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8 September, 2022

FDI in software and IT services in 2021: The state of play

Software and IT services FDI project numbers increased by almost one-third in 2021 but narrowly failed to reach pre-pandemic levels.

By Lara Williams

Global greenfield foreign direct investment (FDI) increased by 18.1% across all sectors in 2021 following a 17.5% decline in 2020 due to the Covid-19 crisis. By comparison, FDI projects in software and IT services increased by 29.3% in 2021, outpacing many other sectors, according to the Global FDI Annual Report 2022.

Software and IT services in FDI rose in 2021

Our FDI Projects Database found that FDI project numbers in software and IT services reached 2,886 in 2021, up from 2,232 the previous year, but failed to reach the 2019 total of 2,953. This resulted in an overall 2.3% decrease in project numbers between 2019 and 2021.

New greenfield projects in software and IT services continued to outnumber expansion projects. In 2021, new project numbers increased by almost one-quarter, from 1,778 projects in 2020 to 2,206 projects. Project expansions, however, outpaced the growth of new projects, increasing from 454 in 2020 to 680 projects in 2021. Between 2019 and 2021, new greenfield projects, although larger in overall volume, actually decreased by 12.6%, while expansion projects grew 58.1%.

Companies leading the sector with the highest numbers of FDI project numbers for software and IT services between 2019 and 2021 were Accenture, Google parent company Alphabet and Microsoft.

Where are the leading destinations for software and IT services FDI?

Western Europe was the leading destination for FDI projects in software and IT services across the three years from 2019 to 2021. The region recovered its pre-pandemic project numbers, with 1,173 projects recorded in 2021. Project numbers in the region had fallen to 877 during 2020 from 1,136 in 2019.

While western Europe held steady, Asia-Pacific and North America failed to recover pre-pandemic project numbers. However, despite Asia-Pacific failing to attract the 816 projects it did in 2019, the region’s project numbers increased from 495 in 2020 to 652 in 2021.

North America fared less well with a continued decline in project numbers from its peak of 401 in 2019 to 378 in 2020 and 309 in 2021. Although attracting much less inward investment than other regions, the Middle East and North Africa demonstrated the highest growth in project numbers, increasing 151% from 108 projects in 2019 to 272 projects in 2021.

On a country level, the UK attracted the highest number of software and IT services FDI projects in 2021 with 285, followed by Germany in a close second with 264. The UK almost recovered its pre-pandemic project volume of 300 projects, while Germany demonstrated a counter-trend of increasing FDI project numbers during the 2020 Covid-19 crisis from 215 projects in 2019 to 230 in 2020, and then reaching 264 projects in 2021.

India recovered its Covid-19 losses in 2021, recording 208 projects, up from 126 in 2020. The US failed to increase its software and IT services FDI project numbers in 2021, recording 207 projects, down from 280 in 2020 and 278 in 2019. Although FDI projects in software and IT services in the US declined by more than one-quarter in 2021 compared with pre-pandemic levels, the country demonstrated a counter-trend by increasing its inward investment in software and IT services during 2020.

What are the top software and IT services FDI operations?

Sales, administration and marketing remained the leading software and IT services FDI operation in 2021 with 1,783 projects. Business and professional services overtook research and development (R&D) project numbers across the three-year period from 2019 to 2021. In 2021, our FDI Projects Database recorded 488 business and professional services projects versus 404 R&D projects. This is a reversal on the 2019 data, which recorded 298 business and professional services projects and 487 R&D projects.

What are the top subsectors for software and IT services FDI?

Software-as-a-service, operating systems and apps remained the leading subsector for software and IT services FDI with 1,391 projects in 2021, increasing from 1,170 projects in 2020. Despite recording the highest number of projects throughout the period from 2019 to 2021, the subsector narrowly failed to recover its Covid-19 losses and achieve 2019 project levels, which stood at 1,539 projects. Computer programming activities and computer games demonstrated the highest growth between 2019 and 2021. Our FDI Projects Database recorded 605 computer programming activities projects and 101 computer games projects during 2021.

Where are the leading software and IT services investors located?

The US remained the leading source market by far for outbound software and IT services FDI in 2021, recording 941 projects, with the UK funding 288 projects, Germany 165 projects, then India and France with 152 and 137 projects, respectively. Although investment from India was much smaller than the leading source countries, the country showed a marked increase in investing in software and IT services FDI in 2021, with a 204% increase in projects, from 50 in 2020 to 152.

What does the future hold for FDI in software and IT services?

Overall, FDI in software and IT services has remained steady, recovering most of the project losses during the height of the Covid-19 crisis in 2020. While increased global digitalisation will continue to drive growth in software and IT services, multiple factors including global supply chain disruption, specialised skills shortages and slow economic growth will prove significant challenges for the sector going forward.

Download the full Global FDI Annual Report 2022 here.

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