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World Investment Report 2021

Key Messages

GLOBAL INVESTMENT TRENDS AND PROSPECTS
The COVID-19 crisis caused a dramatic fall in FDI

Global FDI flows dropped by 35 per cent to $1 trillion, from $1.5 trillion in 2019. This is almost 20 per cent below the 2009 trough after the global financial crisis.

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The decline was heavily skewed towards developed economies, where FDI fell by 58 per cent

This was in part due to oscillations caused by corporate transactions and intrafirm financial flows. FDI in developing economies decreased by a more moderate 8 per cent, mainly because of resilient flows in Asia. As a result, developing economies accounted for two thirds of global FDI, up from just under half in 2019.

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FDI patterns contrasted sharply with those in new project activity, where developing countries are bearing the brunt of the investment downturn

In developing countries, the number of newly announced greenfield projects fell by 42 per cent and the number of international project finance deals – important for infrastructure – by 14 per cent. This compares to a 19 per cent decline in greenfield investment and an 8 per cent increase in international project finance in developed economies.

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All components of FDI were down

The overall contraction in new project activity, combined with a slowdown in cross border mergers and acquisitions (M&As), led to a decline in equity investment flows by more than 50 per cent. With profits of multinational enterprises (MNEs) down 36 per cent on average, reinvested earnings of foreign affiliates – an important part of FDI in normal years – were also down.

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The impact of the pandemic on global FDI was concentrated in the first half of 2020

In the second half, cross-border M&As and international project finance deals largely recovered. But greenfield investment – more important for developing countries continued its negative trend throughout 2020 and into the first quarter of 2021.

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COVID-19 has caused a collapse in investment flows to sectors relevant for the SDGs in developing countries

All but one SDG investment sector registered a double-digit decline from pre pandemic levels. The shock exacerbated declines in sectors that were already weak before the COVID-19 crisis – such as power, food and agriculture, and health.

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Large MNEs, key actors in global FDI, are weathering the storm

Despite the 2020 fall in earnings the top 100 MNEs significantly increased their cash holdings, attesting to the resilience of the largest companies.

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Looking ahead, global FDI flows are expected to bottom out in 2021 and recover some lost ground, with an increase of about 10 to 15 per cent

This would still leave FDI some 25 per cent below the 2019 level. Current forecasts show a further increase in 2022 which, at the upper bound of projections, would bring FDI back to the 2019 level. Prospects are highly uncertain and will depend on, among other factors, the pace of economic recovery and the possibility of pandemic relapses, the potential impact on FDI of recovery spending packages, and policy pressures.

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REGIONAL TRENDS
FDI trends varied significantly by region

Developing regions and transition economies were relatively more affected by the impact of the pandemic on investment in GVC-intensive and resource-based activities.

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Among developed countries, FDI flows to Europe fell by 80 per cent

The fall was magnified by large swings in conduit flows, but most large economies in the region saw sizeable declines.

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FDI flows to Africa fell by 16 per cent to $40 billion – a level last seen 15 years ago

Greenfield project announcements, key to industrialization prospects in the region, fell by 62 per cent. Commodity exporting economies were the worst affected.

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Flows to developing Asia were resilient

Inflows in China actually increased, by 6 per cent, to $149 billion. South-East Asia saw a 25 per cent decline, with its reliance on GVC-intensive FDI an important factor. FDI flows to India increased, driven in part by M&A activity.

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FDI in Latin America and the Caribbean plummeted

FDI in Latin America and the Caribbean fell by 45 per cent to $88 billion. Many economies on the continent, among the worst affected by the pandemic, are dependent on investment in natural resources and tourism, both of which collapsed.

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FDI flows to economies in transition fell by 58 per cent to just $24 billion, the steepest decline of all regions outside Europe

Greenfield project announcements fell at the same rate. The fall was less severe in South-East Europe, at 14 per cent, than in the Commonwealth of Independent.

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FDI in structurally weak and vulnerable economies was further weakened by the pandemic

Although inflows in the least developed countries (LDCs) remained stable, greenfield announcements fell by half and international project finance deals by one third. FDI flows to small island developing States (SIDS) fell by 40 per cent, and those to landlocked developing countries (LLDCs) by 31 per cent.

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INVESTMENT POLICY DEVELOPMENTS
The number of investment policy measures of a regulatory or restrictive nature more than doubled in 2020

UNCTAD’s monitoring of national investment policy measures counted 50, against 21 in 2019. The increased use of screening mechanisms driven by national security concerns over FDI in sensitive industries was a key factor.

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The international investment agreements (IIA) regime is going through a process of rationalization

The entry into force of the EU agreement to terminate all intra-EU bilateral investment treaties (BITs) and the emergence of new megaregional IIAs are adding to the consolidation of bilateral investment policymaking and accelerating regional rulemaking.

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The number of ISDS cases surpassed 1,100

Most of the 68 publicly known ISDS cases initiated in 2020 were brought under IIAs signed before the turn of the century. In 2020, ISDS tribunals rendered at least 52 substantive decisions in investor–State disputes. Discussions on the reform of the investor–State dispute settlement (ISDS) system continued at the multilateral level.

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All newly signed IIAs now include reform-oriented clauses

IIAs concluded in 2020 all contain features in line with UNCTAD’s Reform Package for the International Investment Regime, with the preservation of States’ regulatory space being the most frequent area of reform. In 2020, UNCTAD launched its IIA Reform Accelerator to support the reform process.

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Most countries actively encourage domestic as well as foreign investment in the health sector, according to an UNCTAD survey

The range of policy tools deployed varies by region and level of development and includes incentives, investment promotion and facilitation, and dedicated special economic zones. While the pandemic has led some countries to increase oversight of health-sector investment, it has also led many governments to double down on efforts to encourage investment in the industry.

