Global foreign direct investment (FDI) flows in 2021 were $1.58 trillion, up 64 per cent from the exceptionally low level in 2020 (figure 1). 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.
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. The resulting investor uncertainty could put significant downward pressure on global FDI in 2022.
Other factors will affect FDI negatively in 2022. The flare-up of COVID-19 in China, with renewed lockdowns in areas that play a major role in global value chains (GVCs), could further depress new greenfield investment in GVC-intensive industries. The expected interest rate increases in major economies that are seeing significant rises in inflation will slow down M&A markets and dampen the growth of international project finance. Negative financial market sentiment and signs of a looming recession could accelerate an FDI downturn.
There are several stabilizing factors as well. The large public support packages adopted for infrastructure investment, with multiple-year implementation periods, could provide a floor under international project finance. Cross-border M&As and MNE financial transactions of multinational enterprises (MNEs) have not yet lost their strength. And, looking at the composition of 2021 FDI flows, some large recipient regions, notably Europe, were still at relatively low levels, historically.
However, overall, 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. New project activity is already showing signs of increased risk aversion among investors. Preliminary data for Q1 2022 show greenfield project numbers down 21 per cent and international project finance deals down 4 per cent.
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 (figure 2), where inflows reached $746 billion – more than double the 2020 level. The increase was mostly caused by M&A transactions and high levels of retained earnings of MNEs. Those, in turn, led to sizable intrafirm financial flows and major FDI fluctuations in large investment hubs. 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.Profits were high especially in developed countries because of the release of pent-up demand, low financing costs and significant government support.
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 in 2021, greenfield investment numbers increased by only 11 per cent, still one fifth below pre-pandemic levels. The value of greenfield announcements overall rose by 15 per cent to $659 billion but remained flat in developing countries at $259 billion – stagnating at the lowest level ever recorded. This is a concern, as new investments in industry are crucial for economic growth and development prospects.
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. The share of developing countries in global flows remained just above 50 per cent.
- FDI flows to Africa reached $83 billion, from $39 billion in 2020. Most recipients saw a moderate rise in FDI.
- In developing Asia, despite successive waves of COVID-19, FDI rose to an all-time high for the third consecutive year, reaching $619 billion.
- FDI in Latin America and the Caribbean rose by 56 per cent to $134 billion. Most economies saw inflows rebound, with only a few experiencing further declines.
- FDI flows to the structurally weak, vulnerable and small economies rose by 15 per cent to $39 billion. Inflows to the least developed countries (LDCs), landlocked developing countries (LLDCs) and small island developing States (SIDS) combined accounted for only 2.5 per cent of the world total in 2021, down from 3.5 per cent in 2020.
In 2021, MNEs from developed economies more than doubled their investment abroad to $1.3 trillion, from $483 billion. Their share in global outward FDI rose to three quarters of global outflows (figure 3). Much of the increase was driven by record reinvested earnings and high levels of M&A activity. The strong volatility of conduit countries continued in 2021.
Aggregate outward investment by European MNEs rebounded from the anomalously low level in 2020 of -$21 billion to $552 billion.
Outflows from North America reached a record $493 billion. MNEs from the United States increased their investment abroad by 72 per cent, to $403 billion. Flows to the European Union (EU) and the United Kingdom doubled, and those to Mexico almost tripled.
Outward FDI from other developed countries rose by 52 per cent to $225 billion, mainly because of increases from Japanese and Korean MNEs.
The value of investment activity abroad by MNEs from developing economies rose by 18 per cent, to $438 billion. Developing Asia remained a major source of investment even during the pandemic. Outward FDI from the region rose 4 per cent to $394 billion, contributing to almost a quarter of global outflows in 2021. Although overall outward investment from developing Asia increased, companies headquartered in the region made fewer acquisitions in 2021. Cross-border M&A purchases fell by 35 per cent to $45 billion. Acquisitions by MNEs headquartered in East Asia (mainly China) plummeted, from $44 billion in 2020 to just $6.3 billion.
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. However, most of the growth went to renewable energy. Investment activity – as measured by project numbers – in other SDG-related sectors, including infrastructure, food and agriculture, health, and WASH (water, sanitation and hygiene), saw only a partial recovery (table 1).
In LDCs, the SDG investment trend is less favourable than in other developing economies, and the detrimental impact of the pandemic persists. The share of total SDG investment in developing countries (both greenfield and international project finance values) that went to LDCs decreased from 19 per cent in 2020 to 15 per cent in 2021. Their share in the number of projects declined from 9 to 6 per cent.
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. More than 60 per cent is invested in developed countries, where 85 per cent of projects are purely privately financed. In contrast, almost half of the projects in developing countries require some form of public sector participation.
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. The instrument also enables governments to leverage public investment through private finance participation.
Comparing UNCTAD’s traditional top 100 MNEs with an updated ranking of the top 100 digital MNEs and a new data set of investment projects by small and medium-sized enterprises (SMEs) reveals starkly contrasting investment trends.
Sales of the 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. The traditional top 100 engage more in greenfield investment, and the digital MNEs more in M&As. Digital MNEs are FDI light, needing relatively little investment in physical assets to reach overseas markets. International production by both digital and large MNEs has grown continuously, albeit at different speeds. In contrast, FDI by SMEs is in decline. Over the past five years, the share of SMEs in greenfield investment projects fell from 5.7 to 1.3 per cent.
