Global FDI likely to dip in 2022, says UNCTAD report; warning signs for India
FDI recovered to pre-pandemic levels in 2021, but developing countries must brace for several challenges in 2022, including potential recession
Did India really benefit; did China really weaken?
Global flows of foreign direct investment (FDI) at about $1.6 trillion in 2021 recovered to pre-pandemic levels, but several uncertainties could challenge inflows into developing economies in 2022, according to UNCTAD’s latest World Investment Report.
The United Nations Conference on Trade and Development (UNCTAD), established by the General Assembly in 1964, is the UN’s leading institution dealing with global trade and development.
The report, “International tax reforms and sustainable investment“, highlighted that developing countries face greater challenges in 2022 owing to uncertainty and risk aversion due to several factors including the Ukraine war (triple crises – high food, high fuel prices, and tighter financing), renewed pandemic impacts, the likelihood of further interest rate hikes in major economies, negative sentiment in financial markets and a potential recession.
“In 2022, FDI flows to developing economies are expected to be strongly affected by the war in Ukraine and its wider ramifications, and by macroeconomic factors including rising interest rates,” the report said. “Fiscal space in many countries will be significantly reduced, especially in oil- and food-importing developing economies.”
Developing countries must get significant help from the international community, the report stated. “The need for investment in productive capacity, in the Sustainable Development Goals (SDGs) and in climate change mitigation and adaptation is enormous. Current investment trends in these areas are not unanimously positive,” said Rebeca Grynspan, Secretary-General, UNCTAD.
“It is important that we act now. Even though countries face very alarming immediate problems stemming from the cost-of-living crisis, it is important we are able to invest in the long term.”
In 2021, almost 75% of the growth was in developed economies as FDI flows rose 134% and MNCs posted record profits. The reinvested earnings component accounted for the majority of the global growth, reflecting the record rise in corporate profits, especially in developed economies, according to the report.
FDI to developing economies rose 30% to $837 billion – the highest level ever recorded (peak?) – largely due to strength in Asia. The share of developing countries in global flows remained just above 50% the report said.
China seemed to have benefited from the pandemic. FDI in China rose 21% and in Southeast Asia by 44%. But South Asia reversed, falling 26% as flows to India shrank to $45 billion. However, India announced a record high number of international project finance deals — 108 projects vs 20 on average for the past 10 years.
“UNCTAD foresees that the growth momentum of 2021 cannot be sustained and that global FDI flows in 2022 will likely move on a downward trajectory, at best remaining flat,” the report mentioned. “However, even if flows should remain relatively stable in value terms, new project activity is likely to suffer more from investor uncertainty.”
The introduction of a global minimum tax on FDI will have important implications for the international investment climate, but both developed and developing countries are expected to benefit from an increased revenue collection, the report said.
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