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INVESTING IN SUSTAINABLE RECOVERY
The recovery of international investment has started, but it could take some time to gather speed

Early indicators on greenfield investment and international project finance – and the experience from past FDI downturns – suggest that even if firms and financiers are now gearing up for “catch-up” capital expenditures, they will still be cautious with new overseas investments in productive assets and infrastructure.

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The focus of both policymakers and firms is now on building back better

Resilience and sustainability will shape the investment priorities of firms and governments. For firms, the push for supply chain resilience could lead to pressures in some industries to reconfigure international production networks through reshoring, regionalization or diversification. For governments, recovery stimulus and investment plans focusing on infrastructure and the energy transition imply significant project finance outlays.

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MNEs have three sets of options to improve supply chain resilience

They include (i) network restructuring, which involves production location decisions and, consequently, investment and divestment decisions; (ii) supply chain management solutions (planning and forecasting, buffers, and flexibility); and (iii) sustainability measures that have the additional benefit of mitigating certain risks.

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In the short term, the impact of the resilience push on international investment patterns will be limited

In the absence of policy measures that either force or incentivize the relocation of productive assets, MNEs are unlikely to embark on a broad-based restructuring of their international production networks. Resilience is not expected to lead to a rush to reshore but to a gradual process of diversification and regionalization as it becomes part of MNE location decisions for new investments.

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However, in some industries the process may be more abrupt

Policy pressures and concrete measures to push towards production relocation are already materializing in strategic and sensitive sectors. Recovery investment plans could provide further impetus: most investment packages, in both developed and developing countries, include domestic or regional industrial development objectives.

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Recovery investment plans in most countries focus on infrastructure sectors – including physical, digital and green infrastructure

These are sound investment priorities that (i) are aligned with SDG investment needs; (ii) concern sectors in which public investment plays a bigger role, making it easier for governments to act; and (iii) have a high economic multiplier effect, important for demand-side stimulus.

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A broader perspective on priorities for promoting investment in sustainable recovery includes not only infrastructure but also industries that are key to growth in productive capacity

Investment in industry, both manufacturing and services, was hit much harder by the pandemic than investment in infrastructure. A slow recovery of investment in industrial sectors – in which FDI often plays a more important role – will put a brake on productive capacity growth.

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Recovery investment packages are likely to affect global investment patterns in the coming years owing to their sheer size.

The cumulative value of recovery funds intended for long-term investment worldwide is already approaching $3.5 trillion, and sizeable initiatives are still in the pipeline. Considering the potential to use these funds to draw in additional private funds, the total “investment firepower” of recovery plans could exceed $10 trillion.

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The bulk of recovery finance has been set aside by and for developed economies and a few large emerging markets

Developing countries account for only about 10 per cent of total recovery spending plans to date. However, the magnitude of plans is such that there are likely to be spillover effects – positive and negative – to most economies.

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The use of international project finance as an instrument for the deployment of recovery funds can help maximize the investment potential of public efforts, but also raises new challenges

Addressing the challenges and maximizing the impact of investment packages on sustainable and inclusive recovery will require several efforts:

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Promoting investment in resilience, balancing stimulus between infrastructure and industry, and addressing the implementation challenges of recovery plans requires a coherent policy approach

At the strategic level, development plans or industrial policies should guide the extent to which firms in different industries should be induced to rebalance international production networks for greater supply chain resilience (from a firm perspective) and greater economic and social resilience (from a country perspective).

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For developing countries, industrial development strategies should generate a viable pipeline of bankable projects

The lack of shovel-ready projects in many countries remains a key barrier to attracting more international project finance. The risk now is that, in the absence of projects that have gone through the phases of design, feasibility assessment and regulatory preparation, the roll-out of recovery investment funds will incur long delays.

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At the level of execution, addressing recovery investment challenges can draw on initiatives included in UNCTAD’s Action Plan for Investment in the SDGs

UNCTAD believes that the drive on the part of all governments worldwide to build back better, and the substantial recovery programmes that are being adopted by many, can boost investment in sustainable growth. The goal should be to ensure that recovery is sustainable, and that its benefits extend to all countries and all people.

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CAPITAL MARKETS AND SUSTAINABILITY
UNCTAD estimates that the value of sustainability-themed investment products in global capital markets amounted to $3.2 trillion in 2020, up more than 80 per cent from 2019

These products include sustainable funds (over $1.7 trillion), green bonds (over $1 trillion), social bonds ($212 billion) and mixed-sustainability bonds ($218 billion). Most are domiciled in developed countries and targeted at assets in developed markets.

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Institutional investors are in a strong position to affect change on sustainability

They can do so primarily through two routes: (i) asset allocation – where they choose to invest the capital at their disposal, which can have a determinative impact on companies and markets; and (ii) active ownership – how they influence the policies of the companies they invest in through corporate governance mechanisms.

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Stock exchanges and derivatives exchanges affect sustainability in their markets through their influence on corporate ESG behaviour and through the promotion of sustainable finance products

Derivatives exchanges can contribute through sustainability-aligned derivates products, ESG data products and enhanced transparency. Stock exchanges contribute through a wider set of mechanisms.

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In the coming years, the sustainable investment market needs to transition from a niche to a mass market that fully integrates sustainability in business models and culture, leading up to 2030 and beyond

To do so, the market needs to tackle concerns of greenwashing and SDG-washing, and address its geographical imbalance. Much work has been done over the past decade by asset owners, financial institutions, exchanges, regulators and policymakers. Better coordination and effective monitoring of their activities can help accelerate the transition.

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