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World Investment Report 2022

Key Messages

GLOBAL INVESTMENT TRENDS AND PROSPECTS
Global foreign direct investment (FDI) flows in 2021 were $1.58 trillion, up 64 per cent from the exceptionally low level in 2020.

The recovery 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.

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However, the global environment for international business and cross-border investment changed dramatically in 2022.

The war in 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.

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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.

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The 2021 FDI recovery brought growth in all regions.

However, almost three quarters of the global increase was due to the upswing in developed countries, where FDI reached $746 billion – more than double the 2020 level.

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The high levels of retained earnings in 2021 were the result of record MNE profits.

The profitability of the largest 5,000 MNEs doubled to more than 8 per cent of sales.

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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 per cent and cross-border M&As were up 43 per cent, greenfield investment numbers increased by only 11 per cent, still one fifth below pre-pandemic levels.

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FDI flows to developing economies grew more slowly than those to developed regions but still increased by 30 per cent, to $837 billion.

The increase was mainly the result of strong growth performance in Asia, a partial recovery in Latin America and the Caribbean, and an upswing in Africa.

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International investment in sectors relevant for the Sustainable Development Goals (SDGs) in developing countries increased substantially in 2021, by 70 per cent.

The combined value of greenfield announcements and international project finance deals in SDG sectors exceeded the pre-pandemic level by almost 20 per cent.

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Renewable energy and energy-efficiency projects represent the bulk of climate change investments.

International private investment in climate change sectors is directed almost exclusively to mitigation; only 5 per cent goes to adaptation projects.

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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.

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Finally, comparing the largest, the smallest and the digital MNEs shows starkly contrasting investment trends.

Sales of UNCTAD’s top 100 digital MNEs grew five times faster than those of the traditional top 100 over the past five years, with the pandemic providing a huge boost.

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RECENT POLICY DEVELOPMENTS AND KEY ISSUES
In 2021, the pace of investment policymaking returned to pre-pandemic levels, with 109 new measures, 28 per cent fewer than in 2020.

That signalled an end to the emergency investment policymaking that characterized the first year of the pandemic; however, the crisis still affected the nature of the measures.

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Developed countries expanded the protection of strategic companies from foreign takeovers, bringing the share of measures less favourable to investment to an all-time high (42 per cent).

Four new countries adopted FDI screening mechanisms (including one developing country), and at least twice as many tightened existing mechanisms.

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Conversely, developing countries continued to adopt primarily measures to liberalize, promote or facilitate investment, confirming the important role that FDI plays in their economic recovery strategies.

Investment facilitation measures constituted almost 40 per cent of all measures more favourable to investment, followed by the opening of new activities to FDI (30 per cent) and by new investment incentives (20 per cent).

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The first quarter of 2022 registered a record number of new investment policy measures (75), mainly in response to the war in Ukraine.

Sanctions and countersanctions affecting FDI to and from the Russian Federation, Belarus and the non-government-controlled areas of eastern Ukraine constituted 70 per cent of all measures adopted in Q1 2022.

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Several notable developments accelerated the reform of the international investment agreement (IIA) regime in 2021.

They included the conclusion of new-generation megaregional economic agreements and large-scale terminations of old-generation bilateral investment treaties (BITs).

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For the second consecutive year, the number of terminations exceeded the number of newly concluded IIAs.

In 2021, countries concluded 13 IIAs and effectively terminated at least 86 IIAs, bringing the size of the IIA universe to 3,288.

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The total count of investor–State dispute settlement (ISDS) cases reached 1,190 at the end of 2021, with at least 68 new arbitrations initiated during the year.

Most of the cases initiated were brought under old-generation IIAs.

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Tax policy is used around the world as an instrument to promote international investment.

Countries rely on a variety of fiscal incentives to attract investors to priority sectors or regions.

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Incentives are typically not time-bound, nor allocated on the basis of transparent criteria.

Although the governance of incentives varies greatly across countries, on average, 70
per cent of incentives are allocated on the basis of discretion, criteria not available to the public or negotiation with individual investors.

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IIAs impose obligations on States that can create friction with tax measures undertaken at the national level.

Most IIAs do not exclude taxation from their scope, which means that they cover a wide range of tax-related measures, whether of general or specific application.

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THE IMPACT OF A GLOBAL MINIMUM TAX ON FDI
The introduction of a minimum tax of 15 per cent on the foreign profits of the largest MNEs proposed in the context of the G20/OECD Base Erosion and Profit Shifting (BEPS) project has important implications for international investment and investment policies.

BEPS Pillar II is expected to discourage MNEs from shifting profits to low-tax countries and to reduce tax competition between countries.

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Statutory rates of corporate income tax (CIT) have declined over the last three decades in a race to the bottom to attract international investment.

They now hover at about 25 per cent in both developed and developing countries.

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MNEs often pay significantly less tax on their foreign income because they can shift part of their profits to low-tax jurisdictions.

As a result, the actual tax rates faced by MNEs on their foreign income are about 15 per cent, significantly lower than the headline rate.

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Pillar II will increase the corporate income tax faced by MNEs on their foreign profits.

First, MNEs will reduce profit shifting, as they will have less to gain from it, and will  pay host-country tax rates.

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Both developed economies and developing economies are expected to benefit substantially from increased revenue collection.

