Even as flows of foreign direct investment (FDI) recovered to pre-pandemic levels last year, developing countries need significant help from the international community to cope in an environment of uncertainty and risk aversion, according to the World Investment Report 2022, released today by UNCTAD.
The report titled International tax reforms and sustainable investment said that to cope with an environment of uncertainty and risk aversion, developing countries must get significant help from the international community.
FDI FLOWS: While the recovery from the pandemic benefitted all regions, almost three-quarters of the growth was concentrated in developed economies as FDI flows rose 134% and multinational companies posted record profits.
- Flows to developing economies rose 30% to $837 billion—the highest level ever recorded—largely due to strength 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%.
- The reinvested earnings component of FDI—profits retained in foreign affiliates by multinational companies – accounted for the bulk of the global growth, reflecting the record rise in corporate profits, especially in developed economies.
- The top 10 economies for FDI inflows in 2021 were the United States, China, Hong Kong (China), Singapore, Canada, Brazil, India, South Africa, Russia and Mexico.
2022 prospects: This year, the business and investment climate has changed dramatically as the war in Ukraine results in a triple crisis of high food and fuel prices and tighter financing. Other factors clouding the FDI horizon include renewed pandemic impacts, the likelihood of more interest rate rises in major economies, negative sentiment in financial markets and a potential recession.
- Despite high profits, investment by multinational companies in new projects overseas were still one-fifth below pre-pandemic levels last year. For developing countries, the value of greenfield announcements stayed flat.
- Signs of weakness are already emerging this year. Preliminary data for the first quarter shows greenfield project announcements down 21% globally, cross-border M&A activity down 13% and international project finance deals down 4%.
Investing in Sustainable Development Goals: After taking a significant hit in the first year of the pandemic, international SDG investment jumped 70% last year. But most of the recovery growth came in renewable energy and energy efficiency, where project values reached more than three times the pre-pandemic level.
- International project finance is increasingly important for Sustainable Development Goals and climate change investment. Some positive steps in these areas in 2021 could be tested this year.
- Announced international project finance deals hit a record of 1,262 projects last year and more than doubled in value to $656 billion.
- The introduction of a global minimum tax on foreign direct investment will have important implications for the international investment climate but both developed and developing countries are expected to benefit from an increased revenue collection.
