FDI flows to India drop 30% in 2021: UNCTAD

Foreign direct investment flows to India declined by 30% from its record level in 2020 to $45 billion in 2021, according to a report by the United Nations Conference on Trade and Development (UNCTAD).

However, a flurry of 108 new international project finance deals were announced in the country, compared with an average of 20 in the last 10 years, the trade body says in its World Investment Report 2022.

The renewable sector attracted the largest number of projects, it adds.

Major projects include the construction of a $13.5 billion steel and cement plant by Arcelormittal Nippon Steel and the construction of a $2.4 billion car manufacturing facility by Japan's Suzuki Motor.

The top 10 economies for FDI inflows in 2021 were the United States, China, Hong Kong, Singapore, Canada, Brazil, India, South Africa, Russia and Mexico.

South Asia was the only sub-region to suffer a drop in FDI inflows in 2021, as the $28 billion mergers and acquisitions registered the previous year were not repeated. FDI in South Asia fell by 26% to $52 billion in 2021.

Foreign direct investment (FDI) flows to developing countries in Asia rose by 19% to an all-time high of $619 billion in 2021, according to UNCTAD. FDI in China grew 21% and in Southeast Asia by 44%. Developing Asia receives 40% of global FDI.

This marked the third consecutive year that investment flows to the region grew despite the Covid-19 pandemic, which led to a 35% plunge in global FDI in 2020.

"FDI flows to developing economies in Asia during the pandemic have bucked the global trend and underscored the resilience of developing economies in Asia," says James Zhan, director of UNCTAD's investment and enterprise division.

Although the upward trend in 2021 was experienced across most sub-regions – South Asia was the only exception – just six countries attracted more than 80% of FDI inflows.

China was the main recipient, followed by Hong Kong, Singapore, India, the United Arab Emirates and Indonesia.

Flows of foreign direct investment (FDI) globally recovered to pre-pandemic levels in 2021, hitting $1.58 trillion – a 64% increase compared with 2020, according to UNCTAD.

Coming off a low base in 2020, global FDI rose last year with momentum from booming M&A activity and rapid growth in international project finance due to loose financing and major infrastructure stimulus packages.

Almost three quarters of the growth was concentrated in developed economies, where FDI flows soared 134%.

Flows to developing economies rose 30% to $837 billion – the highest level ever recorded – largely due to strong growth in Asia, a partial recovery in Latin America and the Caribbean and an upswing in Africa. The share of developing countries in global flows remained just above 50%.

The reinvested earnings component of FDI – profits retained in foreign affiliates by multinational companies – accounted for the bulk of the global growth, reflecting the record rise in corporate profits, especially in developed economies.

The trade body, however, says the prospects for 2022 are grimmer. This year, the business and investment climate has changed dramatically as the war in Ukraine has resulted in a triple crisis of high food and fuel prices and tighter financing. Other factors clouding the FDI horizon include renewed pandemic impacts, the likelihood of more interest rate rises in major economies, negative sentiment in financial markets and a potential recession.

Despite high profits, investment by multinational companies in new projects overseas were still one fifth below pre-pandemic levels last year. For developing countries, the value of greenfield announcements stayed flat.

Signs of weakness are already emerging this year. Preliminary data for the first quarter shows greenfield project announcements down 21% globally, cross-border M&A activity down 13% and international project finance deals down 4%.

"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 underlines. "However, even if flows should remain relatively stable in value terms, new project activity is likely to suffer more from investor uncertainty."