. Investment in development sectors remain weak
Global foreign direct investment (FDI) flows showed a strong rebound in 2021, up 77% to an estimated $1.65 trillion, from $929 billion in 2020, surpassing their pre-COVID-19 level, according to UNCTAD’s Investment Trends Monitor released yesterday.
Of the total increase in global FDI flows in 2021 ($718 billion), more than $500 billion, or almost three quarters, was recorded in developed economies.
The United Nations Conference on Trade and Development added that developing economies, especially the least developed countries (LDCs), saw more modest recovery growth.
The Investment Monitor also showed that inflows in Africa also rose. “Most recipients across the continent saw a moderate rise in FDI; the total for the region more than doubled, inflated by a single intra-firm financial transaction in South Africa in the second half of 2021,” it said.
Commenting, UNCTAD Secretary-General, Rebeca Grynspan, said: “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 (SDG) sectors – such as electricity, food or health – is a major cause for concern.”
Indeed, 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 combined value of announced greenfield investments and project finance deals rose by 55%, 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 by only 11%. Renewable energy and utilities continue to be the strongest growth sectors, especially through international project finance.
In LDCs, the trend in SDG-relevant investment is less favourable. SDG investment project numbers in LDCs declined by a further 17%, after the 30% fall in 2020. Total project values increased by about 20% due to a single large renewable energy project.
Looking at investment trends in LDCs through the lens of productive capacity development highlights structural weaknesses and shows that several sectors have been hit hard by the pandemic.
Investment projects important for private sector development and structural change have partly dried up – exacerbating the downturn in natural capital (extractive) projects, traditionally an important part of investment in many LDCs.
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 (SDG) sectors – such as electricity, food or health – is a major cause for concern.
Developed economies saw the biggest rise by far, with FDI reaching an estimated $777 billion in 2021 – three times the exceptionally low level in 2020, the report shows.
In Europe, more than 80% of the increase in flows was due to large swings in conduit economies. Inflows in the United States more than doubled, with the increase entirely accounted for by a surge in cross-border mergers and acquisitions (M&As).
FDI flows in developing economies increased by 30% to nearly $870 billion, with a growth acceleration in East and South-East Asia (+20%), a recovery to near pre-pandemic levels in Latin America and the Caribbean, and an uptick in West Asia.
Confidence in infrastructure
The report says investor confidence is strong in infrastructure sectors, supported by favourable long-term financing conditions, recovery stimulus packages and overseas investment programmes.
The new UNCTAD estimates further show that infrastructure finance rose due to recovery stimulus packages, while greenfield investment activity remains weak across industrial sectors.
International project finance deals were up 53% in number and 91% in value, with sizeable increases in most high-income regions and in Asia and Latin America and the Caribbean.
In contrast, investor confidence in industry and global value chains remains weak. Greenfield investment project announcements were practically flat (-1% in number, +7% 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% below pre-pandemic levels on average across industrial sectors. Only the information and communication (digital) sector has fully recovered.
Project finance in infrastructure now exceeds pre-pandemic levels across most sectors. Project numbers are up most in renewable energy and industrial real estate.
The boom in cross-border mergers and acquisitions (M&As) is most pronounced in services, while the number of deals in information and communication increased by more than 50% to a quarter of the total.
The outlook for global FDI in 2022 is positive, according to the report. The 2021 rebound growth rate is unlikely to be repeated.