FDI Flow in India Down 43% in 2023!
·
But
for the wild swings in financial flows through a small number of European
conduit economies, global FDI flows would have been by as much as 10% compared
to 2022.
·
New
investment in sectors relevant to the Sustainable Development Goals (SDFs) fell
by more than 10%.
·
In
developed countries, the trend was strongly affected by multinational
enterprises (MNEs) financial transactions, partly caused by the move to impose
minimum tax on the largest MNEs.
·
While
FDI into China declined by 13.7%, in the case of India the fall was much
steeper at 43%.
·
Since
2019, the geographical distribution of manufacturing projects, especially in
strategic sectors, has shifted towards locations closer to major MNE home
markets in Europe and the United States. West Asia, North Africa and Central
America are emerging as strategic locations for manufacturing MNEs.
· Weak cross-border mergers and acquisitions (M&As). M&As, which mostly affect FDI in developed countries, fell by 46.4% in value.
·
Furthermore,
growth was concentrated in developing countries, where the number of projects
was up by 15%.
·
M&As fell by 38.6% in the case of India, they registered an
increase of 41.3% for China.
·
India’s
greenfield outward investments suffered a major setback of a 45.2% decline;
China’s investments on the other hand rose by 224.6%.
·
Countries
that conduct FDI screening now account for over half of global FDI flows and
three-quarters of FDI stock. FDI restrictions also increasingly affected
outward FDI.
·
Facilitation
measures reached almost 40% of favourable measures and 30% of all measures – a
record. For incentives, the services sector and renewable energy were the
primary focus in 2023.
The UN Conference on Trade and
Development (UNCTAD), released its annual World Investment Report (WIR) detailing
the trends in global foreign direct investment (FDI) during 2023, on June 20,
2024. Investment facilitation and digital government is the special focus of
the report.
The report reveals that the global FDI was
subdued in 2023 for a second year in succession as the flows stagnated at $1.3
trillion. The flows have declined by 1.8%, from $1.36 trillion to $1.33
trillion, confirming UNCTAD’s last year’s projection. Outward FDI too fell by 1.5% -- from $1.57 trillion to $1.55 trillion. But for the wild swings in financial flows through a
small number of European conduit economies, global FDI flows would have been by
as much as 10% compared to 2022. Notably, foreign direct investment in new
industrial and infrastructure projects in developing countries declined, while
new investment in sectors relevant to the Sustainable Development Goals (SDFs) fell
by more than 10%.
The decline was quite widespread. In developed countries, the trend was strongly affected
by multinational enterprises (MNEs) financial transactions, partly caused by the
move to impose minimum tax on the largest MNEs. FDI flows in Europe jumped
from negative $106 billion in 2022 to positive $16 billion. Being the result of
volatility in conduit economies, this jump does not appear to be real. Inflows
to the rest of Europe were indeed down by 14%. Inflows in other developed
countries also stagnated, with a 5% decline in North America and sizeable falls
elsewhere.
FDI flows to developing countries fell
by 7% from $930 billion to $867 billion, mainly due to an 8% decrease in
developing Asia. Flows fell by 3% in Africa and by 1% in Latin America and the
Caribbean. The number of international project finance deals fell by a quarter.
Even though greenfield project announcements in developing countries increased
by more than 1,000, these projects were highly concentrated with South-East
Asia accounting for almost half, and West Asia for a quarter. Africa registered
a small increase, while Latin America and the Caribbean attracted fewer
projects.
Within the developing world, FDI in
developing Asia fell by 8% to $621 billion. China, the second largest FDI
recipient in the world, saw a rare decline in inflows. While
FDI into China declined by 13.7%, in the case of India the fall was much
steeper at 43%. Sizeable declines were recorded in West and Central Asia
also. Only South-East Asia held steady. While industrial investment in Asia
remains buoyant, as reflected in greenfield announcements, the global downturn
in project finance affected the region significantly.
Industry trends showed mixed results. There
was lower investment in the infrastructure and digital economy sectors, but
growth was strong in the global value chain-intensive sectors of manufacturing
and critical minerals. Weak markets for project finance negatively affected
infrastructure investment. Digital economy sectors continued their slowdown
after the boom ended in 2022. Global value chain-intensive sectors, including
the automotive, electronics and machinery industries, grew strongly, due to
reconstruction of supply chains. In critical minerals extraction and
processing, both investment project numbers and values nearly doubled.
