Letter IEDI n. 1232—World FDI in 2022 and the attractiveness of Brazil
The latest edition of the World Investment Report, UNCTAD's report on foreign direct investments (FDI), brought data from 2022, which will be analyzed in this Letter IEDI. As a result, it was also possible to update the world ranking of the largest countries receiving and originating these investments and highlight the position of Brazil.
According to the survey, global FDI flows totaled US$1.3 trillion in 2022, a decrease of 12.4% against the previous year, after a strong oscillation caused by the COVID-19 pandemic (-50% in 2020 and +53.7% in 2021). As a result, FDI underperformed other important economic variables: +3.4% for global Gross Domestic Product (GDP) and +5.1% for world trade.
According to UNCTAD, this unfavorable FDI performance is associated with the context of multiple crises and challenges on a global scale: war in Ukraine, rising energy and food prices, rising interest rates in developed and developing economies to contain inflation, and risks of recession or debt crises in several emerging countries.
This context has made the outlook more uncertain, negatively affecting investment decisions. So much so that gross fixed capital formation (GFCF) worldwide contracted 2.4% from 2021 to 2022, continuing on a trajectory of oscillation between highs and lows.
At the origin of the decline in world FDI is the group of developed countries, notably Europe, where performance was directly driven by the war in Ukraine and the embargoes on the Russian economy. The drop in FDI flows to developed countries, which totaled US$378 billion, was of 37% in relation to 2021. In Europe, there was a net outflow of US$107 billion, also due to divestment by a telecommunications company in Luxembourg.
In the US, although there was net inflow of FDI (US$338 billion), the result was equally negative: -26% in relation to 2021. Despite this, the country remained in the 1st place in the world ranking of the main FDI receiving countries, followed by China and Singapore.
Flows to developing countries increased 4% in 2022 compared to the previous year, reaching a record US$916 billion. This favorable evolution was mainly due to the 51% increase in flows to Latin America and the Caribbean, whose FDI amount reached a record of US$208 billion, driven by high demand for commodities.
Brazil, as the main FDI destination in Latin America, was the biggest positive highlight. Its foreign investment inflow increased 69% in 2022 and reached US$86 billion. It was the second highest amount ever recorded and well above the average of the 5 years prior to the pandemic (US$59 billion).
As a result, we rose from 6th in 2021 to 5th in the ranking of the largest FDI receivers in the world. We are only behind the US, China and Singapore, mentioned above, and also Hong Kong. It should be noted that we were the only developing country outside Asia to be among the top 10 in the world's FDI inflows ranking.
Mexico appeared in the 11th position, without much progress compared to 2021, as its FDI volume varied only +9.3% and remained unchanged in the world ranking. In addition, the value of external investments received (US$35 billion) was equivalent to only 40% of that recorded by Brazil. And this, it is worth noting, despite Mexico's privileged position in relation to the nearshoring/friendshoring trend promoted by the US.
Investments abroad by Brazilian multinationals also rose, but at a much less expressive pace: 8.2% compared to 2021, reaching US$25 billion. This performance of our multinationals made Brazil rise from the 21st position to 14th in 2022, being the only country in Latin America to appear in the ranking of the 20 countries with the highest FDI outflows in the world. The top of this ranking is occupied by the USA (1st), Japan (2nd) and China (3rd).
UNCTAD also monitors global FDI from three types of operations: greenfield investments, international project finance agreements, and mergers and acquisitions (M&A). These operations are highlighted because they have distinct economic effects. While greenfield and project finance create new assets, mergers and acquisitions, even if they eventually lead to new investments, consist of the change of ownership of assets already constituted.
The last two types of operations, project finance and M&A, fell by 25% and 4%, respectively, which set the tone for 2022. The decrease recorded in the two types was greater in developing countries than in developed countries (respectively, -38% and -14% for project finance and -5% and -4% for M&A).
Greenfield investment announcements, which involve the purchase of new machines and physical installations, advanced, totaling US$1.2 trillion in 2022. It was the second highest recorded value for this type since 2008, having more than doubled in developing economies and increased 37% in developed economies.
Global greenfield investments in manufacturing rose 37% compared to the previous year, totaling US$437 billion (36% of the total). Although significant, it lagged behind the increase in services, which was of +67%, and in the primary sector, whose investments of this type were multiplied by 7.5 between 2021 and 2022.
Among the different activities disaggregated by UNCTAD, the four branches that received the most greenfield investments, accounting for 62% of the total, were energy and gas supply (+157% versus 2021) —reflecting the energy crisis— and electronic and electrical equipment (+31%), followed by information and communication (+13%) and extractive industries (+692%).
For 2023, UNCTAD estimates that the downward trajectory of global FDI will continue, given the adverse international context in geopolitical and economic terms. Even before the outbreak of the war in Palestine, leading indicators pointed to this scenario.
According to preliminary data collected by UNCTAD, the number of international project finance deals fell significantly in the first quarter of 2023. Cross-border M&As also declined, while greenfield projects remained stable compared to the second half of 2022.