Global foreign direct investment (FDI) will face downward pressure in 2023 amid a challenging business environment and following a slowdown in deals over the first months of the year, according to Unctad’s annual World Investment Report. 

Following last year’s 12% drop in international investment flows - which encompasses greenfield FDI, mergers and acquisitions (M&A), and project finance - Unctad’s director of investment and enterprise, James Zhan, expects 2023’s volumes to be “either flat or see a slight decline”.

Unctad’s report, which was released on July 5, says last year’s “economic headwinds have somewhat subsided, [but] they have not disappeared”. Mr Zhan points to slowing economic and trade growth, combined with high interest rates, inflation and debt levels. “These impact FDI…and because of that we see a gloomy [outlook],” he tells fDi. 

The report notes that the first three months of 2023 showed “weak trends in international project finance and M&A”. Preliminary fDi Markets data from January to May shows that global greenfield FDI project numbers were down 26% compared to the same period in 2022, while capital expenditure was down 14%.

However Mr Zhan sees the possibility of FDI “bottoming out towards the end of this year” and believes there is “cautious optimism” for a recovery in 2024. 

Policy shifts noted in Unctad’s report suggest a more constructive environment is emerging for international FDI. The number of government policies favouring FDI increased more than one-third last year to reach 102. These include investment facilitation initiatives, climate-related incentives and the opening of new sectors to FDI. 

The number of less favourable policies remained stable, however Unctad’s findings reaffirm the global trend towards increased screening of FDI on national security grounds. The 37 countries which have established screening regimes accounted for 68% of FDI stock in 2022. Further, last year’s number of M&A deals valued at more than $50m that were withdrawn because of regulatory or political concerns increased by a third (21 deals) and their total value increased by 69% to $70bn. 

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SDG gap nearly doubles 

This year’s report marks the midpoint of the UN’s efforts to meet its Sustainable Development Goals target for 2030. However Unctad analysis shows that the SDG gap has nearly doubled from $2.5tn per year in 2015, when the programme launched, to $4tn today. “The lack of progress in expanding international investment activity in SDG sectors is a major concern,” the report says.

Mr Zhan says the growing gap is caused by a confluence of factors including stagnation, the Covid-19 pandemic and other crises throwing large populations back into poverty, and increased demands for climate mitigation and adaptation. 

Another factor is, quite simply, low investment in the SDGs over the past eight years. While renewable energy has become the world’s biggest sector for greenfield FDI, Unctad stresses that much of this growth has been concentrated in developed countries. The report notes that 30 developing countries have not registered a single utility-sized international investment project in renewables.

The widening SDG gap comes despite the continued expansion of the sustainable finance market which reached $5.8tn in 2022. The disconnect between a widening SDG gap and a rapidly growing volume of funds earmarked for sustainable investments is “the dilemma and paradox we see,” says Mr Zhan.