WIR 2024 notes that global
economic fracturing trends are affecting the investment strategies of
manufacturing MNEs. Since 2019, the geographical
distribution of manufacturing projects, especially in strategic sectors, has
shifted towards locations closer to major MNE home markets in Europe and the
United States. West Asia, North Africa and Central America are emerging as
strategic locations for manufacturing MNEs.
A notable feature of 2023 was the weak cross-border mergers and acquisitions (M&As).
M&As, which mostly affect FDI in developed
countries, fell by 46.4% in value. Tighter financing conditions,
investor uncertainty, volatility in financial markets and tighter regulatory
scrutiny were the principal causes of the decline. Trends in greenfield
projects, however, script a different story, in favour of the developing
countries. The number of greenfield investment projects increased by 2%, with
the growth concentrated in manufacturing, interrupting a decade-long trend of
gradual decline in the sector. Furthermore, growth was
concentrated in developing countries, where the number of projects was up by 15%.
In developed countries, new project announcements were down 6%.
China and India experienced different movements
in the case of M&As and greenfield investments. While M&As fell by 38.6% in the case of India, they
registered an increase of 41.3% for China. In the case of greenfield
investments India recorded a modest rise of 2.9%, for China the increase was
far higher at 71.8%. India’s greenfield outward investments suffered a major
setback of a 45.2% decline; China’s investments on the other hand rose by
224.6%. Thus, notwithstanding the decline in China’s inward FDI, it did
much better than India in terms of both inward and outward greenfield
investments and M&As.
It is of major concern that international
investment in sectors relevant to the Sustainable Development Goals in
developing countries declined in 2023. Overall, the report foresees a modest growth
in FDI flows in 2024. MNE profit levels remain high, financing conditions are
easing and increased greenfield project announcements in 2023 will positively
affect FDI in 2024.
The
number of investment policy measures adopted in 2023 was 25% lower than in 2022
but still in line with the five-year average. Most measures, 72%, were
favourable to investors. There is, however, a major distinction between
developing and developed countries. Developing countries mostly aim to promote
and facilitate investment, whereas developed countries lean towards more
restrictive measures. In developing countries, 86% of measures were favourable
to investors. In developed countries, a majority (57%) of the measures were
less favourable to investors. Most of these concerned restrictions to address
national security concerns.
The introduction or expansion of FDI
screening mechanisms accounted for nearly half of the measures less favourable
to investors. Four additional countries implemented FDI screening in 2023, with
several more expected to follow in 2024. Countries that
conduct FDI screening now account for over half of global FDI flows and three-quarters
of FDI stock. FDI restrictions also increasingly affected outward FDI.
Investment facilitation and incentives
were the main types of measures favourable to investors in both developed and
developing countries. Facilitation measures reached
almost 40% of favourable measures and 30% of all measures – a record. For
incentives, the services sector and renewable energy were the primary focus in
2023.
The total number of Investor–state
dispute settlement (ISDS) cases reached 1,332, with 60 new arbitrations
initiated in 2023. About 70% of new cases were brought against developing
countries, including three LDCs. International investors in the construction,
manufacturing and extractive sectors accounted for over half of the claims in
2023.
Thus,
while the developing countries have been necessarily opening up and improving
their investment facilitation and digital governance systems, the developed
countries are progressively resorting to FDI screening mechanisms with adverse
effects on both inward and outward FDI, especially for developing countries. WIR
2024 rightly underscores that investment facilitation is not a panacea for the
challenges facing global investment flows. However, it is an undeniable
prerequisite for fostering an environment conducive to sustainable investment. The
report also highlights that investment is not just about capital flows; it is
about human potential, environmental stewardship and the enduring pursuit of a
more equitable and sustainable world.
While UNCTAD is rendering a very useful
service by collating data and information from disparate sources, the global
FDI phenomenon being quite complex and nuanced, efforts of the organisation fall
far short of throwing light on various facets of FDI which itself has
underlined, in an unambiguous manner.