Despite being a leading sector for foreign direct investment (FDI), IT and software services was not immune from the disruption caused by the Covid-19 pandemic. Overall, the crisis is widely considered to have accelerated digitalisation across every sector, but GlobalData’s FDI projects database shows that greenfield investment projects in IT and software services during this period were, in fact, declining at a significant rate.

When it comes to greenfield projects in IT and software services, GlobalData’s project database shows that there were 2,239 projects in 2020, down 24.4% from 2,962 projects in 2019. The US and Germany saw a 1.1% and 7% rise, respectively, in FDI projects from 2019 to 2020, but the next three ranking countries in the top five investment destinations experienced declines. The UK’s project numbers decreased by 39.7%, India’s by 37.3% and Singapore’s by 21.4% between 2019 and 2020.

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Expansion projects showed a more positive picture, with the number of existing projects receiving investment rising by 4.9%, from 430 projects in 2019 to 451 in 2020.

What are the leading destinations for FDI in IT and software services?

Western Europe was the leading region when it came to attracting FDI in IT and software services in 2019 and 2020. At 2,026 projects, the region attracted 39% of all projects announced or opened globally during that period.

Asia-Pacific ranked second with 25% of all projects announced or opened, followed by North America, then central and eastern Europe and the Commonwealth of Independent States, followed by the Middle East and North Africa. South America, Central America and the Caribbean and sub-Saharan Africa all had project numbers below 200.

The US ranked as the leading country for attracting IT and software services FDI in 2019 and 2020, with 559 projects announced or opened over this period. The UK ranked second with 489, Germany third with 445, India fourth with 327 and Singapore fifth with 234.

Among these top five global destinations, the growth rate of FDI projects from 2019 to 2020 showed very different results. While FDI in IT and software services grew 1.1% in the US from 2019 to 2020, the UK saw a massive 39.7% drop during that same period. While Germany saw its inward investment grow 7% from 2019 to 2020, India’s fell 37.3% during the same period. Singapore’s FDI in IT and software services also fell 21.4% in 2020.

According to Glenn Barklie, chief economist at Investment Monitor, many large companies were thrust into the spotlight, expanding their bandwidth as the work from home generation was born. However, the online element is only one part of the software sector. “Like other sectors, the software industry had to deal with country lockdowns, making new foreign operations more difficult to achieve," says Barklie. "Given we have seen expansion projects rise but new investments fall, we can deduce that tech companies were focused more on the operations they had as opposed to generating new ones. Supply chain issues of electronic components such as semiconductors also impacted FDI flows.” That said, it should still be noted that the software sector was still the leading FDI sector by some margin.

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What are the top FDI business functions and sectors in IT and software services?

Sales, administration and marketing was by far the business function that attracted the highest number (3,161) of greenfield FDI projects in IT and software services in 2019 and 2020. Research and development ranked second, with a significantly lower number of projects at 829. Business and professional services ranked third with 652 projects.

Software as a service (SaaS), operating systems and apps was the top sector when it came FDI projects in IT and software services in 2019 and 2020, with 2,717 projects. Computer programming activities ranked second at 867, fintech at 682, then web portals at 330. Computer games demonstrated the smallest number of FDI projects at 171, but was the only sector to demonstrate growth between 2019 and 2020, with a 28% increase in project numbers. This growth contrasts with the decrease in project numbers between 2019 and 2020 for every other sector. The SaaS sector dropped 24.1% in project numbers, with web portals performing worst with a drop of 65.9% in project numbers.

Where are the leading investors in IT and software services located?

The US was the top investor when it came to investing in FDI projects in IT and software services throughout 2019 and 2020, although project numbers coming out of the country dropped 40.5% between 2019 and 2020. The UK was the second-largest source country for global investment in IT and software services, although again, project numbers dropped, this time by 24.9% between 2019 and 2020. Other leading source countries for FDI projects in IT and software services were Germany, France, Japan, Switzerland and India in order of investment value.

GlobalData's research shows that while Sweden ranked as the country with the ninth-highest outbound investment in IT and software services, it was the only country among the top ten source countries that increased its investment between 2019 and 2020. Although project numbers for Swedish outbound investment were relatively small, at 58 in 2019 and 71 in 2020, they grew 24.4% in this period compared with an overall slump in investment. Other countries that continued to invest through the downturn were China, Australia and Austria.

Which are the leading countries overall for FDI in IT and software services?

The US, the UK and Germany are the three clear leaders when it comes to IT and software services FDI on a country level. All three rank at the top of inward and outward FDI tables, and combined they represented 28.7% of the global FDI inflows and half of the FDI outflows in IT and software services in 2019 and 2020.

Although the US was the clear leader in project numbers, both for inward and outbound investment, Germany showed 7% growth in inward investment project numbers against an overall trend of negative growth in project numbers.

The UK was a clear second in project numbers for inward and outbound FDI in IT and software services but demonstrated large drops in project numbers for both inward and outbound investment between 2019 and 2020.

Barklie says the software sector is expected to return to positive growth in 2021. In fact, project numbers are expected to be in excess of 20% more than in 2020, and the software industry will continue to be a key driver of overall FDI project numbers going forward in a post-pandemic world.