Foreign direct investment (FDI) flows saw a huge increase in 2021, according to the UN Conference on Trade and Development (UNCTAD) World Investment Report 2022. Capital investment levels rose by 64% to reach $1.58trn in 2021. The substantial growth was primarily a recovery after Covid-19 decimated FDI levels in 2020. Investment levels in 2021 were back to similar levels reached in 2019, before the pandemic was declared.
The growth, however, was not spread evenly across the world. Investment flows into developed economies grew by 134% in 2021, while developing economies only grew by 34%. Still, it should be noted that developed economies were also significantly more (negatively) impacted in 2020 compared with developing economies. This shows that developed economies are much more sensitive to global shocks.
Top companies undertook international finance projects and M&A to drive FDI
The sharp upturn was mostly a result of mergers and acquisitions (M&A) transactions and high levels of retained earnings of multinational corporations (MNCs). Profits of the top 5,000 MNCs rose to 8% of sales in 2021 (more than double the rate in 2020). Increased consumer demand, low financing costs and government support drove profit levels.
Top MNCs preferred investing in international finance projects (up 68%) and M&A deals (up 43%) compared with greenfield projects (up only 11%).
Renewables are the key to growth
According to UNCTAD, international investment in sectors relevant to the Sustainable Development Goals (SDGs) in developing countries increased substantially in 2021, by 70%. The combined value of greenfield announcements and international project finance deals in SDG sectors exceeded the pre-pandemic level by almost 20%. However, most of the growth went to renewable energy.
This tallies with Investment Monitor's own FDI projects database, which saw a 34% increase in greenfield renewable energy FDI projects in 2021.
Dreary outlook for 2022
Russia’s invasion of Ukraine has caused or heightened several key factors lingering from the Covid-19 pandemic, impacting investment levels. The cost of living crisis is being felt across the globe, and from an investment perspective, the threat of rising salaries as employees struggle to afford their existing standard of living is large. Additionally, food and fuel costs are soaring. Economic growth across countries is stalling due to falling trade growth, low capital availability, high debt, soaring inflation and increased interest rates. Supply chain issues continue to add pressures to global value chains.
UNCTAD suggests that in the first quarter of 2022, greenfield FDI was down 21% and international project finance deals were down 4%. This presents a rather sober outlook for the rest of 2022, with expectations of FDI growth set to be flat at best, but likely to fall.