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Info Service on WTO and Trade Issues (Jul23/05) Penang, 6 Jul (Kanaga Raja) — “After a steep drop in 2020 and a strong rebound in 2021, global foreign direct investment (FDI) declined by 12 per cent in 2022, to $1.3 trillion,” the United Nations Conference on Trade and Development (UNCTAD) has said. In its World Investment Report 2023 published on 5 July, UNCTAD said that the slowdown in FDI flows in 2022 was driven by “the global poly-crisis: the war in Ukraine, high food and energy prices, and debt pressures.” “International project finance and cross-border mergers and acquisitions (M&As) were especially affected by tighter financing conditions, rising interest rates and uncertainty in capital markets,” it added. Among the other key messages highlighted are that much of the growth in international investment in renewable energy, which has nearly tripled since the adoption of the Paris Agreement in 2015, has been concentrated in the developed countries. UNCTAD said that developing countries need renewable energy investments of about $1.7 trillion annually but attracted foreign direct investment in clean energy worth only $544 billion in 2022. It said that total funding needs for the energy transition in developing countries are much larger and include investment in power grids, transmission lines, storage and energy efficiency. UNCTAD also said that the investment gap across all sectors of the Sustainable Development Goals (SDGs) has increased to more than $4 trillion per year from $2.5 trillion in 2015, with the largest gaps being in energy, water and transport infrastructure. In a foreword to the report, Ms Rebeca Grynspan, the Secretary-General of UNCTAD, said that the prospects for international investment looked extremely gloomy last year, with a cascading crisis of health, climate change and economic shocks causing investor uncertainty around the world. “Rising inflation, fears of a recession and turbulence in financial markets put many investment plans on hold at the beginning of the year. In the end, international investment flows did suffer, but proved more resilient than expected.” Ms Grynspan said while global FDI declined by 12 per cent last year to $1.3 trillion, the slowdown was limited, investment flows to developing countries increased marginally, and investors finished the year announcing new projects in both industry and infrastructure. “Business as usual, however, is still bad news. The major disparities in global investment patterns remained. The growth of investment in developing countries is concentrated in a small number of large emerging economies.” She said foreign direct investment flows to many smaller developing countries are stagnant, while flows to the least developed countries fell by 16 per cent from an already low base. Similarly, Ms Grynspan said at the sectoral level, strong growth in some sectors – such as semiconductors in response to chip shortages – is accompanied by weak performance in other industries that are important for the build-up of productive capacity in developing countries. GLOBAL FDI TRENDS Global foreign direct investment (FDI) flows in 2022 declined by 12 per cent to $1.3 trillion, after nosediving in 2020 and rebounding in 2021, said the report. “The multitude of crises and challenges on the global stage – the war in Ukraine, high food and energy prices, risks of recession and debt pressures in many countries – negatively affected global FDI.” International project finance values and cross-border mergers and acquisitions (M&As) were especially shaken by stiffer financing conditions, rising interest rates and uncertainty in financial markets. The value of international project finance deals fell by 25 per cent in 2022, while cross-border M&A sales were 4 per cent lower, said the report. “The global environment for international business and cross-border investment remains challenging in 2023. Although the economic headwinds shaping investment trends in 2022 have somewhat subsided, they have not disappeared.” The report said that commodity prices that rose sharply with the war in Ukraine have tempered, but the war continues, and geopolitical tensions are still high. It said recent financial sector turmoil in some developed countries adds to investor uncertainty. In developing countries, continuing high debt levels limit fiscal space, with UNCTAD expecting the downward trend of global FDI to continue in 2023. Early indicators confirm the negative FDI outlook: FDI project activity in the first quarter of 2023 shows that investors are uncertain and risk averse, it said. “According to preliminary data, the number of international project finance deals in the first quarter of 2023 was down significantly; cross-border M&A activity also slowed.” Global FDI trends are in line with other macroeconomic variables, which show either negative or slow growth rates, the report said. Among the components of FDI, retained earnings remained high in 2022, it said, adding that this reflects the continued high profit levels of the largest multinational enterprises (MNEs) across all sectors, especially the extractive industries. It said FDI flows to developed economies fell by 37 per cent, to $378 billion. Much of the decline was driven by one-off transactions and financial flows, and there were signs of investment strength in new projects. Announced greenfield projects were up 4 per cent in number and 37 per cent in value. UNCTAD said that FDI flows to developing economies rose by 4 per cent, to $916 billion – the highest level ever recorded. “Announcements of greenfield projects in developing countries rose by 37 per cent in number, and their value more than doubled. This increase was mostly the result of mega-projects announced