ISLAMABAD: The United Nations Conference on Trade and Development (UNCTAD) says the number of countries conducting foreign direct investment (FDI) screening on national security grounds has increased to 37 in 2022.

The introduction or tightening of national security regulations affecting FDI represented almost half of the policy measures less favourable to investment, cautioned the World Investment Report 2023 released by UNCTAD.

Most of these measures were introduced by developed countries. In total, countries with FDI screening regimes accounted for 68 per cent of FDI stock in 2022. The number of merger and acquisition (M&A) deals withdrawn because of regulatory or political concerns increased by a third, the UNCTAD report says.

Investment policy-making activity surged in 2022, as many countries adopted measures to counter an expected economic downturn. The number of measures favourable to investment reached 102, nearly doubling from the previous year and regaining their pre-pandemic share of total measures, added the report.

The reform of the international investment agreement (IIA) regime continued in 2022. Developments included the emergence of new types of investment-related agreements, the termination of bilateral investment treaties (BITs) and ongoing multilateral discussions on the reform of investor-state dispute settlement (ISDS) mechanisms.

Negotiations were concluded on several international investment governance instruments with proactive investment facilitation features and an increased focus on sustainable investment.

For the third consecutive year, the number of treaty terminations exceeded that of new IIAs. In 2022, countries concluded 15 new IIAs and effectively terminated 58 IIAs. This brought the IIA universe to 3,265 treaties, of which 2,584 are in force. The network of IIAs is dominated by old-generation IIAs. They are characterized by overlapping commitments and inconsistencies with the global sustainability imperative.

These entail risks for climate action and the energy transition and add to the urgency of IIA reform.

About 80pc investor-state disputes in 2022 were brought under IIAs signed in the 1990s or earlier. In 2022 claimants filed 46 new ISDS cases, including 10 under the Energy Charter Treaty (ECT). To date, 132 countries and one economic grouping are known to have been respondents to one or more ISDS claims. The total count of known ISDS cases reached 1,257 in 2022.

The report says the global environment for international business and cross-border investment remains challenging in 2023. Although the economic headwinds shaping investment trends in 2022

have somewhat subsided, they have not disappeared. Geopolitical tensions are still high.

Recent financial sector turmoil has added to investor uncertainty. UNCTAD expects downward pressure on global FDI to continue in 2023. Early indicators for the first quarter of 2023 show weak trends in international project finance and M&As.

After a steep drop in 2020 and a strong rebound in 2021, global foreign direct investment (FDI) declined by 12pc in 2022, to $1.3 trillion. The slowdown was driven by the global poly-crisis: the war in Ukraine, high food and energy prices, and debt pressures. International project finance and cross-border M&As were especially affected by tighter financing conditions, rising interest rates and uncertainty in capital markets.

The report says greenfield investment trends provide a positive counterweight. The number of project announcements was up 15pc in 2022, and the first quarter of 2023 data also shows resilience. Trends in international investment in real productive assets are therefore more positive than the headline FDI data suggests.

The 2022 decline in FDI flows was driven mostly by financial transactions of multinational enterprises (MNEs) in developed economies, where FDI fell by 37pc to $378bn. The number of actual greenfield and project finance announcements increased by 5pc.

In developing countries, FDI increased by 4pc to $916bn, or more than 70pc of global flows, a record share. The number of greenfield investment projects announced in developing countries increased by 37pc and international project finance deals by 5pc.

FDI inflows in developing Asia were flat at $662bn but still accounted for more than half of global FDI. India and ASEAN were the most buoyant recipients, with increases of 10 and 5pc, respectively, and strong growth in project announcements.

China, the second largest FDI host country in the world, saw a 5pc increase. FDI in the Gulf region declined but the number of project announcements increased by two-thirds.

International investment in the renewable energy supply chain is growing. The number of new projects announced in critical minerals in 2021 and 2022 was more than double the average level of the last decade. Investment projects in solar and wind component manufacturing are also increasing, although at a low level. In 2022, the value of announced projects in battery manufacturing tripled, to more than $100bn.

Published in Dawn, July 9th, 2023