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Global Foreign Direct Investment Rebounded in 2021, Despite Weakness in Greenfield Projects

Global foreign direct investment (FDI) showed a strong rebound in 2021, up 77 percent to an estimated $1.65 trillion from $929 billion in 2020, surpassing the pre-Covid-19 level, according to the United Nation’s Conference on Trade and Development’s (UNCTAD) “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 (SDGs) sectors such as electricity, food or health is a major cause for concern,” UNCTAD secretary-general Rebeca Grynspan said.

Developed economies saw the biggest rise, with FDI reaching an estimated $777 billion in 2021–three times the exceptionally low level in 2020, the report showed. In Europe, more than 80 percent of the increase came from large swings in conduit economies. Inflows in the United States more than doubled and were entirely derived from a surge in cross-border mergers and acquisitions (M&As).

FDI flows in developing economies rose 30 percent to nearly $870 billion, with a growth acceleration in East and South-East Asia, a recovery to near pre-pandemic levels in Latin America and the Caribbean and an uptick in West Asia. Inflows in Africa also rose, with most recipients across the continent seeing a moderate rise in FDI. The total for the region more than doubled, inflated by a single intrafirm financial transaction in South Africa in the second half of 2021.

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Of the total increase in global FDI flows in 2021 of $718 billion, more than $500 billion was recorded in developed economies. Developing economies, especially least developed countries (LDCs), saw more modest recovery growth.

The report says investor confidence is strong in infrastructure sectors, supported by favorable long-term financing conditions, recovery stimulus packages and overseas investment programs. International project finance deals were up 53 percent in number and 91 percent in value, with sizable increases in most high-income regions and in Asia and Latin America and the Caribbean, UNCTAD noted.

In contrast, investor confidence in industry and global value chains was weak, according to the report. Greenfield investment project announcements were down 1 percent in number and up 7 percent 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 percent below pre-pandemic levels on average across industrial sectors. Only the digital information and communication sector has fully recovered, UNCTAD said. A greenfield investment is generally defined as a type of FDI in which a parent company creates a subsidiary in a different country, building its operations from the ground up. In addition to the construction of new production facilities, these projects can also include the building of new distribution hubs, offices and living quarters.

FDI in the United States–the largest host economy–increased 114 percent to $323 billion, while cross-border M&As almost tripled in value to $285 billion. FDI in the European Union was up 8 percent, but flows in the largest economies remained well below pre-pandemic levels.

China saw a record $179 billion of inflows, a 20 percent increase, driven by strong services FDI, while Brazil saw FDI double to $58 billion from a low level in 2020, but inflows remained just below pre-pandemic levels.

The Association of Southeast Asian Nations (ASEAN) resumed its role as an engine of growth for FDI in Asia and globally, with inflows up 35 percent and increases across most members. FDI flows to India were 26 percent lower, mainly because large M&A deals recorded in 2020 were not repeated, while inflows to Saudi Arabia quadrupled to $23 billion, in part due to an increase in cross-border M&As.

Flows to South Africa jumped to $41 billion from $3 billion in 2020 due to the $46 billion share swap between the South African multinational Naspers and its Dutch-listed investment unit Prosus.

The recovery of investment flows to sectors relevant to the SDGs in developing economies, which suffered significantly during the pandemic with double-digit declines across almost all sectors, remains fragile, the report concluded.

The combined value of announced greenfield investments and project finance deals rose 55 percent, but mostly because of a small number of very large deals in the renewables sector. The number of SDG-relevant investment projects in developing economies rose only 11 percent. Renewable energy and utilities continue to be the strongest growth sectors, especially through international project finance.

In LDCs, the trend in SDG-relevant investment was less favorable. SDG investment project numbers in LDCs declined 17 percent, after a 30 percent fall in 2020.

UNCTAD said the outlook for global FDI in 2022 was positive, but the 2021 rebound growth rate is unlikely to be repeated, with international project finance in infrastructure sectors continuing to provide growth momentum, the report projected.

“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.”