U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T

WORLD
INVESTMENT
REPORT 2022
INTERNATIONAL TAX REFORMS
AND SUSTAINABLE INVESTMENT
 U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T

WORLD
INVESTMENT
REPORT 2022
INTERNATIONAL TAX REFORMS
AND SUSTAINABLE INVESTMENT

Geneva, 2022
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 PREFACE

Global flows of foreign direct investment recovered to pre-pandemic levels last year,
reaching $1.6 trillion. Cross-border deals and international project finance were
particularly strong, encouraged by loose financing conditions and infrastructure
stimulus. However, the recovery of greenfield investment in industry remains fragile,
especially in developing countries.

This fragile growth of real productive investment is likely to persist in 2022.

The fallout of the war in Ukraine with the triple food, fuel and finance crises, along
with the ongoing COVID-19 pandemic and climate disruption, are adding stresses,
particularly in developing countries. Global growth estimates for the year are already
down by a full percentage point. There is significant risk that the momentum for
recovery in international investment will stall prematurely, hampering efforts to boost
finance for sustainable development.

The World Investment Report supports policymakers by monitoring global and

regional investment trends and national and international investment policy
developments. The report reviews investment in the Sustainable Development
Goals and in climate change mitigation and adaptation. It also looks at sustainable
finance trends in capital markets and among institutional investors.

The coming years will see the implementation of fundamental reforms in international
taxation. These reforms are expected to have major implications for investment
policy, especially in countries that make use of fiscal incentives and special economic
zones. The report of this year provides a guide for policymakers to navigate the
complex new tax rules and to adjust their investment strategies.

I commend this report to all engaged in promoting investment in sustainable

development.

António Guterres
Secretary-General of the United Nations

Preface iii
 FOREWORD

The global environment for international investment changed dramatically with the onset of the
war in Ukraine, which occurred while the world was still reeling from the impact of the pandemic.
The war is having effects well beyond its immediate vicinity, causing a cost-of-living crisis
affecting billions of people around the world, with rising prices for energy and food reducing real
incomes and aggravating debt stress. Investor uncertainty and risk aversity could put significant
downward pressure on global FDI this year.

The effects on investment flows to developing countries in 2022 and beyond are difficult
to anticipate. Apart from direct effects on countries in Central Asia with close investment
ties in the region, the impact on others will be mostly indirect and depend on the extent
of their exposure to the triple crisis – in food, fuel and finance – caused by the conflict and
their consequent economic and political instability – key determinants of international private
investment. If the past is an indication, the last time food prices were this high – during the
2007–2008 food crisis – there were riots in more than 60 countries.

The outcome will be of enormous significance for development prospects. The need for
investment in productive capacity, in the Sustainable Development Goals (SDGs) and in
climate change mitigation and adaptation is enormous. Current investment trends in these
areas are not unanimously positive. Although global FDI flows rebounded strongly in 2021,
industrial investment remains weak and well below pre-pandemic levels, especially in the
poorest countries; SDG investment – project finance in infrastructure, food security, water
and sanitation, and health – is growing but not enough to reach the goals by 2030; and
investment in climate change mitigation, especially renewables, is booming but most of it
remains in developed countries and adaptation investment continues to lag well behind.

Worryingly, some emerging indicators suggest that the war in Ukraine could become a setback
in the energy transition, with increased fossil fuel production in countries previously committed
to reducing emissions. In the first quarter of 2022, most of the 5,000 largest multinational
enterprises revised downward their earnings forecasts for 2022. Alarmingly, while extractive
industries revised upwards their expected earnings, with oil and gas at +22 per cent and
coal at +32 per cent of expected earnings, renewable energy companies released downward
revisions of an average of -22 per cent of expected earnings, lending credence to the intuition
that current conditions risk reversing years of progress towards investing in sustainable
energy. This is especially worrying as global CO2 emissions from energy combustion and
industrial processes rebounded in 2021 to reach their highest ever annual level.

To achieve the SDGs it is imperative that more funds are channeled to where they are most
needed, on the ground, in developing countries. But also an important effort will have to
come from domestic resource mobilization. From that perspective, the ongoing international
tax reforms led by the G20 and the OECD, which we study extensively in this report, are
a major step forward. They aim to ensure that multinationals pay their fair share of taxes
where they operate, and they have the potential to give a significant boost to tax revenues in
developing countries.

iv World Investment Report 2022 International tax reforms and sustainable investment
However, the war in Ukraine has further complicated domestic resource mobilization in
developing countries, already worsened by the COVID-19 pandemic and the increased
frequency of natural disasters in the context of climate change. In the midst of rising and
unsustainable debt levels, without adequate multilateral mechanisms for restructuring,
countries are being forced to reduce their fiscal space at a time when they should be
increasing it.

The International Labour Organization suggests that the social protection financing gap stands at
$1.2 trillion per year in developing countries, part of the $4.3 trillion we at UNCTAD estimate as the
yearly gap in SDG financing. And even with food and energy import bills, and worsening costs of
borrowing due to higher interest rates, developing countries’ primary fiscal balance has shrunk by
$315 billion since the start of the war.

That is why international investment plays a critical complementary role to domestic public
investment. And the new tax rules will affect how countries have traditionally promoted – and
often competed – for international investment, through low tax rates, fiscal incentives and special
economic zones.

The tax reforms are an opportunity for developing countries, not only from a revenue perspective,
but also from an investment attraction perspective. Strategically, tax competition will decrease.
Practically, the need to review the investment promotion toolkit is a chance to make costly
incentives more sustainable.

There will be challenges. Developing countries face constraints in their responses to the reforms,
because of a lack of technical capacity to deal with the complexity of the tax changes, and
because of investment treaty commitments that could hinder effective fiscal policy action. The
international community has the obligation to help. It can do so through technical assistance, by
agreeing a solution to problems caused by international investment agreements, and by putting
in place safeguards that protect the tax revenues of the poorest countries. These efforts should
be part of a broader multilateral endeavor towards reining in illicit financial flows, especially in the
developing world. This report points the way.

It is important that we act now. Even though countries face very alarming immediate problems
stemming from the cost-of-living crisis, it is important we are able to invest in the long term.
Because the short term and long term start at the same time. And the time is now.

Rebeca Grynspan
Secretary-General of UNCTAD

Foreword v
 ACKNOWLEDGEMENTS

The World Investment Report 2022 was prepared by a team led by James X. Zhan.
The team members included Richard Bolwijn, Bruno Casella, Joseph Clements,
Berna Dogan, Hamed El Kady, Kumi Endo, Anastasia Leskova, Massimo Meloni,
Anthony Miller, Abraham Negash, Yongfu Ouyang, Diana Rosert, Amelia U. Santos-
Paulino, Changbum Son, Astrit Sulstarova, Claudia Trentini, Joerg Weber and Kee
Hwee Wee.

Research support and inputs were provided by Gregory Auclair, Hamidreza

Bakhtiarizadeh, Magdalena Bulit Goñi, João de Camargo Mainente, Malou Celander,
Antoine Cornevin, Juliette Gailly, Tiffany Grabski, Vicente Guazzini, Maxime Ladrière,
Corli Le Roux, Iana Miachenkova, Josef Ostřanský, Hayley Marie Pallan, Sang
Hyun Park, Lisa Remke, Samuel Ringier, Rita Schmutz, Baptiste Souillard, Irina
Stanyukova, Ilan Strauss, Yihua Teng and Anqi Wang.

Comments and contributions were provided by Yoseph Asmelash, Chantal

Dupasquier, Isabel Garza Rodriguez and Paul Wessendorp, as well as the Office of
the Secretary General.

Statistical assistance was provided by Mohamed Chiraz Baly and Bradley Boicourt.
IT assistance was provided by Chrysanthi Kourti.

The manuscript was copy-edited by Lise Lingo. The design of the charts and
infographics, and the typesetting of the report were done by Thierry Alran, assisted
by Alexandra Sonia Garcês. Production of the report was supported by Elisabeth
Anodeau-Mareschal and Katia Vieu. Additional support was provided by Nathalie
Eulaerts and Sivanla Sikounnavong.

Michael Keen acted as principal advisor on the theme chapter of the report.
The theme chapter also benefited from the collaboration with the team at the WU
Global Tax Policy Centre of Vienna University of Economics and Business led by
Jeffrey Owens, including Ivan Lazarov, Belissa Ferreira Liotti, Ruth Wamuyu Maina
and Joy Waruguru Ndubai.

At various stages of the preparation of the theme chapter, in particular during the
kick-off event at the World Investment Forum and various expert meetings organized
to discuss drafts, the team benefited from comments and inputs received from
external experts: Flurim Aliu, David Bradbury, Julien Chaisse, Alex Cobham, Michael
Devereux, Lorraine Eden, Javier Garcia-Bernardo, Ana Cinta Gonzalez Cabral, Tibor
Hanappi, Liselott Kana, Anita Kapur, Petr Janský, Michael Lennard, Pierce O’Reilly,
Zahira Quattrocchi, Augustin Redonda, Tove Maria Ryding and Logan Wort.

The team is grateful for advice, input and comments at all stages from colleagues
in international organizations and other experts, including Vincent Beyer, Martin
Dietrich Brauch, Abdul Muheet Chowdhary, Sabrine Marsit, Suzy H. Nikièma,
Marcelo Olarreaga, Joshua Paine, María Florencia Sarmiento, Alessandro Turina,
Christian Volpe Martincus and Sebastian Wuschka.

Numerous officials in central banks, national government agencies, international

organizations and non-governmental organizations also contributed to the report.

vi World Investment Report 2022 International tax reforms and sustainable investment
 TABLE OF
CONTENTS

PREFACE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
FOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
ACKNOWLEDGEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi
ABBREVIATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
KEY MESSAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

CHAPTER I. GLOBAL INVESTMENT TRENDS AND PROSPECTS. . . . . . . . . . . . . . 1

A. INVESTMENT TRENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1. Global trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Trends by geography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. Trends by type and sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
B. SDG AND CLIMATE CHANGE INVESTMENT TRENDS. . . . . . . . . . . . . . . . . . . . 26
1. SDG investment trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2. Climate change and investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
C. INTERNATIONAL PRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
1. Key indicators of international production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2. Internationalization trends of the largest MNEs. . . . . . . . . . . . . . . . . . . . . . . . . 40
3. Internationalization trends of digital MNEs. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
4. Internationalization trends of SMEs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

CHAPTER II. RECENT POLICY DEVELOPMENTS AND KEY ISSUES. . . . . . . . . . . 53

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
A. NATIONAL INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
1. Overall trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
2. M&A controls affecting foreign investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
B. INTERNATIONAL INVESTMENT POLICIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
1. Trends in IIAs: new treaties and other policy developments. . . . . . . . . . . . . . . . 65
2. Key investment-related issues in megaregional agreements. . . . . . . . . . . . . . . 69
3. Trends in ISDS: new cases and outcomes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Table of Contents vii

 C. KEY TRENDS IN THE TAXATION OF INVESTMENT. . . . . . . . . . . . . . . . . . . . . . 76
1. Evolution of corporate income tax rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
2. Tax incentives for investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
3. Taxation measures and international investment policies. . . . . . . . . . . . . . . . . 87

CHAPTER III. THE IMPACT OF A GLOBAL MINIMUM TAX ON FDI. . . . . . . . . . . . 99

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
A. HOW A MINIMUM TAX AFFECTS FDI – A THEORETICAL FRAMEWORK. . . . . . 103
1. Tax-investment spillover channels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
2. The mechanics of Pillar II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
3. Pillar II and FDI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
B. ESTIMATING THE IMPACT OF PILLAR II ON FDI. . . . . . . . . . . . . . . . . . . . . . . 111
1. Corporate income taxes on FDI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
2. Pillar II and the taxation of FDI income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
3. The effect of higher taxes on global FDI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
C. IMPLICATIONS OF PILLAR II FOR TAX INCENTIVES. . . . . . . . . . . . . . . . . . . . 131
1. Tax incentives and ETRs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
2. Pillar II and tax incentives: an empirical assessment. . . . . . . . . . . . . . . . . . . . 132
3. Impact of the GloBE rules on tax incentives. . . . . . . . . . . . . . . . . . . . . . . . . . 135
4. Detailed assessment of impact on in-scope incentives. . . . . . . . . . . . . . . . . . 137
D. RESHAPING INVESTMENT POLICY FOR A GLOBAL MINIMUM
TAX ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
1. Fiscal investment policy responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
2. Challenges for investment policymakers and institutions. . . . . . . . . . . . . . . . . 151
3. Strategic investment policy implications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

CHAPTER IV. CAPITAL MARKETS AND SUSTAINABLE FINANCE. . . . . . . . . . . . 161

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
A. SUSTAINABILITY-THEMED CAPITAL MARKET PRODUCTS. . . . . . . . . . . . . . . 164
1. Sustainable funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
2. Sustainable bond markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

viii World Investment Report 2022 International tax reforms and sustainable investment
B. INSTITUTIONAL INVESTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
C. STOCK EXCHANGES AND MARKET INFRASTRUCTURE. . . . . . . . . . . . . . . . . 179
1. Stock exchanges and derivatives exchanges . . . . . . . . . . . . . . . . . . . . . . . . . 179
2. Advancing gender equality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
D. POLICIES, REGULATIONS AND STANDARDS. . . . . . . . . . . . . . . . . . . . . . . . . 184
1. National sustainable finance policies and regulations. . . . . . . . . . . . . . . . . . . 184
2. International regulations and standard setting . . . . . . . . . . . . . . . . . . . . . . . . 190
3. Lessons learned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
E. CLIMATE ACTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
1. Carbon emissions in public markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
2. The Net Zero movement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
3. Climate action by public pension and sovereign wealth funds. . . . . . . . . . . . . 196
4. Stock exchange strategies for climate action. . . . . . . . . . . . . . . . . . . . . . . . . 198

REFERENCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

ANNEX TABLES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

Annex table 1. FDI flows, by region and economy, 2016–2021. . . . . . . . . . . . . . 210
Annex table 2. FDI stock, by region and economy, 2000, 2010 and 2021. . . . . . 214

ONLINE ONLY: REGIONAL TRENDS

AFRICA
DEVELOPING ASIA
LATIN AMERICA AND THE CARIBBEAN
STRUCTURALLY WEAK, VULNERABLE AND SMALL ECONOMIES:
Least Developed Countries (LDCs)
Landlocked Developing Countries (LLDCs)
Small island developing States (SIDS)

Table of Contents ix
 ABBREVIATIONS
AETR average effective tax rate IIR Income Inclusion Rule
AfCFTA African Continent Free Trade Area IMF International Monetary Fund
ASEAN Association of South-East Asian Nations IOSCO International Organization of Securities Commissions
AUM assets under management IP intellectual property
BEA Bureau of Economic Analysis IPA investment promotion agency
BEPS Base Erosion and Profit Shifting IPFSD Investment Policy Framework for Sustainable Development
BIT bilateral investment treaty ISDS investor–State dispute settlement
CbCR country-by-country reporting ISSB International Sustainability Standards Board
CDP Carbon Disclosure Project LDC least developed country
CIS Commonwealth of Independent States LLDC landlocked developing country
CIT corporate income tax M&A merger and acquisition
COVID-19 coronavirus disease 2019 METR marginal effective tax rate
CPTPP Comprehensive and Progressive Agreement MFN most favoured nation
for Trans-Pacific Partnership MNE multinational enterprise
CSR corporate social responsibility NAFTA North American Free Trade Agreement
DTT double taxation treaty NT national treatment
ECT Energy Charter Treaty OFC offshore financial centre
EIA Economic Impact Assessment OIC Organisation of Islamic Cooperation
ESG environmental, social and governance PPP public-private partnership
ETR effective tax rate QDMTT qualified domestic minimum top-up tax
EU European Union R&D research and development
FET fair and equitable treatment RCEP Regional Comprehensive Economic Partnership
FTA free trade agreement SDGs Sustainable Development Goals
GATS General Agreement on Trade in Services SEZ special economic zone
GATT General Agreement on Trade and Tariffs SIDS small island developing States
GCI Guidance on Core Indicators SMEs small and medium-sized enterprises
GDP gross domestic product SSE Sustainable Stock Exchanges
GHG greenhouse gas STR statutory tax rate
GILTI global intangible low-taxed income STTR Subject to Tax Rule
GloBE Global Anti-Base Erosion TIP treaty with investment provision
GSSB GRI Standard Setting Board TRIPS Trade-Related Aspects of Intellectual Property Rights
GTED Government Tax Expenditure Database UNCITRAL United Nations Commission on International Trade Law
GVC global value chain UNEP United Nations Environment Programme
ICCC Independent Consumer and Competition Commission UNODC United Nations Office on Drugs and Crime
ICT information and communication technology USMCA United States–Mexico–Canada Agreement
ICMA International Capital Market Association WAEMU West African Economic and Monetary Union
ICSID International Centre for Settlement of Investment Disputes WFE World Federation of Exchanges
IFC International Finance Corporation WHT withholding tax
IFRS International Financial Reporting Standards WIR World Investment Report
IIA international investment agreement WTO World Trade Organization

x World Investment Report 2022 International tax reforms and sustainable investment
 KEY MESSAGES 2021
72%
INVESTMENT TRENDS AND PROSPECTS 2021
72%
Global foreign direct investment (FDI) flows in 2021 were $1.58 trillion, up 64 per cent

Climate
from the exceptionally low level in 2020. The recovery showed significant rebound
momentum, with booming merger and acquisition (M&A) markets and rapid growth
+64%
investment
in international project finance because of loose financing conditions and major Global FDI
infrastructure stimulus packages.
rebound
2021
However, the global environment for international business and cross-border investment
changed dramatically in 2022. The war in Ukraine – on top of the lingering effects of the
64 %
+ $1.6 trillion
pandemic – is causing a triple food, fuel and finance crisis in many countries around the

Climate
world. Investor uncertainty could put significant downward pressure on global FDI in 2022.

investment
The 2021 growth momentum is unlikely to be sustained. Global FDI flows in 2022 will

with total
likely move on a downward trajectory, at best remaining flat. New project activity is Global FDI
already showing signs of increased risk aversion among investors: preliminary data for
project values
Q1 2022 show greenfield project numbers down 21 per cent and international project rebound
x2
finance deals down 4 per cent. 2021 2x 1.6 trillion
$
2021

The 2021 FDI recovery brought growth in all regions. However, almost three quarters of MNE
the global increase was due to the upswing in developed countries, where FDI reached profits
$746 billion – more than double the 2020 level. The increase was mostly caused by

SMEs
M&A transactions and high levels of retained earnings of multinational enterprises
(MNEs). Those, in turn, led to sizeable intrafirm financial flows and major FDI fluctuations

with total
in large investment hubs.
in developing
The high levels of retained earnings in 2021 were the result of record MNE profits.
countries
project values
The profitability of the largest 5,000 MNEs doubled to more than 8 per cent of sales. SMEs
x2
in developing
2x
Profits were high especially in developed countries, because of the release of pent-up
2021
demand, low financing costs and significant government support.
countries are
Despite high profits, the appetite of MNEs for investing in new productive assets
overseas remained weak. While infrastructure-oriented international project finance was
MNE
more likely to
regionalize
up 68 per cent and cross-border M&As were up 43 per cent, greenfield investment profits
invest more
numbers increased by only 11 per cent, still one fifth below pre-pandemic levels.

SMEs
The value of greenfield announcements overall rose by 15 perwithin
cent, their
to $659
regionbillion,
but remained flat in developing countries at $259 billion – stagnating at the lowest Renewables
level ever recorded. This is a concern, as new investments in industry are crucial for
economic growth and development prospects.
Developed & energy
in developing
+134%
FDI flows to developing economies grew more slowly than those to developed regions

countries
but still increased by 30 per cent, to $837 billion. The increase was mainly the result
of strong growth performance in Asia, a partial recovery in Latin America and the
Developing
Caribbean, and an upswing in Africa. The share of developing countries in global flows
SMEs
in developing
remained just above 50 per cent.
+30% countries are
• FDI flows to Africa reached $83 billion, from $39 billion in 2020. Most recipients saw a efficiency
more likely to
moderate rise in FDI. The total for the continent was inflated by a single large intrafirm
LDCs
financial transaction. Greenfield announcements remained depressed, but international projects
regionalize
+15%
project finance deals were up 26 per cent, with strong growth in extractive industries.

invest more
within their region +134%
Renewables
Key Messages xi
 projects
+134% • In developing Asia, despite successive waves of COVID-19, FDI rose to an all-
time high for the third consecutive year, reaching $619 billion. Asia is the largest
recipient region, accounting for 40 per cent of global FDI. However, inflows remain
highly concentrated; six economies account for more than 80 per cent of FDI
to the region.

• FDI in Latin America and the Caribbean rose by 56 per cent to $134 billion. Most
+30%
SDG
economies saw inflows rebound, with only a few experiencing further declines,

+13% caused by pandemic-induced economic crises. Total inflows remained about

H1 15 per cent below the pre-pandemic level.

investment
• FDI flows to the structurally weak, vulnerable and small economies rose by 15 per
Developed
Developing
LDCs

cent to $39 billion. Inflows to the least developed countries (LDCs), landlocked
developing countries (LLDCs) and small island developing States (SIDS) combined
accounted for only 2.5 per cent of the world total in 2021, down from 3.5 per cent
in 2020.

International investment in sectors relevant for the Sustainable Development Goals

13 2021
(SDGs) in developing countries increased substantially in 2021, by 70 per cent.
The combined value of greenfield announcements and international project finance
deals in SDG sectors exceeded the pre-pandemic level by almost 20 per cent. Most
IIAs signed of the growth went to renewable energy. Investment activity in other SDG-related

72%
in 2021 sectors – including infrastructure, food and agriculture, health, and WASH – saw only a
partial recovery.
Terminated IIAs

86
Renewable energy and energy-efficiency projects represent the bulk of climate
change investments. International private investment in climate change sectors is
directed almost exclusively to mitigation; only 5 per cent goes to adaptation projects.

64%
More than 60 per cent is invested in developed countries, where 85 per cent of projects
are purely+privately financed. In contrast, almost half of the projects in developing
countries require some form of public sector participation.

Climate International project finance is increasingly important for SDG and climate change

investment investment. The strong growth performance of international project finance can be
Global FDI
explained by favourable financing conditions, infrastructure stimulus and significant

rage rebound
interest on the part of financial market investors to participate in large-scale projects
that require multiple financiers. The instrument also enables governments to leverage

rate 2021 $
public investment 1.6 trillion
through private finance participation.

3x
ar II Finally, comparing the largest, the smallest and the digital MNEs shows starkly
contrasting investment trends. Sales of UNCTAD’s top 100 digital MNEs grew five times
imum faster than those of the traditional top 100 over the past five years, with the pandemic
ease providing a huge boost. The largest MNEs engage more in greenfield investment, and
axation
with total digital MNEs more in M&As. Digital MNEs are FDI light, needing relatively little investment

The magic project values

in physical assets to reach overseas markets. International production by both digital
x 2
and large MNEs has grown continuously, albeit at different speeds. In contrast, FDI by

number
2x SMEs is in decline. Over the past five years, the share of SMEs in greenfield investment
2021
projects declined from 5.7 to 1.3 per cent.

MNE

15%
profits

SMEs
xii
in developing
• estimated tax rate paid by MNEs

• Pillar
countries
II minimum tax rate SMEs
World Investment Report 2022 International tax reforms and sustainable investment

• Increase in tax paid by MNEs

in developing
 more likely to
regionalize
invest more
within their region
INVESTMENT POLICY DEVELOPMENTS CH2 Renewables
Developed & energy
In 2021, the pace of investment policymaking returned to pre-pandemic levels, with
109 new measures, 28 per cent fewer than in 2020. That signalled an end to the +134% 58%
42%
emergency investment policymaking that characterized the first year of the pandemic;
however, the crisis still affected the nature of the measures.
Developing
Developed countries expanded the protection of strategic companies from foreign
+30% efficiency

More favourable

Less favourable
takeovers, bringing the share of measures less favourable to investment to an all-time
high (42 per cent). Four new countries adopted FDI screening mechanisms (including
one developing country), and at least twice as many tightened existing mechanisms.LDCs projects
+15%
Together, countries that conduct FDI screening account for 63 per cent of global FDI
inflows and 70 per cent of stock (up from 52 and 67 per cent, respectively, in 2020).
Te

National
+134%investment
Conversely, developing countries continued to adopt primarily measures to liberalize,
promote or facilitate investment, confirming the important role that FDI plays in their
policy measures
economic recovery strategies. Investment facilitation measures constituted almost 40
per cent of all measures more favourable to investment, followed by the opening of new
activities to FDI (30 per cent) and by new investment incentives (20 per cent).

The first quarter of 2022 registered a record number of new investment policy measures
+30%
(75), mainly in response to the war in Ukraine. CH2
Sanctions and countersanctions affecting
3x Pillar
+13% Average
tax rate

15
FDI to and from the Russian Federation, Belarus and the non-government-controlled CH3
II %

Developed
Developing
LDCs
areas of eastern Ukraine constituted 70 per cent of all measures adopted in Q1 2022.

58%
minimum
Several notable developments accelerated the reform of the international investment Increase
agreement (IIA) regime in 2021. They included the conclusion of new-generation in taxation
megaregional economic agreements and large-scale terminations of old-generation
42% T
n
bilateral investment treaties (BITs). Greater policy attention to investment facilitation,
climate change and human rights will also affect international investment governance.
13
IIAs
1
More favourable

Less favourable

For the second consecutive year, the number of terminations exceeded the number of
newly concluded IIAs. In 2021, countries concluded 13 IIAs and effectively terminated IIAs signed
in 2021
at least 86 IIAs, bringing the size of the IIA universe to 3,288. In line with UNCTAD’s
IIA policy recommendations, IIAs signed in 2021 continue to feature many reform-
Terminated IIAs

86
oriented provisions aimed at preserving regulatory space while promoting investment
for development.
National investment • es

policy measures
The total count of investor–State dispute settlement (ISDS) cases reached 1,190 at the
end of 2021, with at least 68 new arbitrations initiated during the year. Most of the cases Pillar • Pil

• Inc
be
initiated were brought under old-generation IIAs. In 2022, the war in Ukraine brought
into the spotlight past and potential future ISDS claims related to armed conflict. II
Trends in the taxation of investment
inv
3x Pillar
Average
tax rate
taxes
go up
wil

15 3x
Tax policy is used around the world as CH3 an instrument to promote international
%
15%
investment. Countries rely on a variety of fiscal incentives to attract investors to priority II
sectors or regions. An analysis of tax-related investment policy measuresminimum adopted
Increase
worldwide over the last decade shows that profit-based incentives, such as tax
in taxation investment c

2%
holidays and reduced corporate income tax (CIT), are among the most frequent and
widespread.
The magic no
number
Incentives are typically not time-bound, nor allocated on the basis of transparent criteria.

IIAs % may go de
Although the governance of incentives varies greatly across countries, on average, 70

15%
co
per cent of incentives are allocated on the basis of discretion, criteria not available
down
Key Messages xiii
 +30%
H2 +13% +30%
CH2 +13%

Developed
Developing
LDCs
58% 58%

Developed
Developing
LDCs
to the public or negotiation with individual investors. In addition, only about half of all
tax incentives introduced worldwide over the last decade were time-bound, with lower

42% 42% shares in Africa (35 per cent) and Asia (40 per cent).

13 13
IIAs impose obligations on States that can create friction with tax measures undertaken
at the national level. Most IIAs do not exclude taxation from their scope, which
More favourable

More favourable
Less favourable

Less favourable means that they

IIAs signed cover a wide range of tax-related measures, whether of general or
IIAs signed
in 2021application.
specific in 2021 UNCTAD data suggest that investors have challenged tax-related
measures in 165 ISDS cases based on IIAs. UNCTAD’s guide for tax policymakers on
Terminated IIAs
Terminated IIAs

86 86
IIAs, published in 2021, contains IIA reform options to minimize the risk of friction with
National investment
National investment tax policy.
policy measures
policy measures
THE IMPACT OF A GLOBAL MINIMUM TAX ON FDI
The introduction of a minimum tax of 15 per cent on the foreign profits of the largest

3x 3x
Average
Average tax rateMNEs proposed in the context of the G20/OECD Base Erosion and Profit Shifting

15 3x
CH3
tax rate % Pillar(BEPS)
II project has important implications for international investment and investment

15 The 3x
H3
% Pillar II minimum
policies. BEPS Pillar II is expected to discourage MNEs from shifting profits to low-tax
minimum Increase
countries and to reduce tax competition between countries. Further objectives are to
Increase in taxation
stabilize international tax rules and reduce tax uncertainty, to create a more level playing
The magic in taxation field for companies and to prevent the proliferation of unilateral measures that would

magic
number lead to a deterioration of the investment climate. In addition, increased tax revenues will

IIAsIIAs number
support domestic resource mobilization for the SDGs.

15%
Statutory rates of corporate income tax (CIT) have declined over the last three decades

15%
in a race to the bottom to attract international investment. They now hover at about 25
per cent in both developed and developing countries. Effective tax rates (ETRs) on the
reported profits of foreign affiliates tend to be lower, less than 20 per cent on average,
mainly because
• estimated of fiscal
tax rate paid incentives
by MNEs offered by host countries.

Pillar • Pillar II minimum tax rate

MNEs often pay significantly less tax on their foreign income because they can shift part
Increase
• estimated tax rate• paid in tax paid by MNEs
by MNEs

Pillar II
becausetoof low-tax
of their profits the minimumjurisdictions. As a result, the actual tax rates faced by MNEs
• Pillar II minimum tax rate
on their
• Increase foreign
in tax paid income
by MNEs are about 15 per cent, significantly lower than the headline rate.
because
Thisofisthecaptured
minimum by a new metric introduced in this report, the FDI-level ETR, reflecting

II taxes
go up
the average taxes paid by MNEs on their entire FDI income, including shifted profits.

investment
Pillar II will increase the corporate income tax faced by MNEs on their foreign profits.
willwill
First, MNEs be reduce
diverted
profit shifting, as they will have less to gain from it, and will pay

15% investment
host-country tax rates. Second, foreign affiliates that pay an ETR below the minimum
taxes from
go up on profits reported in host countries will be subject to a top-up tax. The expected rise in
willthe low
be(FDI-level)
diverted ETRtax
faced by MNEs is conservatively estimated at 2 percentage points.

