Global foreign direct investment (FDI) surged 77 per cent year-on-year to an estimated $1.65 trillion in 2021, exceeding pre-pandemic levels, while the outlook for flows this year is positive, the United Nations has said.
The rise in FDI flows last year was driven by higher infrastructure financing due to economic stimulus packages but recovery remains uneven, the UN Conference on Trade and Development (Unctad) said in its latest Investment Trends Monitor report.
Developed economies recorded the biggest FDI flows last year, which tripled to $777 billion from a year ago, while inflows to developing countries rose 30 per cent to $870bn. By comparison, least-developed economies recorded a modest FDI increase of 19 per cent to $28bn in 2021.
“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 Goal sectors – such as electricity, food or health – is a major cause for concern,” said Rebeca Grynspan, Unctad secretary general.
FDI into the US, the world's biggest economy and the largest recipient of investments, more than doubled to $323bn as cross-border mergers and acquisitions surged. Flows to the EU rose 8 per cent to $165bn but remained well below pre-pandemic levels in the bloc's largest economies.
China, the world's second-biggest economy which grew 8.1 per cent last year, recorded $179bn of inflows – a 20 per cent increase – driven by strong investment in the services sector.
Inflows to Saudi Arabia, the Arab world's biggest economy, quadrupled to $23bn, in part due to an increase in cross-border mergers and acquisitions, Unctad said.
The Association of South-east Asian Nations drove FDI growth in Asia and globally, with inflows up 35 per cent. Inflows to India were 26 per cent lower, mainly because large M&A deals recorded in 2020 were not repeated, the UN agency said.
In terms of sectors, investor confidence in infrastructure was strong, supported by favourable long-term financing conditions, recovery stimulus packages and overseas investment programmes.
The number of international project finance deals rose 53 per cent, while transaction value increased 91 per cent, with sizeable increases in most high-income regions, Asia, Latin America and the Caribbean, Unctad said.
By contrast, investor confidence in industry and global value chains was weak. Greenfield investment project deals were flat, declining 1 per cent in the number of transactions and up 7 per cent in value. The number of new projects in global value chains and intensive industries such as electronics fell further.
In industrial sectors, greenfield investment activity was 30 per cent below pre-pandemic levels. Only the information and communication sector has fully recovered.
Project finance in infrastructure now exceeds pre-pandemic levels across most sectors. Project numbers are up the most in renewable energy, as countries and companies commit to net-zero targets by mid-century.
The service sector saw a boom in cross-border M&A deals. The number of transactions in information and communication increased by more than 50 per cent to a quarter of the total.
However, the recovery of investment flows to sectors relevant to the UN’s SDGs in developing economies, which suffered significantly during the pandemic with double-digit declines across almost all sectors, remains fragile.
Looking forward, the outlook for global FDI in 2022 is "positive", though last year's rebound growth rate is unlikely to be repeated, Unctad said.
“New investment in manufacturing and GVCs remains at a low level, partly because the world has been in waves of the Covid-19 pandemic and due to the escalation of geopolitical tensions,” said James Zhan, director of investment and enterprise at Unctad.
“Besides, it takes time for new investment to take place. There is normally a time lag between economic recovery and the recovery of new investment in manufacturing and supply chains."
A major risk to the FDI outlook this year is the protracted duration of the health crisis with successive new waves of the pandemic continuing, the UN agency said.
Labour shortages, supply chain bottlenecks, energy prices and inflationary pressures are also significant risks to the global FDI outlook this year.
"The pace of vaccinations, especially in developing countries, as well as the speed of implementation of infrastructure investment stimulus, remain important factors of uncertainty," Unctad said.