in the renewable energy sector, including five of the 10 highest-value projects.” Highlighting FDI trends in geographical terms, the report said the 2022 decline in developed economies reflected the uncertainty in financial markets and the winding-up of stimulus packages, but the volatile nature of FDI flows in developed markets also continued to affect aggregate values. It said in Europe, FDI totals were affected by fluctuations in the major conduit economies as well as by a large withdrawal of capital by a telecommunication MNE operating in Luxembourg, while in the United States, where inflows fell by 26 per cent, the halving of cross-border M&A values played a role. FDI flows to developing economies as a group increased, it said, adding, however, that inflows to developing Asia remained flat at $662 billion. “Those to Latin America and the Caribbean rose by 51 per cent to $208 billion – a record level. And inflows to Africa fell by 44 per cent following the anomalous peak in 2021 caused by a large corporate re-configuration in South Africa.” The report said developing countries accounted for more than two thirds of global FDI, up from 60 per cent in 2021. The impacts of the multi-dimensional crises, especially in food and energy, and financial and debt distress hit investment flows to the poorest countries disproportionally. Flows to the least developed countries (LDCs) fell by 16 per cent; they continue to account for only 2 per cent of global FDI, it added. It also said the number of investment projects (including greenfield projects and international project finance deals) increased by 14 per cent in 2022. “Although more projects were announced in developed countries, the share of developing economies reached close to 40 per cent, up from an average of 33 per cent in the last two years.” Most regions, other than East and Central Asia, recorded an increase in announced greenfield projects, with the highest growth being in South Asia – the number in India more than doubled, it added. “The number of announced projects also increased by two thirds in West Asia, mainly because of the significant rise of activity in the United Arab Emirates, which made that country the fourth largest recipient of greenfield projects in the world.” Africa also saw a jump in 2022 (39 per cent), mainly caused by a doubling of the number of projects in Egypt and increases in the number of projects in South Africa, Morocco and Kenya, said the report, adding that in East Asia, announced greenfield projects fell by 17 per cent. The report said that the number of international project finance deals also rose in most regions, although more modestly. The most significant rise was in India, where project numbers increased by 64 per cent, making it the recipient of the second largest number of international project finance deals. In the European Union (EU), project numbers increased by 27 per cent, with significant increases in Italy (78 per cent), Germany (57 per cent) and Spain (10 per cent), it added. “The United States remained the largest host for announced greenfield projects and international project finance deals, followed by the United Kingdom, India, the United Arab Emirates and Germany for greenfield projects, and by India, the United Kingdom, Spain and Brazil for project finance deals.” In 2022, FDI flows to developed countries as a group fell by 37 per cent, largely in Europe and North America, while in the other developed countries, they rose, said the report. “In the United States, flows declined by 26 per cent to $285 billion, mainly due to the halving of cross-border M&As, which generally account for a large share of inflows. Among the 10 largest sales, only one occurred in the United States.” The decrease in M&As had a direct impact on the equity component of FDI, which fell by 35 per cent. Inflows declined strongly in chemicals, computer and electronic products and finance. Information and communication remained the largest recipient industry ($51 billion) – a 21 per cent increase from 2021, it added. “Sweden saw FDI inflows more than double to $46 billion – making it the largest EU recipient of FDI. Equity investment accounted for two thirds of total inflows, mostly the result of a steep rise in cross-border M&As, to $35 billion.” Meanwhile, in the Russian Federation, FDI flows fell to -$19 billion in 2022 from $39 billion in 2021, as more large companies divested, while flows to Ukraine fell to $1 billion from $7 billion last year. Most other developed economies saw FDI inflows rise in 2022. In Australia, flows tripled to $62 billion as M&A sales almost tripled. In Israel, FDI continued its upward trend, to $28 billion. FDI flows to Japan also increased again, reaching $33 billion – the highest level ever recorded. Flows to the Republic of Korea fell by 18 per cent, to $18 billion, said the report. The value of announced greenfield projects in developed economies rose by 37 per cent to a record $639 billion, while the number of projects rose by 4 per cent, it added. The value of projects in the primary sector remained low (at $12 billion); in manufacturing and services it rose by 39 and 35 per cent, respectively, said UNCTAD. Greenfield projects in electronics and electrical equipment grew to a record $118 billion, while automotives also saw a rise, to $37 billion. “The value of announced projects in electricity and gas supply more than doubled, to $196 billion. The largest deal was in semiconductors, a plan by Taiwan Semiconductor Manufacturing (Taiwan Province of China) to boost capital spending in the United States to $28 billion,” said the report. The number of international project finance deals in developed economies rose by 10 per cent in 2022, reaching 1,549 projects – a record. However, the total value of deals