Looking specifically at the investment behaviour of digital MNEs, although they invest relatively less through greenfield projects, when they do, the potential contribution to developing the digital economy can be significant. In addition to logistical and sales support points (accounting for 42 per cent of their greenfield investment projects), digital MNEs set up professional services offices (24 per cent), research and development (R&D) centres (14 per cent) and infrastructure for the internet (10 per cent). Just over one third of projects by digital MNEs are in developing countries.
Looking instead at the smallest MNEs, the fall in their investment abroad during 2020 and 2021 can be explained by the economic fallout from the COVID-19 pandemic, which hit small businesses disproportionally. However, the decline set in well before the pandemic, which indicates that longer-term factors hinder SME internationalization. These factors include unequal access to finance, the growing digital gap between SMEs and larger companies, continued concentration in international business and, from a policy perspective, a lack of investment promotion and facilitation measures targeted at SMEs. The deteriorating international policy environment for trade and investment, especially the trade tensions after 2017, are also likely to have discouraged SMEs more than large MNEs.
Regional FDI Trends
FDI flows to Africa reached $83 billion – a record level – from $39 billion in 2020, accounting for 5.2 per cent of global FDI. However, most recipients saw a moderate rise in FDI after the fall in 2020 caused by the pandemic. The total for the continent was inflated by a single intrafirm financial transaction in South Africa in the second half of 2021. Excluding that transaction, the increase in Africa is still significant, but more in line with other developing regions. Southern Africa, East Africa and West Africa saw their flows rise; Central Africa remained flat and North Africa declined (figure 4).
Despite the overall positive FDI trend on the continent, total greenfield announcements remained depressed, at $39 billion, showing only a modest recovery from the low of $32 billion in 2020. In contrast, international project finance deals targeting Africa showed a rise of 26 per cent in number (to 116) and a resurgence in value to $121 billion (after $36 billion in 2020). The rise was concentrated in power ($56 billion) and renewables ($26 billion).
European investors remain the largest holders of foreign assets in Africa, led by the United Kingdom ($65 billion) and France ($60 billion).
Despite successive waves of COVID-19, FDI in developing Asia rose for the third consecutive year to an all-time high of $619 billion, underscoring the resilience of the region. It is the largest recipient region of FDI, accounting for 40 per cent of global inflows.
The 2021 upward trend was widely shared in the region, with South Asia the only exception (figure 5). However, inflows remain highly concentrated. Six economies (China, Hong Kong (China), Singapore, India, the United Arab Emirates and Indonesia, in that order) accounted for more than 80 per cent of FDI to the region.
Across developing Asia, investment in sectors relevant for the SDGs rose significantly. International project finance values in these sectors increased by 74 per cent to $121 billion, primarily because of strong interest in renewable energy. Project values in this industry rose 123 per cent, to $77 billion, from $34 billion in 2020.
In 2021, FDI in Latin America and the Caribbean rose by 56 per cent to $134 billion, sustained by strong inflows in traditional target industries such as automotive manufacturing, financial and insurance services, and electricity provision, and pushed up by record high investments in information and communication services across the region. Most economies saw inflows rebound, with only a few experiencing further declines caused by pandemic-induced economic crises. Flows rose in all three subregions in Latin America and the Caribbean (excluding financial centres) (figure 6).
Cross-border M&A activity in the region increased, resulting in a higher number of deals, although the total value of net sales was virtually unchanged from 2020 at $8 billion. Announced greenfield investment increased by 16 per cent, with most commitments going to the automotive, information and communication, and extractive industries. The value of international project finance deals doubled, exceeding pre-pandemic levels, pushed by large projects in transportation infrastructure (especially in Brazil), mining (across the region) and renewable energy.
FDI flows to 82 structurally weak, vulnerable and small economies rose by 15 per cent to $39 billion (figure 7). Inflows to the least developed countries (LDCs), landlocked developing countries (LLDCs) and small island developing States (SIDS) combined accounted for only 2.5 per cent of the global total in 2021, down from 3.5 per cent in 2020. Investment in various sectors relevant for achieving the SDGs, especially in food, agriculture, health and education, continued to fall in 2021.
The number and value of greenfield project announcements in LDCs continued their downward trend in 2021. The number of projects fell to 158, the lowest number since 2008. This is a major concern as greenfield investments are crucial for building productive capacity and thus for prospects of sustainable growth. By value, the largest projects were announced in energy and gas supply and in information and communication.
Looking over a longer period, since 2011, FDI flows to LDCs as a group have increased only marginally. FDI remains an important external source of finance for LDCs, but the growth of FDI lags other sources; official development assistance and remittances are by far the largest external financial flow to LDCs.
International project finance is an increasingly important source of investment in most countries and in a diverse set of industries, including SDG-relevant sectors. However, LDCs extractive industries continue to be the main target of project finance.
A few LDCs have seen some sectoral diversification. Looking at the types of investment that are most important for the development of productive capacities in LDCs, only investment in energy generation and distribution grew significantly during the decade, while investment in other infrastructure sectors and projects important for private sector development and structural change barely increased. During the pandemic, investment in several priority sectors for developing productive capacity almost completely dried up, making the next programme of action for LDCs – recently adopted – particularly challenging.