15%2%
investment Thisfrom
countries
corresponds to an increase in tax revenues paid by MNEs to host countries of
to
low tax
about 15 per cent – more for large MNEs that are directly affected by the reform.

investment Both normaleconomies

countries
developed and developing economies are expected to benefit
may go
%2%
to
substantially developing
from increased revenue collection. Offshore financial centres stand to lose

countries
a substantial part of CIT revenues collected from MNEs’ foreign affiliates. For smaller
normal
42
down
developing countries – which generally have lower ETRs – the application of the top-up
may go developing
tax could make a major difference in revenue collection.

down countries
incentive
The flipside of increased tax revenues is the potential downward pressure on the
volume of investment that the increase in CIT on FDI activities will exert. The baseline

traffic
scenario places the potential downward effect on global FDI at about -2 per cent.
Tax investment
xiv
incentive +15%
World Investment Report 2022 International tax reforms and sustainable investment -2%
 Developed & ene
+134%
Developing
At the same time, the reduction in tax rate differentials will result in the diversion of +30% efficien
investment from low- to higher-tax jurisdictions, with developing countries benefiting
relatively more because of their higher corporate tax rates.
LDCs proje
The diversion effect could counterbalance investment losses caused by the volume
+15%
effect. However, this will not occur automatically. In a world of smaller tax rate differentials, +134%
countries stand to gain more from improvements in other investment determinants –
including those related to infrastructure and the regulatory and institutional environment.

No country can afford to ignore Pillar II. The mechanism that has been devised for +3
implementation is such that it is sufficient for a relatively limited number of investorCH2
home countries (e.g. G20 and OECD members) to apply the top-up tax for the effects

Developed
Developing
to become almost universal. Host countries, including many developing economies,
then have the option to apply the top-up tax first – before home countries can do so –
to protect tax revenues. But the effectiveness of competitive tax rates or traditional tax
58%
incentives to attract FDI will be diminished.
42%
The Pillar II reforms will thus have major implications for national investment
13

More favourable

Less favourable
policymakers and investment promotion institutions, and for their standard toolkits.
IIAs sign
Fiscal incentives are widely used for investment promotion, including as part of the in 202
value proposition of most special economic zones. Looking specifically at the incentives
Terminate

86
most used to attract FDI:

• Accelerated depreciation and loss carry-forward provisions will remain effective.

National investment
policy measures
• Tax holidays and exemptions will lose all or most of their attraction for investors.

• A range of other incentives will be affected to various degrees depending on

their design.

Investment policymakers urgently need to review their incentives packages, for

3x Pillar
Average
tax rate

15 3
both existing and new investors. Some fiscal policy options to promote investment CH3
II%
remain, including amplifying the benefit to investors of the so-called substance-based minimum
carve-out; shifting to incentives that are less affected by Pillar II; or reducing taxes Increase
that are not covered by Pillar II, to the extent that they have a bearing on investment in taxation
decisions. The m
num
IIAs
International investment policymakers and negotiators of IIAs need to consider the

15
potential constraints that IIA commitments may place on the implementation of key
provisions of Pillar II. If host countries are prevented by IIAs and their ISDS provisions
from applying top-up taxes or removing incentives, the tax increase to the global
minimum will accrue to home countries. Host countries would lose out on tax revenues
without the compensating investment-attraction benefit. Existing old-generation IIAs, of • estimated tax r
the type predominantly in force in many developing countries, are likely to be particularly
problematic. Pillar • Pillar II minimu

• Increase in tax
because of the
The strategic implications of the reforms for investment policy are also important.
Reduced competition from low-tax locations could benefit developing economies.
Nevertheless, as competition shifts from tax levers to alternative investment
II
determinants, and from fiscal incentives to financial incentives, many could still find
themselves at a disadvantage because they are unable to afford the substantial upfront
taxes
go up
investm
will be div

15%
financial commitments associated with infrastructure provision or subsidies.
from
Looking ahead, many important details of Pillar II still need to be defined. Therefore,
low ta
it will be key for developing countries to strengthen cooperation and technical
investment countr

2%
capabilities to ensure effective participation in the process of negotiating the final shape to
of the reforms.
normal
may go develop
down
Key Messages xv
count
 15%
investment countries

2%
to
normal
may go developing
Finally, the implementation of BEPS Pillar II by tax authorities will be highly complex,
countries
42
down and so will the translation of the reforms into investment policies, incentives regimes,
% and the value propositions of investment promotion agencies and special economic
zones. Moreover, the tax revenue implications for developing countries of constraints
posed by IIAs are a major cause for concern. The international community, in parallel
incentive with or as part of the Inclusive Framework discussions, should alleviate the constraints

traffic
that are placing developing countries, and especially LDCs, at a disadvantage:
Tax investment
• Vastly scale up technical assistance to developing countries to support BEPS
+15%
implementation -2investment
and
%
policy adjustment.

• Adopt a multilateral solution to remove implementation constraints posed by IIAs

and mitigate ISDS risks.

• As a stopgap measure, establish a mechanism to return any top-up revenues raised

light
by developed home countries that should have accrued to developing host countries,
but that they were unable to raise because of capacity or treaty constraints.

CH4
CAPITAL MARKETS AND SUSTAINABILITY
Mandatory

ESG
UNCTAD estimates that the value of sustainability-themed investment products in
global financial markets amounted to $5.2 trillion in 2021, up 63 per cent from 2020.

$5.2
These products include sustainable funds ($2.7 trillion), green bonds (over $1.5 trillion

disclosure in
sustainable finance

outstanding), social bonds ($418 billion), mixed-sustainability bonds ($408 billion) and

30
sustainability-linked bonds ($105 billion). Most are domiciled in developed countries
trillion and targeted at assets in developed markets.

in 2021 The global market for sustainable funds experienced another year of exceptional growth

up 63% in 2021. Net investment reached $557 billion, up 58 per cent from 2020 and more
than three times the 2019 level. European funds attracted net inflows of $472 billion,

markets
or 85 per cent of the world’s total. Sustainable funds now account for 18 per cent of
the assets of the European fund market. Globally, however, sustainable funds still only
account for about 4 per cent of total open-ended funds.

Policy measures
New global sustainable bond issuance surpassed $1 trillion in 2021, including
green, social and mixed-sustainability bonds, as well as sustainability-linked bonds.
dedicated to
The increase in sustainable bond issuance was especially visible in emerging markets.
sustainable finance
The European Union and the corporate sector continue to push social and mixed-

Tax investment
up
40%
sustainability bond issuance
in past to new heights.
5 years
Concerns remain about greenwashing and the real impact of sustainability-themed
investment products. That is because most of these products are self-labelled and
+15% -2% there is a lack of consistent standards and high-quality data to assess sustainability
credentials. Also, developing economies are largely bypassed by the sustainable fund
market.
Development implications: from GVC to SDG investment
In 2021, public pension funds held more than $22 trillion in assets, or almost 40 per
cent of global pension fund assets. The assets of sovereign wealth funds grew to
$11 trillion. Institutional investors can exert a significant influence over their investees
and the sustainable investment market through asset allocation and active ownership.

Currently, more than half of the 100 largest public pension and sovereign wealth funds
do not disclose or report on sustainability issues. Making progress on ESG reporting by
these funds will require strengthening national regulations.

xvi World Investment Report 2022 International tax reforms and sustainable investment
 light
CH4
Exchanges continue to play an important role in promoting sustainable finance,
Mandatory

ESG
especially ESG disclosure. The number of exchanges with written guidance on ESG
disclosure for issuers grew to 63 at the end of 2021. Mandatory ESG disclosure,

$5.2
supported by both exchanges and security market regulators, now exists in 30 markets.
disclosure in

sustainable finance
30
Exchanges also have an important role in promoting gender equality. The number of
exchanges engaged in annual “Ring the Bell for Gender Equality” events has grown trillion
from just 7 in 2015 to over 110 in 2022. Beyond raising awareness, exchanges support in 2021
mobilizing finance for gender-equality-themed investment products, improving women’s
access to financial markets and promoting greater levels of female participation in
up 63%
corporate board rooms.
markets
The climate emissions of publicly listed companies vary significantly from one market
to another and can present systemic risks in some markets in a transition to net-zero Policy measures
emission economies. Exchanges, regulators and policymakers should monitor the dedicated to
emissions of companies listed on public markets to ensure an orderly transition.
sustainable finance
Stock exchanges are playing an important role in helping listed companies take action up
on climate change, including through intensive training of their issuers on climate
disclosure reporting. Tax investment
40% in past
5 years

+15% 2
- %
With the rise of sustainability-themed financial products, governments around the world
are stepping up their efforts to develop regulatory frameworks for sustainable finance.
Development implications: from GVC to SDG inves
By the end of 2021, 35 countries and economic groupings – both developed and
developing – had 316 sustainable finance-dedicated policy measures and regulations in
force, more than 40 per cent of which were introduced in the last five years. Almost half
of these policies are dedicated to sustainability disclosure. Sector-specific regulations
with respect to asset management, sustainable banking and sustainable insurance
are the second biggest policy area, representing about 20 per cent of all measures.
Policy and regulatory gaps are more visible in three relatively new policy areas:
taxonomies, product standards and carbon pricing.

In 2021, efforts to coordinate and consolidate sustainable finance regulations and

standards at the international level gathered momentum. The International Organization
of Securities Commissions (IOSCO) and the International Financial Reporting Standards
(IFRS) Foundation are now leading a global effort in consolidating the major ESG
reporting standards, effectively reducing the fragmentation that has persisted over the
past decade.

Key Messages xvii

CHAPTER I

GLOBAL INVESTMENT
TRENDS AND
PROSPECTS
 A. INVESTMENT TRENDS

1. Global trends
Global foreign direct investment (FDI) flows in 2021 were $1.58 trillion, up 64 per cent from
the level during the first year of the COVID-19 pandemic of less than $1 trillion (figure I.1).
FDI flows appeared to have significant momentum mainly because of booming merger and
acquisition (M&A) markets and rapid growth in international project finance as a result of
loose financing conditions and major infrastructure stimulus packages.

However, the global environment for international business and cross-border investment
changed dramatically in 2022 with the onset of the war in Ukraine, which occurred while
the world was still reeling from the impact of the pandemic. The war is having effects
well beyond its immediate vicinity, causing a triple food, fuel and finance crisis, with rising
prices for energy and basic commodities driving inflation and worsening debt spirals
(box I.1). Investor uncertainty and risk aversity could put significant downward pressure on
global FDI in 2022.

The war, with its direct implications for investment in and from the Russian Federation
and Ukraine, and its ripple effects through sanctions, supply shortages in energy and
basic commodities, and broader macroeconomic impact, is not the only factor cooling
FDI prospects for 2022. The flare-up of COVID-19 in China, which is resulting in renewed
lockdowns in some areas that play a major role in global value chains (GVCs), could further
depress new greenfield investment in GVC-intensive industries.

Figure I.1. FDI inflows, global and by economic grouping, 2008–2021 (Billions of dollars and per cent)

Developed economies Developing economies World total

2 500
837 $1 582 746
+134%
53% +30%
+64%

2 000

1 500

1 000

500

0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics).

2 World Investment Report 2022 International tax reforms and sustainable investment
Box I.1. The impact of the war in Ukraine on global FDI flows

The war in Ukraine will have far-reaching consequences for international investment in economic development and the Sustainable
Development Goals (SDGs) in all countries. It comes as a fragile world economy was just beginning an uneven recovery from the effects of
the pandemic. Global FDI in 2022 and beyond will be affected by the security and humanitarian crises, by macroeconomic shocks set off by
the conflict, by energy and food price hikes, and by increased investor uncertainty.
The direct effects of the war on investment flows to and from the Russian Federation and Ukraine include the halting of existing investment
projects and the cancellation of announced projects, an exodus of MNEs from the Russian Federation, widespread loss of asset values and
sanctions virtually precluding outflows.
The value at risk is significant. MNEs from developed economies that support the sanctions account for more than two thirds of FDI stock in
the Russian Federation (with a significant part of the rest accounted for by offshore financial centres (OFCs)). In contrast, to date, MNEs from
China and India account for a negligible share of FDI stock in the Russian Federation (less than 1 per cent), although their share in ongoing
projects is larger. Box table I.1.1 shows the top 10 non-financial MNEs ranked by assets held in the Russian Federation. Energy sector
MNEs hold the largest share. In Ukraine, similarly, a number of MNEs hold significant assets, mostly in steel, information and communication
technology (ICT), pharmaceuticals and agricultural commodities. Arcelor Mittal (Luxembourg) is the largest investor, with assets of $6.5 billion.

Box table I.1.1. Top 10 non-financial MNEs by assets held in the Russian Federation, 2021
(Billions of dollars)

Company Home country Industry Estimated assetsa

Fortum Finland Utilities 32.6
Renault France Automotives 15.9
BP United Kingdom Oil and gas 14.4
TotalEnergies France Oil and gas 13.7
Exxon Mobil United States Oil and gas 7.5
Shell United Kingdom Oil and gas 5.7
PepsiCo United States Food and Beverages 5.6
Carlsberg Denmark Food and Beverages 3.7
Japan Tobacco Japan Tobacco 3.9
Siemens Germany Machinery 2.6
Source: UNCTAD, based on data from Refinitiv SA.
a
Because companies rarely report country-by-country segment figures, assets are estimated in many cases using subsidiary data.

The wider effects on global investment flows are mostly indirect and difficult to anticipate. Apart from its importance as a natural resource
exporter, the Russian Federation plays a relatively minor role in international investment and global value chains (GVCs). Moreover, both its
inward and outward investments had already declined significantly after the international sanctions imposed in 2014. Inward FDI fell by more
than three quarters immediately following those sanctions and remained 43 per cent lower than the pre-sanctions average in the subsequent
years (box figure I.1.1). It can be expected that only a few economies – mainly in Eastern Europe and Central Asia – will be significantly
affected now as a result of Russian links with their FDI profile.

Box figure I.1.1. FDI inflows to the Russian Federation, 2008–2021

(Billions of dollars)
2014 sanctions
80

60
-78%
42.6
40

24.1
20

0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2008–2013 average 2015–2021 average

Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics). /…

Chapter I Global Investment Trends and Prospects 3

 Box I.1. The impact of the war in Ukraine on global FDI flows (Concluded)

The indirect effects on investment flows to developing countries will mostly depend on the extent of their exposure to the triple “food, fuel and finance”
crises caused by the conflict and their consequent economic and political instability – key determinants of international private investment.
An early indication of investment prospects for individual sectors and industries can be found in the profit expectations of MNEs. Since the
start of the war, the majority of the top 5,000 MNEs have revised earnings forecasts for 2022. Due to high commodity prices, extractive
industries (mining, oil and gas) have revised their forecasts upward. Industries that require commodities as production inputs (such as
manufacturing and construction) or that depend on fuel (such as airlines) have revised their earnings forecasts downwards. Geographically,
companies in Eastern Europe and North Africa appear to face relatively more downward pressure on earnings.

Source: UNCTAD.

Furthermore, the expected interest rate rises in the United States, Europe and other major
economies that are seeing significant rises in inflation could slow down M&A markets later
in the year and dampen the growth of international project finance. Negative financial
market sentiment and signs of a looming recession could accelerate an FDI downturn.

There are also factors that point towards making FDI relatively resilient to drastic decline
at times of global economic downturn. The part of FDI that is most closely correlated with
financial markets has not yet lost its strength. Cross-border M&As and international project
finance in infrastructure sectors may provide a floor to global FDI in 2022. Greenfield
investment in industry, which saw only a partial recovery in 2021 and remains weak in
many sectors, is likely to suffer more.

Early indicators reveal a worrisome FDI outlook: FDI project activity in the first months of
2022 shows investors’ uncertainty and risk aversity. According to preliminary data, the
number of greenfield project announcements in the first quarter of 2022 was 21 per cent
below the quarterly average in 2021. Cross-border M&A activity was 13 per cent below
the 2021 average and international project finance deals were down 4 per cent (figure I.2).
However, in terms of value, cross-border M&As were up 59 per cent from last year. The
value of announced international project finance deals was 37 per cent below the record
levels of 2021 but remains at a very high level compared with the pre-pandemic period.

Announced greenfield projects, cross-border M&As and international project finance deals,
Figure I.2.
Q1 2020–Q1 2022 (Number and per cent)

a. Greenfield projects b. Cross-border M&As c. International project finance deals

5 000 2 500 700

600
4 000 3 680 2 000 2 212
500 529
3 000 3 314 1 500 1 550 400
316
2 000 1 000 300
200
1 000 500
100
0 0 0
Q1 2021 Q1 2021 Q1 2021
Q1 2020 Q2 Q3 Q4 Q1 2022 Q1 2020 Q2 Q3 Q4 Q1 2022 Q1 2020 Q2 Q3 Q4 Q1 2022

2020 quarterly 2020 average 2021 quarterly 2021 average

Source: UNCTAD, cross-border M&A database (https://unctad.org/fdistatistics) for M&As, information from the Financial Times Ltd, fDi Markets (www.fDimarkets.com) for announced
greenfield FDI projects and Refinitiv SA for international project finance deals.

4 World Investment Report 2022 International tax reforms and sustainable investment
Overall, UNCTAD foresees that the growth momentum of 2021 cannot be sustained and
that global FDI flows in 2022 will likely move on a downward trajectory, at best remaining flat.
This projection takes into account the various downward pressures and potential stabilizing
factors and considers the composition of the 2021 value of $1.6 trillion, which for some
recipient regions (especially Europe) does not represent historically high levels and could
therefore cushion the decline. However, even if flows should remain relatively stable in value
terms, new project activity is likely to suffer more from investor uncertainty.

Looking at the global FDI trend over the course of the pandemic to date, a clear contrast
emerges with other economic variables (table I.1). In 2020, FDI was much more severely
affected than global trade and GDP, which had already started their recovery in the second
half of the year. In 2021, FDI accelerated faster than other variables.

The large swings in FDI observed between the first and second year of the pandemic,
especially in developed countries, were mainly caused by the substantial financial flow
component of FDI and by transactions that are closely linked to the performance of
financial markets. The booming M&A market and retained earnings of MNEs explain much
of the rapid rebound of growth in 2021. The corollary is visible in much weaker growth of
greenfield investments in industry and in the low share of new equity in FDI flows.

The reinvested earnings component of FDI –

profits retained in foreign affiliates by multinational
enterprises (MNEs) – accounted for the bulk of FDI Global FDI inflows, by components,
Figure I.3.
growth in 2021. In the United States, reinvested 2020 and 2021 (Billions of dollars and per cent)
earnings reached $200 billion – the highest level
2021 2020
ever recorded. Other developed countries, including
1 000 +86%
Switzerland, the Netherlands, Canada, Australia and
Belgium, in that order, also saw large jumps in their 800
reinvested earnings. Global equity investment grew
more moderately, reflecting the more limited growth
600 +15%

of new project investments and the shift towards 400

international project finance, which often includes a
much smaller equity component and greater reliance 200

on debt financing. Intracompany loans remained

0
negative in many countries (figure I.3).
- 200
The importance of retained earnings in 2021 Equity Reinvested earnings Loans
FDI flows reflects the record rise in profit levels of
MNEs, especially in developed economies, with Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics).

Table I.1. Growth rates of global GDP, GFCF, trade and FDI, 2015–2022 (Per cent)
Variable 2015 2016 2017 2018 2019 2020 2021 2022a

GDP 3.4 3.3 3.7 3.6 2.9 -3.1 6.1 3.6

Trade 3.0 2.3 5.6 4.0 0.9 -7.9 10.1 5.0

GFCF -4.7 0.9 4.1 5.0 0.5 -2.9 8.0 3.2

FDI 47 -1 -20 -11 2 -35 64 -

Memorandum

FDI value (Trillions of dollars) 2.1 2.0 1.6 1.4 1.5 1.0 1.6 1.6

Source: UNCTAD, FDI/MNE database for FDI; IMF (2022b) for GDP, GFCF and trade.
Note: GFCF = gross fixed capital formation.
a
Forecasted.

Chapter I Global Investment Trends and Prospects 5

 the release of pent-up demand, low financing costs and significant government support.
The profitability of the largest MNEs doubled to 8.2 per cent (figure I.4).

As a result of these growth factors, developed economies saw the biggest rise by far, with
FDI reaching $746 billion in 2021 – more than double the exceptionally low level in 2020.
In Europe, FDI rose in most countries, although half of the increase was caused by large
fluctuations in major conduit economies. Inflows in the United States more than doubled,
with much of the increase accounted for by a surge in cross-border M&As. Although much
of the growth in FDI in developed countries was driven by financial flows and M&As, there
were indications of investment strength in actual new projects. Investor confidence was
high in infrastructure sectors, supported by favourable long-term financing conditions and
recovery stimulus packages. International project finance deals in developed economies
were up 70 per cent in number and 149 per cent in value (table I.2).

FDI flows to developing economies increased by 30 per cent, to $837 billion, with 19 per
cent growth in developing Asia (to a record $619 billion), a partial recovery in Latin America
and the Caribbean (to $134 billion) and an uptick in Africa (to $83 billion). International project
finance deals rose by 64 per cent in number (142 per cent in value). Investor confidence in
industry remained weak, although the low points seen in GVC-intensive industries in 2020
were not repeated and several industries registered a partial recovery. Greenfield project
announcements in developing countries were flat in value terms, although activity (project
numbers) increased by 16 per cent.

Figure I.4. Profitability and profit levels of MNEs, 2010–2021 (Billions of dollars and per cent)

Value Profit Profitability Per cent

4 000 9

3 000
6

2 000

3
1 000

0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: UNCTAD, based on data from Refinitiv SA.

Announced FDI greenfield projects, cross-border M&As and international project

Table I.2.
finance deals, by economic grouping, 2020–2021
Value
Number
(Billions of dollars) Growth rate Growth rate
Group of economies Type of FDI 2020 2021 (%) 2020 2021 (%)
Cross-border M&As 389 615 58 5 333 7 838 47
Developed economies Greenfield projects 316 401 27 8 993 9 790 9
International project finance 264 656 149 742 1 262 70

Cross-border M&As 86 113 31 868 1 008 16

Developing economies Greenfield projects 259 259 - 4 255 4 920 16
International project finance 220 532 142 520 853 64

Source: UNCTAD, cross-border M&A database (https://unctad.org/fdistatistics) for M&As, information from the Financial Times Ltd, fDi Markets (www.fDimarkets.com) for announced
greenfield FDI projects and Refinitiv SA for international project finance deals.

6 World Investment Report 2022 International tax reforms and sustainable investment
2. Trends by geography

a. FDI inflows
FDI flows recovered strongly in 2021 in all regions FDI inflows by region, 2020–2021
(figure I.5; box I.2). The increase in FDI flows to Figure I.5.
(Billions of dollars and per cent)
developed economies (+134 per cent) – from the
exceptionally low values in 2020 – accounted for Per cent
most of the global growth. The jump in developed
World 1 582 + 64
economies showed the effect of stimulus packages, 962
resulting in record earnings for MNEs, and reflects
Developed 746 + 134
the more volatile nature of FDI flows in developed economies 319
markets because of the larger financial component.
Europe 219 + 171
However, FDI flows to developing regions also 81
increased significantly. FDI inflows to developing
North America 427 + 145
Asia increased by 19 per cent to reach a new high 174
of $619 billion, driven mostly by East and South-
Developing 837 + 30
East Asia (table I.3). Flows to Latin America and economies 644
the Caribbean increased by 56 per cent, recovering
Africa 83 + 113
part of the ground lost in 2020. Flows to Africa more 39

than doubled, but most of the increase was due to

Asia 619 + 19
a single corporate transaction, without which they 519

would have increased moderately. Latin America and 134 + 56

the Caribbean 86
The share of global flows accounted for by developed
countries returned to pre-pandemic levels, at about
half of the total, from just one third in 2020. Structurally 2021 2020

weak economies continued to attract only a small

share of global FDI, at 2.5 per cent of the total. Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics).

Box I.2. Changes in geographical classifications in WIR22

Several changes in the definition – for statistical purposes – of regions and economic groups have been
introduced in this year’s World Investment Report, following the reclassification of some countries by the
United Nations Statistical Division (UNSD).
Transition economies have been discontinued as an economic group. The economies in it have been
distributed across other groups and regions. Europe now includes five countries of the western Balkans,
namely Albania, Bosnia and Herzegovina, Montenegro, North Macedonia and Serbia, and four countries
from the Commonwealth of Independent States (CIS) namely Belarus, the Republic of Moldova, the Russian
Federation and Ukraine. These nine countries are now included among developed countries under “other
Europe”. Armenia, Azerbaijan and Georgia are included in West Asia and Kazakhstan, Kyrgyzstan, Tajikistan,
Turkmenistan and Uzbekistan are included in Central Asia. They are all part of developing Asia. In addition, at
its 1215th plenary meeting, the Trade and Development Board approved the application of the Republic of
Korea, endorse by Group B, and with the agreement of the Asia-Pacific Group, to be moved from the States in
list A to the list B States annexed to General Assembly resolution 1995 (XIX). Therefore, the Republic of Korea
is now included in the group of developed countries throughout the WIR. Thus, invarious data presentations,
it no longer features under developing Asia, but under other developed countries.
All references to developed economies, developing economies, Europe and developing Asia in WIR22 refer to the
new classification; growth rates have been calculated on the basis of adjusted series, unless stated otherwise

Source: UNCTAD.

Chapter I Global Investment Trends and Prospects 7

 Table I.3. FDI flows, by region, 2019–2021 (Billions of dollars and per cent)
Other Europe FDI inflows FDI outflows
Region 2019 2020 2021 2019 2020 2021
World 1 481 963 1582 1 124 780 1 708
Developed economies 764 319 746 737 408 1 269
Europe 405 81 219 343 -21 552
EU 402 210 138 368 66 398
Other Europe 3 -129 81 -26 -87 154
North America 275 174 427 108 281 493
Other developed countries 84 64 100 286 147 225
Developing economies 716 645 837 387 372 438
Africa 46 39 83 5 -1 3
Asia 512 519 619 336 378 394
Central Asia 8 6 7 -3 -2 2
East Asia 232 285 329 203 268 244
South Asia 59 71 52 13 11 16
South-East Asia 175 122 175 80 62 76
West Asia 37 35 55 43 39 56
Latin America and the Caribbean 159 86 134 47 -5 42
Oceania 0.1 -0.1 0.1 -0.8 -0.8 -0.2
Structurally weak, vulnerable and small economiesa 41 34 39 -0.2 0.4 2.4
LDCs 23 23 26 -1.0 1.5 -0.1
LLDCs 22 14 18 0.8 -1.3 1.7
SIDS 4 3 3 0.8 1.0 0.5
Memorandum: percentage share in world FDI flows
Developed economies 51.6 33.1 47.1 65.6 52.3 74.3
Europe 27.3 8.4 13.8 30.5 -2.6 32.3
EU 27.1 21.7 8.7 32.8 8.5 23.3
Other Europe 0.2 -13.4 5.2 -2.3 -11.1 9.0
North America 18.6 18.1 27.0 9.6 36.1 28.9
Other developed countries 5.7 6.6 6.3 25.5 18.9 13.2
Developing economies 48.4 66.9 52.9 34.4 47.7 25.7
Africa 3.1 4.1 5.2 0.4 -0.1 0.2
Asia 34.6 53.9 39.1 29.9 48.5 23.1
Central Asia 0.6 0.7 0.4 -0.2 -0.3 0.1
East Asia 15.7 29.6 20.8 18.0 34.3 14.3
South Asia 4.0 7.4 3.3 1.2 1.4 0.9
South-East Asia 11.8 12.7 11.1 7.1 8.0 4.4
West Asia 2.5 3.6 3.5 3.8 5.0 3.3
Latin America and the Caribbean 10.7 8.9 8.5 4.2 -0.6 2.5
Oceania 0.0 -0.0 0.0 -0.1 -0.1 -0.0
Structurally weak, vulnerable and small economiesa 2.8 3.5 2.5 -0.0 0.1 0.14
LDCs 1.5 2.4 1.6 -0.1 0.2 -0.01
LLDCs 1.5 1.5 1.2 0.1 -0.2 0.1
SIDS 0.3 0.3 0.2 0.07 0.12 0.0
Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics).
Note: LDCs = least developed countries, LLDCs = landlocked developing countries, SIDS = small island developing States.
a
Without double counting countries that are part of multiple groups.

(i) Developed economies

In 2021, most developed countries – 34 out of 48 – saw an increase in FDI. The overall
rise was characterized by strong fluctuations in conduit FDI, financial flows resulting from
corporate restructurings, and M&As. Among subregions, flows rose in North America,
other Europe and other developed countries while they fell in the EU (figure I.6).

In North America, flows to the United States more than doubled to $367 billion, the third
highest level ever recorded, after those of 2015 and 2016. The United States remained the
largest recipient of FDI (figure I.7). The increase in corporate profits had a direct impact on
reinvested earnings, which rose to a record $200 billion. In addition, equity investments
were up by 54 per cent, reflecting a steep increase in cross-border M&As. New greenfield
project announcements also increased, by 28 per cent to $86 billion.

8 World Investment Report 2022 International tax reforms and sustainable investment
Cross-border M&A sales of United States assets FDI inflows in developed economies,
to foreign investors in the services sector reached
Figure I.6.
2020–2021 (Billions of dollars)
$200 billion. They were spread across many services
industries, including information and communication Per cent
($43 billion), trade ($40 billion), transport and storage
Developed 746 +134
($37 billion), finance and insurance ($30 billion) and economies 319

professional services ($21 billion). Among the 18 European 138

-34
cross-border M&As sales of more than $10 billion Union 210

in 2021, nine took place in the United States. They 81 ..

Other Europe
included the acquisition of Alexion by AstraZeneca -129
(United Kingdom) for $39 billion, the purchase of North America 427 +145
GE Capital Aviation Services by AerCap Holdings 174

(Ireland) for $31 billion, the purchase of Kansas City 100

Other developed +55
64
Southern by Canadian Pacific Railway (Canada) countries
for $31 billion and the acquisition of Speedway by
Seven & I Holdings (Japan) for $21 billion. The boom 2021 2020
in cross-border M&A deals explained much of the
increase in FDI in the United States. Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics).

Figure I.7. FDI inflows, top 20 host economies, 2020 and 2021 (Billions of dollars)

(x) = 2020 ranking 2021 2020

367
United States (1) 151
181
China (2) 149
141
Hong Kong, China (3) 135

Singapore (6) 99
75
60
Canada (12) 23
50
Brazil (9) 28
45
India (8) 64

South Africa (51) 41

3
38
Russian Federation (22) 10
32
Mexico (10) 28

Germany (7) 31
65

Israel (11) 30
24
28
United Kingdom (16) 18
27
Sweden (14) 19

Belgium (20) 26
12
Australia (17) 25
17
25
Poland (19) 14
Japan (21) 25
11

United Arab Emirates (13) 21

20

Indonesia (15) 20
19

Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics).

