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December 15, 2021

Three key trends that will shape foreign investment in 2022

The erosion of democracy, Covid’s impact on developing markets and shifts in investment from China are three key trends that will impact FDI in 2022.

It has been a particularly dramatic year in 2021, with the world enduring another 12 months dominated by Covid-19. The pandemic has brought new challenges and opportunities that business leaders will continue to respond to in 2022, while also exacerbating pre-existing issues such as the steady (but marked) downturn in global foreign direct investment (FDI) since 2016.

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In fact, global investment flows plunged by an enormous 35% in 2020 thanks to Covid-19, down to $1trn from $1.5trn the previous year, according to the UN Conference on Trade and Development (UNCTAD). The latest data shows that global FDI flows rebounded in the first half of 2021, but that recovery was highly uneven. We will see more of that in 2022.

Fast-rising inequality in the foreign investment world

Since the outbreak of Covid-19, the world’s poorest countries have, by far, seen the greatest decrease in headline FDI and greenfield FDI, a divergence that became particularly apparent in the 2021 global figures recently released by UNCTAD. With vaccination rates still lagging way behind in the developing world, thereby deterring investment and economic recovery, this rising inequality seems set to continue in 2022.

For the world’s lowest-income nations, the consequences are huge. Greenfield FDI is key to their economic development since, of all types of FDI, it creates the most jobs and value-added. To make matters worse, those economies are also suffering the most from the slow recovery of investment flows to sectors linked to the UN’s Sustainable Development Goals.

In other words, this means less international investment in power, food, agriculture and health, thereby setting back the 2030 Agenda for Sustainable Development even more, and more pressingly, the post-pandemic recovery.

The continued debasement of global democracy

2021 was a bad year for democracy, worldwide. Only days after the New Year had passed, we saw the US Capitol attack, a harbinger of things to come in the world’s most powerful democracy.

The past 12 months have witnessed dramatic legal feuds across US state legislatures, as Democrats pushed back against Republican efforts to take control of electoral processes through dubious means, to say the very least. The erosion of the US’s democratic institutions is a trend of utmost concern to private business.

These tensions will come to a head in the US midterm elections in 2022, while the world’s next most powerful economy, China, will have its political system put to the test during the 2022 Communist Party congress. In terms of the global political economy, both events are the key moments to follow.

The US’s ongoing slide towards authoritarianism is, of course, part of the global rise in populism, autocracy and nationalism since 2016, epitomised by the election of Donald Trump. Covid-19 only fanned these flames, as reflected in the decrease of judicial independence in more than 45 countries in 2021, especially China, meaning even less legal recourse for foreign companies.

In short, the weakening of democracy is bad news for international companies (although not always), so these fault lines will be important to watch next year. Populist-strongman regimes will also be put to the test in 2022 in Hungary and Brazil, both of which have national elections next year.

More targeted Chinese investment into the world

FDI from China has slowed significantly since 2017 and will continue to do so in 2022.

Internal factors led Beijing to put the brakes on Chinese FDI several years ago – factors that remain in place. Covid-19 has only accelerated this pre-existing trend, including projects across China’s Belt and Road Initiative (BRI), which had seen less of a slowdown before the pandemic compared with overall FDI flows. In the coming year, the BRI is expected to focus much more on green and digital projects, so there may be an uptick in those sectors, as well as the potential for much-needed collaboration between China and the West with regards to the climate agenda.

It will be particularly interesting to see just how quickly the EU’s new antidote to the BRI, the Global Gateway, will mobilise funds for green infrastructure across the developing world. Similarly, Covid-19 stimulus packages across numerous nations, such as the US’s Infrastructure Bill, have unlocked swathes of opportunities for foreign investors in both advanced and developing countries.

The BRI aside, another key trend to watch in 2022 will be evermore government investment in screening mechanisms. The pandemic created a global environment that is even less welcoming to Sino state investors, as part of the wider political and (to a certain extent economic) decoupling between China and the West. This is why, since the outbreak of Covid-19, the number of laws aimed at scrutinising Chinese investment has increased markedly across many Western countries. This trend will likely continue. In fact, the US may even begin to reverse screening mechanisms in 2022 for outbound FDI to China – an important space to watch.

The aforementioned tides do not mean that Chinese investment in the US, the EU, Canada, Australia (and other US allies) will dry up in the coming 12 months. It does mean, however, that Chinese investments are likely to be smaller in value and fewer in number, sourced less and less from state-owned enterprises, and far more focused on purely commercial types of investment and transactions involving less risk of intellectual property (IP) snatching. (In other words, more Chinese FDI across sectors that are less linked to a country’s national security and that are less reliant on mergers and acquisitions – which involves higher IP theft risks – i.e more greenfield foreign investment.) Meanwhile, beyond the US and its allies, Chinese investors are likely to focus more on countries that are perceived as Sino-friendly and more geographically close to China.

The Winter Olympics in Beijing will certainly be a geopolitical flashpoint next year, something that may undermine certain high-profile investments into or out of China. Similar dynamics may be at play during the 2022 World Cup in Qatar.

Nonetheless, FDI to China from the West will continue to grow robustly in 2022, despite ongoing human rights issues, including accusations of ethnic cleansing. However, certain sectors, especially those linked strongly to Covid-struck global value chains such as automotive, will see growing diversification away from China and increased nearshoring. US tech will also continue to tread more carefully in China, with more instances of divestment (such as that of LinkedIn’s in 2021) due to data security concerns or issues surrounding AI (a sector that is seeing rapid growth in competition between the US and China).

The three trends discussed in this article have been playing out for several years now. In 2022, however, they are likely to fester and fizzle more than ever before. Foreign investors, in small but significant ways, will be part of the unfolding of all three dynamics, for better and for worse.

This article originally appeared on Just Food sister site Investment Monitor.

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