Offshore financial centres stand to lose a substantial part of CIT revenues collected from MNEs’ foreign affiliates.

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The flipside of increased tax revenues is the potential downward pressure on the volume of investment that the increase in CIT on FDI activities will exert.

The baseline scenario places the potential downward effect on global FDI at about -2 per cent.

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The diversion effect could counterbalance investment losses caused by the volume effect.

However, this will not occur automatically. In a world of smaller tax rate differentials, countries stand to gain more from improvements in other investment determinants – including those related to infrastructure and the regulatory and institutional  environment.

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No country can afford to ignore Pillar II.

The mechanism that has been devised for implementation is such that it is sufficient for a relatively limited number of investor home countries (e.g. G20 and OECD members) to apply the top-up tax for the effects to become almost universal.

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The Pillar II reforms will thus have major implications for national investment policymakers and investment promotion institutions, and for their standard toolkits.

Fiscal incentives are widely used for investment promotion, including as part of the value proposition of most special economic zones.

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Investment policymakers urgently need to review their incentives packages, for both existing and new investors.

Some fiscal policy options to promote investment remain, including amplifying the benefit to investors of the so-called substance-based carve-out; shifting to incentives that are less affected by Pillar II; or reducing taxes that are not covered by Pillar II, to the extent that they have a bearing on investment decisions.

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International investment policymakers and negotiators of IIAs need to consider the potential constraints that IIA commitments may place on the implementation of key provisions of Pillar II.

If host countries are prevented by IIAs and their ISDS provisions from applying top-up taxes or removing incentives, the tax increase to the global minimum will accrue to home countries.

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The strategic implications of the reforms for investment policy are also important.

Reduced competition from low-tax locations could benefit developing economies.

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Looking ahead, many important details of Pillar II still need to be defined.

Therefore, it will be key for developing countries to strengthen cooperation and technical capabilities to ensure effective participation in the process of  negotiating the final shape of the reforms.

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The international community, in parallel with or as part of the Inclusive Framework discussions, should alleviate the constraints that are placing developing countries, and especially LDCs, at a disadvantage:
  • Vastly scale up technical assistance to developing countries to support BEPS implementation and investment policy adjustment.
  • Adopt a multilateral solution to remove implementation constraints posed by IIAs and mitigate ISDS risks.
  • As a stopgap measure, establish a mechanism to return any top-up revenues raised by developed home countries that should have accrued to developing host countries, but that they were unable to raise because of capacity or treaty constraints.
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CAPITAL MARKETS AND SUSTAINABLE FINANCE
UNCTAD estimates that the value of sustainability-themed investment products in global financial markets amounted to $5.2 trillion in 2021, up 63 per cent from 2020.

These products include sustainable funds ($2.7 trillion), green bonds (over $1.5  trillion outstanding), social bonds ($418 billion), mixed-sustainability bonds ($408 billion) and sustainability-linked bonds ($105 billion).

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The global market for sustainable funds experienced another year of exceptional growth in 2021.

Net investment reached $557 billion, up 58 per cent from 2020 and more than three times the 2019 level.

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New global sustainable bond issuance surpassed $1 trillion in 2021, including green, social and mixed-sustainability bonds, as well as sustainability-linked bonds.

The increase in sustainable bond issuance was especially visible in emerging markets.

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Concerns remain about greenwashing and the real impact of sustainability-themed investment products.

That is because most of these products are self-labelled and there is a lack of consistent standards and high-quality data to assess sustainability credentials.

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Institutional investors can exert a significant influence over their investees and the sustainable investment market through asset allocation and active ownership.

In 2021, public pension funds held more than $22 trillion in assets, or almost 40 per cent of global pension fund assets. The assets of sovereign wealth funds grew to $11 trillion.

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Currently, more than half of the 100 largest public pension and sovereign wealth funds do not disclose or report on sustainability issues.

Making progress on ESG reporting by these funds will require strengthening national regulations.

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Exchanges continue to play an important role in promoting sustainable finance, especially ESG disclosure.

The number of exchanges with written guidance on ESG disclosure for issuers grew to 63 at the end of 2021.

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Exchanges also have an important role in promoting gender equality.

The number of exchanges engaged in annual “Ring the Bell for Gender Equality” events has grown from just 7 in 2015 to over 110 in 2022.

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The climate emissions of publicly listed companies vary significantly from one market to another and can present systemic risks in some markets in a transition to net-zero emission economies.

Exchanges, regulators and policymakers should monitor the emissions of companies listed on public markets to ensure an orderly transition.

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Stock exchanges are playing an important role in helping listed companies take action on climate change,

including through intensive training of their issuers on climate disclosure reporting.

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With the rise of sustainability-themed financial products, governments around the world are stepping up their efforts to develop regulatory frameworks for sustainable finance.

By the end of 2021, 35 countries and economic groupings – both developed and developing – had 316 sustainable finance-dedicated policy measures and regulations in force, more than 40 per cent of which were introduced in the last five years.

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In 2021, efforts to coordinate and consolidate sustainable finance regulations and standards at the international level gathered momentum.

The International Organization of Securities Commissions (IOSCO) and the International Financial Reporting Standards (IFRS) Foundation are now leading a global effort in consolidating the major ESG reporting standards, effectively reducing the fragmentation that has persisted over the past decade.

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