Chapter I Global Investment Trends and Prospects 9

 FDI in Canada increased by 157 per cent to $60 billion, 30 per cent above the 10-year
average before the pandemic. Reinvested earnings reached a record $29 billion, from only
$3 billion in 2020. Equity flows rose also, by 50 per cent to $25 billion, driven by a doubling
of cross-border M&A sales to $29 billion. Sales – predominantly to MNEs from the United
States – increased in extractive industries ($7 billion) and services ($14.5 billion), mainly in
information and communication ($7 billion) and finance and insurance ($4 billion).

FDI flows to the European Union (EU) reached $138 billion – the lowest level since 1997–
mostly due to continued large swings in conduit flows, including negative values in the
Netherlands (-$81 billion in 2021 from -$105 billion in 2020) and an enormous drop of
flows to Luxembourg (from $102 billion in 2020 to -$9 billion in 2021). Equity flows in EU
countries fell sharply from $220 to -$4.2 billion. Cross-border M&A sales dropped also by
26 per cent to $139 billion. While intra-EU sales doubled, mainly because of acquisitions
by French and German MNEs, sales to MNEs from outside the EU declined. The fall was
due in part to several sizeable divestments of foreign affiliates to domestic firms, which
led to negative values in net cross-border M&As. For example, the sale in France of Aviva
France (United Kingdom) to Aema Groupe (France) for $3.9 billion.

The fall in EU inflows occurred despite record reinvested earnings of foreign affiliates in
the group, at $252 billion. The decline was not limited to conduit locations: FDI flows also
decreased in large EU host countries. Flows to Germany fell by 52 per cent, to $31 billion,
from $65 billion in 2020.

The overall positive growth in Europe was driven by FDI flows registered in Switzerland
which, after three consecutive years of negative flows, turned positive to $1 billion.
In addition to intrafirm financial flows, M&A activity drove part of the increase. Among
the larger deals were the acquisition of Sunrise by Liberty Global (United Kingdom) for
$5.4 billion. FDI flows to the United Kingdom also rose, by 51 per cent to $28 billion,
still one of the lowest levels ever recorded. Equity investment there more than doubled,
together with cross-border M&A values. Large deals in the United Kingdom included
the merger of Fiat Chrysler Automobiles with Peugeot (France) for $22 billion and the
purchase of GW Pharmaceuticals by Jazz Pharmaceuticals (United States) for $6.8 billion.
Two large divestments included the sale by PPL (United States) of its Bristol-based electric
power distributor to National Grid for $20 billion and the sale by Telefonica (Spain) of its
O2 Holdings to Virgin Media for $13 billion. Most other developed economies also saw
FDI inflows rise in 2021. In Israel, FDI continued its upward trend, to $30 billion – a record.
Cross-border M&A sales there reached $22 billion, more than half of which was in
information and communication. For example, Thoma Bravo (United States) merged with
Ironsource, for $10 billion. Flows to Australia rose by 50 per cent to $25 billion, driven in
part by M&A sales in food and beverages; Coca-Cola European Partners (United Kingdom)
acquired a 69 per cent in Coca-Cola Amatil for $5.2 billion. Despite some large divestments,
FDI flows to Japan more than doubled, to $25 billion, and flows to the Republic of Korea
doubled to $17 billion.

Although developed economies are more prone to large fluctuations in FDI caused by
financial flows and M&A transactions – clearly the case in the 2021 rebound from the 2020
lows – there were upswings in new productive project announcements as well. The value
of new greenfield projects announced in developed economies rose by 27 per cent to
$401 billion. Projects in the primary sector remained minimal (at $7 billion), while the value
of projects in the services sector rose slightly, by 9 per cent, to $215 billion. Manufacturing
industries experienced a return to pre-pandemic values, at $179 billion. Greenfield projects
announced in electronics and electrical equipment, strongly affected during the first year
of the pandemic by supply chain concerns, more than doubled to $73 billion. The value of
announced projects in information and communication kept rising in 2021 to $68 billion.

10 World Investment Report 2022 International tax reforms and sustainable investment
The two largest deals announced were in semiconductors: Intel (United States) intends to
build a semiconductor plant in Germany for $19 billion, and Samsung (Republic of Korea)
plans to build a semiconductor factory in the United States for $17 billion.

In 2021, the number of announced international project finance deals continued its upward
trend, reaching 1,262 projects – a record. The total value of deals more than doubled, to
$656 billion. Renewable energy remained the most important industry with two thirds of
the deals (805), a 52 per cent increase from 2020. Deals in residential and commercial
real estate quintupled to 78 from 16. Many international project finance deals target
sustainability or climate change objectives; in 2021 projects included, for example, the
construction of a zero-carbon retail and residential precinct in Australia for $1 billion.

For 2022, FDI trends in developed economies are highly uncertain, as the war in Ukraine
could have far-reaching consequences for investment – especially in Europe where,
apart from the direct impact on investment in the Russian Federation and Ukraine, the
main channel through which the war and the sanctions will affect investment is the rise in
energy prices and energy insecurity. Supply chain disruptions will also hurt some industries
– including automotive – as the war and sanctions hinder production of key inputs.
Nonetheless, cross-border M&As – the most important type of FDI in developed economies
– rose by 39 per cent, to $285 billion, in the first four months of 2022, compared with the
$205 billion four months average in 2021. One third of M&A sales ($87 billion) took place in
the extractive industries, reflecting the higher commodity prices.

(ii) Developing economies

FDI flows to developing economies in 2021 increased by 30 per cent to $837 billion,
the highest level ever recorded. The increase was mainly the result of strong growth
performance in Asia, a partial recovery in Latin America and the Caribbean, and an
upswing in Africa. The share of developing countries in global flows remained just above
50 per cent. FDI flows continue to be an important source of external finance for developing
economies, together with other cross-border capital flows, which also saw a rise in
2021 (figure I.8).

Developing economies: sources of external finance, 2011–2021

Figure I.8.
(Billions of dollars)

900

800

700

600

500

400

300

200

100

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

FDI inflows Remittances Portfolio investment ODA

Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics) (for FDI inflows), OECD (for ODA flows) and World Bank (for remittances).

Chapter I Global Investment Trends and Prospects 11

 In 2022, FDI flows to developing economies are expected to be strongly affected by the
war in Ukraine and its wider ramifications, and by macroeconomic factors including rising
interest rates. The main drivers of a possible contraction of FDI are the impact of higher
energy prices on domestic demand; high food prices, which can lead to political instability;
and tighter financial conditions. Fiscal space in many countries will be significantly reduced,
especially in oil- and food-importing developing economies. Rising investor uncertainty and
downgrades of country risk ratings will be important factors for FDI. Higher commodity
prices may provide some offsetting investment increases for resource-based economies
in Africa and in Latin America. As in developed economies, cross-border M&A sales in
developing economies also rose – by 13 per cent, to $42 billion in the first months of 2022,
40 per cent of which targeted extractive industries.

Africa

FDI flows to Africa reached $83 billion – a record level – from $39 billion in 2020, accounting
for 5.2 per cent of global FDI. Most recipients saw a moderate rise in FDI after the fall in
2020 caused by the pandemic. The total for the continent was inflated by a single intrafirm
financial transaction in South Africa in the second half of 2021. Excluding that transaction,
the increase in Africa is moderate, more in line with other developing regions. Southern
Africa, East Africa and West Africa saw their flows rise; Central Africa remained flat and
North Africa declined (figure I.9).

Flows to North Africa fell by 5 per cent to $9.3 billion. Egypt saw its FDI drop by 12 per
cent as large investments in exploration and production agreements in extractive industries
were not repeated. Despite the decline, the country was the second largest host of FDI on
the continent. Pledges from Gulf States to invest some $22 billion in various sectors may
boost FDI going forward. Announced greenfield projects in Egypt more than tripled, to
$5.6 billion; for example, Reportage Properties (United Arab Emirates) announced a real
estate project for $1.5 billion. Flows to Morocco rose by 52 per cent to $2.2 billion. A large
international project finance deal was announced there: the $20 billion construction of a
3,800 km transmission line to the United Kingdom with 3.6 GW of capacity, sponsored by
Xlinks (United Kingdom).

FDI in West Africa increased by 48 per cent to $14

billion. Nigeria saw its flows double to $4.8 billion,
FDI inflows in Africa, by subregion mainly because of the resurgence in oil investment
Figure I.9.
2020–2021 (Billions of dollars) and expansion in gas. International project finance
deals in the country jumped to $7 billion, with some
Per cent large projects in residential and commercial real
estate. These included, for example, the $2.9 billion
Africa 83 +113
39 Escravos Seaport project, involving construction of
9
an industrial complex with a refinery, international
North Africa -5
10 airport, industrial estate and free trade zone.
FDI flows to Ghana rose by 39 per cent to $2.6
West Africa 14 +48
9 billion, again mainly owing to projects in extractive
industries; for example, the construction of an
Central Africa 9 -1
10 $850 million gold mining facility by Newmont Corp
(United States) and the construction of a cement
East Africa 8 +35
6 factory by Ciment d’Afrique (CIMAF) (Morocco) for
$436 million.
Southern Africa 42 +895
4
FDI to East Africa grew by 35 per cent to $8.2
2021 2020 billion. Flows to Ethiopia reached $4.3 billion.
Chinese investments tripled in 2021 (Ethiopia is
Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics). a central hub for China’s Belt and Road Initiative).

12 World Investment Report 2022 International tax reforms and sustainable investment
Four (out of five) international project finance announcements in the country were in
renewables; for example, the Masdar solar project involves construction of a 500 MW solar
power plant for $135 million, with Abu Dhabi Future Energy as a sponsor. Uganda saw its
FDI rise by 31 per cent to $1.1 billion. FDI to the United Republic of Tanzania rose by 35 per
cent to $922 million, and new greenfield project announcements tripled in value. The two
largest projects announced in 2021 were the development of nickel project from Kabanga
Nickel (United Kingdom) for $318 million, and an investment in food and beverages by
Associated British Foods (United Kingdom) for $238 million.

Flows to Central Africa remained flat at $9.4 billion. FDI to the Democratic Republic of the
Congo rose by 14 per cent $1.9 billion, with investment remaining buoyant because of flows
in offshore oil fields and mining. Other projects include a facility for treatment of municipal
organic waste by Biocrude Technologies (Canada) for $136 million. Flows to Congo fell
by 8 per cent to $3.7 billion, but two international project finance deals were announced;
the largest involves the construction of an oil facility for $166 million, sponsored by China
National Chemical and Beijing Fortune Dingheng Investment (China).

FDI to Southern Africa jumped to $42 billion due to a large corporate reconfiguration in
South Africa – a share exchange between Naspers and Prosus in the third quarter of
2021. New project announcements included a $4.6 billion clean energy project finance
deal sponsored by Hive Energy (United Kingdom) and a $1 billion greenfield project by
Vantage Data Centers (United States), with its first African campus.

Despite the overall positive FDI trend on the continent, total greenfield announcements
remained depressed, at $39 billion, showing only a modest recovery from the low of $32
billion in 2020 (down from $77 billion in 2019).

In contrast, international project finance deals targeting Africa showed a rise of 26 per
cent in number (to 116) and a resurgence in value to $121 billion (after $36 billion in 2020).
The rise was supported by strong investment by multilateral finance and capital market
investors targeting power ($56 billion) and renewables ($26 billion). The largest project was
the announcement in Mauritania of a power-to-x hydrogen project for $40 billion by CWP
Renewables (Australia).

European investors remain by far the largest holders of foreign assets in Africa, led by
the United Kingdom ($65 billion) and France ($60 billion).

Developing Asia

Despite successive waves of COVID-19, FDI in

Figure I.10. FDI inflows in developing Asia by
developing Asia rose for the third consecutive year subregion, 2020–2021 (Billions of dollars)
to an all-time high of $619 billion, underscoring the
resilience of the region. It is the largest recipient Per cent
region of FDI in the world, accounting for 40 per
Developing Asia 619 +19
cent of global inflows. 519

329
The 2021 upward trend was widely shared in the East Asia 285
+16

region, with South Asia the only exception (figure 175

South-East Asia 122
+44
I.10). However, inflows remain highly concentrated.
Six economies (China, Hong Kong (China), 52
South Asia 71
-26

Singapore, India, the United Arab Emirates and

55
West Asia +59
Indonesia, in that order) accounted for more than 80 35

per cent of FDI to the region. Central Asia 7 +12

6
FDI in East Asia increased 16 per cent to $329
2021 2020
billion in 2021. FDI growth in China picked up
pace, growing by 21 per cent to $181 billion, after Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics).

Chapter I Global Investment Trends and Prospects 13

 only a 6 per cent increase in 2020. China’s robust FDI growth was powered by strong
investment in services and high-tech sectors, where the outlook also remains robust;
for example, TSMC (Taiwan Province of China) plans to invest $2.8 billion in China to
ramp up the production of semiconductors used in automobiles. The number of foreign-
invested enterprises in China registered in 2021 reached 48,000, up 24 percent year
on year. International project finance deals reached 25 – a record number, with the
most projects announced in renewables and industrial real estate. One of the largest
projects was the construction of a data centre in Shanghai for $1 billion, sponsored
by Princeton Digital Group (Singapore). Flows to Hong Kong, China, reached $141
billion – 4 per cent higher than 2020, mostly accounted for by reinvested earnings
($108 billion). FDI trends in China in 2022 will be affected by renewed lockdowns in
parts of the country, with significant implications for industrial production and global
supply chains.

South-East Asia resumed its role as an engine of growth for FDI in developing Asia and
globally, with inflows up 44 per cent to $175 billion and increases across most countries.
The rise was underpinned by strong investment in manufacturing, the digital economy and
infrastructure. Singapore, the largest recipient, saw inflows up 31 per cent to $99 billion,
driven by a jump in cross-border M&As. The largest deal was the merger of Altimeter
Growth Corp (United States) with Grab, a Singapore-based software publisher, for $34
billion. Announced greenfield projects also rose to $13 billion with a $4 billion project of
GlobalFoundries (United Arab Emirates) to build a chipmaking plant in Singapore. Malaysia
also attracted chipmakers; its largest greenfield project announcements were all in
semiconductors – Risen Solar Technology (China) for $10 billion, Intel (United States) for $7
billion and AT&S (Austria) for $2.1 billion.

FDI in West Asia increased by 59 per cent to $55 billion in 2021 from $35 billion in 2020,
mainly driven by a significant rise in cross-border M&As. While the United Arab Emirates
remained the largest recipient with stable flows at $20 billion, inflows more than tripled
in Saudi Arabia and rose by 60 per cent in Turkey. In the United Arab Emirates, DHL
Global Forwarding (Germany) and Total (France) announced the building of a solar energy
project in Dubai for $633 million. FDI inflows to Saudi Arabia rose to $19 billion from
$5.3 billion in 2020 thanks to two large deals. In Turkey, after two consecutive years of
decline, inflows reached $13 billion, with a rise in new equity investments. Deals included
the refinancing of project debt across several oil and gas assets in Turkey by Socar
(Azerbaijan), for $1.3 billion.

FDI in South Asia fell by 26 per cent, to $52 billion, as the large M&As registered in
2020 were not repeated. Flows to India declined to $45 billion. However, a flurry of new
international project finance deals were announced in the country: 108 projects, compared
with 20 projects on average for the last 10 years. The largest number of projects (23) was
in renewables. Large projects include the construction in India of a steel and cement plant
for $13.5 billion by Arcelormittal Nippon Steel (Japan) and the construction of a new car
manufacturing facility by Suzuki Motor (Japan) for $2.4 billion.

Flows to Central Asia rose by 12 per cent to $7 billion. Flows to Kazakhstan – the largest
host in the subregion – fell by 14 per cent to $3.2 billion, with declines in extractive
industries and transportation. Flows rose by 18 per cent to $2 billion in Uzbekistan and by
24 per cent to $1.5 billion in Turkmenistan.

Across developing Asia, investment in sectors relevant for the SDGs rose significantly.
International project finance values in these sectors increased by 74 per cent to $121
billion, primarily because of strong interest in renewable energy. Project values in this
industry rose 123 per cent, to $77 billion, from $34 billion in 2020.

14 World Investment Report 2022 International tax reforms and sustainable investment
Latin America and the Caribbean
Figure I.11. FDI inflows in Latin America and the
In 2021, FDI in Latin America and the Caribbean Caribbean, by subregion, (Billions of dollars)
rose by 56 per cent to $134 billion, sustained by
Per cent
strong inflows in traditional target industries such as
automotive manufacturing, financial and insurance Latin America and 134 +56
services, and electricity provision, and pushed the Caribbean 86

up by record high investments in information

South America 88 +74
and communication services across the region. 51

Most economies saw inflows rebound, with only

Central America 42 +30
a few experiencing further declines caused by the 33
pandemic-induced economic crisis, in some cases
Caribbean 4
combined with political instability. Flows rose in all 3
+39

three subregions in Latin America and the Caribbean

2021 2020
(excluding financial centres) (figure I.11).

In South America, FDI grew by 74 per cent to $88 Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics).
billion, sustained by higher demand for commodities
and green minerals. All major recipients, which
include Brazil, Chile and Colombia, saw their FDI flows rise, driven by the resumption of
flows into mining and hydrocarbons. In Brazil investments in agribusiness, automotive and
electronics manufacturing, information technology and financial services led to an increase
of total FDI by 78 per cent, to $50 billion. The value of announced greenfield projects and
number of international project finance deals in the country rose by 35 per cent and 32 per
cent, respectively. One of the largest greenfield projects was the kick-off by Bravo Motor
(United States) of a $4.4 billion project to produce electric vehicles as well as batteries
and components in Brazil. Among international project finance deals, the largest was the
construction of a 2 GW offshore wind farm for $5.9 billion, sponsored by Ocean Winds
(Spain). Flows to Chile rose by 32 per cent to $13 billion, sustained by several large
acquisitions and renewed interest in mining projects. The number of international project
finance deals there rose 80 per cent to 88 projects. One of the largest is the construction
of a $3 billion ammonia plant with onshore wind farm, electrolysers, and port facility.
Flows to Colombia grew by 26 per cent to $9 billion, led by inflows in the manufacturing
sector and in transport, logistics and communication services. Flows to Argentina and
Peru recovered to pre-pandemic levels. In Argentina, inflows grew to $6.5 billion, largely in
mining projects.

In Central America, FDI reached $42 billion. Flows to Mexico, the second largest recipient
in the subregion, increased by only 13 per cent to $32 billion, with new equity investments
in the mining and extractive industries as well as in automotive. Greenfield investment
announcements, an indicator of future investment plans, were up 43 per cent from 2020,
with the biggest jump in information and communication; for example, Huawei (China)
announced that it will open a cloud data centre in Mexico for $4.5 billion. Flows to Costa
Rica returned to pre-pandemic levels, almost doubling to $3.2 billion with new investments
in special economic zones. In Guatemala flows reached a record level of $3.5 billion.

In the Caribbean, FDI increased by 39 per cent to $3.8 billion, mainly driven by growth
in inflows to the Dominican Republic, to $3.1 billion. Flows increased in mining, financial
services and special economic zones.

Overall, in Latin America and the Caribbean, cross-border M&A activity increased, with
a higher number of deals, although the total value of net sales was virtually unchanged
from 2020 at $8 billion. The services sector recorded the highest increase of net
sales, especially in the financial and energy supply industries. Announced greenfield

Chapter I Global Investment Trends and Prospects 15

 investment increased by 16 per cent, with most commitments going to the automotive,
information and communication, and extractive industries. The value of announced
international project finance deals doubled, exceeding pre-pandemic levels, pushed by
large projects in transportation infrastructure (especially in Brazil), mining (across the region)
and renewable energy.

Structurally weak, vulnerable and small economies

FDI flows to 82 structurally weak, vulnerable and small economies rose by 15 per cent
to $39 billion (figure I.12). Inflows to the least developed countries (LDCs), landlocked
developing countries (LLDCs) and small island developing States (SIDS) combined1
accounted for only 2.5 per cent of the world total in 2021, down from 3.5 per cent in 2020.
The impact of the pandemic continued to intensify the fragility of the structurally weak
economies. Investment in various sectors relevant for achieving the SDGs, especially in
food, agriculture, health and education, continued to fall in 2021.

FDI in LDCs increased by 13 per cent to $26 billion, despite the acceleration of funds
repatriation by oil companies, which resulted in negative inflows to Angola of -$4.1 billion
(from -$1.9 billion in 2020). Flows remained concentrated, with the top five recipients
(Mozambique, Ethiopia, Cambodia, Bangladesh and Senegal, in that order) accounting for
69 per cent of total FDI in the group.

FDI inflows to the 33 African LDCs increased by 17 per cent to $16 billion, accounting
for almost two thirds of all LDC inflows. Inflows exceeded $1 billion in five African LDCs.
In Mozambique, inflows grew by 68 per cent to $5.1 billion, and the country saw a jump
in greenfield projects; for example, Globeleq Generation (United Kingdom) plans to build
power plants for $2 billion. Flows to Ethiopia rose by 79 per cent to $4.3 billion as FDI from
China tripled in 2021. FDI in Senegal rose by 21 per cent to $2.2 billion, and the country
registered a 27 per cent rise in announced greenfield projects. Flows to Zambia remained
negative at -$457 million, due to a $1.5 billion copper mine divestment by Glencore
(Switzerland) to State-owned ZCCM Investments Holdings.

In the nine Asian LDCs, FDI inflows rose by 6 per cent to $9.8 billion, or one third of
the LDC total. In Cambodia, the largest LDC recipient, FDI was down by 4 per cent, at
$3.5 billion. While greenfield projects fell to only $124 million (from $1.6 billion in 2020),
there were eight international project finance deals (compared with only two in 2020).
For example, a 50-hectare car tire manufacturing
facility is under construction for $350 million,
FDI inflows in structurally sponsored by Sailun Group (China). In Bangladesh,

Figure I.12. weak, vulnerable and small inflows rose by 13 per cent to $2.9 billion – around
economies, 2020–2021 the pre-pandemic level. The number of international
(Billions of dollars) project finance deals tripled to 14, reaching $4.7
billion. The largest project was the construction of
Per cent
a container terminal in Ananda Bazar for $2 billion.
Structurally weak,
vulnerable and 39 +15
34 The number and value of greenfield project
small economies
announcements in LDCs continued their downward
LDCs 26 +13
23 trend in 2021. The number of projects fell to the
lowest level since 2008. Their value fell to the lowest
LLDCs 18 +31
14 ever recorded, $12 billion. This is a major concern
as these investment types are crucial for building
SIDS 3 +17
3 productive capacity and thus for prospects of
2021 2020 sustainable recovery. By value, the largest projects
were announced in energy and gas supply and in
Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics). information and communication.

16 World Investment Report 2022 International tax reforms and sustainable investment
International project finance deals targeting LDCs decreased by 6 per cent in number
(to 73) but rose by 69 per cent in value. Renewable energy projects accounted for the
largest number (34), while power was the largest in terms of value ($41 billion).

Investment in SDG sectors in LDCs remains weak. The number of foreign investment
projects (both greenfield and international project finance deals) fell in important SDG
sectors, including renewables, power, food and agriculture, and health. They rose in
transport, WASH (water, sanitation and hygiene) and education.

MNEs from developing countries play an increasingly important role in LDCs. China
continues to be the largest source of FDI, with its FDI stock in the group reaching $46
billion – a 38 per cent rise from 2016.

Since 2011, FDI flows to LDCs as a group have increased only marginally. The pandemic
has further undermined the attainment of the goals of the Istanbul Programme of Action
for LDCs, as well as the SDGs. FDI remains an important external source of finance for
LDCs, but the growth of FDI lags other sources; ODA and remittances are by far the largest
external financial flows to LDCs (figure I.13).

Although international project finance is an increasingly important source of investment in

most countries and in a diverse set of industries, including SDG-relevant sectors, in LDCs
extractive industries continue to be the main target of project finance. This points to the
continued dependence of LDCs on resource-driven FDI.

A few LDCs have seen some sectoral diversification. Looking at the types of investment that
are most important for the development of productive capacities in LDCs, only investment
in energy generation and distribution grew significantly during the decade, while investment
in other infrastructure sectors and projects important for private sector development and
structural change barely increased. During the pandemic, investment in several priority
sectors for developing productive capacity almost completely dried up, making the next
programme of action for LDCs – recently adopted – particularly challenging (table I.4).

Figure I.13. LDCs: FDI inflows, ODA and remittances, 2011–2021 (Billions of dollars)

70

60

50

40

30

20

10

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Total ODA FDI inflows Remittances

Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics) (for FDI inflows), OECD (for ODA flows) and World Bank (for remittances).

Chapter I Global Investment Trends and Prospects 17

 LDCs: announced investment in productive capacity, 2011–2012 and 2019–2021
Table I.4. (Millions of dollars and per cent)

Greenfield projects International project finance deals

2020– 2020–
2021 2021
2011 2012 2019 2020 2021 2011 2012 2019 2020 2021
Productive capacity- growth growth
relevant sector rate (%) rate (%)
Total
Value 28 741 24 765 33 779 17 314 11 368 -34 96 765 115 265 67 376 32 401 60 474 87
Number of projects 492 556 421 207 160 -23 24 27 83 60 63 5

Energy
Value 4 398 4 265 3 483 7 047 3 260 -54 93 370 54 821 59 267 18 208 55 855 207
Number of projects 3 9 17 24 7 -71 14 19 67 49 47 -4

Human capital
Value 177 438 201 43 244 467 387 100 130 351 216 -38
Number of projects 10 8 10 5 7 40 2 1 1 2 3 50

ICT
Value 1 120 771 337 2 248 1 898 -16 320 410 ..
Number of projects 27 41 19 31 31 0 2 2 ..

Natural capital
Value 12 159 6 374 11 214 3 059 1 568 -49 181 ..
Number of projects 44 22 19 10 7 -30 1 ..

Private sector
development
Value 2 322 3 128 1 377 838 524 -37 ..
Number of projects 147 178 108 45 31 -31 ..

Structural change
Value 8 488 9 110 14 754 4 078 3 364 -18 1 844 1 112 314 992 858 -14
Number of projects 256 287 232 92 72 -22 5 2 3 5 5 0

Transportion
Value 77 678 2 413 509 .. 1 164 59 231 7 164 12 849 3 135 -76
Number of projects 5 11 16 5 .. 3 5 9 4 6 50
Source: UNCTAD, information from the Financial Times Ltd, fDi Markets (www.fDimarkets.com) for announced greenfield FDI projects and Refinitiv SA for international project
finance deals. For the methodology on investment in productive capacities, see WIR21, chapter IV, and UNCTAD’s Productive Capacities Index.

FDI inflows to the 32 LLDCs rose by 31 per cent to $18 billion. Flows to these countries in
Africa, Latin America and the Caribbean, and Europe rose. Only flows to LLDCs in Central
Asia fell. Flows remained concentrated in a few economies, with the top five recipients
(Ethiopia, Kazakhstan, Mongolia, Turkmenistan and Uzbekistan, in that order) accounting
for more than 71 per cent of total FDI to the group.

In Africa, flows to the group increased by 53 per cent to $7.8 billion, accounting for 42 per
cent of total FDI in LLDCs. Ethiopia became the largest LLDC recipient. Flows to Mali rose
by 23 per cent to $660 million; Ciment d’Afrique (CIMAF) (Morocco) intends to construct a
factory for $436 million. Uganda saw its FDI rise by 31 per cent, to $1.1 billion.

In the two Latin American LLDCs, FDI inflows turned positive in 2021, to $716 million,
after large divestments in 2020 in the Plurinational State of Bolivia. In Paraguay, flows
remained flat, rising by 1 per cent to $594 million. The country’s lockdown, nationwide for
two months and in selected areas afterwards, proved effective and the economy reopened
relatively quickly.

Inflows to the LLDCs in developing Asia contracted by 6 per cent to $9.1 billion. After
the increase in 2020, flows to Kazakhstan fell by 14 per cent to $3.2 billion. Investment
in extractive industries and in transportation and storage declined, but they rose in
manufacturing and in finance and insurance. Top investors in the country included MNEs

18 World Investment Report 2022 International tax reforms and sustainable investment
from the United States ($1.6 billion, up 11 per cent), the Russian Federation ($865 million,
doubling from 2020) and China ($491 million from -$851 million in 2020). Flows to Mongolia
rose by 24 per cent, to $2.1 billion. There were three international project finance deals; for
example, the South Gobi green hydrogen pilot plant project for $262 million. Flows rose in
Turkmenistan, Uzbekistan and the Lao People’s Democratic Republic. In Azerbaijan, flows
turned negative to -$1.7 billion because of the repatriation of funds by oil companies.

Looking at the LLDCs group as a whole, the value of greenfield project announcements
decreased to $9.9 billion in 2021, although the number of projects rose by 26 per cent,
to 173. The decrease in value was particularly pronounced in in manufacturing and services.
There was a jump in value in extractive industries, mainly because Zimplats (South Africa)
plans to expand investment in the production of platinum in Zimbabwe by $1.2 billion.

The number of international project finance deals in LLDCs was 46 per cent higher than
in 2020, at 76 projects. The majority (41) targeted renewables, but projects were also
announced in other sectors, including mining, power generation and infrastructure.
Examples include the construction of a gas-fired power plant in Kazakhstan for $1.2 billion,
sponsored by Siemens Energy (Germany), the expansion of Almaty International Airport
in Kazakhstan for $780 million, sponsored by TAV Havalimanlari Holding (Turkey) and the
construction of a wind farm and 69 wind turbines in North Macedonia for $610 million,
sponsored by WPD (Germany).

FDI to LLDCs originates mostly from a few key investor countries. With $20 billion, China
was by far the largest investor in LLDCs (with $6 billion in Kazakhstan alone), followed by
Thailand, the Netherlands and Canada.

FDI inflows to the SIDS in 2021 rose by 17 per cent to $3.3 billion, continuing to hover
around 0.2 per cent of global FDI. Reflecting differences in levels of development and
factor endowments, a handful of SIDS continued to attract the bulk of inflows. The top five
recipients (Maldives, Fiji, the Bahamas, Trinidad and Tobago, and Mauritius, in that order)
accounted for 56 per cent of FDI flows to the group. The 2021 increase represented only a
partial recovery, as pre-pandemic levels were about 25 per cent higher than current levels.
This reflects the multiple problems that several of these countries face resulting from the
pandemic, including stagnant international tourism.

