merger and acquisition (M&A) activity and rapid growth in international project finance due to loose financing and major infrastructure stimulus packages.
Explore UNCTAD’s interactive data visualization on FDI inflows and outflows in countries and regions over the last 30 years.
While the recovery benefitted all regions, almost three-quarters of the growth was concentrated in developed economies as FDI flows rose 134% and multinational companies posted record profits.
Flows to developing economies rose 30% to $837 billion – the highest level ever recorded – largely due to strength in Asia, a partial recovery in Latin America and the Caribbean and an upswing in Africa.
The share of developing countries in global flows remained just above 50%.
The reinvested earnings component of FDI – profits retained in foreign affiliates by multinational companies – accounted for the bulk of the global growth, reflecting the record rise in corporate profits, especially in developed economies.
The top 10 economies for FDI inflows in 2021 were the United States, China, Hong Kong (China), Singapore, Canada, Brazil, India, South Africa, Russia and Mexico.
This year, the business and investment climate has changed dramatically as the war in Ukraine results in a triple crisis of high food and fuel prices and tighter financing.
Other factors clouding the FDI horizon include renewed pandemic impacts, the likelihood of more interest rate rises in major economies, negative sentiment in financial markets and a potential recession.
Despite high profits, investment by multinational companies in new projects overseas were still one-fifth below pre-pandemic levels last year. For developing countries, the value of greenfield announcements stayed flat.
"UNCTAD foresees that the growth momentum of 2021 cannot be sustained and that global FDI flows in 2022 will likely move on a downward trajectory, at best remaining flat," the report underline. "However, even if flows should remain relatively stable in value terms, new project activity is likely to suffer more from investor uncertainty."
In 2021, FDI in Latin America and the Caribbean rose 56% – with South America’s growth of 74% sustained by higher demand for commodities and green minerals.
For structurally weak, vulnerable and small economies rose by 15% to 39 trillion, however influx to the least developed countries, landlocked and small island developing states combined accounted only for 2.5 percent of the world total in 2021, down from 3.5 percent in 2020.
The impact of the pandemic intensified fragility and investment in sectors relevant for the SDGs – especially food, agriculture, health and education – continued to fall.
"In 2022, FDI flows to developing economies are expected to be strongly affected by the war in Ukraine and its wider ramifications, and by macroeconomic factors including rising interest rates," the report said. "Fiscal space in many countries will be significantly reduced, especially in oil- and food-importing developing economies."
Investing in Sustainable Development Goals
After taking a significant hit in the first year of the pandemic, international SDG investment jumped 70% last year.
But most of the recovery growth came in renewable energy and energy efficiency, where project values reached more than three times the pre-pandemic level.
"While the 2021 recovery in value terms is positive, investment activity in most SDG-related sectors in developing economies, as measured by project numbers, remained below pre-pandemic levels," the report said.
"Across developing Asia, investment in sectors relevant for the SDGs rose significantly," the report said. "International project finance values in these sectors increased by 74% to $121 billion, primarily because of strong interest in renewable energy."
International project finance is increasingly important for Sustainable Development Goals and climate change investment. Some positive steps in these areas in 2021 could be tested this year.
Announced international project finance deals hit a record of 1,262 projects last year and more than doubled in value to $656 billion.
The introduction of a global minimum tax on foreign direct investment will have important implications for the international investment climate but both developed and developing countries are expected to benefit from an increased revenue collection.