Foreign direct investment (FDI) flows are exhibiting a robust rebound from Covid-19 as the world enters 2022. According to the UN Conference on Trade and Development’s (UNCTAD) Investment Trends Monitor, FDI flows increased by 77 percent to $1.65 trillion in 2021, after falling to $929 billion in 2020.
Unsurprisingly, developed countries witnessed the greatest increase in FDI inflows, with an expected $777 billion in 2021, three times the amount in 2020.
Due to cross-border mergers and acquisitions (M&A) almost tripling in value to $285 billion, FDI inflows into the United States more than doubled. Inflows into the United States increased by 114 percent to $323 billion.
In Europe, conduit economies (those providing tax benefits) accounted for 80% of inflows, with EU inflows increasing by 8%. However, the top economies are still below pre-Covid levels, so there is still a long way to go before a genuine recovery can be declared.
China had record-breaking FDI inflows of $179 billion in 2021, with a 20% growth, thanks to a strong services sector. Brazil has yet to fully recover, but FDI has increased to $58 billion.
The developing world is lagging behind.
On the negative side, the number of investment projects in areas relevant to the United Nations’ Sustainable Development Goals (SDGs) – such as power, food, and health – increased by just 11% in developing nations. However, the aggregate value of both greenfield and project finance deals climbed by 55%, owing to a small number of high-value renewables developments.
In the least-developed nations, overall investment project numbers for SDG sectors fell by 17%, which is especially worrying given the 30% drop in 2020.
FDI inflows into emerging economies increased by 30% in 2021 compared to 2020, with East, West, and South East Asia, Latin America, and the Caribbean leading the way in terms of foreign investment attraction after the pandemic.
Inflows into the Association of Southeast Asian Nations region increased by 35%, with the bulk of its members experiencing significant growth. However, India was unable to replicate its impressive M&A results from 2020, and FDI inflows were 26% lower in 2021 than in 2020.
Inflows into Africa more than doubled, but a substantial amount of it was due to a $46 billion share swap in South Africa between Naspers and Dutch investment firm Prosus in the second half of 2021. As a result, the bulk of African beneficiaries witnessed a more moderate increase in FDI. Inflows to Saudi Arabia doubled to $23 billion, thanks to cross-border M&A.
In 2021, the infrastructure industry benefited the most.
With a 53 percent growth in international project finance deals in 2021, infrastructure sectors received the lion’s share of FDI inflows. In comparison, new greenfield projects in industrial sectors (such as aerospace and manufacturing) fell by 1%.
Infrastructure industries have been recognized as being helped by stable financing environments, stimulus packages, and overseas investment incentives (such as energy and transportation). In 2021, the majority of high-income regions backed project finance deals, with the average value growing by 91%.
As a result, project finance has recovered to pre-pandemic levels in the vast majority of industries, with renewable energy and industrial real estate witnessing the most significant rises.
The impact of weakening supply chains is still being felt in the industrial sector, with greenfield project announcements only increasing by 7% in value. Greenfield investment is nevertheless recovering slowly, with activity hovering about 30% below pre-pandemic levels on average. The only industry that has defied the trend is information and communications technology (ICT), which has fully recovered from the pandemic’s effects.
M&A agreements in the services sector have injected money into the business, with the ICT sector experiencing a 50 percent rise in investment.
Despite the disparities in recovery between rich and developing nations, UNCTAD forecasts that worldwide FDI inflows are expected to increase in 2022. Infrastructure sectors, particularly renewables, are projected to continue their robust recovery from the impact of Covid-19.
Fragmented supply chains and an unequal global vaccination roll-out, on the other hand, may continue to obstruct developing countries’ recovery.