Inflows to the 10 Caribbean SIDS rose by 4 per cent to $1.7 billion, after dropping 27
per cent in 2020. In the Bahamas, inflows decreased by 60 per cent to $360 million.
However, there was a rise in announced greenfield projects and international project
finance deals. CGrowth Capital (United States) sponsored the construction of a
refinery in the Bahamas for $262 million. Flows to Trinidad and Tobago turned positive
(to $342 million from -$103 in 2020); Digicel (Jamaica) plans to invest $137 million in
telecommunication.

FDI rose in the two Asian SIDS. In Maldives, FDI inflows rose by 27 per cent, to $443
million, still about half of the 2019 level. In Timor-Leste, a large project was announced
in 2021—the construction of a carbon capture and storage scheme in the Timor Sea
for $1.6 billion sponsored by a group of investors from Italy, Australia, the Republic of
Korea and Japan.

In the five African SIDS, FDI rose by 25 per cent to $592 million. Mauritius saw its FDI flows
rise by 13 per cent to $253 million. Decathlon (France) opened its fourth global warehouse
in that country – an investment with a value of $17 million. In Seychelles, FDI flows rose
by 28 per cent (to $157 million), more than recovering the loss during the pandemic.
Cross-border M&As rose in information and technology as ICOA (United States) acquired
iBG, a provider of custom computer programming services, for $185 million.

Chapter I Global Investment Trends and Prospects 19

 In the 11 SIDS in Oceania, inflows also recovered to pre-pandemic levels, with a 64 per
cent rise to $517 million. In Fiji, the largest host country by far, FDI was up by 67 per cent
to $401 million, as Sevens Pacific (Singapore) acquired a 44 per cent stake in the state-
owned Energy Fiji for $210 million.

b. FDI outflows
In 2021, MNEs from developed economies more than doubled their investment abroad to
$1.3 trillion, from $408 billion. Their share in global outward FDI rose to three quarters of
global outflows. The strong volatility of conduit countries continued in 2021.

Aggregate outward investment by European MNEs rebounded from the anomalously low
level in 2020 of -$21 billion to $552 billion.

Outflows from the Netherlands reversed direction, jumping back to $29 billion from -$191
billion in 2020, with the difference accounting for two thirds of the rise in investment by
EU MNEs. A sharp increase in outflows from Germany to $152 billion (from $61 billion in
2020) made it the second largest investor home country in the world (figure I.14). Among
the components, reinvested earnings of German MNEs abroad jumped to $66 billion – the
highest level ever recorded. Large acquisitions by German MNEs included the purchase
of Varian Medical Systems (United States) by Siemens Healthineers for $16 billion and
the purchase of the petrochemicals business of BP (United Kingdom) in the United
States by INEOS Styrolution Group for $5 billion. Outflows from Ireland increased also,
to $62 billion from -$45 billion in 2020, mainly owing to several large acquisitions, such
as the purchase of GE Capital Aviation Services (United States) by AerCap Holdings for
$31 billion.

Outward investments by MNEs from other European countries turned positive to $154
billion from -$87 billion in 2020. MNEs from the United Kingdom increased their investment
abroad to $108 billion from -$65 billion in 2020, mainly in the form of reinvested earnings.
Outward FDI flows from the Russian Federation increased to $64 billion from $7 billion,
mostly directed to Cyprus.

Outflows from North America reached a record $493 billion. MNEs from the United States
increased their investment abroad by 72 per cent, to $403 billion. Flows to the EU and the
United Kingdom doubled to $154 billion and $79 billion, respectively. Outflows from the
United States to Mexico almost tripled (to $11 billion), and to Singapore they increased
significantly ($25 billion). By industry, the biggest rises were in wholesale trade (to $38
billion from -$1 billion) and finance (to $39 billion from -$30 billion).

Outward FDI from other developed countries rose by 52 per cent to $225 billion, mainly
because of increases from Japanese and Korean MNEs. Outflows from Japan rose by 53
per cent to $147 billion, making it the third largest investor country. Cross-border M&As from
Japan rose to $60 billion from $18 billion, mainly in information and communication and
in chemicals. For example, Renesas Electronics (Japan) acquired Dialog Semiconductor
(United Kingdom) for $6 billion. Outflows from Korean MNEs doubled to $61 billion, with
announced greenfield projects overseas jumping from $9.4 billion to $33 billion.

The value of investment activity abroad by MNEs from developing economies rose by 18 per
cent, to $438 billion. Developing Asia remained a major source of investment even during
the pandemic. Outward FDI from the region rose 4 per cent to $394 billion, contributing to
almost a quarter of global outflows in 2021. The rise included robust outflows from Saudi
Arabia (with a five-fold increase to $24 billion), Singapore (up 49 per cent to $47 billion)
and the United Arab Emirates (up 19 per cent to $23 billion). Investment from China and
Hong Kong (China), the region’s two largest investors, fell by 6 per cent to $145 billion and

20 World Investment Report 2022 International tax reforms and sustainable investment
Figure I.14. FDI outflows, top 20 home economies, 2020 and 2021
(Billions of dollars)

(x) = 2020 ranking 2021 2020

United States (1) 403

235

Germany (6) 152

61

Japan (5) 147

96

China (2) 145

154

United Kingdom (166) 108

-65

Canada (7) 90
47
87
Hong Kong, China (4) 101

Russian Federation (25) 64

7
62
Ireland (165) -45
61
Korea, Republic of (9) 35
47
Singapore (10) 32
46
Belgium (18) 11

Netherlands (167) 29
-191
25
Luxembourg (4) 103
24
Saudi Arabia (26) 5
23
Brazil (163) -13
23
United Arab Emirates (14) 19
22
Denmark (17) 11
20
Sweden (11) 24
17
Thailand (13) 19

Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics).

13 per cent to $87 billion, respectively. Outward FDI from South Asia, mainly from India,
rose by 43 per cent to $16 billion. In South-East Asia, only outflows from Singapore and
Malaysia increased.

Although overall outward investment from developing Asia increased, companies

headquartered in the region made fewer acquisitions in 2021. Cross-border M&A purchases
fell by 35 per cent to $45 billion. Acquisitions by MNEs headquartered in East Asia (mainly
China) plummeted, from $44 billion in 2020 to just $6.3 billion. South-East Asia, however,
saw cross-border M&A purchases rise by 19 per cent to $29 billion and West Asia saw a
rise from -$1.3 billion to $7.7 billion.

Outward FDI from Latin America and the Caribbean jumped back to 2019 levels at $42
billion. The increase is mostly explained by the investment behaviour of Brazilian MNEs,
as $13 billion of negative outflows turned to a positive $23 billion. Chilean MNEs also
increased their foreign investments to $12 billion.

Chapter I Global Investment Trends and Prospects 21

 3. Trends by type and sector
In 2021, cross-border M&As, greenfield project announcements and international project
finance deals all increased, both in value and in number (figure I.15). Strong financial
markets and loose financing conditions led to robust growth in international project finance
numbers, up by 68 per cent, and a boom in M&A activity, with a corresponding increase in
cross-border M&As of 43 per cent. The recovery of greenfield project announcements after
the steep drop in 2020 was more moderate, with project numbers up 11 per cent.

a. Greenfield investment trends

The value of announced greenfield investment projects rose by 15 per cent to $659 billion
(table I.5). It remained flat in developing countries at $259 billion – stagnant at the lowest
level ever recorded as MNEs’ appetite for investing overseas in real productive assets
remained weak. This is a major concern, as these investments in industry are crucial for
economic growth and development prospects.

Greenfield projects targeting the primary sector – mainly in extractive industries – remained
small. At $13 billion, the aggregate value of announced greenfield projects represented
less than 2 per cent of the total, compared with 24 per cent in 2003, 13 per cent in 2009
and 7 per cent in 2016. The long-term decline in primary sector projects is the result of
continued low international investment in agriculture, and – in extractives – a shift from
greenfield projects by individual investors to international project finance investments that
allow risk sharing among multiple investors.

The number of projects in manufacturing rose by 8 per cent. The increase represents only
a hesitant initial recovery after the 2020 drop in investment activity by more than a third,
and it leaves manufacturing project numbers about a quarter below the average of the
last 10 years.

Value and number of cross-border M&As and announced greenfield projects,

Figure I.15.
2012–2021 (Billions of dollars, number and per cent)

a. Value b. Number

1 200 20 000
+146%

16 000 14 710 +11%

+53%
800
12 000
+15% 8 846 +43%
8 000
400

4 000 +68%
2 115

0 0
2012 2017 2021 2012 2017 2021

Greenfield projects Cross-border M&As International project finance deals

Source: UNCTAD, cross-border M&A database (https://unctad.org/fdistatistics) for M&As, information from the Financial Times Ltd, fDi Markets (www.fDimarkets.com) for announced
greenfield FDI projects and Refinitiv SA for international project finance deals.

22 World Investment Report 2022 International tax reforms and sustainable investment
 Table I.5. Announced greenfield projects, by sector and selected industries, 2020–2021
Value
Number
(Billions of dollars)
Growth rate Growth rate
Sector/industry 2020 2021 (%) 2020 2021 (%)
Total 575 659 15 13 248 14 710 11
Primary 11 13 15 100 98 -2
Manufacturing 240 297 23 5 258 5 688 8
Services 323 350 8 7 890 8 924 13

Top 10 industries in value terms

Electronics and electrical equipment 47 120 156 882 1 028 17
Information and communication 85 104 23 2 962 3 743 26
Electricity and gas supply 103 90 -13 546 484 -11
Construction 33 49 49 320 329 3
Automotives 33 34 3 571 692 21
Transportation and storage 27 33 25 639 737 15
Chemicals 40 28 -30 452 445 -2
Trade 23 24 4 580 638 10
Food, beverages and tobacco 18 19 9 432 431 0
Pharmaceuticals 15 19 26 360 378 5
Source: UNCTAD, based on information from the Financial Times Ltd, fDi Markets (www.fDimarkets.com).

Among the stronger performers in 2021 were a few typical GVC-intensive industries such
as electronics and automotive, which were hit hard during the first year of the pandemic.
Announced greenfield values in electronics and electrical equipment more than doubled to
$120 billion. Booming demand for microchips prompted producers to start several mega
investment projects. The two largest deals announced in 2021 were in semiconductors:
Intel (United States) intends to build a semiconductor plant in Germany for $19 billion and
Samsung (Republic of Korea) plans to build a $17 billion semiconductor factory in the
United States. Several other large projects were announced in electronic components; for
example, Risen Energy (China) will invest $10 billion in a new production facility in Malaysia
to manufacture high-efficiency photovoltaic modules.

The moderate recovery in the number of greenfield project announcements was mostly
driven by services, which now account for 61 per cent of total projects – the highest on
record. The fast-growing global demand for digital infrastructure and services led to a
significant rise in greenfield FDI project activity in the ICT industry, with values up by 23 per
cent to $104 billion and numbers up by 26 per cent to a record 3,743 projects. Amazon
(United States) stood out as the most active foreign investor in 2021, with $20 billion worth
of investments.

b. International project finance trends

International project finance activity in 2021 was frenetic. The number of projects reached
2,115, a 68 per cent increase over 2020 and almost three times the average of the last
10 years. The value of international project finance deals was above $1 trillion for the
first time ever.

The rise of projects led by domestic sponsors was even higher (90 per cent) than
internationally sponsored deals (as reported in table I.6), reaching 3,924 projects.
While conducive long-term financing conditions favoured both types, recovery stimulus
packages benefitted domestic markets more than international ones.

Chapter I Global Investment Trends and Prospects 23

 Table I.6. Announced international project finance deals, selected industries, 2020–2021
Value
Number
(Billions of dollars) Growth rate Growth rate
Industry 2020 2021 (%) 2020 2021 (%)
Total 484 1 188 146 1 262 2 115 68

Top 10 industries by number

Renewable energy 198 502 154 802 1 193 49

Industrial real estate 52 135 160 52 152 192

Residential/commercial real estate 13 30 137 45 143 218

Mining 21 39 88 65 109 68

Power 30 116 293 55 109 98

Oil and gas 60 139 131 71 102 44

Telecommunication 42 61 45 52 92 77

Transport infrastructure 41 49 20 52 90 73

Petrochemicals 19 90 370 25 59 136

Water and sewerage 3 9 176 21 18 -14

Source: UNCTAD, based on data from Refinitiv SA.

Investment in renewable energy has been the main engine of growth in international project
finance for several years running. It now makes up more than half the annual number of
projects. In 2021, activity growth in the sector was exceptionally high (up 49 per cent).
Values increased even more because of some megaprojects. Six projects were worth
more than $10 billion, including the largest, the $74 billion construction in Australia of a 50
GW green energy hub over 15,000 square km that could convert wind and solar power
into green fuels, sponsored by Intercontinental Energy Corp (United States), CWP Europe
SARL (Luxembourg) and Mirning Green Energy (Australia).

International project finance announcements in industrial real estate have also grown
continuously for several years, with no let-up during the pandemic. In 2021, deal numbers
tripled to 152 projects with a value of $135 billion. Large projects include the construction
of a steel and cement manufacturing plant in India for $14 billion and the construction
of a 960 -hectare pharmaceutical park in Viet Nam for $10 billion. The number of deals
targeting residential and commercial real estate also tripled, to 143. The biggest increase
took place in developed countries, where the number of such projects rose from 16 to 78.

Investment in the oil and gas industry in 2021 rose by 131 per cent in value and 44 per
cent in number. The most significant rise across developing regions was reported in Asia,
where the value of announced investment rose to $62 billion from $19 billion. The largest
project involved the construction of a 1,700-km oil pipeline in Iraq for $18 billion.

Telecommunication investment continued its rise, reaching $61 billion and 92 projects
following the pandemic-induced acceleration of the digital economy. While most projects
targeted Europe (46), the number of projects in developing Asia more than doubled, from
7 to 18. The largest projects include the acquisition by Telxius Telecommunication Towers
(United States) of telecommunication towers in Argentina, Brazil, Chile, Germany, Peru and
Spain, from Telefonica (Spain) for $9.4 billion and the construction by Dito Telecommunity
(China) of 10,000 towers in the Philippines for $5.4 billion.

In petrochemicals, the value of projects also rose strongly to a record $90 billion, driven
mainly by a few very large projects; for example, in Oman, the $30 billion construction of a
plant to produce over 1.8 million tonnes per year of green hydrogen.

24 World Investment Report 2022 International tax reforms and sustainable investment
c. Cross-border M&As
Cross-border M&A sales reached $728 billion in 2021 – up 53 per cent compared with
2020 (table I.7). In the services sector, cross-border M&As doubled to $461 billion – one
of the highest levels ever recorded. Deals targeting manufacturing firms rose slightly, by 5
per cent, to $239 billion. In the primary sector, M&A values remained at a low level ($28
billion), continuing the decade long downward trend, reflecting reduced investment in the
upstream activities of the oil and gas industry.

Information and communication and pharmaceuticals remained in the top ranking as the
pandemic pushed up activity in the digital and health sectors. Sales of assets in digital
industries rose by 69 per cent to $136 billion – a record level. In deal numbers information
and communication has been the most active sector since 2000; in 2021 it was also the
largest in value terms. An important deal was the $34 billion merger of Altimeter Growth
(United States) with Grab (Singapore), a leading Asian “superapp” for food delivery, mobility
and digital payments.

After the fall in value in 2020, the value of M&A sales in pharmaceuticals rose by 31 per
cent, to $73 billion, and the number of deals by 6 per cent, reaching 223 deals – the highest
number ever recorded. The largest deal of the year was recorded in the pharmaceutical
industry: the acquisition of Alexion (United States) by AstraZeneca (United Kingdom)
for $39 billion.

In developed countries, where cross-border M&As are a significant part of total FDI, the
value of deals rose by 58 per cent to $615 billion, mostly from tripling in North America,
while in Europe the value remained flat at $258 billion.

In other sectors, M&A sales in transportation and storage rose more than seven-fold to a
record $53 billion, mainly because of a single large deal in which Canadian Pacific Railway
acquired Kansas City Southern (United States) for $31 billion. Some large divestments were
recorded in the electric and electrical equipment sector. For example, PPL (United States) sold
its Bristol-based electric power distributor to National Grid (United Kingdom) for $20 billion.

Table I.7. Net cross-border M&As, by sector and selected industries, 2020–2021
Value
Number
(Billions of dollars) Growth rate Growth rate
Sector/industry 2020 2021 (%) 2020 2021 (%)
Total 475 728 53 6 201 8 846 43
Primary 25 28 11 658 639 -3
Manufacturing 228 239 5 1 136 1 674 47
Services 221 461 108 4 407 6 533 48

Top 10 industries in value terms

Information and communication 80 136 69 1 248 2 114 69
Pharmaceuticals 56 73 31 211 223 6
Finance and insurance 28 72 157 562 733 30
Trade 18 63 255 495 663 34
Transportation and storage 7 53 651 224 324 45
Automotives 17 42 144 41 81 98
Professional services 11 41 268 447 689 54
Electronics and electrical equipment 40 38 -4 165 311 88
Real estate 22 35 57 327 420 28
Administrative and support services 6 28 413 206 303 47
Source: UNCTAD, cross-border M&A database (https://unctad.org/fdistatistics).

Chapter I Global Investment Trends and Prospects 25

 B. SDG AND CLIMATE CHANGE
INVESTMENT TRENDS

1. SDG investment trends

Cross-border investment in SDG sectors in developing economies was growing before
the COVID-19 pandemic, although not at a sufficient rate to fill the SDG investment gap.
International SDG investment was significantly hit in the first year of the pandemic, with
double-digit declines across all sectors except renewable energy (WIR21). In 2021, with
the overall investment recovery, SDG investment increased substantially, by 70 per cent,
compared with 2020. The combined value of greenfield investment and international
project finance in SDG sectors, which had dropped to $218 billion in the first year of the
pandemic (from $312 billion in 2019) rebounded to $371 billion in 2021, thus surpassing
the pre-pandemic level. However, most of the recovery growth was due to international
project finance activity in the renewable energy sector, where project values reached more
than three times the pre-pandemic level.

While the 2021 recovery in value terms is positive, investment activity in most SDG-related
sectors in developing economies, as measured by project numbers, remained below pre-
pandemic levels (table I.8). Apart from renewables, only investment activity in education
fully recovered to prior levels. Other sectors, including food and agriculture, health, physical
infrastructure and WASH, partially recovered.

Greenfield investment in SDG sectors – mostly by individual firms – has started its recovery
from the fall of 2020 but remains well below pre-pandemic levels (table I.9). In contrast,
international project finance – large projects, often with the involvement of multiple
investors, including financial institutions – is now well above pre-pandemic levels (table I.10).

International private investment in the SDGs: 2021 project numbers compared to

Table I.8.
pre-pandemic levels (Per cent)

Infrastructure Food and agriculture

Transport infrastructure, power Investment in agriculture,
generation and distribution
(except renewables),
-11 research, rural development -35
telecommunication

Health
Renewable energy
Installations for renewable +2 Investment in health
infrastructure, e.g. new -25
energy generation, all sources
hospitals

WASH Education
Provision of water and
sanitation to industry and -9 Infrastructural investment,
e.g. new schools +17
households

Source: UNCTAD.

26 World Investment Report 2022 International tax reforms and sustainable investment
 Announced greenfield projects in SDG sectors in developing economies
Table I.9. (Millions of dollars and per cent)

Developing economies Of which, LDCs

2020–2021 2020–2021
2019 2020 2021 growth rate 2019 2020 2021 growth rate
SDG-relevant sector (%) (%)

Total
Value 133 874 92 551 101 345 10 12 824 10 824 6 332 -41
Number of projects 1 686 1 147 1 277 11 114 85 69 -19
Power a
Value 18 484 10 841 4 169 -62 1 483 3 452 2 000 -42
Number of projects 45 22 20 -9 4 4 1 -75
Renewable energy
Value 40 880 28 977 35 831 24 2 030 3 601 1 329 -63
Number of projects 241 190 144 -24 15 21 9 -57
Transport services
Value 25 921 10 522 13 327 27 3 627 1 071 449 -58
Number of projects 321 182 269 48 36 17 22 29
Telecommunication b
Value 18 285 25 756 26 125 1 255 2 112 1 717 -19
Number of projects 303 241 281 17 6 22 20 -9
Water, sanitation and hygiene (WASH)
Value 1 819 633 4 119 551 61 - 136 ..
Number of projects 17 7 19 171 1 - 1 ..
Food and agriculture
Value 21 700 11 347 11 847 4 4 812 477 421 -12
Number of projects 428 291 271 -7 30 12 7 -42
Health
Value 5 556 3 618 4 805 33 419 77 172 123
Number of projects 256 151 188 25 14 5 3 -40
Education
Value 1 228 858 1 121 31 137 33 109 229
Number of projects 75 63 85 35 8 4 6 50

Source: UNCTAD, based on information from Financial Times Ltd, fDi Markets (www.fdimarkets.com).
a
Excluding renewable energy.
b
Including information services activities.

The stronger growth performance of international project finance can be explained by loose
financing conditions, infrastructure stimulus and significant interest of financial market
investors in participating in large-scale projects. It is likely that international project finance
will increasingly play the leading role in SDG investment, including by leveraging public
investment through private finance participation.

The diverging trends between greenfield and international project finance investment are
evident across several sectors. Greenfield investment in the power sector continued to
decline in 2021 and remained at less than half the level of 2019. In contrast, international
project finance activity recovered almost to its pre-pandemic level, and its value increased
by 68 per cent, due to large deals such as the 1.5 GW Basra gas-fired power project in
Iraq, estimated at about $10 billion.

Similarly, the number of greenfield investment projects in renewable energy remained

continued to decline, although the value of such projects increased by 24 per cent, driven
by a few large projects such as the Base-one project in Ceará, Brazil, valued at $5.4 billion.
International project finance activity in renewables is booming, increasing both in numbers
of projects and in values, confirming the shift in sources of investment. It is responsible for
the bulk of overall growth in SDG investment.

Chapter I Global Investment Trends and Prospects 27

 International project finance deals in SDG sectors in developing economies
Table I.10. (Millions of dollars and per cent)

Developing economies Of which, LDCs

2020–2021 2020–2021
2019 2020 2021 growth rate 2019 2020 2021 growth rate
SDG-relevant sector (%) (%)
Total
Value 178 021 125 738 270 356 115 24 032 29 833 51 249 72
Number of projects 408 360 543 51 72 48 49 2

Powera
Value 29 452 21 758 36 490 68 8 267 3 910 970 -75
Number of projects 46 32 39 22 13 6 3 -50

Renewable energy
Value 53 231 69 149 183 171 165 7 970 12 695 46 519 266
Number of projects 283 275 393 43 46 35 35 0

Transport infrastructure
Value 36 092 22 605 22 995 2 7 164 12 849 3 135 -76
Number of projects 46 21 50 138 9 4 6 50

Telecommunication
Value 55 127 9 826 16 875 72 320 - 410 ..
Number of projects 10 13 31 138 2 - 2 ..

Water, sanitation and hygiene (WASH)

Value 3 398 1 339 536 -60 130 380 138 -64
Number of projects 15 14 10 -29 1 3 2 -33

Food and agriculture

Value 562 1 034 8 155 688 181 - - ..
Number of projects 4 3 10 233 1 - - ..

Health
Value 120 9 2 035 22 514 - - - ..
Number of projects 2 1 5 400 - - - ..

Education
Value 40 18 100 473 - - 78 ..
Number of projects 2 1 5 400 - - 1 ..

Source: UNCTAD, based on data from Refinitiv SA.

a Excluding renewable energy.

The momentum in international project finance, specifically in renewables, shows that this
form of investment is particularly suitable for the risk profile of such projects in developing
economies. The large size of some individual projects makes risk-sharing arrangements
more attractive. International project finance deals also make it easier for domestic capital
or governments to participate in or initiate the project. In the non-renewable power sector,
a similar trend can be observed. The appetite of international investors for fossil-fuel-based
facilities is waning, and projects are increasingly initiated by domestic or State-owned
enterprises, explaining the stagnant greenfield numbers and continued growth in international
project finance, through which international investors can participate in domestic projects.

Project finance activity in transport infrastructure more than doubled in numbers,

returning to the pre-pandemic level, although the increase in value was marginal.
Most of the international project finance investments target critical infrastructure in
roads, bridges and ports. For example, Nigeria introduced five projects for expanding,
repairing and maintaining 884 km of toll road. In Kenya, four bridge projects will
bring connectivity with remote areas. Of the 600 international projects in transport
infrastructure and services (considering both greenfield and project finance) announced
in 2021, 319 are in developing economies and more than half in Asia (232 projects).

28 World Investment Report 2022 International tax reforms and sustainable investment
LDCs account for a small share, with only 28 projects. The Berbera Port and Economic
Zone project is ground-breaking for the Horn of Africa, as it is poised to provide a trade
gateway for the countries surrounding it. Such projects in LDCs have the potential to
address long-term challenges in access to markets and supply chain bottlenecks.

In the telecommunication sector, which contributes to SDG 9 on universal access to industry,

innovation and infrastructure, large-scale private investment clearly outweighs public sector
investment. The most relevant projects from an SDG perspective are those in low-income
countries, including LDCs, where a large share of the population is still excluded from
access to basic infrastructure and connectivity. For example, in the Democratic Republic of
Congo, a fibre network estimated at $200 million will help to improve Internet access and
connectivity for more than 30 million people across Central Africa. SDG-relevant greenfield
activity in telecommunication picked up in 2021, also growing in value (1 per cent from
a negative post-pandemic trend). International project finance activity in the sector more
than doubled, with the value of deals also picking up (72 per cent). In LDCs, greenfield
investment decreased in 2021 in comparison with 2020, and the level of project finance
activity remains low.

Greenfield investments in WASH rallied in 2021. The value of announced investment

increased six-fold, and the number of projects more than doubled. Yet project finance
deals and activity in the sector continued to decline compared with pre-pandemic levels.

Investment in the food and agriculture sector also reversed the persistent negative trend
and the pandemic shock. International project finance deals saw a recovery, both in value
and in project activity in developing economies, although investment activity remains
small, with only 10 projects in 2021. The large increase in value was driven by a $7 billion
phosphates project in Algeria, sponsored by China – now particularly important in light of
shortages in phosphorus-based fertilizers caused by the war in Ukraine. In LDCs, greenfield
investments lagged, and no project finance activity was registered in 2021.

Greenfield investment in the health sector partially recovered in 2021. Investments included
hospitals and several COVID-19-related projects such as vaccine production. The sharp rise
in project finance values was due to a single $1.6 billion project involving the construction
of a large hospital and subsidiary facilities in China. Out of 188 new greenfield projects in
the health sector, only 3 were in LDCs. However, the total value of such investment in LDCs
increased, driven by BioNTech (Germany), which will construct a vaccine production facility
in Rwanda at a total estimated cost of $79 million.

International investment in the education sector has fully recovered from the pandemic-
related decline. A number of education projects were announced in developing countries,
including a significant expansion of rural secondary schools in Malawi (table I.11).

In LDCs, the SDG investment trend is less favourable than in other developing economies,
and the detrimental impact of the pandemic persists. The share of total SDG investment
in developing countries (both greenfield and international project finance values) that went
to LDCs decreased from 19 per cent in 2020 to 15 per cent in 2021. Their share in the
number of projects declined from 9 to 6 per cent.

Physical infrastructure and broader infrastructure industries (including utilities and power)
are capital-intensive projects that are highly dependent on the long-term risk outlook.
This can explain in part the stagnant trend in LDCs. In addition, the boost in infrastructure
project finance in developed economies and high-income developing countries because
of pandemic-related recovery packages risks drawing private project sponsors away
from LDC markets (WIR21). The unfavourable trends in SDG-related investment in LDCs
add to their structural handicaps and aggravate persistent challenges, including weak
infrastructure, underdeveloped human capital and a narrow productive capacity base.

