India gains 3rd highest FDI with tech-investment boost

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By Pradeep Kumar Panda

Bhubaneswar, July 6: India was the third largest recipient of foreign direct investment (FDI) in greenfield projects in the world in 2022, according to the World Investment Report 2023 published by UN Conference on Trade and Development (UNCTAD).

The FDI flows into India rose 10 per cent from $44.7 billion in 2021 to $49.3 billion in 2022. This is lower only than the FDI flows into the US and the UK. Apart from a sharp increase in foreign investment in greenfield—or new—projects in India, the report also noted that India was the second-largest recipient of international project finance in the world in 2022.

International project finance is when international lenders provide debt or equity to infrastructure projects in various countries. The inflows into India in 2022 were, however, significantly lower than what was seen in 2020 during the Covid-19 pandemic, during which $64 billion of FDI entered the country.

Global foreign direct investment (FDI) declined by 12 per cent in 2022, to $1.3 trillion. The decline was mainly a result of lower volumes of financial flows and transactions in developed countries. Real investment trends were more positive, with growth in new investment project announcements in most regions and sectors. FDI in developing countries increased marginally, although growth was concentrated in a few large emerging economies. Inflows in many smaller developing countries were stagnant, and FDI to the least developed countries (LDCs) declined.

Industry trends showed increasing project numbers in infrastructure and industries that face supply chain restructuring pressures, including electronics, automotive and machinery. Three of the five largest investment projects were announced in semiconductors, in response to global chip shortages. Investment in digital economy sectors slowed after the boom in 2020 and 2021.

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 slowdown was driven by the global polycrisis: 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.

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. Geopolitical tensions are still high. Recent financial sector turmoil has added to investor uncertainty. UNCTAD expects downward pressure on global FDI to continue in 2023.

Early indicators for Q1 2023 show weak trends in international project finance and M&As. Greenfield investment trends provide a positive counterweight. The number of project announcements was up 15 per cent in 2022, and Q1 2023 data also shows resilience. Trends in international investment in real productive assets are therefore more positive than the headline FDI data suggests.

The 2022 decline in FDI flows was driven mostly by financial transactions of multinational enterprises (MNEs) in developed economies, where FDI fell by 37 per cent to $378 billion. The number of actual greenfield and project finance announcements increased by 5 per cent.

In developing countries, FDI increased by 4 per cent to $916 billion, or more than 70 per cent of global flows, a record share. The number of greenfield investment projects announced in developing countries increased by 37 per cent, and international project finance deals by 5 per cent. This is a positive sign for investment prospects in industry and in infrastructure.

The FDI increase in developing countries was unevenly shared. Much of the growth was concentrated in a few large emerging economies.

FDI in Africa fell back to the 2019 level of $45 billion after anomalously high levels in 2021 caused by a single financial transaction. Greenfield project announcements increased by 39 per cent, and international project finance deals by 15 per cent. The energy sector, both extractives and energy generation, saw the biggest increase.

FDI inflows in developing Asia were flat at $662 billion but still accounted for more than half of global FDI. India and ASEAN were the most buoyant recipients, with increases of 10 and 5 per cent, respectively, and strong growth in project announcements. China, the second largest FDI host country in the world, saw a 5 per cent increase. FDI in the Gulf region declined, but the number of project announcements increased by two thirds.

Flows to Latin America and the Caribbean increased by 51 per cent, reaching $208 billion, the highest level ever recorded. High commodity prices pushed up reinvested earnings of foreign affiliates in extractive industries. Project growth across the region was more modest, with 14 per cent more greenfield announcements and a decline in international project finance deals.

FDI flows to the structurally weak and vulnerable economies declined. Despite the increase in developing countries overall, FDI in the 46 least developed countries (LDCs) fell by 16 per cent to $22 billion – less than 2 per cent of global FDI. Greenfield project announcements to LDCs recovered some ground after the 2020–2021 decline, but they remained well below their 10-year average. Landlocked developing countries (LLDCs) and small island developing States (SIDS) saw small increases in FDI.

Industry trends showed increasing project numbers in infrastructure and global value chain (GVC)-intensive industries, stable numbers in energy and a slowdown in digital economy sectors. GVC-intensive industries that face supply-chain restructuring pressures, including electronics, automotive and machinery, saw project numbers and values grow. Three of the five largest announced investment projects were in semiconductors, in response to global chip shortages.

The degree of internationalization – the ratio of foreign over total assets, sales and employment – of the largest MNEs remained stable overall. The trend documented in successive WIRs of overseas sales growing at a faster pace than assets and employment continued in 2022. Whereas in previous years this was driven by asset-light MNEs in the digital economy, in 2022 it was caused by high energy prices, which boosted revenues of companies in oil and gas, commodity trading and utilities. Overseas sales of the top 100 MNEs increased by more than 10 per cent, while the value of their overseas assets declined marginally.

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. 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, 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.