After nosediving in 2020 and rebounding in 2021, global foreign direct investment (FDI) declined by 11% in 2022, registering $1.3trn, according to the UN Conference for Trade and Development (UNCTAD) World Investment Report, a flagship annual publication released on 4 July.

Driving this slowdown is the global polycrisis: the war on Ukraine, food and energy prices, financial turmoil and debt pressures, to name but the obvious. International project finance deals and cross-border mergers and acquisitions (M&As) were particularly shaken by the financial markets’ growing uncertainty, especially due to rising interest rates.

The global slowdown of FDI in 2022 was most pronounced among developed economies, where flows dropped by 21%. This decline reflects the uncertainty in financial markets and the winding up of stimulus packages, as well as the volatile nature of FDI flows in developed markets due to the data-distorting impact of capital-intensive megaprojects or divestments. Despite the decrease in FDI flows, the US remained the largest host country for FDI, followed by China.

Meanwhile, investment to developing economies rose moderately, by 7%, accounting for two-thirds of global FDI. Across these countries, greenfield project announcements rose by 37% in number, almost doubling in value. 

A closer look at FDI in world regions

Overall FDI flows to developing Asia reached a record $652bn in 2022 – 5% higher than the previous year – accounting for almost half of global FDI. In South Asia, greenfield projects surpassed 1,000 in number for the first time. 

Flows to Latin America and the Caribbean rose by 4%, reaching $202bn – thereby recovering 2020’s lost ground fully and reaching the second-highest level ever recorded. The rise of commodity prices pushed up reinvested earnings in Brazil to record levels. 

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Following a record year in 2021, FDI to Africa fell by 44% to $45bn due to a single intra-company financial transaction in South Africa. Despite the decrease, flows in 2022 were similar to the ten-year average before 2021.

The succession of global crises, especially in food and energy as well as financial and debt distress, has hit investment flows to least-developed countries (LDCs) disproportionally. Flows to structurally weak economies fell by 12%, attracting a tiny share of global FDI, at just over 2% of the total. 

Although greenfield project announcements to LDCs increased in 2022 compared with 2021, they still remain lower (more than half in number) than their ten-year average. This is a major concern as new investments in industry are crucial for economic growth and development prospects. The share of LDCs in Sustainable Development Goal-relevant investment across developing countries fell to its lowest level ever in 2022.

What will 2023 bring in the world of FDI? 

UNCTAD’s report shows that the global environment for international business and cross-border investment continues to be challenging in 2023. Although the headwinds shaping investment trends in 2022 have decreased in strength, they remain in place. With geopolitical and economic risks unlikely to disappear this year, global FDI flows are expected to continue falling. 

Early indicators already reveal a worrying outlook for 2023, with project activity in the first few months exhibiting an uncertain and risk-averse investor profile. Preliminary data shows that the number of international project finance deals in the first quarter of 2023 was significantly low, while the decline in greenfield project announcements and cross-border M&A activity was moderate.

The difficult and shifting global economic conditions in 2022 changed the pattern of FDI components. For one, the substantial financial flow component of FDI reached -$11bn, a record low, while global equity investment fell to negative values following one large divestment. Although the reinvested earnings of multinational enterprises (MNEs) remained the largest part of FDI, they declined by 6%. The relatively high level of retained earnings reflect the ever-elevated profit levels of the largest MNEs in all sectors, especially the extractive industry. 

On the other hand, greenfield projects were up 4% in number and 37% in value. In particular, investment in the primary sector jumped by seven times to $97bn – the highest value since 2009. Greenfield projects have become more attractive to MNEs reacting to global shortages and supply chain restructuring, especially in industries such as semiconductors.