Chapter I Global Investment Trends and Prospects 29

 Examples of SDG-relevant investment projects in developing economies
Table I.11.
announced in 2021, by sector
Total cost estimate
SDG-relevant sector Country Project name (Millions of dollars) Description

PPP project in the Sahara sponsored by

30 GW Mauritania Power-to-X Australian developer CWP Global and the
Mauritania 40,000
Hydrogen Project Government, generating wind and solar energy
to power electrolysers to produce hydrogen

Renewable energy Build-own-operate project by Energy ES,

and power 20.76 MW Kulim Large-Scale an incorporated joint venture company
Malaysia 20,725
Solar Photovoltaic Project of Savelite Engineering, Moderntent
Development and Frasers Construction

3900 MW Hai Phong Offshore A build-own-operate project funded by a joint

Viet Nam 11,900
Wind Power Plant Project venture between T&T Group and Orsted

A build-own-operate project, sponsored by

MTN Nigeria Network
Nigeria 1,460 MTN Nigeria Communications, to connect
Infrastructure Project
some 3,000 rural communities to the network

Construction of a fibre network to help

Democratic
Liquid Technologies and Facebook connect East and West Africa, enabling
Republic 202
Fibre Network Project improved Internet access for more than 30
Telecommunication of Congo
million people across Central Africa

Deployment and integration of Open vRAN in

Sri Lanka, Malaysia and Indonesia to provide
Axiata and Mavenir TIP Evenstar
Sri Lanka 154 seamless service continuity, better mobile
4G Radio Project
broadband experience and next-generation
voice services

Construction of two monorails to connect the

Bombardier Transportation
Egypt 2,321 New Administrative City with East Cairo and
Monorail Project
6th October City with Giza

A 555-km mass transit system under

a PPP scheme, sponsored by Comisión
El Salvador Tren Pacifico Rail PPP Project 450
Transportation Ejecutiva Portuaria Autonoma and the Central
American Bank for Economic Integration

A build-own-operate project comprising

Bangladesh Dual-Gauge Railway construction of an 80-km mass transit
Bangladesh 282
Line Project system, with Bangladesh Railway and Rites
Ltd as sponsors

Construction of the largest solar-powered

water desalination project, under a PPP
Solar-powered water desalination scheme sponsored by Engie and Saudi Water
Saudi Arabia 827
plant in Saudi Arabia Partnership, awarded as a build-own-operate
contract, with commercial operation expected
in 2024

Construction of an agricultural waste

Water, sanitation and
managment plant with a capacity of 6 million
hygiene (WASH) Wastewater treatment plant
Egypt 739 cubic metres, in a joint venture with Hassan
(El-Hammam)
Allam, Arab Contractors and Orascom
Construction

A build-own-operate project including

Pemba Water Supply Center and construction of a 172-km water pipeline;
Mozambique 134
Pipeline Network Project sponsored by Water Supply & Sanitation
Service Improvement Project

/…

30 World Investment Report 2022 International tax reforms and sustainable investment
 Examples of SDG-relevant investment projects in developing economies
Table I.11.
announced in 2021, by sector (Concluded)
Total cost estimate
SDG-relevant sector Country Project name (Millions of dollars) Description

Construction of several multidisciplinary

hospitals in the cities of Kokshetau,
RenEll Multidisciplinary Hospital Aktobe, Atyrau, Aktau, Taraz, Pavlodar,
Kazakhstan 303
PPP Project and Karaganda, sponosered by RenEll and
provided for the State Programme for the
Development of Health Care for 2020-2025

Construction of a hospital in Hambantota in

Hambantota COVID-19 Vaccine
Health Sri Lanka 154 a deal allowing the facility to source up to 9
Plant Project
million COVID-19 vaccine doses

Construction of 100 beds on 2.2 hectares

of land owned by the Kemaman Municipal
Chukai Private Specialist Hospital Council in Kg. Jaya, Mukim Chukai,
Malaysia 24
Project Kemaman that will give residents in the
southern part of Terengganu access to high-
quality health care and specialist treatment

Construction of a demolition wind-powered

Taiwan Province Linkou District Wind-Powered
82 smart farm, sponsored by Alternaturals Inc
of China Smart Farm Project
under a build-own-operate scheme

Construction of a flour mill by Tetra Pak

Nordic Holding in a build-own-operate
South Africa Pinetown Plant Upgrading Project 34 project that aims to have the world's most
sustainable packaging made from renewable
materials
Food and agiculture
Support for households affected by COVID-19
by assisting 2,000 MSMEs and 250
smallholder farmers through the Business
Sustainable Economic
Center Corporation’s outreach initiatives,
Maldives Empowerment and Development 2
implemented in a build-own-operate mode,
(SEED) Project
by the Government of Japan and the United
Nations Development Programme, with
enhanced private sector participation

Building of 38 schools in a partnership

Malawi Rural Secondary Education
between the governments of the United
Malawi Expansion for Development (SEED) 78
States and of Malawi, funded through Basic
Project
Education and PEPFAR funds

Building of the company's first human

resources training centre outside of Japan,
Malaysia Sankyu Technical Academy 29
in the Medini Central Business District,
Education under a build-own-operate scheme

Building of 75 schools by a consortium

Colegio San Felipe, Escuela Nuestra of eight companies from the United
Senora de La Visitacion, Jose de Kingdom and Finland (Gleeds, Arup Group,
Peru 7
la Torre Ugarte, Jorge Basadre 4Global, AFRY Group Finland, Lahdelma
Grohman School Project & Mahlamki Architects, Isku, Polar Partners
and Mace)

Source: UNCTAD, based on data from Refinitiv SA.

The dependence of many developing economies, and particularly LDCs, on grain imports
from the Russian Federation and Ukraine and their consequent vulnerability to the food
crisis underscore the need to accelerate efforts to foster international private investment in
food security and to diversify food supply chains. Despite the calls for increased investment
as part of the effort to achieve SDG 2 on food security, investment in agriculture remains
small, at less than 1 per cent of total FDI flows globally.

Chapter I Global Investment Trends and Prospects 31

 2. Climate change and investment
UNCTAD first reported on the investment gap in climate change mitigation and adaptation
in WIR14, which analysed investment needs and investment levels across all SDG areas.
Subsequently, the SDG Investment Trends Monitor and the WIR series have continued to
report on trends in these two areas. In consideration of the growing urgency and renewed
emphasis placed on the mobilization of financial resources for investment in combating
climate change for COP27, this section on climate change and investment breaks down the
aggregate figures on mitigation and adaptation provided in the SDG investment section. It also
adds insights on other relevant sectors to provide a more granular view of investment trends
related to climate change. The analysis focuses on cross-border private investment and reports
mostly greenfield investment and international project finance trends. The data collection
approach follows the same methodology used for the assessment of SDG investment
trends (box I.3).

Box I.3. Measuring international private climate change investment

UNCTAD’s data on climate change investment focus on direct investments in greenhouse gas (GHG) emission reductions and climate
resilience activities. It includes greenfield investments (new projects and expansions by individual overseas investors) and project finance
(large-scale projects, mostly in infrastructure industries, involving multiple investors and a significant debt component). Both greenfield
investments and international project finance data are on an announcement basis.a
As in the case of UNCTAD’s SDG Investment Trends Monitor and in line with the scope of the World Investment Report, the focus is on
international investment, i.e. cross-border investment flows. For international project finance this implies that the project’s sponsor is an
international investor (although co-investors may include domestic financiers).b
International project finance investment flows are retrieved from Refinitiv SA and greenfield investments are sourced from fDi Markets.
The sectoral breakdown distinguishes the following categories:

Climate change mitigation

Renewable energy. This includes investments in power generation projects from the following sources: biomass, geothermal,
hydroelectric, solar, tidal or wave (marine) and wind. While energy from residual waste (excluding biomass) is only partially renewable
due to the presence of fossil-based carbon in the waste, such projects are also included in this category. As hydrogen is a secondary
source of energy, only projects producing hydrogen from the renewable energy sources listed above qualify as climate mitigation
investments. Whenever the primary source of energy is not specified in the project, the project is not included in the renewable
energy category.
Energy efficiency and emission reduction. Projects included in this category vary depending on the data available across data sets.
Greenfield investment data distinguish electric vehicles and clean technologies, which include investments in the production of new
materials used in developing renewable energy projects and other products that contribute to reducing greenhouse gases emissions.
fDi Markets allows for the identification of such projects across standard industrial classifications through its project tags. International
project finance further includes energy transmission lines, carbon capture and battery storage projects.
Low-carbon mobility. This category captures transport projects that contribute to a decrease in GHG emissions. They consist mostly of
projects in public transport (trains, buses, municipal transport).

Climate change adaptation

Water management. This category includes investments in projects building resilience to climate related changes in the water cycle. Both
fDi Markets and Refinitiv SA provide a sufficiently granular industrial breakdown to identify such projects.
Other adaptation projects. Several industry-wide projects fall into this category including investments that improve the climate resilience
of existing infrastructure, as well as investments in climate-resilient agriculture and coastal protection. These projects are selected
through manual screening of the database.

Source: UNCTAD.
a
The value of such a project indicates the capital expenditure planned by the investor at the time of the announcement. Data can differ substantially from the official FDI
data as companies can raise capital locally and phase their investments over time, and a project may be cancelled or may not start in the year when it is announced.
b
UNCTAD’s sectoral breakdown of international investment flows is based on the methodology in the Global Landscape of Climate Finance (Climate Policy Initiative, 2021)
but adapted to the granularity and quality of data available for international project finance and greenfield investments.

32 World Investment Report 2022 International tax reforms and sustainable investment
 Table I.12. Climate change investment categories
Sectors Investment area

Climate change mitigation

• Power generation from: biomass, geothermal, hydroelectric, hydrogen, solar, tidal or wave, waste
Renewable energy
(excluding biomass), wind.

Energy efficiency/ • Energy provision efficiency transmission lines, battery storage, carbon capture.
emission reduction • Other investments in energy efficient technology or products: electric vehicles, clean technologies.

Low-emission transport • Mass transit systems: rail, public transport systems.

Climate change adaptation

• Investments on climate related changes in the water cycle: water pipelines, water supply, district
Water management cooling (i.e. deep ocean or lake water cooling systems), desalination, water storage, disposal and
treatment.

• Investments to improve the climate resilience of existing infrastructure, and coastal protection.
Other adaptation
• Climate resilient agriculture, such as flood / drought resistant crops.

Source: UNCTAD.

Climate change investments are broadly defined as mitigation investments in cleaner and/or
more energy-efficient technologies supporting the reduction of greenhouse gas emissions,
and adaptation investments, which are those in critical infrastructure, technologies and
activities to improve resilience and help adapt to the consequences of climate change.
Table I.12 shows the categorization adopted for the purpose of reporting international
investment trends in this section. Combating climate change will require many other types
of investment, including in research and development, energy-efficient buildings and means
of production, green minerals and materials needed to produce batteries or clean energy
technologies, as well as other, often yet unknown adaptation investments. The scope here
is limited to the key areas in which international direct investors are active to date and for
which it is possible to monitor discrete investment projects.

For international private investment, mitigation is far more important than adaptation.
The attractiveness of the various categories of climate-relevant investment for the private
sector depends on the existence of a clear revenue model and on project- and country-level
risks (WIR21). Adaptation projects are often public goods, characterized by steep upfront
costs, long investment timelines, lack of a clearly identifiable revenue stream or unattractive
risk-return profiles. These categories necessarily rely on public investment (table I.13).

Looking at total climate change mitigation finance in 2019, 54 per cent was funded by
private sources in 2019–2020.2 For project finance, the share is even higher, with 85 per
cent of mitigation investments (including domestic projects) in developed economies and
56 per cent in developing economies not requiring any public sector involvement (figure
I.16).3 In contrast, just over half of adaptation projects in developed economies and only
18 per cent in developing ones have no government involvement. For very large projects
in mitigation, and in particular in developing economies, the involvement of multilateral
development banks is often required to lower investment risk.4

Chapter I Global Investment Trends and Prospects 33

 Table I.13. Adaptation and mitigation: the scope for private investment

Scope for private investment Example projects

Floodwalls, protection systems for dams, drainage systems, reforestation, mangrove protection, disaster
i. Projects that are pure public goods
prevention, early warning systems

ii. Projects that allow for PPP models

or concessionary schemes Climate resilient infrastructure, green infrastructure, water management, public transportation
(identifiable revenue stream)

iii. Projects that can be privately financed but

that may require incentives or subsidies to Agricultural investment in resistant crops, weather monitoring systems, clean technologies,
cover the additional cost of making them carbon-neutral buildings, carbon capture
climate friendly or climate-change resilient

iv. Projects that can be purely privately financed Renewable energy generation, electric vehicles, green minerals extraction
Source: UNCTAD.

Share of government participation Categories that have higher shares of projects with
in mitigation and adaptation project public sector participation show a correspondingly
Figure I.16. lower share of internationally sponsored projects.
finance investments, 2011–2021
(Per cent) In developing economies where the political
and economic environment for investors is less
90 predictable, government involvement – especially
through equity participation – can reduce the
perceived risk of the project. However, beyond a
certain threshold, higher government equity shares
60 can also discourage foreign investors, as they may
fear public interference and governance issues
(WIR21; Barclay and Vaaler, 2021).

30
In both developed and developing economies,
fewer than a quarter of adaptation projects have a
foreign sponsor, and nearly all of those are water
management projects. Beyond water management,
0 only a single adaptation project in resilient
Developed economies Developing economies
infrastructure had a foreign sponsor over the last
decade: a $38 million project in the Marshall Islands
Mitigation Adaptation
to develop energy-efficient, disaster- and climate-
Source: UNCTAD, based on data from Refinitiv SA.
resilient digital infrastructure across all 24 inhabited
Note: The data include both domestic and international projects. atolls and islands, announced in 2019.

Trends
Mitigation projects account for more than 95 per cent of international climate investments,
with the remainder in adaptation. The vast majority is in renewables and, to a lesser extent,
in energy efficiency projects (figure I.17). In developing regions, the share of adaptation
projects is higher (12 per cent, compared with 1 per cent in developed economies) owing
to the greater prevalence of international water management projects.

Climate investment showed an upward trend after the adoption of the SDGs in 2015,
a trend that was interrupted by the pandemic but recovered strongly in 2021, with total
project values at twice the pre-pandemic level of 2019. Mitigation investments funded
through international project finance more than doubled in value. Adaptation project values
increased almost three-fold, although project numbers remained low (table I.14).

34 World Investment Report 2022 International tax reforms and sustainable investment
 International mitigation and adaptation investment projects,
Figure I.17.
2011–2021 (Billions of dollars)

800

600

400

200

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Renewables Low-emission transport

Energy efficiency/emission reduction Water management

Source: UNCTAD, based on information from Financial Times Ltd, fDi Markets (www.fdimarkets.com) for greenfield projects and Refinitiv SA for
international project finance deals.

Announced greenfield and international project finance deals in climate change

Table I.14. sectors, 2019–2021 (Millions of dollars and per cent)
Announced greenfield projects International project finance deals

2020–2021 2020–2021
2019 2020 2021 growth rate 2019 2020 2021 growth rate
Climate Change relevant sector (%) (%)

Total mitigation
Value 125 149 115 439 159 787 38 212 888 217 556 552 203 154
Number of projects 804 739 1 090 47 761 814 1 226 51

Renewable energy
Value 92 479 92 016 85 175 -7 170 835 185 225 418 306 126
Number of projects 520 524 467 -11 712 764 1 070 40

Energy efficiency or emission reduction

Value 31 651 23 173 74 456 221 9 061 13 003 124 011 854
Number of projects 258 205 611 198 33 39 136 249

Low-emission transport
Value 1 019 250 156 -37 32 991 19 328 9 886 -49
Number of projects 26 10 12 20 16 11 20 82

Total adaptation
Value 2 316 716 4 412 516 4 383 3 358 9 305 177
Number of projects 35 15 30 100 21 21 19 -10

Water management
Value 2 316 716 4 412 516 4 383 3 358 9 268 176
Number of projects 35 15 30 100 21 21 18 -14

Other adaptation
Value - - - .. - - 38 ..
Number of projects - - - .. - - 1 ..
Source: UNCTAD, based on information from Financial Times Ltd, fDi Markets (www.fdimarkets.com) for greenfield projects and Refinitiv SA for international project finance deals.

Chapter I Global Investment Trends and Prospects 35

 Renewables and energy efficiency projects accounted for most of the growth in 2021. New
projects included, for example, the Xlinks subsea transmission cables project in Morocco,
which involves the construction of a 3,800 km transmission line with 3.6 GW of capacity
(estimated at $20 billion) to enable solar energy from the Sahara and wind power off the
Atlantic to be sent to the United Kingdom. Another example is the carbon capture and
storage project at the Bayu-Undan offshore gas field in Timor-Leste waters, estimated to
cost $1.6 billion. Other examples appear in table I.15.

Renewable energy project finance and greenfield investments represented 70 per cent of
all international climate change investments in 2021, with projects in developed economies
accounting for the lion’s share (61 per cent). Europe alone accounted for almost half of
renewables projects, followed by Latin America and the Caribbean, North America and
developing Asia – each of which attracted about 200 projects in 2021 (figure I.18). The
number of international projects in renewables in Africa doubled between 2011 and 2021,
from 36 to 71, including several megaprojects such as the power-to-x project for the
construction of a 30 GW hydrogen plant in Mauritania (estimated at $40 billion).

Within renewables, solar and wind accounted for more than three quarters of investments.
They reached a peak share of 86 per cent in the years 2018 to 2020 (figure I.19). Historically,
hydroelectric energy has always been important in renewables investment, with yearly
investments of $15–20 billion. Other sources are slowly gaining importance, including
biomass, with about $10 billion of investment in recent years; hydrogen, which boomed in
2021; and, especially in developed economies, waste-to-energy projects. After remaining
stagnant in 2019 and 2020, international investments in renewables almost doubled in
2021, due to a 42 per cent increase in investments in solar and wind energy generation
and a boom in green hydrogen energy.

Examples of international project finance deals in

Table I.15.
renewable energy, developing economies, 2021
Value
Renewable energya Country Project name (Millions of dollars)

Prime Infrastructure Waste-to-Fuel

Biomass Philippines 424
Biorefinery Project

San Jacinto-Tizate Geothermal Power

Geothermal Nicaragua 280
Project

Pecem Industrial Complex Green Hydrogen

Green hydrogen Brazil 2,000
Project

Hydroelectric Burundi 10.2 MW Mpanda Hydropower PPP Project 43

Residual waste Kazakhstan Waste Incineration Power Plant

Kazakhstan 110
(excluding biomass) Project

Solar South Africa Kenhardt Solar and Battery Project 1,000

Wind Sri Lanka 200 MW Mannar Wind Power Project 93

Source: UNCTAD, based on data from Refinitiv SA.

a
No tidal or wave (marine) projects have been reported in developing economies since 2015.

36 World Investment Report 2022 International tax reforms and sustainable investment
 International investments in renewables, by region, 2011–2021  
Figure I.18.
(Number of projects) 

700

600

500

400

300

200

100

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Europe Developing Asia Other developed economies Oceania

Latin America and the Caribbean North America Africa

Source: UNCTAD, based on information from Financial Times Ltd, fDi Markets (www.fdimarkets.com) for greenfield projects and Refinitiv SA for
international project finance deals.

Figure I.19. Investment projects in renewables, by type, 2011–2021 (Billions of dollars)

600

500

400

300

200

100

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Solar Hydroelectric Biomass

Wind Geothermal Other

Source: UNCTAD, based on information from Financial Times Ltd, fDi Markets (www.fdimarkets.com) for greenfield projects and Refinitiv SA for
international project finance deals.

Chapter I Global Investment Trends and Prospects 37

 The energy price shock caused by the war in Ukraine could have implications for
international investment in the energy transition. On the one hand, a significant increase
in oil and gas prices, as seen immediately after the start of the war (although mitigated
since by policy action), could shift investment back into extractive industries and fossil-fuel-
based energy generation, temporarily reversing the trend towards renewables documented
over the past 10 years. In 2011–2013, when oil prices were last above $100 per barrel,
the total value of investment projects in fossil fuels was almost a third higher on average
than in the second half of the last decade. On the other hand, expectations are that the
fuel crisis will also boost investment in renewable energy, especially in Europe. However,
investment in renewables is already growing at high speed, and it is unclear if further
stimulus could generate enough capacity in the short term to replace supplies by the
Russian Federation.

38 World Investment Report 2022 International tax reforms and sustainable investment
 C. INTERNATIONAL
PRODUCTION

1. Key indicators of international production

International production gained further strength in 2021, with all indicators of FDI rising,
albeit at different growth rates (table I.16). FDI stock reached a record $45 trillion, equivalent
to almost half of global GDP. Therefore, the rate of return remained unchanged, at 4.9 per
cent, despite the jump in corporate profits.

Indicators of FDI and international production, 2021 and selected years

Table I.16. (Billions of dollars)
Value at current prices
2005–2007
(pre-crisis
Item 1990 average) 2018 2019 2020 2021

FDI inflows 205 1 425 1 448 1 481 963 1 582

FDI outflows 244 1 464 941 1 124 780 1 708
FDI inward stock 2 196 14 605 32 843 36 530 41 728 45 449
FDI outward stock 2 255 15 315 31 393 34 496 39 546 41 798
Income on inward FDI a 82 1 129 2 199 2 264 1 997 2 193
Rate of return on inward FDI b
5.2 9.2 6.5 6.0 4.9 4.9
Income on outward FDI a 128 1 243 2 128 2 259 2 041 2 131
Rate of return on outward FDI b 8.4 10.5 6.5 6.6 5.4 5.3
Cross-border M&As 98 729 816 507 475 728
Announced greenfield FDI projects .. .. 982 846 575 659

Sales of foreign affiliates 4 801 19 781 32 884 32 889 .. ..

Value added of foreign affiliates 1 074 4 668 7 148 6 512 .. ..
Total assets of foreign affiliates 4 649 47 124 96 130 92 235 .. ..
Employment by foreign affiliates (thousands) 20 449 49 840 84 066 83 597 .. ..

Memorandum:

GDPc 23 475 52 481 86 085 87 536 85 239 96 293

Gross fixed capital formation c
5 838 12 477 21 908 22 488 22 028 24 902

Royalties and licence fee receipts 31 189 417 457 469 471

Source: UNCTAD.
Note: Not included in this table are the value of worldwide sales by foreign affiliates associated with their parent firms through non-equity relationships and of the sales of the
parent firms themselves. Worldwide sales, value added, total assets and employment of foreign affiliates are estimated by extrapolating the worldwide data of foreign
affiliates of MNEs from Australia, Austria, Belgium, Canada, Czechia, Finland, France, Germany, Greece, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Portugal,
Slovenia, Sweden, Switzerland and the United States for sales; those from Czechia, France, Israel, Japan, Portugal, Slovenia, Sweden and the United States for value
added (product); those from Austria, Germany, Japan and the United States for assets; those from Czechia, Japan, Portugal, Slovenia, Sweden and the United States for
exports; and those from Australia, Austria, Belgium, Canada, Czechia, Finland, France, Germany, Italy, Japan, Latvia, Lithuania, Luxembourg, Macao (China), Portugal,
Slovenia, Sweden, Switzerland and the United States for employment, on the basis of three-year average shares of those countries in worldwide outward FDI stock.
a
Based on data from 168 countries for income on inward FDI and 144 countries for income on outward FDI in 2021, in both cases representing more than 90 per cent of global inward
and outward stocks.
b
Calculated only for countries with both FDI income and stock data. The stock is measured in book value.
c
Data from IMF (2022b).

Chapter I Global Investment Trends and Prospects 39

 2. Internationalization trends of the largest MNEs
The recovery after the first year of the pandemic enhanced the degree of internationalization
of the top 100 MNEs but this was mostly limited to their sales (table I.17). Rescue and
stimulus packages boosted revenues of companies in construction materials, mining,
hydrocarbons, commodity trading and utilities (especially those with a greener energy
portfolio). High demand for health-care products lifted revenues of pharmaceutical MNEs,
almost doubling them for major vaccine providers. In some cases these higher sales,
combined with low interest rates and high share prices, translated into foreign acquisitions
and expansion of business lines abroad.

The largest deal was the acquisition by the pharmaceutical firm AstraZeneca (United
Kingdom) of Alexion Pharmaceuticals (United States) for $40 billion. Perhaps an even bigger
operation was a complex asset swap deal (the value of which was not fully disclosed) that
started in 2018 and was completed in 2020; it brought RWE (Germany) into the upper
half of the 2021 ranking by more than doubling its foreign assets.5 The deal involved the
acquisition of the international business of E.ON (Germany) with the objective to transform
the vertically integrated utilities company and refocus it on renewables.

Automotive MNEs also enjoyed an increase in revenues, capturing some of the pent-
up demand of 2020; however, they did not increase their foreign investment, having to
concentrate on overcoming supply chain constraints. Similarly, light industry MNEs,
despite the stabilization of consumer demand, mostly abstained from expanding their
overseas operations.

Internationalization statistics of the 100 largest non-financial MNEs, worldwide

Table I.17. and from developing economies (Billions of dollars, thousands of employees and per cent)
100 largest MNEs, developing
100 largest MNEs, global
economies

Change, Change,
Change
2019a 2020b 2020–2019 2021b 2021–2020 2019a 2020
(%)
Variable (%) (%)

Assets (Billions of dollars)

Foreign 9 322 9 591 2,9 10 092 5,2 2 479 2 642 6,6
Domestic 7 698 8 251 7,2 8 664 5,0 5 061 5 857 15,7
Total 17 021 17 842 4,8 18 756 5,1 7 540 8 499 12,7
Foreign as share of total (%) 55 54 54 33 31
Sales (Billions of dollars)
Foreign 5 982 5 196 -13,1 6 409 23,3 1 963 1 812 -7,7
Domestic 4 375 3 950 -9,7 4 720 19,5 3 155 3 041 -3,6
Total 10 357 9 146 -11,7 11 128 21,7 5 118 4 854 -5,2
Foreign as share of total (%) 58 57 58 38 37
Employment (Thousands)
Foreign 9 591 9 140 -4,7 9 157 0,2 4 359 4 150 -4,8
Domestic 10 396 10 192 -2,0 11 000 7,9 8 981 8 971 -0,1
Total 19 987 19 332 -3,3 20 157 4,3 13 341 13 121 -1,6
Foreign as share of total (%) 48 47 45 33 32
Unweighted average TNI 61 62 62 50 48
Median TNI 63 62 61 49 47
Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics).
Note: Data refer to fiscal year results reported between 1 April of the base year and 31 March of the following year. Complete 2021 data for the 100 largest MNEs from
developing economies are not yet available.
a Revised results.
b
Preliminary results.

40 World Investment Report 2022 International tax reforms and sustainable investment
The aggregate transnationality index (TNI) of the top 100 MNEs was weighed down by
corporate restructuring operations and reconfigurations carried out by several firms in the
ranking. For example, the spin-off of its truck unit by Daimler (Germany) led to a 17 per cent
decrease in its foreign assets. Daimler had restructured into a holding company containing
a car division, a truck unit and a financial services arm in 2019, but weak synergy between
the two manufacturing businesses and a diverging geographical focus led to the spin-off.
General Electric (United States) continued its decade-long restructuring, selling its Capital
Aviation Services to AerCap (Ireland) for $30 billion and announcing it will further split into
three companies focused on health care, energy and aviation.

The top developing-country MNEs resumed overseas investment activity in 2021, especially in
the services industries. Among the largest deals were the continued expansion of State Grid
(China) in the Chilean energy provision market with the acquisition of Cia General de Electricidad
for $3.1 billion; the South African digital MNE Naspers’ acquisition of Stack Exchange (United
States), a provider of knowledge-sharing and management platforms, for an estimated $1.8
billion; and the purchase by logistics company DP World (United Arab Emirates) of Syncreon
NewCo (United States), a provider of long-distance freight trucking services, for $1.2 billion.

The second year of the pandemic continued to buoy tech MNEs but not equally across
different segments of the industry. Competition in the software and IT services industry
depressed revenues and led IBM (United States) to spin off the IT services business Kyndryl.
In contrast, consolidation and support through national industrial policies gave a big push to
semiconductor companies; e.g. Micron Technology (United States) joined the top 100 ranking.
Together with the return to the ranking of Oracle (United States), this brings the total number
of tech and digital MNEs to 15.6 In comparison with five years ago, the list also includes
two Chinese hardware producers, Legend and Huawei, while the semiconductor producer
Broadcom (United States) and the hardware company Nokia (Finland) have dropped off the list.

Tech MNEs have an international footprint that differs fundamentally from that of other MNEs
because, with their many digital services, they can often reach foreign markets without making
large investments in overseas assets (WIR17). Figure I.20 depicts the recent evolution of tech
MNEs’ share of assets and sales in the top 100 ranking. Tech MNEs have gained increasing
weight in the ranking in terms of number of companies and also in terms of their share in
total assets and sales. Sales have been growing at an annual rate of 19 per cent since 2016,
compared with about 4 per cent for the rest of the MNEs in the ranking. The pandemic has
further accelerated this trend, so that tech MNEs’ revenues now account for more than 20
per cent of the ranking’s total sales.

Evolution of tech MNEs in UNCTAD’s ranking of the top 100 MNEs,

Figure I.20.
2016 – 2021 (Number and per cent) 

25

20

15

10
15
13 13 13 13
5 11

0
2016 2017 2018 2019 2020 2021

Number of firms Share in total sales Share in total assets

Source: UNCTAD FDI/MNE database (https://unctad.org/fdistatistics).

Chapter I Global Investment Trends and Prospects 41

 3. Internationalization trends of digital MNEs
To assess the potential impact of digitalization on international production, WIR17 analyzed
and provided a ranking of the top 100 digital MNEs. An update of this ranking provides
evidence of their growing importance in the economy (box I.4).

The inherent dynamism of digital companies, coupled with the pandemic-induced

acceleration in the adoption of digital solutions, is reflected in a significant number of
new companies (39) in the ranking of the top 100 digital MNEs. The segments that saw
the highest relative number of new entrants were Internet platforms (9 out of 15) and
e-commerce (9 out of 21), with the initial public offerings of relevant digital companies that
were private during the compilation of the first top digital ranking, such as Airbnb (United
States), Didi Global (China), Uber (United States) and WeWork (United States). In both
segments new entrants represent almost half of the companies in the group. In absolute
terms the digital solution category had the highest number of new entrants (14). With
respect to the companies that fell out of the ranking, almost a third (14) were acquired by
others. This is the case of LinkedIn (acquired by Microsoft), Priceline (by Booking Holdings
(United States)), Viacom (by National Amusement (United States)) and Sky (by Comcast
(United States)), among others. Another third of the companies that fell out of the ranking
(14) were simply outranked by other companies.

Despite the high number of new companies, the ranking is still dominated by companies
from developed economies, mostly from the United States (59) followed by other developed
economies (32). Nonetheless, MNEs from South-East Asia and Latin America are gaining
global relevance, e.g. Mercado Libre (Argentina), and Joyy and SEA (both Singapore).

Especially for e-commerce MNEs, local knowledge is proving an important factor, as

shown by the large share (two thirds) of non-United States MNEs. Geographical diversity
also increased in the internet platforms segment with the entry of companies from China,
Singapore and Europe. In particular, the Chinese search engine Baidu has expanded its
foreign operations since 2016, including by entering a partnership with the social network
company Snap (United States). Despite their economic importance, preeminent Chinese
digital companies (such as Meituan and JD.com) are not represented in the ranking owing
to their focus on the large domestic market.

The overall FDI lightness – the ratio of the foreign share of sales to the corresponding share
of assets – of the new ranking is higher than that of the 2017 ranking. This is partly because
the new entrants were on average 30 per cent lighter than the companies that continued in
the ranking. Digital solution entrants were two times lighter than the companies that carried
over from the previous ranking.

Overall, for digital MNEs, the ratio between the share of sales generated by foreign
affiliates and the corresponding share of foreign assets (the FDI lightness index) is very high
compared with that of UNCTAD’s top 100 MNE ranking, with the exception of the tech
group in that broader ranking (table I.18).7 Between 2016 and 2021, the sales of traditional
MNEs in UNCTAD’s top 100, excluding technology MNEs, increased at a much slower
pace than those of top digital companies, further accentuating the difference between
digital and traditional MNEs.

Foreign asset lightness varies between segments of the digital economy, which highlights
the different underlying business models within this group of MNEs. Internet platforms
and digital solutions have the lightest ratios. Their business model is easily scalable
internationally; it does not necessarily require physical capital investment in each of the
markets where they generate sales. In contrast, e-commerce and digital content MNEs are
more similar to traditional MNEs. Global e-commerce firms rely on their own large-scale

42 World Investment Report 2022 International tax reforms and sustainable investment
distribution centres across the world, while many digital content MNEs are traditional firms
that have transformed or expanded into digital markets (“gone digital” rather than “born
digital”). They often still engage in the physical production of their content and maintain
a relatively higher share of foreign assets. This is also confirmed by their engagement in
equity acquisitions and greenfield investments.

