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Trends: what affects global investment in 2021. Top 5 factors

The pandemic and slowdown in economic growth in 2020 affected investment activity today. In a new material from the traditional Trends cycle, we will tell you why investments fell and how investments affect the economy of the region and the world in 2021. The material is based on the report of the United Nations Conference on Trade and Development (UNCTAD) and includes a description of investment flows in recent years by region and type of investment, as well as investment forecasts as a source of economic growth in the near future.

FDI flows recover from the fall in 2020

Global foreign direct investment (FDI) in 2020 declined 35% from 2019 levels to $1 trillion. This is the worst figure since 2005, despite the global financial crisis that raged in 2009.

Earlier we wrote about investments and how they work in 2019. Then there was stagnation, especially in developed countries. However, COVID-19 and the lockdown exacerbated negative trends and led to a revaluation of many investment projects. The impact of the pandemic on the GDP of different countries and the global level of trade at the end of the year was somewhat mitigated. However, investments as a source of economic growth slowed down significantly.

The volume of attracting FDI decreased in developed countries and countries with economies in transition by 58%. Developing countries were less affected - FDI inflows fell by 8%. In the Asian region, there was a slight increase (+ 4%). FDI volumes in the large economies of Great Britain (-57%), France (-47%) and Germany (-34%) declined significantly. Overall, FDI flows to the European Union decreased by 73% to $103 billion.

The decline in greenfield project announcements has been most noticeable in the manufacturing sector. Investments and how they work are clearly demonstrated by the service sector. Half of the total number of greenfield projects in 2019 in this area was less affected. The number of projects for the creation of production and distribution of electricity decreased by 13% to $99 billion. Renewable energy investment projects, which hit record levels in both cost and quantity in 2019, have not been immune from the global recession, but have shown resilience. 9 out of 10 energy projects announced in 2020 were in renewable energy sources.

However, already in the second half of 2020, the number of investment transactions began to increase. This trend migrated to 2021 and took hold. Investment and tax growth has been driven by demand for digital infrastructure and services around the world. This has boosted the number of greenfield ICT projects to $81 billion.

Food and agriculture as a driver of investment

The volume of cross-border mergers and acquisitions amounted to $475 billion. Contrary to the general trend, the value of transactions in the food, beverage and tobacco sectors quadrupled to $86 billion. Positive dynamics is noted in the field of communications and healthcare.

Trends: how the flows of foreign direct investment in the world were distributed in 2019

Recovery in global investment flows depends on the speed and scale of vaccinations, the pace of industrial and business recovery, especially in developed countries. The recovery in investment flows will be uneven. The governments of developed and higher-income developing countries have responded to the COVID-19 crisis with massive fiscal stimulus programs. The European Union and the United States are promoting public investment strategies. Such measures will have a positive impact on investment and taxes, especially in infrastructure, green and digital economies, and investment for beginners.

Asia's contribution to investment recovery

Investments in the countries of East and Southeast Asia. What do you need to know? Forecasts point to further growth in foreign direct investment in 2022 to the level of 2019. Growth will come from Asian countries and some developed economies. Results will be influenced by the availability of the vaccine, financial capacity to stimulate investment, high economic uncertainty and riskier behavior of international investors.

Asia has become the only region where investments did not decrease following the results of the crisis in 2020, and the investment climate remained open. China is a catalyst for FDI flows to the region. Despite considerable uncertainty over developments related to geopolitical and trade tensions, multinational corporations continue to invest heavily in China as an indispensable strategic market. They are encouraged by the growing purchasing power, developed infrastructure and generally favorable investment climate.

Impact of world prices on raw materials

Transition economies benefit from rising commodity prices. As a result of the economic sanctions affecting the Russian Federation, the inflow of investments was the lowest in recent years. At the same time, in January-June of this year, residents of FEZ Grodnoinvest invested 147 million rubles in fixed assets, which is 1.5 times more compared to the same period last year.

The outlook for FDI inflows will depend on a variety of factors, including effective vaccination roll-out, increased global demand for commodities, and eased regional and international geopolitical shocks. Processing of raw materials (natural) resources is seen as a key entry point for foreign investment, especially in developing countries and countries with transition economies.

Global production and the position of transnational corporations

Despite the sharp decline in global FDI flows, global manufacturing will continue to play an important role in supporting growth and development of economic. Energy and heavy industry corporations have reduced their presence overseas.

Others, including pharmaceuticals and telecoms, have stepped up and are looking at risk-free investments. Light industry, utilities, automotive and retail companies, despite declining sales during the year, have maintained the stability of their international production structure. In the extractive industries, heavy industry and construction, overseas corporate sales fell by more than 15% on average. Due to the collapse in oil prices at the beginning of the year, sales of oil and gas MNCs fell by 30%. The pandemic has boosted demand for pharmaceuticals and healthcare services, resulting in a 15% increase in revenues in the healthcare sector. Accelerated digitalization has benefited tech corporations.

In the field of tourism and travel, corporations have lost about 90% of working capital and have increased accounts payable 10 times. With very low interest rates, investors are willing to invest risk-free in large multinational companies that were strong enough to survive the crisis.

Thus, in 2021, the recovery of FDI flows continues after the largest drop in recent years. The growth driver will be the countries of the Asian region and countries with developed economies. In the sectoral context, the largest inflow of FDI in the coming years will be provided by telecommunications, information technology, and the food industry.