fell by 14 per cent to $665 billion. Renewable energy remained the most important industry, with more than half the deals (855), the same level as in 2021, it added. “FDI flows to developing economies as a group increased by 4 per cent to $916 billion in 2022. The increase was mainly the result of strong growth performance in Latin America and the Caribbean. FDI flows continue to be an important source of external finance for developing economies compared with other cross-border capital flows.” The report said FDI flows to Africa fell by 44 per cent to $45 billion, following a record year in 2021 that was due to a single intra-firm financial transaction in South Africa. Excluding this deal, the change in FDI flows to Africa in 2022 would have increased by 7 per cent. The value of greenfield projects announced in Africa almost quadrupled, to a record $195 billion (from $52 billion in 2021), while the number of projects also rose, by 39 per cent, to 766, said the report. “The biggest increases were in energy and gas supply (to $120 billion), construction ($24 billion) and extractive industries ($21 billion). Six of the top 15 greenfield mega-projects announced in 2022 were in Africa.” In contrast, the report said international project finance deals in Africa showed a decline of 47 per cent in value ($74 billion, down from $140 billion in 2021), but a 15 per cent increase in project numbers to 157. Decreases in values were registered in renewables, mining and power. It said European investors remain, by far, the largest holders of FDI stock in Africa, led by the United Kingdom ($60 billion), France ($54 billion) and the Netherlands ($54 billion). The report said FDI flows to developing Asia remained flat at $662 billion. The region is the largest recipient of FDI, accounting for half of global inflows. “The number of announced greenfield projects and international project finance deals in the region increased by 45 and 20 per cent, respectively.” In East Asia, FDI decreased by 3 per cent to $324 billion in 2022. Flows to China rose by 5 per cent, to a record $189 billion, said the report. The increase was concentrated in manufacturing and high-tech industries (mainly electronics and communication equipment) and came mostly from European MNEs, while cross-border M&A sales tripled to $15 billion. The report said flows to South-East Asia increased by 5 per cent to $223 billion – the highest level ever recorded. The values of announced greenfield projects and international project finance deals also increased, by 28 and 49 per cent, respectively. In contrast, it said that the value of cross-border M&As fell by 75 per cent to $12 billion. Singapore, the largest recipient, registered another record, up 8 per cent to $141 billion (accounting for almost two thirds of flows to the Association of Southeast Asian Nations (ASEAN)). The report said flows to Malaysia rose by 39 per cent to $17 billion – a new record for the country. The number of both greenfield projects and project finance deals increased. “The largest greenfield project announced was the plan by Bin Zayed International (United Arab Emirates) to invest $9.6 billion in developing a mixed-use real estate project in Langkasuka, following a joint venture with Widad Business Group (Malaysia).” In South Asia, FDI flows to India rose by 10 per cent to $49 billion, making it the third largest host country for announced greenfield projects and the second largest for international project finance deals. The report said among the largest greenfield projects were the plans by Foxconn (Taiwan Province of China) and Vedanta Resources (India) to build one of the first chip factories in India for $19 billion and a $5 billion project to produce urea from green hydrogen by a joint venture of TotalEnergies (France) and Adani Group (India). In 2022, FDI in Latin America and the Caribbean increased by 51 per cent to $208 billion, sustained by the high demand for commodities and critical minerals, it said, adding that in South America all major recipients saw their FDI flows rise, driven by investment in mining and hydrocarbons. “In Brazil, flows rose by two thirds, reaching $86 billion, the second highest value ever recorded. Re-invested earnings doubled to $34 billion – a record.” The number of announced greenfield projects and international project finance deals rose by almost 30 per cent, to 242 and 138, respectively, with the country ranking fifth worldwide by number of international project finance deals, said the report. In Central America, it said that FDI reached $44 billion – up 5 per cent from 2021. Flows to Mexico, the second largest recipient in Latin America, increased by 12 per cent to $35 billion, with a rise in new equity investment and re-invested earnings. The value of net cross-border M&A sales jumped to $8.2 billion (from less than $1 billion in 2021). The value of announced greenfield investment more than doubled to $41 billion. Tesla (United States) is planning to invest $5 billion in a plant in Mexico, it added. UNCTAD said in the Caribbean, FDI increased by 53 per cent to $3.9 billion, mainly driven by growth in inflows to the Dominican Republic, to $4 billion. On the other hand, the report said that flows to a group of 84 structurally weak, vulnerable and small economies declined by 4 per cent to $41 billion. Inflows to the least developed countries (LDCs), landlocked developing countries (LLDCs) and small island developing states (SIDS) combined accounted for 3.2 per cent of the world total in 2022, up from 2.9 per cent in 2021. “FDI in LDCs declined by 16 per cent to $22 billion. Flows remained concentrated, with the top five recipients (Ethiopia, Cambodia, Bangladesh, Senegal and Mozambique, in that order) accounting for about 70 per cent of the total.” FDI