Box I.4. UNCTAD’s top 100 digital MNEs

The World Investment Report 2017 introduced the first ranking of the top 100 digital MNEs and investigated the effect of digitalization on global
investment patterns. Recently, a Special Issue of the Global Investment Trends Monitor (UNCTAD, 2022) and a related UNCTAD Insights research
note in Transnational Corporations (Trentini et al., 2022) presented an updated of the ranking and of the investment footprint of digital MNEs.
The update is timely because (i) a five-year timespan is sufficient to look at evolutionary trends; (ii) the five years include the COVID-19
pandemic period, which has provided a huge boost to digital activities; and (iii) recent international policy developments – including Pillar I
of the G20/OECD Base Erosion and Profit Shifting (BEPS) project and the Digital Services Act of the European Union – make it interesting to
assess which firms and activities will be most affected.
The updated ranking closely follows the methodology established in WIR17 (and explained in Casella and Formenti, 2018). The compilation
of data for the new ranking started from the original ranking, updating the underlying statistics – operating revenues, sales and assets.
Additional companies were selected using the same criteria as in WIR17: (i) listed companies with total revenues above $1 billion, reporting
information on foreign business (i.e. foreign sales and foreign assets, or at least one of the two), and (ii) relevant core industry or activity.
Companies were selected by screening a sample of large public companies in tech or consumer-facinga industries on the basis of activity
codes, business description and financial reporting to determine their core activity.
As in WIR17, digital MNEs are classified into four main types:
(i) Internet platforms: born digital, and operated and delivered through the Internet, such as search engines, social networks and other
platforms and shared-economy companies (e.g. ride-hailing companies Uber (United States) and Didi Global (China), and shared
accommodation platform Airbnb (United States)).
(ii) Digital solutions: other Internet-based players and digital enablers. This category is expanded to include providers of software as a
service (SaaS) and fintech, in addition to e-payment solutions. Fintech has a broader range of services: brokers, banking and finance.
(iii) e-Commerce: online platforms that enable commercial transactions. This category includes e-retailers and the new delivery group (mostly
food delivery and mobile apps) which gained significant relevance during the pandemic.
(iv) Digital content: producers and distributors of goods and services in digital-format media, including games as well as data and analytics.
The digital MNEs were matched to investment project data, in particular data on M&As and greenfield investments from Refinitiv and fDi
Markets, to provide an assessment of digital FDI. These data provide information on the geography and industry of investments.

Source: UNCTAD.
a
In the initial sample, consumer-facing companies were included and screened if they have a significant digital offering (for goods companies) or product (mostly services
companies that could digitalize).

Sales growth rates and FDI lightness: comparison between traditional

Table I.18.
top 100 MNEs, tech MNEs and top digital MNEs

Total sales increase (%) FDI lightness

Change
2016–2021 2016 2021
(%)

Traditional MNEs 36 1.00 1.01 2

Tech MNEs (from top 100) 73 1.50 1.45 -3
Top digital MNEs 159 1.37 1.58 15
Internet platforms 212 2.25 2.32 3
Digital solutions 110 1.85 2.21 20
E-commerce 225 1.03 1.21 17
Digital content 68 1.32 1.12 -15
Source: UNCTAD FDI/MNE database (https://unctad.org/fdistatistics).

Chapter I Global Investment Trends and Prospects 43

 The overall lightness of the top 100 digital MNEs increased by 15 per cent since 2016.
Digital solutions MNEs increased their asset lightness the most, pushed by fast-growing
foreign sales during the pandemic. Similarly, e-commerce companies benefitted from the
heightened demand for delivery services during lockdown periods. Digital content MNEs
became asset heavier.

Internet platforms increased their already high lightness index only marginally. One
explanation for this relative slowdown lies in the vertical integration being pursued by major
platforms and their expansion across business segments. For example, Alphabet (United
States) decreased its asset lightness ratio from 2.2 to 2 over the period, as it increased
physical asset investments overseas to support international growth.

The different international asset footprints are also evident in diverging investment patterns
since 2016. Traditional top manufacturing MNEs engage almost exclusively in greenfield
investment, with a share of about 90 per cent of greenfield investment projects over their
total number of foreign investment projects. In contrast, digital MNEs typically engage
less in greenfield investment; most of their investment abroad relates to acquisitions of
competitors or valuable start-ups and sales support activities. E-commerce companies are
the exception, because they need to set up their networks of warehouses and distribution
facilities, accounting for more than two thirds of all projects. The soaring e-commerce
activity induced by the pandemic translated into an increase in greenfield investments
(mostly in logistics and sales-related projects) of 120 per cent in 2020 and a further 10 per
cent in 2021 (figure I.21). Much of that increase was accounted for by e-commerce giant
Amazon. Before the pandemic, the increase was due largely to coworking space provider
WeWork (United States), which invested heavily to expand its real estate portfolio.

Greenfield investment projects of top 100 digital MNEs, by segment,

Figure I.21.
2016–2021 (Billions of dollars)

25

20

15

10

0
2016 2017 2018 2019 2020 2021

E-commerce Digital content

Digital solutions Internet platforms

Source: UNCTAD, based on Financial Times Ltd, fDi Markets (www.fdimarkets.com).

44 World Investment Report 2022 International tax reforms and sustainable investment
In addition to logistical and sales support points (accounting for 42 per cent of the projects),
digital MNEs also set up professional services offices (24 per cent of their greenfield
investment projects), research and development (R&D) centres (14 per cent) and ICT and
internet infrastructure (10 per cent). The relative importance of R&D and ICT investments
for digital MNEs is significantly higher than for traditional MNEs, for which investments
in R&D centres account on average for only 6-7 per cent and those in ICT and Internet
infrastructure about 2–3 per cent of the total number of greenfield projects. The share of
investment in these two activities varies across segments, with digital content companies
devoting more than a third (35 per cent) of their projects to R&D centres, while digital
solutions providers devote a slightly lower share (31 per cent) to internet infrastructure.
Also, almost half of all R&D and two thirds of ICT and Internet infrastructure investments
are made by the largest 10 digital MNEs in terms of assets: Amazon, Alphabet (both United
States), Alibaba Group and Tencent (both China), Walt Disney, Meta Platform (both United
States), Rakuten (Japan), and Salesforce, FIS and Fiserv (all United States).

More than 60 per cent of greenfield investments are in developed economies (table I.19.),
especially in Europe (45 per cent). The geographical focus differs by segment. R&D projects
concentrate in developed countries, with Canada, the United Kingdom and Spain among
the top recipients; of R&D investment in developing economies, India captures almost
half of all projects. Professional services seem to be the most geographically spread out,
with almost half of such projects flowing to developing countries, especially in Asia and
in Latin America.

Foreign acquisitions also show different profiles for the various categories. E-commerce
MNEs and Internet platforms are less active in this case (figure I.22). Digital content and
digital solutions providers accelerated their acquisitions in 2021, increasing their deals by
48 and 70 per cent respectively, pushed by heightened demand for their services in the
second year of the pandemic.

Top 100 digital MNEs’ greenfield investment projects: geographical distribution

Table I.19.
by activity (Number and per cent)
Logistics Professional ICT and
and sales services R&D Internet Othera Total

Total number of projects 905 520 294 219 227 2165

Developed economies 69 53 68 60 55 63

Europe 56 30 43 42 43 45

North America 9 5 18 4 5 8

Other developed economies 5 18 7 15 7 9

Developing economies 31 47 32 40 45 37

Africa 2 1 2 3 4 2

Asia 19 29 24 26 25 23

China 2 15 2 1 2 5

India 8 2 13 5 2 6

Latin America and the Caribbean 10 17 7 11 16 12

Brazil 4 5 2 5 2 4

Mexico 3 5 1 .. 1 2
Source: UNCTAD, based on information from Financial Times Ltd, fDi Markets (www.fdimarkets.com).
a
Other includes, in order of importance, headquarters, customer care services, technical support, manufacturing, construction, maintenance and electricity.

Chapter I Global Investment Trends and Prospects 45

 International equity acquisitions of top 100 digital MNEs by segment,
Figure I.22.
2016–2021 (Number)

120

100

80

60

40

20

0
2016 2017 2018 2019 2020 2021

E-commerce Digital content

Digital solutions Internet platforms

Source: UNCTAD, based on data from Refinitiv SA.

Note: The figure reports numbers of deals instead of volumes because of the high quantity of deals for which values were not disclosed. Equity
acquisitions include minority stakes.

The most common acquisition targets are software, IT consulting and online services
(platform) companies, which account for 48 per cent of deals by digital MNEs. Other
industries in which digital MNEs regularly acquire firms are professional services, publishing
and broadcasting (for digital content MNEs), financial services (for digital solutions
providers), retail and business-to-business services (for e-commerce companies),
and travel services and audiovisual services (for Internet platforms).

Thus, the international expansion of digital MNEs through acquisitions occurs both
horizontally (within the same industry) and vertically (in different industries). Some digital
MNEs can expand their business across segments, bundling multiple services into their
applications; e-commerce and e-payments are typically combined in the same app, to
which – in an effort to leverage synergies and network effects – new digital companies
often add much more (e.g. ride-hailing, social networking, streaming). Confirming this logic,
Internet platforms typically invest in vertical deals; they buy companies in the same industry
in only 13 per cent of cases. In contrast, digital solutions MNEs engage mostly in horizontal
deals, expanding in foreign markets by acquiring overseas direct competitors to quickly
gain local knowledge and customer relationships. E-commerce and digital content MNEs
lie between these two extremes, with a share of horizontal deals of about 23 per cent.

For the many firms new to this year’s top 100 ranking of digital MNEs, their investment
profile differs from that of well-established MNEs. Large digital MNEs are already globally
dominant players, and their investment decisions are mostly motivated by the need to
protect business and to secure the next innovation, rather than to reach foreign customers.
The top 10 MNEs by assets in the ranking account for a fifth of the deals (and almost half
of the greenfield projects) mostly in innovative start-ups in other developed economies or
segments of their supply chain (ICT and infrastructure). More than 80 per cent of the foreign
equity acquisitions of digital MNEs are in other developed economies, with European firms
the target of almost half (48 per cent) of all deals. Among developing economies, digital
MNEs targeted firms in India firms in a sizeable share of deals (7 per cent), because of its
thriving tech start-up scene.

46 World Investment Report 2022 International tax reforms and sustainable investment
Digital MNEs from the United States accounted for 53 per cent of all deals, targeting
in more than half of the cases (53 per cent) companies from European countries –
in particular, the United Kingdom (23 per cent). In developing economies, United States
MNEs targeted India in 8 per cent of deals, mostly buying minority stakes to gain access
to the market and to local innovative solutions. For example, eBay (United States) jointly
with Microsoft (United States) and Tencent (China), acquired an undisclosed minority stake
in online retailer Flipkart (India), for $1.4 billion in 2017. Similarly, Paypal (United States)
acquired undisclosed minority stakes in a range of Indian companies across several
industries, including software providers, online brokerage systems, professional services
and electronic payments (Moshpit Technologies, Speckle Internet Solutions, Scalend
Technologies, Freecharge Payment Technologies).

European digital companies (of which there are 22 in the ranking) accounted for a quarter of
foreign equity acquisition deals, of which more than half were in other European countries
(54 per cent), in search of opportunities to consolidate operations with competitors. Another
quarter were in the United States. One example of the first type of deals is the 2020 merger
of two delivery companies, Takeaway (The Netherlands) and Just Eat (United Kingdom),
a deal valued at $8 billion. Music streaming company Spotify (Luxembourg) was one of
the most active buyers in the United States, where its acquisitions included the Internet
software and services companies Podz and Betty Labs (for undisclosed value) in 2021.

The four Chinese companies in the ranking accounted for 11 per cent of the deals and
invested a relatively higher share in developing-economy MNEs (34 per cent) than their
developed counterparts did. They invested especially in Asia, with shares divided equally
between India and South-East Asia. Across developed economies, 41 per cent of their
acquisitions were in Europe and 12 per cent in the United States. Most of the deals involved
an undisclosed minority participation, often as part of a group of international investors.
The only majority acquisition was the purchase by Alibaba (China) of e-commerce company
Lazada (Singapore) – which has been occurring in several tranches with one still pending
– for a total of $4 billion.

Digital MNEs’ engagement in international project finance deals is limited. Only the very
top digital MNEs have now started investing overseas, especially in ICT infrastructure. For
example, Alphabet (United States) is among the sponsors of one of the largest project
finance deals in the telecommunication sector in Africa; a $47 billion project announced in
2019 to construct a subsea internet cable running from Portugal to South Africa, resulting
in improved high-speed and affordable Internet access for West Africans. Amazon (United
States) in addition to establishing data centres in different regions, has recently been
sponsoring renewable energy projects.

4. Internationalization trends of SMEs

Small and medium-sized enterprises (SMEs) – defined as firms with revenues below
$15 million and fewer than 300 employees – are the backbone of most economies and
contribute significantly to growth and development (box I.5). Only the most productive and
dynamic SMEs engage in international business activity through trade and investment.
Few invest in physical assets abroad.

Predictably therefore, FDI by SMEs is small. Moreover, SME investment activity has shown
a downward trend since 2015 (figure I.23). The number of FDI projects by SMEs fell from
880 in 2015 to 195 in 2021, and the share of SMEs in total greenfield investment projects
declined from 5.7 to 1.3 per cent. The decline in 2020 can be explained by the economic
fallout from the COVID-19 pandemic, which hit small businesses disproportionally;

Chapter I Global Investment Trends and Prospects 47

 Box I.5. Foreign direct investment by multinational SMEs

A new UNCTAD research project examines the internationalization process of SMEs, with a focus on FDI by SMEs from and to
developing economies. A novel aspect of the research is the analysis of the role of SMEs in South–South and intraregional FDI.
The objective is to evaluate the importance of SME international expansion, particularly through FDI, for the economies of both home and
host countries.
UNCTAD first published a study on FDI by SMEs in 1998 (UNCTAD, 1998), focusing on developing economies in Asia. In the intervening
quarter-century, the growing importance of global value chains, the continued rise of emerging-market players and the new industrial
revolution have changed the landscape. In addition, the more difficult international policy environment for international investment in recent
years and the economic fallout from the pandemic have both had disproportionately negative effects on SMEs. This makes it imperative to
take a fresh look at FDI by SMEs.
UNCTAD’s research project will bring together empirical evidence on FDI by SMEs covering all developing regions and cutting across
industries. It will include firm-level evidence and case studies on Argentina, Brazil, Colombia, Ghana, Peru, Thailand, Turkey and Viet Nam.
This project will also contribute to realization of the BAPA+40 outcome of “More than 40 entities participating in the UN mechanism for the
implementation of this resolution will welcome data on South-South investment by SMEs”.a
A fundamental driver for the project is the perception that in many economies policy tools and institutions for promoting international
investment are mostly geared towards attracting large-scale industrial projects by major MNEs, and that investment promotion agencies,
special economic zones and other home- and host-economy institutions have often not paid sufficient attention to the needs of SME
investors. The project will aim to provide clear policy recommendations to strengthen the investment environment and investment facilitation
for multinational SMEs.

Source: UNCTAD.
a
Official Records of the General Assembly, Seventy-third Session, Resolution 73/291 24(m).

however, the decline before the pandemic indicates that longer-term factors hinder SME
internationalization. These factors include unequal access to finance, the growing digital
gap between SMEs and larger companies, continued concentration in international
business and, from a policy perspective, a lack of investment promotion and facilitation
measures targeted to SMEs. The deteriorating international policy environment for trade
and investment, especially the trade tensions after 2017, are also likely to have discouraged
SMEs more than large MNEs. Looking ahead, the potential role of SMEs in South–South
and intraregional FDI could provide some impetus to reverse the downward trend, as
regional economic cooperation among developing economies takes hold.

Figure I.23. Greenfield projects by SMEs, 2015–2021 (Number and per cent)

1 000 6

5
800

4
600
3
400
2

200
1

0 0
2015 2016 2017 2018 2019 2020 2021

Number Share (right-hand axis)

Source: UNCTAD, based on information from the Financial Times Ltd, fDi Markets (www.fDimarkets.com).

48 World Investment Report 2022 International tax reforms and sustainable investment
Foreign investment by SMEs from developing economies represented only 6 per cent
of all SME greenfield investment projects in 2021. This contrasts with the 39 per cent
share of developing economies in total outward investment. SME outward investors are
predominantly from upper-middle-income developing economies; for example, SMEs from
China, India and Turkey are relatively active. Home-country economic conditions are clearly
a key factor in the internationalization of SMEs.

SMEs invest relatively more within their own regions than MNEs do (figure I.24). This
holds for both developed and developing economies, and for almost all regions except
for developing Asia, where the data are skewed by the large numbers of Chinese SMEs,
which are highly active in Africa, and by Turkish SMEs, which invest almost exclusively
in Europe.

A more nuanced picture emerges when looking at bilateral investment links, confirming that
SMEs are more likely to invest within their region than large MNEs. The average distance
to the host economy of greenfield investments by MNEs is about 4,000 km, whereas for
SMEs it is about 3,500 km. Moreover, SMEs have a higher average share of greenfield
investment in neighbouring countries (19 per cent) than do all firms (14 per cent).

In addition to their tendency to invest regionally, SMEs are more likely to invest in economies
at a similar level of development as their home economy. SMEs from developed economies
tend to invest in developed economies – irrespective of the region – whereas SMEs from
developing economies target investment projects in other developing economies.

Overseas investment by SMEs tends to concentrate in industries that do not require high
set-up (or fixed) costs, such as services and some specialized and light manufacturing.
SMEs in information and communication services and those in professional services
activities together account for more than half of all foreign investment projects (figure I.25).
Within information and communication services, more than three quarters of projects are
in software and information technology services, highlighting the importance of the digital
economy for the development of a dynamic SME sector.

Shares of regional greenfield projects, SMEs and total, by region

Figure I.24. (Per cent)

70

60

50

40

30

20

10

0
Europe North America Other developed Africa Developing Latin America
economies Asia and the Caribbean

SMEs All greenfield

Source: UNCTAD, based on information from the Financial Times Ltd, fDi Markets (www.fDimarkets.com).

Chapter I Global Investment Trends and Prospects 49

 Figure I.25. Top sectors of greenfield projects, SMEs and total, 2015–2021 (Per cent)

a. SMEs b. All greenfield

20
28
39
8
53
4 7
4
8 7
17 6

Information and communication Information and communication

Professional services Textiles
Machinery and equipment Manufacture of electronics
Financial services Professional services
Textiles Motor vehicles and other transport equipment
Other Other

Source: UNCTAD based on information from the Financial Times Ltd, fDi Markets (www.fDimarkets.com).

50 World Investment Report 2022 International tax reforms and sustainable investment
 NOTES
1
For the list of LDC, LLDCs and SIDS, please see footnotes e,f,g of annex table I. The category of LDCs
overlaps partly with that of LLDCs and SIDS. There are 17 economies that are both LDCs and LLDCs, and
6 that are both LDCs and SIDS.
2
See also the report on the Global Landscape of Climate Finance 2021 by Climate Policy Initiative (CPI,
2021).
3
Government involvement includes any form of support through grants, guarantees, loans, equity
participations, subsidies, tax breaks, and ancillary infrastructure improvements.
4
According to the Joint Report on Multilateral Development Banks’ Climate Finance, the multilateral
development banks collectively committed $66 billion in 2020 – $50 billion, or 76 per cent, for mitigation
and $16 billion, or 24 per cent, for adaptation. Of the total, 58 per cent was committed to low- and middle-
income economies (AfDB et al., 2020).
5
Although the deal was completed in 2020, it affected financial accounts only in fiscal year 2021, with
RWE’s total assets increasing by 113 and its foreign ones by 130 per cent.
6
In 2017, Hitachi (Japan) was categorized as tech company because its core industry was historically
defined as manufacturing of computers; however, in consideration of the expansion of its business in
many new areas including electric grids, automotive and railways it is now categorized as conglomerate.
In addition, the preliminary ranking for WIR17 included Oracle (United States), which ultimately joined the
ranking only in the following year, replacing Broadcom (United States).
7
Three MNEs are in both the broader UNCTAD ranking of the top 100 MNEs and the UNCTAD ranking of the
top 100 digital MNEs: Alphabet and Amazon (both United States) and Tencent (China).

Chapter I Global Investment Trends and Prospects 51

52 World Investment Report 2022 International tax reforms and sustainable investment
CHAPTER II

RECENT POLICY
DEVELOPMENTS
AND KEY ISSUES
 INTRODUCTION

In 2021, the number of investment policy measures returned to pre-pandemic levels (109),
decreasing by 28 per cent compared with 2020, signalling an end to the emergency
investment policymaking that characterized the first year of the COVID-19 pandemic.
The pandemic nevertheless continued to affect the nature of investment policy measures
adopted in 2021. Developed countries, in particular, expanded the protection of strategic
companies from foreign takeovers, in a continuation of a trend towards tighter regulation
of investment, which brought the ratio of measures less favourable to investment over
those more favourable to an all-time high (42 per cent). Conversely, developing countries
continued to adopt primarily measures to liberalize, promote or facilitate investment,
confirming the important role that foreign direct investment (FDI) plays in their economic
recovery strategies. Investment facilitation measures constituted almost 40 per cent of all
measures more favourable to investment, followed by the opening of new activities to FDI
(30 per cent) and by new investment incentives (20 per cent) (section A).

The first quarter of 2022 saw a dramatic increase in the adoption of investment policy
measures (75 – a record for a single quarter), largely because of the war in Ukraine.
Sanctions and countersanctions affecting FDI to and from the Russian Federation, Belarus
and the non-Government controlled areas of eastern Ukraine, constituted 70 per cent of all
measures adopted in Q1 2022. The balance points to the continued adoption of measures
more favourable to investment in developing countries (13 out of 14) and more restrictive
measures in developed ones (5 out of 8).

At the international level, several notable developments in 2021 and 2022 accelerated the
trend towards reform of the international investment agreements (IIA) regime. These include
the conclusion of new-generation megaregional economic agreements, the termination of
bilateral investment treaties (BITs) and multilateral discussions on the reform of investor–
State dispute settlement (ISDS) mechanisms. At the same time, greater policy attention to
investment facilitation, climate change and human rights is set to recalibrate international
investment governance (section B).

Tax policy is one of the key instruments utilized around the world to promote investment,
and the pandemic has accentuated the importance of tax incentive and relief efforts in
economic recovery and resilience packages adopted worldwide. The ongoing reform of the
international tax system may affect the capacity of countries to continue relying on certain
types of tax incentives to promote FDI. In this context, section C of this chapter highlights
key trends in the taxation of investment. Statutory corporate income taxes have dropped
in all regions since 1980, as countries have increasingly engaged in tax competition to
promote investment regardless of their size or level of development (section C.1). Beyond
reducing the statutory corporate tax rates, countries rely on investment incentives, mainly
in the form of tax holidays or reduced corporate tax rates, to attract investors to priority
sectors or regions, as highlighted by analysis of tax-related investment policy measures
adopted worldwide in the last decade (section C.2).

With respect to tax policy, IIAs impose obligations on States that can create friction with
taxation measures taken at the national level. The actions of tax authorities, as organs of
the State, and tax policymaking more generally can potentially engage the international
responsibility of a State under an IIA when they adversely affect foreign investors and
investment. It is therefore important to enhance cooperation between investment and

54 World Investment Report 2022 International tax reforms and sustainable investment
tax policymakers. The joint expertise of these two policy communities can help improve
the coherence between tax and investment policymaking. Equally important is the need to
minimize the risk of friction between the IIA regime and the global tax treaty network, with
more than 3,000 agreements each (section C.3).

Chapter II Recent policy developments and key issues 55

 A. NATIONAL INVESTMENT
POLICIES

1. Overall trends
The number of investment policy measures adopted in 2021 returned to pre-pandemic
levels (109), decreasing by 28 per cent from the number in  2020. However, the trend
towards tighter regulation of investment continued, and the ratio of measures less
favourable to investment over those more favourable was the highest on record (42 per
cent, a point higher than in 2020).

Fifty-three economies introduced an aggregate 109 policy measures affecting foreign

investment in 2021 – a decrease of approximately 28 per cent compared with 2020, as the
haste to adopt emergency pandemic-related measures has subsided and the total number
of investment policy measures has returned to pre-pandemic levels (figure II.1).

Although the number of new measures less favourable to investment declined by 20 per
cent (from 50 in 2020 to 40 in 2021), they reached the highest proportion ever recorded (42
per cent of non-neutral measures), as several countries reinforced their screening regimes
for investment or extended the temporary regimes introduced in reaction to the pandemic
(figure II.2).1 This surge in measures to tighten control over investor entry and operation
continues the policy trend observed since the global financial crisis, which the pandemic
accentuated. It started in developed countries but is increasingly extending to developing
ones (section A.2).

Figure II.1. Changes in national investment policies, 2003–2021 (Number of measures)

152
144

30
128 23
1 125
116
20 19 112
6 107 109
23
100 16 14
92 22 20 50
89 33 11
86 6 87
4 3
3 14
74 31
21 21 40
68 24 21 21
2 10
15 12
107
98
84
77 75 72
61 62 65 63 65 66
52 55
51

2003–2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
(average)

More favourable Less favourable Neutral/indeterminate

Source: UNCTAD, Investment Policy Monitor.

56 World Investment Report 2022 International tax reforms and sustainable investment
The number of measures more favourable to
Changes in national investment
investment (55) declined by almost 24 per cent Figure II.2.
policies, 2005–2021 (Per cent)
to reach the lowest share on record (58 per cent).
The large majority of these measures (48, or 87
More favourable Less favourable
per cent) were undertaken in developing countries,
100
highlighting that investment attraction remains a
key element in these countries’ economic recovery 75
58
strategies. Many countries took further steps 50

towards investment facilitation by simplifying or 25 42

streamlining administrative procedures, and several 0
2005 2007 2009 2011 2013 2015 2017 2019 2021
others expanded their investment incentive regimes
to attract more foreign investment (see section 1.b).
Source: UNCTAD, Investment Policy Monitor.
The remaining 14 measures were of a neutral or
indeterminate nature (figure II.1).

In regional terms, developing countries in Asia once again led the adoption of new
investment policy measures (40), followed by countries of Latin America and the Caribbean
(18) and Africa (17). Among developed regions, European countries continued to adopt the
largest number of measures (19), although these declined by 30 per cent compared with
2020 – a year in which many of them implemented the European Union (EU) regulation
on FDI screening of 2019. The number of measures adopted in North America and other
developed regions remained stable compared with 2020 (figure II.3).

Overall trends mask important regional differences in the nature of the measures
introduced. Almost two thirds of the measures adopted in developing economies, including
in developing Asia, Africa, and Latin America and the Caribbean, were meant to promote or
facilitate investment, continuing a well-established trend (64 per cent, or 77 per cent when
excluding policies of neutral nature). In contrast, the majority of the measures adopted

Figure II.3. Regional distribution of national investment policy measures in 2021

(Number of measures)

26 Asia
Africa
7 Latin America and the Carribbean
1 8
Europe
North America
7 19
Other developed countries

18
14

40
17

13
More favourable 48
Less favourable
Neutral/indeterminate

Source: UNCTAD, Investment Policy Monitor.

Chapter II Recent policy developments and key issues 57

 by developed countries introduced or reinforced investment restrictions (76 per cent,
or 79 per cent when excluding policies of neutral nature). All of them related directly or
indirectly to national security concerns about foreign ownership of critical infrastructure,
core technologies or other sensitive domestic assets. Often, these measures were an
extension of the restrictions introduced in the midst of the pandemic and motivated by
the desire to protect sensitive domestic businesses against foreign takeovers (section 1.a).

The first quarter of 2022 saw a dramatic expansion in investment policymaking around
the world, largely as the result of the war in Ukraine and the flurry of sanctions and
countersanctions adopted by several countries. Twenty-seven countries and the EU
introduced 75 policy measures affecting foreign investment, the highest level ever recorded
in a quarter. Seventy per cent of them (52 measures) represented sanctions adopted in the
context of the war in Ukraine. These include primarily measures targeted at prohibiting or
otherwise limiting FDI to and from the Russian Federation, Belarus and the non-Government
controlled areas of eastern Ukraine, as well as countersanctions adopted by the Russian
Federation to impose restrictions on transnational business activities.2

Beyond sanctions that impose outright prohibitions or limitations on FDI, several measures
that aim to interrupt a broad range of foreign transactions also have an impact on investment
activities. Among them are sanctions targeting Russian banks and their subsidiaries;
trade restrictions on inputs, goods, software and technology; and blocking sanctions
that target transport companies, which have a significant impact on supply chains for
foreign manufacturers in several sectors. Finally, travel bans and asset freezes affecting
hundreds of individuals and entities targeted by sanctions have impacts on a broad range
of foreign investment.

Among the 23 investment policy measures adopted in the first quarter of 2022 unrelated
to sanctions, 60 per cent were adopted by developing countries. All but one aimed to
facilitate or attract FDI. Conversely, among the remaining eight measures adopted
by developed countries, five aimed to tighten control on FDI. One measure was of
neutral nature.

a. D
 eveloped countries continued increasing FDI scrutiny for
national security concerns
The trend towards increased FDI screening intensified in 2021, with at least four more
countries adopting new FDI screening mechanisms and at least twice as many tightening
existing mechanisms.

Two thirds of the policy measures less favourable to investment adopted in 2021 concerned
the introduction or tightening of national security regulations affecting FDI. Nearly all of them
were adopted by developed economies. In particular, at least four additional countries
introduced FDI screening mechanisms, including three European countries (Czechia,
Denmark and Slovakia) and Saudi Arabia. This brought the total number of countries
conducting FDI screening for national security to 36. In addition, at least eight countries and
the EU reinforced existing screening regimes for foreign investment. Together, countries
that conduct FDI screening account for 63 per cent of global FDI flows and 70 per cent of
FDI stock (up from 52 and 67 per cent respectively in 2020).

For example,
• Australia amended the Foreign Acquisitions and Takeovers Act to permanently lower
to $0 the monetary threshold for mandatory screening of sensitive national security
projects. Accordingly, foreign investors require approval for all investments in land or
businesses that are sensitive to national security, regardless of the amount invested.

