Einar H. Dyvik
Research expert covering Nordics and global data for society, economy, and politics
After a major slump in 2020 due to the COVID-19 pandemic, global foreign direct investment (FDI) levels bounced back in 2021, reaching pre-pandemic levels. However, the aftermath of the pandemic continued to have an impact on the global economy, and the world faced another crisis when Russia's President Vladimir Putin launched a full-scale invasion of Ukraine in February 2022. Some experts predicted another major economic downturn, but surprisingly, the impact on FDI levels was much lower than first feared. Global FDI inflows fell to 1.3 trillion U.S. dollars in 2022, showing a decrease of only 12 percent. It even increased in Latin America and the Caribbean. Why did FDI levels remained stable, despite challenging economic circumstances? And what is FDI?
FDI inflows in 2022 driven by a few countries
While an annual decrease of only 12 percent seems fairly positive amid the multiple global challenges, the detailed picture is more mixed. Large sums of FDI continue to flow to a few major countries, with the United States recording the highest amount of inflows in 2022 at 285 billion U.S. dollars. Moreover, a few large countries are behind FDI increases in developing economies, with investments stagnating in smaller economies. This is concerning because many developing countries rely on foreign investments for economic growth, and they play an important part in these countries reaching the sustainable development goals (SDGs). Brazil was one of the major drivers of FDI from 2021 to 2022, with inflows increasing by 70 percent.FDI varies vastly between industries
The total 1.3 billion dollars in FDI inflows hide a picture of different amounts of spending across different industries. In terms of value, greenfield FDI was by far the highest in energy and gas supply, which must be seen in relation with Russia's invasion of Ukraine and European countries seeking to diversify energy supply following breakdown of deliveries from Russia. Looking at greenfield FDI in SDG projects, renewable energy was by far the industry with the highest amount of investments. Investments even decreased in water, sanitation, and hygiene, essential areas for some of the world's least developed countries.What is FDI?
Foreign direct investment refers to when a company, an investor, or a government acquires an ownership stake in a company or project in a foreign country. This means that an FDI is more than a mere stock investment, and the investor actively becomes involved in the domestic company's day-to-day business. Cases where a foreign investor acquires less than 10 percent of a company or project usually does not count as an FDI. There are two major forms of FDIs; first, a company can build up new factories from the bottom, referred to as greenfield investments, and second, a company may acquire existing plants or factories, called brownfield investments. FDI should not be confused with foreign portfolio investment (FPI), which is when a company buys stocks or bonds in a foreign company. An FDI is a far more substantial investment than an FPI.Toward an uncertain future?
Despite uncertain global economic circumstances, FDI remains an important tool both for businesses to grow and for countries to achieve economic development, particularly developing countries. For instance, China has relied heavily on FDI to facilitate its economic growth over the past decades. Moreover, FDI remains an important tool for countries to reach the SDGs, and investments in renewable energy are important to halt climate change. Nevertheless, more diversified investments are needed, both across industries and countries. Furthermore, the full effects of the Russia-Ukraine war on FDI are not yet clear, and the war in Gaza has made the global political landscape even more uncertain. Add in the ongoing political turmoil between the United States and China, and a U.S. election in 2024 and hence, the global economy and FDI may be facing a very challenging future.