in the 33 African LDCs accounted for 58 per cent of all LDC inflows. Inflows exceeded $1 billion in seven of them. Ethiopia was the largest recipient of FDI in the group, with $3.7 billion – a 14 per cent decrease from 2021, said the report. It said that although the number and value of greenfield project announcements in LDCs increased in 2022, they remained depressed: they were below their 10-year average, at about half in number and a quarter in value. “International project finance deals targeting LDCs decreased by 9 per cent in number and by 68 per cent in value to $20 billion.” In 2022, MNEs from developed economies decreased their investment abroad by 17 per cent to $1 trillion. The trend was distorted by the withdrawal of capital by a telecommunication company in Luxembourg (excluding that, FDI outflows would have increased by 9 per cent). The share of developed economies in global outward FDI remained stable, at two thirds, said the report. Aggregate outward investment by European MNEs fell by 61 per cent to $224 billion, down from $573 billion in 2021. The report said MNEs from the United States increased their investment abroad by 7 per cent, to $373 billion. Cross-border M&A purchases from the United States rose by 21 per cent to a record $273 billion. The biggest increases were in information and communication and in administrative and support services. Among more than 40 global deals worth more than $5 billion, 15 originated in the United States. The value of investment activity abroad by MNEs from developing economies decreased by 5 per cent, to $459 billion, it added. “Flows from developing Asia fell by 11 per cent, but the region remained an important source of investment, accounting for a quarter of global FDI. FDI from China fell by 18 per cent to $147 billion. Nevertheless, it was the third largest investor home-country in the world.” The value of cross-border M&A purchases rose to $10 billion from $1 billion, and announced greenfield FDI reached $41 billion, a 24 per cent increase, said the report. It said that outward investment by Indian MNEs fell by 16 per cent to $15 billion. However, greenfield project announcements by Indian MNEs more than tripled to $42 billion. “Overseas investment by MNEs in ASEAN rose by 6 per cent, mainly due to the increase of FDI from Malaysia (from $5 billion to $13 billion) and Indonesia (from $4 billion to $7 billion).” The report said that both cross-border M&A purchases and greenfield projects announced by Malaysian MNEs rose. Petronas Chemicals Group (Malaysia) acquired Perstorp Holding (Sweden) for $2.6 billion, and Petronas Hydrogen committed to invest $3.8 billion in India to set up a renewable energy plant. Singaporean MNEs remained the largest investor in the region, with outward FDI of $51 billion – the same value as in 2021, it added. Meanwhile, it said outward FDI from Latin America and the Caribbean continued its upward trend to $59 billion. FDI outflows from Mexico turned positive to $13 billion from -$2 billion in 2021, while investment by Brazilian MNEs rose by 23 per cent to $25 billion. Flows from Chile also grew, by 4 per cent to $12 billion. FDI BY TYPE AND SECTOR The report said in 2022, international project finance deals and cross-border M&As were affected by the war in Ukraine, deteriorating financing conditions and uncertainty in financial markets. The value of project finance deals fell by 25 per cent and cross-border M&A sales by 4 per cent. The number of net cross-border M&As also fell by 9 per cent, while the number of project finance deals rose by 8 per cent. In contrast, announced greenfield projects rose by 15 per cent due to continued momentum in the first part of the year. The value of projects increased by 64 per cent because of several mega-projects, it added. “In 2022, the value of announced greenfield investment projects rose by 64 per cent to $1.2 trillion – the second highest level recorded since 2008. It more than doubled in developing economies to $573 billion (with project numbers up 37 per cent) and rose by 37 per cent in developed countries (with project numbers up 4 per cent).” Highlighting the sectoral distribution of greenfield mega-projects in 2022, the report said that of the 10 largest announced projects, 3 were in semiconductors, in response to global shortages and supply chain restructuring trends, and 5 were in renewables. “In 2022, the number of international project finance deals rose by 8 per cent, but their value was 25 per cent lower than in 2021. International project finance in renewable energy, which has accounted for much of the growth in project finance in recent years, slowed down. While the number of deals remained stable, values fell by almost 30 per cent to $368 billion.” The report said that cross-border M&A sales reached $707 billion in 2022 – down 4 per cent. In manufacturing, cross-border M&As fell by 42 per cent to $142 billion, while deals targeting services decreased slightly, by 5 per cent, to $442 billion. “In the primary sector, M&A values more than quadrupled to $122 billion, breaking the decade-long downward trend.” The report also said that for the third consecutive year, the number of treaty terminations exceeded that of new international investment agreements (IIAs). In 2022, countries concluded 15 new IIAs and effectively terminated 58 IIAs, bringing the IIA universe to 3,265 treaties, of which 2,584 are in force. About 80 per cent of investor-State dispute settlement (ISDS) cases in 2022 were brought under IIAs signed in the 1990s or earlier. In 2022 claimants filed 46 new ISDS cases under IIAs, including 10 cases under the Energy Charter Treaty (ECT), with the total count of known ISDS cases reaching 1,257 in 2022, it added. +
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