58 World Investment Report 2022 International tax reforms and sustainable investment
• Canada lowered slightly the thresholds that trigger FDI screening3 and strengthened its
scrutiny of foreign investment in four areas of heightened risk: sensitive personal data,
specified sensitive technology areas, critical minerals and investments by State-owned
or State-influenced foreign investors.
• Czechia introduced a new FDI screening mechanism in line with the EU Guidance on
FDI screening. According to the new law, any non-EU investor must obtain a permit
prior to acquiring effective control of a company in the country.
• Denmark introduced an FDI screening mechanism through the Investment Review Act.
It requires foreign investors to obtain prior governmental approval for an acquisition of
at least 10 per cent of shareholding in a Danish company, as well as for establishing a
new company in selected sectors.
• France included technologies related to renewable energy production in the list of
sectors and key technologies subject to the FDI review mechanism.
• Germany added 16 high-tech activities to the list of activities covered by the FDI review
mechanism, bringing the total to 43, and changed the thresholds that trigger investment
screening for different types of acquisitions, depending on their sectors.
• Italy expanded the scope of the procedures that require prior government approval
for foreign investors to acquire assets strategically important to the national interest.
The amendments concern ports, airports, motorways of national interest, national
spaceports, railway network within the trans-European network, and broadband and
ultrabroadband services.
• Japan added a requirement that foreign investors in 34 rare earth metals obtain prior
government approval. Accordingly, foreigners who wish to acquire more than 1 per cent
of the stock of a listed company or more than one share of the stock of an unlisted
company are required to notify the Bank of Japan.
• Saudi Arabia established a Standing Ministerial Committee for Foreign Investment
Investigation, tasked with identifying sensitive and strategic sectors or companies
in which foreign investment might affect national security or public order. Foreign
investments in those sectors will be subject to examination and potentially restrictions.
• Slovakia established an investment screening mechanism according to which any
acquisition of more than 10 per cent of shares or voting rights in an operation of critical
infrastructure may be subject to review in light of possible disruption of public order
or national security. The governmental power to block acquisitions applies to a list of
sectors that includes transport, information and communication technology, energy,
mining, postal services, pharmaceuticals and chemicals, metallurgy, health care, water,
finance and agriculture.
• Spain extended the suspension of the FDI liberalization regime until 31 December 2022.
Therefore, investors from the EU or the European Free Trade Association (FTA) buying
at least 10 per cent of a Spanish company must notify the Spanish authorities and await
approval. This temporary scheme applies if the acquisition or investment in publicly
traded companies operating in the strategic sector exceeds €500 million.
• The United Kingdom introduced a stand-alone screening regime separate from the
merger control regime, to address acquisitions of British companies and assets by
both domestic and foreign investors. The screening procedure focuses on evaluating
risks to national security associated with such acquisitions. The law introduces
a mandatory notification of the Minister for Investment prior to gaining control over a
company or an asset.
• The United States prolonged the prohibition for its citizens of investing in companies
related to China’s defence and surveillance technology sector by one year (until
12 November 2022) and extended the ban to eight new companies.

Chapter II Recent policy developments and key issues 59

 • At the regional level, the European Commission expanded the list of projects
and programmes of “Union interest” to include investments related to the Space
Programme, the Digital Europe Programme and the European Defence Fund, as well
as the Europe4Health Programme. Accordingly, the Commission may issue an opinion
if it considers that such investments pose a threat to the security and public order of
more than one Member State or the Union as a whole.

b. D
 eveloping economies aimed at reducing the risks of
crowding out and increasing FDI’s contribution to local
economic development…
In developing countries, most restrictions on FDI are aimed at protecting domestic
companies, including SMEs or companies operating in strategic sectors and activities, as
well as increasing local content.

For example,
• Burundi has introduced an eligibility threshold of $500,000 for foreign investment that
seeks to benefit from incentives under the Investment Code.
• Indonesia required foreign investors in a non-bank payment services provider to
guarantee a minimum of 15 per cent Indonesian shareholding, with 51 per cent of the
voting rights to be held by Indonesian investors.
• Mauritius extended the scope of restrictions on the ownership of property by non-
citizens. A requirement for prior approval by the Office of the Prime Minister on holding,
purchasing or acquiring property was extended to property disposal, which includes
burdening a property with a mortgage or charge.
• Mexico amended the Hydrocarbon Act to grant the State new powers to exercise
regulatory controls over the distribution, storage, import and export of fuels and oil
produced by the country.
• Mozambique increased the minimum capital requirement for foreign investors to be
able to freely repatriate profits and investment capital from $45,000 to $130,000.
• Namibia amended the rules regarding the transfer, cessation and assignment of mineral
licences to foreign companies, requiring the local retention of at least 15 per cent
interest in the company.
• Nepal required foreign investors to transfer at least 70 per cent of the proposed investment
capital before starting a business, and the balance within the following two years.
• South Africa introduced a new requirement under which private security companies
must be at least 51 per cent owned and controlled by South African citizens.

c. …
 but largely continued to embrace policies to promote or
facilitate investment
At least 30 developing countries implemented various promotion and facilitation measures
in 2021, hoping to attract additional FDI and help overcome the economic crisis caused
by the pandemic. Investment facilitation measures accounted for almost 40 per cent of all
measures more favourable to investment.

(i) New investment facilitation measures

Many new measures concerned the simplification of administrative procedures for

investment. For example,

60 World Investment Report 2022 International tax reforms and sustainable investment
• Angola amended the Private Investment Law to introduce several facilitation
mechanisms. For instance, investors who obtain a Private Investment Registration
Certificate are now exempt from obtaining provisional licences and other authorizations
from public administration bodies.
• China simplified the documentation required for company registration in the Shenzhen
Special Economic Zone. Applicants can simply provide documents and information
when they file applications online.
• Fiji introduced a broader range of treatment and protection guarantees for foreign
investors and removed the requirement to apply for a Foreign Investor Registration
Certificate. It also harmonized reporting obligations on foreign and local investors.
• India launched the National Single-Window System, which will become a one-
stop shop for approvals and clearances needed by investors, entrepreneurs and
businesses.
• Indonesia eased the employment licensing process for tech-based start-ups seeking
to hire foreign workers by waiving the Foreign Worker Utilization Plan requirement for
contracts shorter than three months.
• In the United Arab Emirates, Abu Dhabi launched the Virtual Licence, allowing non-
resident foreign investors to obtain an economic licence for doing business in Abu
Dhabi without any prior residence procedures and from any location outside the
United Arab Emirates.

(ii) New investment incentives

At least 15 countries introduced new incentives for investors, most of them in the form of
new fiscal benefits for priority sectors or through the institution of special economic zones
(SEZs). For example,
• Angola introduced the Free Zones Act, focused on developing the agricultural and
industrial sectors, labour-intensive industries and high-tech industries. The Act grants a
range of tax incentives to companies established in the free zones.
• Botswana announced that, in addition to other commercial and fiscal incentives,
income accruing to an investor or developer from SEZ-licensed operations is to be
taxed at a special rate of 5 per cent for the first 10 years of operation in an SEZ and 10
per cent thereafter.
• Honduras created a general rebate of the airport tax for new low-cost operators as well
as rebates ranging from 75 to 100 per cent of take-off and landing charges for certain
domestic airports.
• Mauritius introduced several new tax incentives for investment, including double tax
deduction on expenditure incurred for research and development targeting the African
market and the acquisition of specialized software and systems, 10 years carry-forward
of unrelieved investment tax credit for manufacturing companies and an 8-year tax
holiday for new companies in prescribed sectors and activities.
• Uzbekistan introduced new tax and customs incentives for both national and foreign
investors in capital-intensive sectors including oil, natural gas, gold, copper, tungsten
and uranium. The incentives include reduced taxes on subsoil use and customs duty
exemptions on equipment, material and technical resources and special equipment not
produced in the country.
• Zambia reduced the general corporate income tax rate from 35 to 30 per cent and
extended the 15 per cent corporate income tax rate for hotel income from lodging
and food services through 2022. It also made the mineral royalty levy deductible for
corporate income tax purposes.

Chapter II Recent policy developments and key issues 61

 (iii) Other legal and institutional reforms to promote FDI

Several countries adopted new or enhanced legal and institutional mechanisms to promote
FDI in 2021. For example,
• Cambodia adopted a new Law on Investment, offering a range of new investment
incentives, new investor guarantees (including non-discrimination, guarantees against
nationalization and arbitrary expropriation) and improved registration procedures.
• Ecuador signed the Convention on the Settlement of Investment Disputes between
States and Nationals of Other States, thereby opening the process of Ecuador’s return
to the multilateral dispute settlement mechanism.
• Indonesia established a new Ministry of Investment, thus upgrading the status of the
Indonesian Investment Coordinating Board. A key goal of the reform is to enhance
the ease of doing business in the country.
• Panama created a new Export and Investment Promotion Agency (ProPanamá).
• Sudan passed the Public Private Partnership Law, aimed at encouraging private entities
to invest and participate in projects alongside public entities.

d. FDI liberalization
Thirty per cent of the policy measures more favourable to FDI introduced in 2021 concerned
partial or full liberalization of investment in a variety of industries, including in particular
utilities (e.g. telecommunications, electricity), but also transportation, insurance and several
manufacturing activities. As in previous years, developing economies in Asia were the most
active in liberalizing foreign investment.

For example,
• Angola authorized the privatization of 51 per cent of the capital held by MS–TELCOM in
NetOne Telecomunicações, SA, through a limited tender by prior qualification open to
national and international investors.
• Brazil allowed a partial privatization of the electricity company EletroBras. Accordingly,
the State’s stake in the company is expected to be reduced from approximately
61 to 45 per cent.
• China continued to open its economy to FDI. Among the main measures: the
number of sectors restricted or prohibited for foreign investors was reduced
from 33 to 31; comprehensive pilot programmes were approved on the
opening of 12 services sectors to FDI in the Tianjin, Shanghai and Chongqing
municipalities and in Hainan Province; and foreign investors are now encouraged
to establish regional headquarters in China for fund management, procurement
and sales.
• India shifted to allow 100 per cent foreign participation in the telecommunication
services industry, including all services and infrastructure providers, through the
Automatic Route. Thus, non-resident investors or Indian companies do not require any
approval from the Government of India for the investment. The FDI ceiling in insurance
companies was also raised, from 49 to 74 per cent.
• The Philippines shifted to allow 100 per cent foreign ownership of select public services,
including telecommunications, airlines, shipping and railways and up to 40 per cent
in the operation of a public utility, including electricity distribution and transmission,
airports, seaports, water pipeline distribution and sewerage, tollways and expressways,
and public utility vehicles. The Government also reduced the minimum paid-up
capital requirements for foreign retail enterprises from $2.5 million to $1 million and

62 World Investment Report 2022 International tax reforms and sustainable investment
 removed the pre-qualification requirements for foreign retailers of having engaged in
the retailing industry for the preceding five years or of holding at least five retailing
branches in the world.

2. M&A controls affecting foreign investors

In 2021, the number of merger and acquisition (M&A) deals valued at over $50 million
that were withdrawn by the parties for regulatory or political concerns remained stable
(14 deals), but their value quadrupled, to over $47 billion.

At least 14 large M&A deals were terminated by the parties in 2021 for regulatory or political
reasons. While the number of such deals remained stable (15 were terminated in 2020),
their aggregate value almost quadrupled, from $12.4 billion in 2020 to $47.1 billion in 2021.
The terminated deals concerned a variety of industries, including extractive industries,
semiconductors, automotive and aviation, financial services, trading and media (table II.1).

Foreign acquisitions withdrawn for regulatory or political reasons in 2021

Table II.1. (Illustrative list)

For national security reasons

On 5 January 2021, Shandong Gold Mining (China) withdrew from its definitive agreement to acquire the entire share
Shandong Gold Mining Co capital of TMAC Resources Inc. (Canada) for $144 million. The Canadian Government blocked the sale of TMAC
Ltd – TMAC Resources Inc Resources and its Hope Bay gold-mining project to Chinese State-owned company Shandong Gold following a national
security review under the Investment Canada Act.

On 25 March 2021, TMH International (Switzerland), a unit of Transmash Holding JSC (Russian Federation), cancelled
its plans to acquire Bergen Engines, based in Norway and owned by Rolls-Royce (United Kingdom), for $180 million,
TMH International AG –
after indication from the Norwegian Government that the deal would be blocked on national security grounds, on
Bergen Engines AS
the basis of concerns that the engine maker would have been of significant military strategic interest to the Russian
Federation.

On 6 April 2021, China Oceanwide Holdings Group (China) withdrew its bid to acquire the entire share capital of life
China Oceanwide Holdings Group
insurance company Genworth Financial (United States) for an estimated $2.7 billion, fearing that the United States
Co Ltd – Genworth Financial Inc
might stall it over concerns about Chinese access to sensitive data of United States citizens.

On 7 September 2021, TransDigm Group (United States) announced the cancellation of its plans to acquire the entire
share capital of the aerospace and defence company Meggitt (United Kingdom) for $9.7 billion, over concerns of
TransDigm Group Inc – Meggitt PLC
increased scrutiny by the Government of the United Kingdom of defence company takeovers after a flurry of M&As in
the sector.

On 16 January 2021, Alimentation Couche-Tard (Canada) decided to drop its merger plan for $19.7 billion with the
Alimentation Couche-Tard
food retail corporation Carrefour (France), because the French Finance Minister had voiced objection to the deal on the
Inc – Carrefour SA
grounds that it would present risks to France’s food sovereignty.

For competition reasons

On 22 September 2021, Kina Securities (Papua New Guinea) abandoned its plans to acquire the entire share capital of
Kina Securities Ltd – Fiji business the Fiji business of the bank and financial services corporation Westpac Banking Corp (Australia), following a decision
of Westpac Banking Corp by Papua New Guinea’s Independent Consumer and Competition Commission to deny authorization for the proposed
acquisition.

On 26 July 2021, Aquiline Capital Partners (United States) withdrew its bid to acquire the United States retirement
Aquiline Capital Partners business of Aon PLC (United Kingdom), concerned that the Justice Department of the United States had filed a lawsuit
LLC – Aon PLC aimed at stopping insurance broker Aon's $30 billion acquisition of Willis Towers Watson because it would reduce
competition and could lead to higher prices.

On 26 July 2021, Arthur J. Gallagher (United States) terminated its plans to acquire the reinsurance brokerage
Arthur J Gallagher & Co – business of Willis Towers Watson (United Kingdom), after the planned merger of Aon PLC and Willis Towers Watson
Willis Towers Watson PLC was scrapped. Willis Towers Watson agreed to divest Willis Re Ltd and certain corporate risk, broking, and health and
benefits businesses to Gallagher for $3.6 billion to allay competition concerns about its terminated merger with Aon.

/…

Chapter II Recent policy developments and key issues 63

 Foreign acquisitions withdrawn for regulatory or political reasons in 2021
Table II.1. (Illustrative list) (Concluded)

For other regulatory reasons

On 23 April 2021, Chijin International (Hong Kong, China), a unit of Chifeng Jilong Gold Mining Co Ltd (China), withdrew
Chijin International Ltd – from its agreement to acquire the entire share capital of Mensin Bibiani, a gold ore mine operator based in Ghana, from
Mensin Bibiani Pty Ltd Resolute Mining Ltd (Australia) for $108.9 million. In a filing, Chifeng Jilong said that Resolute did not disclose that the
Ministry of Lands and Natural Resources of Ghana had terminated the mining lease.

On 31 March 2021, VI Investment Corp (Republic of Korea) abandoned its proposed acquisition of the entire share
VI Investment Corp – JT
capital of J Trust Savings Bank (Japan) for $129 million, as it failed to get approval from the Financial Supervisory
Savings Bank Co Ltd
Service of the Republic of Korea.

On 21 April 2021, private investment fund Remus Horizons (United Kingdom) withdrew its tender offer of $158.8 million
Remus Horizons PCC Ltd – FAR Ltd for the entire share capital in oil and gas exploration company FAR (Australia), because Remus had its registration as
a private investment fund suspended by the Guernsey Financial Services Commission.

On 19 March 2021, Pershing Square Tontine (United States) walked away from its plans to acquire a 10 per cent stake
Pershing Square Tontine Holdings in Universal Music Group (France) for $4 billion, after the Securities and Exchange Commission of the United States
Ltd – Universal Music Group BV raised issues with several elements of the proposed transaction – in particular, whether the structure of the initial
business combination qualified under New York Stock Exchange rules.

While waiting for host-country approval

On 29 March 2021, Applied Materials (United States) cancelled its plans to acquire the entire share capital of
Applied Materials Inc – semiconductor manufacturing company Kokusai Electric (Japan) for $3.5 billion, announcing that the amended
Kokusai Electric Corp Kokusai Electric Corporation share purchase agreement with KKR HKE Investment LP was terminated as of 19 March
2021 as Applied Materials did not receive confirmation of timely approval from the regulator in China.

On 13 December 2021, Wise Road Capital Ltd (China) withdrew its bid for power and display chipmaker Magnachip
Semiconductor Corp (Republic of Korea). Wise Road offered $1.4 billion in cash in March 2021. According to
Wise Road Capital Ltd – Magnachip
Magnachip, the offer was withdrawn because after months of effort the companies had failed to obtain approval of the
Semiconductor Corp
merger by the Committee on Foreign Investment in the United States. The company also withdrew the application for
approval of the merger submitted to the Korean Ministry of Trade, Industry and Energy.

Source: UNCTAD, based on media and company reports.

At least five deals were formally prohibited by the host country for national security reasons,
up from three in 2020, confirming that national security concerns underpin increased
screening of foreign investment. Such deals concerned the defence sector, involving the
manufacturing of aircraft parts and auxiliary equipment (United States); food trading, raising
the issue of food sovereignty (France); life insurance, mortgage financing and investment
services, raising concerns related to access to sensitive data of host-country citizens
(United States); the maritime industry, aimed at avoiding foreign influence in maritime engine
making (Norway); and the mining sector, highlighting risks of increased foreign influence in
the Arctic (Canada).

At least three deals were discontinued because of concerns from competition authorities
in the industries, including denial of banking business by a foreign entity (Papua New
Guinea), and withdrawal of plans to acquire businesses in the insurance industry (United
States). Another four deals were withdrawn for various regulatory reasons, and one
planned acquisition was terminated because of delays in receiving approval from the host
country (China).

It should also be noted that the actual number and value of deals screened out by
governments worldwide for national security reasons, though not available, is likely
to be significantly higher, particularly in light of the extended adoption of FDI screening
mechanisms discussed in the previous section. The adoption or announcement of tighter
screening of M&A deals is also likely to have had a chilling effect on the number of deals in
a number of strategic sectors.4

64 World Investment Report 2022 International tax reforms and sustainable investment
 B. INTERNATIONAL
INVESTMENT POLICIES

1. Trends in IIAs: new treaties and other policy developments

Several notable developments in 2021 and 2022 accelerated the trend towards reform of
the international investment agreement (IIA) regime. These include the conclusion of new-
generation megaregional economic agreements, the termination of bilateral investment
treaties (BITs) and multilateral discussions on the reform of investor–State dispute settlement
(ISDS) mechanisms. At the same time, greater policy attention to investment facilitation,
climate change and human rights is set to recalibrate international investment governance.

a. Developments in the conclusion and termination of IIAs

In 2021, countries concluded 13 IIAs. As in 2020, the number of effective treaty terminations
exceeded that of new IIAs, with 86 terminations.

In 2021, countries concluded at least 13 new IIAs: 6 BITs and 7 treaties with investment
provisions (TIPs). This brought the size of the IIA universe to 3,288 (2,861 BITs and
427 TIPs).5 In addition, at least 13 IIAs entered into force in 2021, bringing the total of IIAs
in force to at least 2,558 by the end of the year (figure II.4).

The number of terminations in 2021 exceeded the number of newly concluded IIAs:
At least 86 IIA terminations entered into effect (“effective terminations”), of which 75 were
terminations by mutual consent, 4 were unilateral terminations, 4 were replacements
(through the entry into force of a newer treaty), and 3 expired. Of the 75 terminations by
mutual consent, 74 were based on the agreement to terminate intra-EU BITs; the remaining
termination concerned the BIT between Malta and the United Kingdom. By the end of the
year, the total number of effective terminations reached at least 483, with 69 per cent of
them terminated in the last decade (figure II.5).

Figure II.4. Number of IIAs signed, by decade, 1961–2021

BITs TIPs
1800
Number of
1600 IIAs in force
1400
1200
1000
2558
800
600
400
200
0
1961–1970 1971–1980 1981–1990 1991–2000 2001–2010 2011–2021

Source: UNCTAD, IIA Navigator.

Chapter II Recent policy developments and key issues 65

 Number of terminated IIAs, The TIPs concluded in 2021 can be grouped into
Figure II.5. two categories:
by decade, 1991–2021
1. Agreements with obligations commonly
400 found in BITs, such as substantive standards of
investment protection:
350
• Australia–United Kingdom FTA

300 • Israel–Republic of Korea FTA

Number of
terminated IIAs
2. Agreements with limited investment provisions
250

200
483 (e.g. market access, national treatment (NT) and
most-favoured-nation treatment (MFN) with respect
to commercial presence, an institutional framework
150 to promote and cooperate on investment) but do not
contain substantive investment protection provisions:
100
• Cambodia–Republic of Korea FTA

50 • Cameroon–United Kingdom Economic

Partnership Agreement
0 • Chile–Paraguay FTA
1991–2000 2001–2010 2011–2021
• Ghana–United Kingdom Interim

Source: UNCTAD, IIA Navigator.

Trade Partnership Agreement
• India–Mauritius Comprehensive Economic
Cooperation and Partnership Agreement

The four substantive IIAs concluded in 2021 for which texts are available feature many
reformed provisions aimed at preserving regulatory space while granting investor
protection.6 All four clarify the fair and equitable treatment (FET) standard and the scope of
indirect expropriation. Three IIAs contain general exceptions for the protection of human,
animal or plant life or health (Australia–United Kingdom FTA, Georgia–Japan BIT, Israel–
Republic of Korea FTA). All four include clauses on “not lowering of standards” (e.g. for
laws or measures related to labour and the environment) and two of them also incorporate
provisions on the promotion of corporate social responsibility standards (Australia–United
Kingdom FTA, Colombia–Spain BIT). Three IIAs provide for ISDS subject to certain limitations,
e.g. in the form of limited periods in which to submit claims (Colombia–Spain BIT, Georgia–
Japan BIT, Israel–Republic of Korea FTA); one IIA omits ISDS altogether (Australia–United
Kingdom FTA). One, the Australia–United Kingdom FTA, contains a dedicated chapter
on gender equality and women’s economic empowerment in the context of trade
and investment.

b. Other developments relating to investment rulemaking

Other notable developments continued the trends towards reform of the international
investment regime. This includes greater attention to investment facilitation, climate change,
anti-corruption, due diligence and human rights.

African Continental Free Trade Area negotiations on the Investment Protocol:

The negotiations on investment of the African Continental Free Trade Area (AfCFTA)
commenced in March 2021, and subsequent rounds of discussions started in March
2022. The AfCFTA Protocol on Investment will aim at promoting, facilitating and protecting
intra-African investment that fosters sustainable development while safeguarding the
State Parties’ right to regulate. The Negotiating Principles for the Protocol recognize
UNCTAD’s work on IIA reform and refer to its Investment Policy Framework for Sustainable

66 World Investment Report 2022 International tax reforms and sustainable investment
Development (UNCTAD, 2015) and its IIA Reform Accelerator (UNCTAD, 2020b).
UNCTAD continues to provide technical support to the African Union and the AfCFTA
Secretariat in the process leading to the conclusion of the Protocol. The Investment
Protocol is expected to be finalized and adopted in September 2022.

EU agreement for the termination of intra-EU BITs: The termination agreement entered
into force for 19 EU member States and effectively terminated over 110 intra-EU BITs as of
March 2022.7 The termination agreement was signed by 23 EU member States on 5 May
2020 and came into effect on 29 August 2020, following receipt by the Depository of the
second instrument of ratification.

EU corporate sustainability due diligence directive: On 23 February 2022,

the European Commission adopted a proposal for a directive on corporate sustainability
due diligence, which has been submitted to the European Parliament and the Council for
approval.8 The proposed directive aims to foster sustainable and responsible corporate
behaviour and to anchor human rights and environmental considerations in companies’
operations and corporate governance. Under the new due diligence rules, certain groups
of EU and non-EU companies will need to address adverse impacts of their activities,
including in their value chains inside and outside the EU. The proposal builds on concepts
set out in the Organisation for Economic Co-operation and Development (OECD)
Guidelines for Multinational Enterprises and the United Nations Guiding Principles on
Business and Human Rights. Encouraging corporate social responsibility and responsible
business practices also plays a role in EU investment policymaking and related negotiation
processes, including the modernization of the Energy Charter Treaty (ECT).

International Centre for Settlement of Investment Disputes approves amended

rules: On 21 March 2022, ICSID member States approved the amended rules of the
International Centre for Settlement of Investment Disputes (ICSID). The amendments
reflect extensive dialogue with ICSID’s membership and the public. ICSID launched the
amendment process in 2016 and published proposals in a series of six working papers.
The updated rules incorporate greater transparency in the conduct and outcome of
proceedings, new disclosure requirements for third-party funding, expedited arbitration
rules for parties wishing to shorten further the procedural calendar, and broadened access
to ICSID’s procedural rules and administrative services.9 The updated rules will come into
effect on 1 July 2022.

Investment Facilitation for Development negotiations at the World Trade

Organization: Over 110 members of the World Trade Organization (WTO) are participating
in the Joint Initiative on Investment Facilitation for Development. On 25 September 2020,
participants in the structured discussions on investment facilitation for development began
formal negotiations. On 10 December 2021, members drafted the Joint Statement on
Investment Facilitation for Development, which sets the goal to finalize an agreement by
the end of 2022.10 In February 2022, participants agreed to establish a Working Group
of international organizations that work on investment facilitation (including UNCTAD) to
develop a Self-Assessment Guide to help developing and least developed countries assess
their needs in terms of implementing the future agreement. A negotiating meeting on 15–16
March 2022 focused on definitions of “authorization”, the provisions on MFN treatment/
non-discrimination, responsible business conduct, and special and differential treatment,
among other topics.

Modernization of the ECT: Six rounds of negotiations on the modernization of the ECT
were held in 2021. The Modernization Group held its 11th round of negotiations on 1–4
March 2022, making progress on investment protection (e.g. denial of benefits, MFN
clause, right to regulate), dispute settlement (e.g. frivolous claims, third-party funding,
valuation of damages), sustainable development and corporate social responsibility.

Chapter II Recent policy developments and key issues 67

 The negotiations also addressed the principle of flexibility in the definition of “economic
activity in the energy sector”. Two more rounds of negotiations are scheduled in 2022, with
the objective of reaching an agreement in principle.

OECD work programme on the future of investment treaties: In March 2021, the
OECD launched a two-year work programme on the future of investment treaties, to
address issues relating to climate change, the pandemic and digital transformation, with
concerns about the climate crisis at its core. The work programme has discussions in
two tracks: Track 1 addresses challenges facing future IIAs and changes to the current
treaty regime, and Track 2 discusses the possible modernization of provisions found in old-
generation IIAs (Gaukrodger, 2021).

UNCITRAL Working Group III on investor–State dispute settlement reform:

In February 2021, Working Group III of the United Nations Commission on International
Trade Law (UNCITRAL) held its 40th session in Vienna, Austria and then resumed virtually
on 4–5 May 2021. Discussions revolved around establishing a workplan for the next five to
six years. The Working Group held its 41st session in Vienna on 15–19 November 2021.
In this session, the Working Group deliberated on the draft code of conduct for adjudicators
in international investment disputes and the working agenda on the draft provisions in 2022.
The 42nd session took place on 14–18 February 2022 in New York. Topics discussed at
this session included the multilateral advisory centre, the standing multilateral mechanism
(selection and appointment of ISDS tribunal members and related matters) and the draft
code of conduct for adjudicators in international investment disputes (UNCITRAL, 2022).

UNCTAD Annual IIA Conference: On 19 October 2021, UNCTAD held its annual
IIA Conference as part of the World Investment Forum 2021, gathering high-level
representatives from government, the private sector, civil society and academia.
Experts took stock of IIA and ISDS reform efforts and agreed on the need to accelerate
IIA reform in the public interest. The IIA Conference 2021 provided a platform to engage in
IIA reform and made concrete steps toward a more coherent and consolidated process of
modernizing old-generation IIAs.

United Nations Working Group on Business and Human Rights: In its 2021 report to
the United Nations General Assembly (United Nations, 2021), the United Nations Working
Group on Business and Human Rights highlighted the imbalances of the IIA regime.
The report urges States to ensure that all existing and future IIAs are compatible with their
international human rights obligations. Building on recommendations made by UNCTAD
and other organizations, the Working Group outlines five reform pathways for States to
harness the potential of IIAs in encouraging responsible business conduct on the part of
investors, in line with the United Nations Guiding Principles on Business and Human Rights.
In its 10th Annual Forum on Business and Human Rights, the United Nations Working Group
included a session dedicated to the reform of the IIA regime.11 The session presented the
recommendations made in the 2021 report and discussed the role of UNCTAD and other
international and regional organizations in supporting States in carrying out structural and
systemic reform of the international investment regime.

United Nations Office on Drugs and Crime–UNCTAD work on Corruption and

International Investments: In December 2019, the Conference of the States Parties to
the United Nations Convention against Corruption adopted Resolution 8/9, in which it noted
“the positive role of international investments and the importance of minimizing opportunities
for corruption and transfer of proceeds of crime”. In this context, the United Nations Office
on Drugs and Crime (UNODC) partnered with UNCTAD in May 2021 to organize an Expert
Group Meeting on Corruption and International Investments. Participants in the meeting
called for strong and coherent anti-corruption provisions in IIAs and a better balance
between the interests of investors and host States, to enable host States to regulate for the

68 World Investment Report 2022 International tax reforms and sustainable investment
public interest, including preventing and fighting corruption. In December 2021, UNODC
and UNCTAD organized an expert-level event during the Conference of the States Parties
to the United Nations Convention against Corruption, which took place in Sharm el-Sheikh,
Egypt. Participants reported to the Conference on the activities and progress made by the
Expert Group Meeting on Corruption and International Investment.

2. Key investment-related issues in megaregional agreements

Megaregional agreements have been proliferating, covering a broad range of economic issues
beyond investment disciplines. These agreements’ comprehensive nature and geostrategic
relevance are increasingly shaping international investment rulemaking and policy.

Megaregional agreements are broad economic agreements among a group of countries

that together carry significant economic weight and in which investment is only one of
several subjects addressed. Among the other subjects are, for instance, trade in goods and
rules of origin, trade in services, competition, e-commerce, intellectual property (IP), public
procurement, regulation of State-owned enterprises (SOEs) and small and medium-sized
enterprises (SMEs). The multitude of economic issues covered in megaregional agreements
may have a more substantial positive impact on FDI flows and greater geopolitical relevance
than BITs (table II.2). Most megaregional agreements liberalize market access and, more
generally, foster regional integration among the contracting parties, stimulating additional
investment flows.

Table II.2. Selected recent megaregional agreements at a glance

Megaregional IIA Selected provisions with impact on investment (other than the investment chapter)

• Protocols on competition, IP rights and investment are under negotiation

• ROOs to be harmonized across the continent
• Pan-African Payments and Settlements System operational
AfCFTA • Will cater to African SMEs
• Liberalization of services sector, which accounts for 75 per cent of greenfield investment in Africa, with specific commitments to
be concluded in 2022
• Trade and investment facilitation measures to be concluded in 2022

• Regulatory coherence and business facilitation (e.g. implementation mechanisms, simplified customs procedures)
• E-commerce (e.g. validity of e-signatures, prohibition of data localization and requirements to disclose software source codes,
customs exemptions for digital products, online consumer protection)
• SMEs (e.g. special committee, dialogue mechanism, transparency and information-sharing)
• IP rights (e.g. goes beyond TRIPS, regulates criminal procedures and remedies, regulates geographical indications)
• SOEs (progressive provisions aimed at reducing unfair competition)
CPTPP
• Innovative regulation of the ROOs (designed specifically for each tariff line to allow for less costly and more integrated regional
value chains)
• Liberalization of services (uses negative list with two types of measures)
• Public procurement (e.g. increased transparency, clear criteria for selection procedures, reduced barriers to foreign bidders)
• Environmental and labour standards (comprehensive e.g. to adopt and maintain laws and practice governing “acceptable
conditions of work”; obligation to combat the illegal take of, and trade in, wild flora and fauna)

• Investment liberalization (e.g. similar to the WTO, based on national treatment and MFN; various sectoral carve-outs; no automatic
access to the EU single market; no country-of-origin principles and passporting; removal of the economic-needs test and
quantitative restrictions; four modes of market access)
• State aid, labour and environmental standards (e.g. streamlined procedure for countermeasures, progressive provisions on the
EU–UK TCA
environment and labour)
• Competition (e.g. requirement of similar standards in labour, environment, tax and State aid)
• Public procurement (e.g. accessibility to public procurement markets, including for smaller contracts)
• Digital trade (e.g. prohibition of data localization; high consumer protection)

/…

Chapter II Recent policy developments and key issues 69

 Table II.2. Selected recent megaregional agreements at a glance (Concluded)
Megaregional IIA Selected provisions with impact on investment (other than the investment chapter)

• ROOs harmonized across the member States (threshold for regional value content is approximately 40 per cent; gradual move
towards self-certification)
• Liberalization of services (combined positive and negative lists; commitments in financial, telecommunication and professional services)
• IP rights (comprehensive coverage, e.g. enforcement against pirate and counterfeit goods by allowing rights holders to apply for
RCEP
suspension of the release of suspicious goods)
• E-commerce (e.g. validity of e-signatures, removal of customs duties for electronic transmissions, limited prohibition of data
localization)
• Competition, SMEs and public procurement (e.g. transparency in procurement regulations and tenders)

• ROOs commitments with a threshold for regional value content at 60 per cent as a general rule and 75 per cent in the automotive
industry and other thresholds for specific product lines
• Provisions on labour costs (“high-wage factory” requirement for tariff-free qualification)
• Liberalization of services (e.g. expanded market access in agriculture and financial services)
• Increase in de minimis value for tariff-free imports
• Streamlined customs procedures
USMCA
• E-commerce provisions (e.g. prohibits data localization and requirements to disclose software source codes, offers customs
exemptions for digital products, provides protection from lawsuits related to content posted on digital platforms)
• IP rights (strong and extensive protections)
• Labour (complex provisions, e.g. Rapid Response Labour Mechanism to address complaints related to violation of labour rights)
• Special provisions on SMEs
• Currency regulation (e.g. reaffirms market-determined exchange rates and prohibits currency manipulation)

Source: UNCTAD.
Note: IP = intellectual property, MFN = most-favoured nation, ROOs = rules of origin, SMEs = small and medium-size enterprises, TRIPS = Trade-Related Aspects of Intellectual
Property Rights, WTO = World Trade Organization.

The following sections summarize selected key non-investment provisions found in five
recently concluded megaregional agreements that indirectly affect investment flows and
policy. The five agreements are the following:
• African Continental Free Trade Agreement (AfCFTA), in force since 30 May 2019
• Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),
in force since 30 December 2018
• EU–United Kingdom Trade and Cooperation Agreement (EU–UK TCA), in force
since 1 May 2021
• Regional Comprehensive Economic Partnership Agreement (RCEP), in force
since 1 January 2022
• United States–Mexico–Canada Agreement (USMCA), in force since 1 July 2020

The investment chapters of these megaregional agreements were discussed in the World
Investment Report 2021.

Liberalization of trade in services

Services liberalization may affect investment inflows. It may induce investors in the
services sector to establish their presence in host countries and by lowering or removing
regulatory barriers may provide new opportunities for firms to offer services. Compared
with regulations in the General Agreement on Trade in Services (GATS), the services
regulations in the new megaregional agreements provide a broader set of disciplines
(e.g. investment liberalization, domestic regulation, competition policy). They generally
provide additional levels of market access and NT commitments, either covering additional
sectors or deepening GATS obligations in this area.

The megaregional agreements approach the regulation of services in various ways, and
the level of access depends on how the service is supplied. For instance, the CPTPP is
based entirely on a negative list, such that all services, except those specifically excluded,

70 World Investment Report 2022 International tax reforms and sustainable investment
are liberalized. The negative list contains two types of exclusions (non-conforming
measures): (i) a standstill and ratchet mechanism, which covers areas that cannot become
more restrictive in the future and, once liberalized, cannot be reversed; and (ii) reservations,
under which member States have complete discretion to regulate and are free to change
domestic liberalization measures. The EU–UK TCA contains four modes of service provision
with concomitant regulations. In Mode 1, the service crosses the border (e.g. Internet);
in Mode 2, a consumer uses the service while abroad (e.g. a tourist purchasing service
in another country); in Mode 3, a company establishes a branch to supply services in
another country; and Mode 4 refers to the mobility of professionals for business purposes.
The RCEP uses both positive and negative lists, depending on the Contracting Party.
The AfCFTA uses a positive list, with schedules that are to be completed in 2022.

Regarding the sectors covered, the services liberalization commitments commonly found
relate to telecommunications (RCEP, USMCA), financial services (CPTPP, EU–UK TCA,
RCEP, USMCA), energy (EU–UK TCA) and professional services (CPTPP, EU–UK TCA,
RCEP). Modern megaregional agreements often include specific regulations on digital
services as well.

Supply chains and the rules of origin

The megaregional agreements under review aim at making global and regional supply
chains more effective by simplifying and harmonizing the rules of origin (ROOs). The ROOs
in these agreements regulate the regional value content required for goods to qualify
for tariff-free (or lower-tariff) treatment, and they facilitate the administrative procedures
connected with cross-border trade. In this way, the agreements have an important effect
on investment flows between the parties.

For example, the RCEP harmonizes ROOs across its 16 member States, which are at
different levels of economic development. They include import- and export-oriented
economies, services- and goods-based economies, and landlocked and island States,
as well as countries with large differences in population. The RCEP ROOs set a relatively
low threshold for regional value content (40 per cent), which, in combination with the move
towards self-certification of origin, removal of non-tariff barriers and other trade facilitation
measures, is likely to boost the integration of global supply chains across the region.
This may contribute to encouraging foreign investment inflows. The USMCA ROOs,
by contrast, include a relatively high threshold for regional value content (60 per cent as
a general rule and 75 per cent for the automotive industry), incentivizing companies to
locate their production facilities in the region. This is complemented by a provision requiring
that 40–45 per cent of the parts of any tariff-free vehicle must come from a “high-wage
factory”’ (i.e. pay a minimum of $16 per hour on average). The CPTPP uses an innovative
approach to ROOs, which are designed specifically for each tariff line. This makes trade
easier, as once the ROOs are satisfied for one product tariff line, there is no need for further
modifications. For instance, the CPTPP regulates smartphone supply chains that cover
components and materials sourced in many countries.

Competition

Competition policies are also likely to have an impact on foreign investment. The new
megaregional agreements commonly include chapters that regulate competition. These
provisions generally require parties to adopt and maintain laws and procedures against
anti-competitive activities, and enforce those laws accordingly, generally through a
competition authority (e.g. RCEP Chapter 13, CPTPP Chapter 16, USMCA Chapter
21). Moreover, other provisions affect competition; for instance, the requirement
for similar standards in labour, environment, tax and State aid. For the AfCFTA,
negotiations on the Competition Protocol are under way and will continue into 2022.

Chapter II Recent policy developments and key issues 71

 Regulating competition will be particularly important for African SMEs (90 per cent of African
businesses). UNCTAD has been highlighting the linkage between investment, competition
and industrial policies in Africa (UNCTAD, 2021a). Competition policies protect market
participants, including SMEs, from monopolies and other anti-competitive practices and
by facilitating access to credit they increase productivity, among other benefits.

E-commerce and the digital economy

The new agreements reflect the continuing turn towards a digital economy. Although they
regulate e-commerce through specially dedicated chapters, their provisions on services
liberalization and investment are equally relevant for a digital economy. Their provisions
on e-commerce regulate various aspects of trade in data, such as prohibition of data
localization measures, commitments to allow cross-border data transfers, protection
of online consumers, regulations on customs duties, and fees and other charges on
electronic transmissions and digital products (e.g. CPTPP Chapter 14, USMCA Chapter 19,
EU–UK TCA Part Two Title III). In addition, some of these agreements protect businesses
by prohibiting the disclosure of software source code as a condition for the import, sale,
or use of the software (e.g. CPTPP, USMCA). Some agreements, while regularizing cross-
border transfer of data, do not include a general prohibition of data localization requirements
(e.g. RCEP). Finally, some protect online platforms from lawsuits related to content posted
on the online platforms (e.g. USMCA).

IP rights

The new megaregional agreements strengthen the protection of IP rights. Strong IP rights
may influence investment decisions, especially for knowledge-based FDI and projects with
high research and development components. By and large, the IP commitments in these
agreements go beyond the WTO’s Agreement on Trade-Related Aspects of Intellectual
Property Rights. The new megaregional agreements, for example, extend the time frame of
copyright protection (e.g. USMCA), provide for procedures and remedies for enforcement
of IP rights against pirate and counterfeit goods (e.g. RCEP, CPTPP, USMCA), and contain
extensive protections for a wide variety of IP rights including comprehensive coverage of
geographical indications (e.g. CPTPP).

Public procurement

Megaregional agreements may affect investment by opening government procurement

markets to economic actors from other contracting parties. Their commitments generally
require fair and transparent selection procedures, such as making laws and regulations
on procurement publicly available (e.g. RCEP, CPTPP, USMCA), and may cover small
government contracts as well (e.g. EU–UK TCA). Transparent and non-discriminatory
government procurement policies in megaregional agreements can also lead to greater
competition between domestic and foreign investors for government procurement contracts
and fewer market distortions leading to economic inefficiencies, and more generally to a
more favourable, transparent and attractive investment environment for foreign investors.

Small and medium-size enterprises

The new agreements will also affect the business environment and investment in the
contracting parties, as they include specific chapters on SMEs. These provisions aim to
make it possible for SMEs to take full advantage of the opportunities that the agreements
create. Generally, they do so by fostering cooperation and collaboration to promote SMEs,
through information-sharing tools, rules on transparency that reduce administrative costs,
and exchange of best practices related to such concerns as access to capital and credit.

For instance, the USMCA and the CPTPP include chapters on SMEs that create SME
committees and dialogue mechanisms (USMCA Chapter 25, CPTPP Chapter 24).

72 World Investment Report 2022 International tax reforms and sustainable investment
The RCEP contains provisions on information-sharing and creates contact points to
facilitate cooperation and information-sharing related to the Agreement (RCEP Chapter
14). In addition, various provisions on regulatory coherence, trade facilitation, public
procurement and business facilitation further assist SMEs in taking full advantage of the
opportunities that these agreements create and making supply chains less costly.

State-owned enterprises

The new megaregional agreements also regulate SOEs to address the risks of unfair trade
practices, unfair competition and obstacles to trade. The commitments require SOEs to
act according to commercial considerations. Complex regulations of SOEs can be found
in the USMCA and the CPTPP; they include traditional non-discrimination and commercial
considerations disciplines from the General Agreement on Tariffs and Trade but also a legal
framework on Non-Commercial Assistance (USMCA Chapter 22; CPTPP Chapter 17).
The framework addresses effects that are adverse to the interest of other State parties
because of the advantages that SOEs may gain through their government relationships.

3. Trends in ISDS: new cases and outcomes

The total ISDS case count had reached 1,190 by the end of 2021, with at least 68 new
arbitrations initiated in 2021. Two IIAs signed in the 1990s – the ECT and NAFTA – continued
to be the instruments invoked most frequently.

a. New cases initiated in 2021

In 2021, at least 68 new treaty-based ISDS cases were initiated. Five countries faced their
first known ISDS claims.

In 2021, investors initiated 68 publicly known ISDS cases under IIAs (figure II.6). As of 1 January
2022, the total number of publicly known ISDS claims had reached 1,190. As some arbitrations
can be kept confidential, the actual number of disputes filed in 2021 and in previous years
is likely higher. To date, 130 countries and one economic grouping are known to have been
respondents to one or more ISDS claims. In 2022, the war in Ukraine brought into the spotlight
past and potential future ISDS claims relating to armed conflict (box II.1).

Figure II.6. Trends in known treaty-based ISDS cases, 1987–2021

Annual
ICSID Non-ICSID
number of cases Cumulative number
of known ISDS cases

1190
90
80
70
60
50
40
30
20
10
0
1987 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Source: UNCTAD, ISDS Navigator.

Note: Information has been compiled from public sources, including specialized reporting services. UNCTAD’s statistics do not cover investor–State cases that are based exclusively on
investment contracts (State contracts) or national investment laws, or cases in which a party has signalled its intention to submit a claim to ISDS but has not commenced the
arbitration. Annual and cumulative case numbers are continually adjusted as a result of verification processes and may not match exactly case numbers reported in previous years.

Chapter II Recent policy developments and key issues 73

 IIA-based ISDS cases related to war and armed conflict:
Box II.1.
facts and examples

ISDS cases can arise out of events related to war and armed conflict. In the past, at least 30 ISDS cases
brought against States arose out of destruction or harm caused to investments in the context of war, armed
conflict, military operations and civil unrest. This includes the first known ISDS case based on an IIA brought
in 1987: AAPL v. Sri Lanka, which arose out of the alleged destruction of the claimant’s investment during a
military operation conducted by Sri Lankan security forces.

International courts and tribunals (e.g. the International Court of Justice and the International Criminal Court)
may weigh in on specific elements of armed conflicts. Disputes may also occur in the trade context and at the
WTO through the State–State dispute mechanism.

The stock of IIAs in force commonly protects covered investments in cases of direct and indirect expropriation,
impairment and losses owing to war or armed conflict. They also include other substantive protection
standards such as full protection and security, and FET. While most of these treaties grant foreign investors
direct access to international arbitration in case of treaty violations and the possibility of treaty shopping, some
of them include exceptions that could allow countries to avoid facing ISDS claims in emergency situations.
Generally, ISDS tribunals have not pronounced on the legality of the use of force; instead, they have limited
their assessments to the question of State responsibility for breaches of IIAs. The underlying events giving rise
to ISDS claims related to armed conflicts are multifaceted and multi-layered.

Out of the 30 ISDS cases identified in this context, the Russian Federation and Libya were the most frequent
respondents, with 10 cases each. The cases against the Russian Federation related to the events in Crimea in
2014, including nationalizations in different economic sectors. Ukrainian companies and businesspeople invoked
the Russian Federation–Ukraine BIT (1998), alleging expropriation of assets by the Russian Federation (e.g.
Ukrenergo v. Russia; Oschadbank v. Russia; Naftogaz and others v. Russia). The cases against Libya mostly
related to the alleged failure to protect foreign investments during times of war and civil unrest in the country
(e.g. Trasta v. Libya; Cengiz v. Libya). In addition, several ISDS cases have related to economic sanctions and
the suspension of diplomatic relations (e.g. Qatar Pharma and Al Sulaiti v. Saudi Arabia; beIN v. Saudi Arabia).

Source: UNCTAD.
Note: The ISDS cases related to war and armed conflict were identified on the basis of UNCTAD’s ISDS Navigator and information
from other public sources, including notices of arbitration, arbitral decisions and specialized reporting services.

(i) Respondent States

The new ISDS cases in 2021 were initiated against 42 countries. Peru was the most
frequent respondent, with six known cases, followed by Egypt and Ukraine with four known
cases each. Five countries – Cambodia, the Republic of Congo, Finland, Malta and the
Netherlands – faced their first known ISDS claims. As in previous years, the majority of new
cases (about 65 per cent) were brought against developing countries.

(ii) Claimant home States

Developed-country claimants brought most – about 75 per cent – of the 68 known

cases in 2021. The highest numbers of cases were brought by claimants from the United
States (10 cases), France (5 cases), the Netherlands (5 cases) and the United Kingdom
(5 cases).

(iii) Applicable investment treaties

About 75 per cent of investment arbitrations in 2021 were brought under BITs and TIPs
signed in the 1990s or earlier. The ECT (1994) was the IIA invoked most frequently in 2021,
with seven cases, followed by the North American Free Trade Agreement (NAFTA) (1992) in
combination with the USMCA (2018), with four cases.12 Overall (1987–2021), about 20 per
cent of the 1,190 known ISDS cases have invoked the ECT (145 cases), NAFTA (76 cases)
or the OIC Investment Agreement (16 cases).

74 World Investment Report 2022 International tax reforms and sustainable investment
b. ISDS outcomes Results of concluded cases,
Figure II.7. 1987−2021 (Per cent)
(i) Decisions and outcomes in 2021

In 2021, ISDS tribunals rendered at least 54

substantive decisions in investor–State disputes, Breach but no damagesa
31 of which were in the public domain at the time 3
Discontinued
of writing: 11 of the public decisions principally
12 Decided in
addressed jurisdictional issues (including preliminary
favour of State
objections), with 4 upholding the tribunal’s jurisdiction 38
Settled
and 7 declining jurisdiction. The remaining 20 19
public decisions were rendered on the merits, with
12 holding the State liable for IIA breaches and 8
dismissing all investor claims. 28

In addition, six publicly known decisions were Decided in favour of investor

rendered in annulment proceedings at the ICSID.
Ad hoc committees of the ICSID rejected the
applications for annulment in five cases; in one case,
Source: UNCTAD, ISDS Navigator.
the award at issue was partially annulled. a Decided in favour of neither party (liability found but no damages awarded).

(ii) Overall outcomes

By the end of 2021, at least 807 ISDS proceedings had been concluded. The relative share
of case outcomes changed only slightly from previous years (figure II.7).

Chapter II Recent policy developments and key issues 75

 C. KEY TRENDS IN
TAXATION OF
INVESTMENTS
Foreign investors base their decision to enter a country on many factors, including
political stability, economic potential, natural resources, transparency and efficiency of
regulatory regimes and the level of infrastructure and skills. The tax regime is also a factor
in investment decisions, and although tax incentives are frequently far from being the most
important one,13 they have traditionally been one of the most widespread policy tools to
attract and retain foreign investment. The pandemic has accentuated the importance of
incentives and tax relief efforts as part of the economic recovery and resilience packages
adopted worldwide.14

This section highlights key trends in the taxation of investment by analysing the evolution of
corporate income taxes (CITs) across the world (section C.1), as well as country efforts to
attract investments through tax incentives (section C.2). It highlights how, beyond engaging
in tax competition for investment by lowering the statutory CITs, countries rely on a wide
array of investment incentives to attract investors to priority sectors or regions. Section
C.3 highlights how IIAs impose obligations on States that can create friction with taxation
measures and sheds light on the interplay between the international tax system, double-
taxation treaties (DTTs) and investment policymaking.

The analysis of the tax incentives for investment is based on review of tax-related investment
policy measures adopted worldwide in the last decade. The chapter also examines the
treatment of tax incentives in investment laws, which often constitute the legal basis
for their adoption, and in industrial policies, which generally provide their broader policy
background or motivation.

For the purpose of this analysis, tax incentives are categorized into CIT-based and other
incentives. CIT-based incentives include two kinds:

(i) Profit-based incentives, i.e., those determined as a percentage of profit, including tax
holidays, reduced CIT or loss carry-forward or carry-back to be written off against
profits earned later
(ii) Expenditure-based (or capital investment-based), i.e., those that reduce the after-tax
cost of capital investment expenditure, including investment allowance, accelerated
depreciation, tax credits and the like15

Profit-based incentives provide tax relief based on earnings and not on new investment.
In this regard, they are particularly attractive to mobile FDI. Expenditure-based incentives,
by contrast, tend to promote reinvestment and therefore further integration into the local
economy. In addition, expenditure-based incentives typically target specific types of capital
investment or activities that can be associated with countries’ sustainable development
objectives, such as skills development and low-carbon transition. Other tax incentives
include reduced rates on indirect taxes (e.g. value added tax (VAT), duties and tariffs), taxes
on labour and land, social security contributions and other payments.

The analysis confirms that countries rely intensively on tax incentives for investment and
that profit-based incentives are among the most widespread and frequently adopted ones
(see chapter IV).

76 World Investment Report 2022 International tax reforms and sustainable investment
1. Evolution of corporate income tax rates
CIT rates have gradually declined throughout the world since the 1980s, as countries have
increasingly engaged in tax competition to promote investment. Declines have been seen
in all geographical regions and in an overwhelming majority of economies, regardless of
their size or level of development.

In 1980, the worldwide CIT rate averaged 39.3 per cent, and 80 per cent of the jurisdictions
for which data on CIT rates are available imposed rates of 30 per cent or higher. A steady
decline was observed globally until 2010, when the number of economies charging CIT at or
above 30 per cent decreased to 67 and the worldwide average CIT rate fell to 23.7 per cent.
Since then, the average rate has practically stabilized at the current level of 22.7 per cent
(figure II.8). In 2021, fewer than one third of all countries applied CIT at 30 per cent or above.16

The largest downswing has occurred in developed regions, where the average CIT rate
more than halved between 1980 and 2021 (from 41.8 per cent to 19.9 per cent) (see figure
II.8). The average rate for developing regions, which contain 75 per cent of the world’s
economies, has been very close to the worldwide average. Nevertheless, 105 developing
economies (some 65 per cent) still have CIT rates above the world average. The average
CIT rate for the least developed countries (LDCs) has followed the common downtrend but
has been characterized by more volatility and the highest values among the three groups.
Although the average rate in LDCs has dropped from 44.3 to 28 per cent over the last four
decades, in half of these countries it remains at the level of 30 per cent or above. Whereas
in many developing economies reducing the corporate tax became possible because of a
shift from direct to indirect taxes in the structure of fiscal income, this was not the case for
several LDCs, which rely much less on other sources of fiscal revenue than on CIT.17

In 2021, Europe, which has seen the largest reduction in CIT rates of all regions, had
the lowest regional average rate, at 19.1 per cent, followed by Asia at 19.3 per cent. In
contrast, Africa had the highest regional average statutory rate, at 28.2 per cent. Countries
in Latin America and the Caribbean also tend to have higher corporate tax rates than do
Asian and European economies, and in Oceania and North America corporate tax rates
align closely to the world average at 22.9 and 23.3 per cent, respectively (figure II.9).

Figure II.8. Statutory CIT rates, regional and world averages, 1980–2021
(Per cent)

50

45

40

35

30

25

20

15
1980 1985 1990 1995 2000 2005 2010 2015 2020

LDCs World
Developed regions Developing regions

Source: UNCTAD, based on Tax Foundation.

Chapter II Recent policy developments and key issues 77

 Figure II.9. Average statutory CIT rate by region, 1980 and 2021 (Per cent)

44.3 44.6
39.3 38.8
35.7 34.6
28.2
22.7 23.3 22.9
19.3 19.1

World Africa America Asia Oceania Europe

1980 2021

Source: UNCTAD, based on Tax Foundation.

2. Tax incentives for investment

a. R
 ecent trends in investment policy measures related
to taxation
National investment policy measures adopted in the past decade reveal widespread use of
investment tax incentives across all regions. Profit-based incentives, including tax holidays
and reduced CIT, are the most frequently used, with lower emphasis on expenditure-based
and other tax and non-tax incentives for investment. Most tax incentives target specific
sectors or policy objectives. In Africa and Asia, the majority are not time-bound.

This section highlights key trends in the taxation of investment, on the basis of a review of
headline investment policy measures related to taxation adopted worldwide from January
2011 to December 2021, as recorded by UNCTAD in its Investment Policy Monitor.18 It
reveals the continued and extensive use of tax incentive schemes by countries around
the world as a tool for promoting and attracting FDI.
In that period, of 100 countries adopting measures
related to taxation, 90 lowered taxes, introduced
Tax-related investment policy new tax incentives or made existing incentives more
Figure II.10. measures more favourable to generous. Of all tax measures adopted, only 17 per
investment by region (Per cent) cent were specifically directed at foreign investors,
while 83 per cent targeted both domestic and
World
average foreign investors.

Asia 96 Investment-related tax measures adopted globally

during the last decade were overwhelmingly more
Europe and favourable to investment – 83 per cent introduced
83
North America new incentives or made existing incentives more
Latin America and generous across the economy or in selected
79
the Caribbean sectors. This trend held for all levels of development
(84 per cent in developing countries, 82 per cent in
Africa 78 LDCs and 81 per cent in developed countries) and
all regions, though it is particularly strong in Asia
Source: UNCTAD, Investment Policy Monitor. (figure II.10).

78 World Investment Report 2022 International tax reforms and sustainable investment
Among tax measures less favourable to investment, three out of four consisted of an increase
in tax rates (e.g. CIT or VAT) or the establishment of new taxes (e.g. mining royalties or
other sector-specific taxes). The remainder involved the outright elimination of an incentive
scheme. Almost half of all tax measures less favourable to investment were adopted in
Africa (19 measures), one third in Latin America and the Caribbean (12 measures), with the
balance split between Europe and North America (7 measures in all) and Asia (2 measures).

(i) A strong reliance on profit-based tax incentives for investment

Jointly considered, CIT-based instruments are the most prevalent form of investment
incentive introduced over the last decade across the globe (49 per cent of all new incentives)
(figure II.11). Their share in all investment incentives is evenly distributed between all regions
(51 per cent in Europe and North America and Latin America and the Caribbean, 48 per
cent in Africa, 47 per cent in Asia).

Focusing specifically on fiscal incentives, 39 per cent of those adopted globally since
2011 were profit-based. Tax holidays were used by the largest number of countries (55).
By themselves, they represent about 20 per cent of all fiscal incentives introduced worldwide
(22, 19 and 17 per cent of all incentives adopted respectively by LDCs, developing and
developed countries). Tax holidays are also the main profit-based incentive used by African
and Asian countries (accounting for 21 and 23 per cent of all tax incentives respectively), while
reduced CIT is the most frequent profit-based incentive in Latin American and Caribbean
countries (18 per cent) and European and North American countries (20 per cent) (figure II.12).19

Tax holidays of up to five years are the incentive most utilized worldwide (figure II.13). This
overall trend is largely influenced by African countries, which overwhelmingly favour the use
of short-term tax holidays (75 per cent). By contrast, longer tax holidays of up to 10 years
are the most common among countries of Latin America and the Caribbean (62 per cent).
Tax holidays of over 10 years are much less common in developing countries (20 per cent)
and LDCs (11 per cent), than in developed countries (40 per cent).

New investment incentives by main type and region, 2011–2021

Figure II.11.
(Number of incentives)

80

62

50
43
40
36
34

26 24
19
15
10 11
7
4 3

CIT-based incentives Indirect taxes or duties Other taxes Financial incentives

Africa Asia Latin America and the Caribbean Europe and North America

Source: UNCTAD, Investment Policy Monitor.

Chapter II Recent policy developments and key issues 79

 New CIT-based investment incentives by type and region, 2011–2021
Figure II.12.
(Number of incentives)

34

28

22
20

17 17
16
14
12
11 11
10
7

3 3
1

Tax holidays Reduced CIT Loss carry-forward Expenditure-based incentives

Profit-based incentives

Africa Asia Latin America and the Caribbean Europe and North America

Source: UNCTAD, Investment Policy Monitor.

Investment-related tax holidays by duration, by region and world 

Figure II.13. (Per cent)

0–5 years 6–10 years Over 10 years

Africa 75 20 5
22

Asia 35 35 30 42
World
Europe and North America 33 33 33

Latin America and 36

the Caribbean 8 62 30

Source: UNCTAD, Investment Policy Monitor.

Reductions of the CIT rate (across all sectors or in selected sectors) accounted for 16 per
cent of all tax incentives introduced worldwide since 2011 (42 countries). Their weight
in the overall incentives landscape is higher in developed countries (21 per cent) than in
developing ones (16 per cent) and in LDCs (14 per cent).

In contrast, the use of loss carry-forward provisions was much less widespread (accounting
for 3 per cent of all new tax incentives). Almost 30 per cent of loss carry-forward provisions
are included in incentive packages for SEZs.

80 World Investment Report 2022 International tax reforms and sustainable investment
 (ii) With lower emphasis on expenditure-based incentives

Expenditure-based incentives represent 13 per cent of all tax incentives for investment
introduced over the last decade. They mainly consist of schemes to provide accelerated
depreciation for fixed assets, investment allowances and/or tax credit mechanisms.
This type of fiscal incentive was adopted by 39 countries worldwide (14 in Africa, 10 in
Latin America and the Caribbean, 8 in Asia and 7 in Europe and North America). Over 55
per cent of expenditure-based instruments were adopted in conjunction with a tax holiday
or a CIT reduction.

(iii) And frequently in combination with other tax and non-tax incentives for
investment

Both expenditure-based and profit-based incentives for investment are often combined
with additional fiscal benefits in the form of tax breaks for indirect taxes and duties, such as
VAT or import tariffs. These accounted for about 30 per cent of all tax incentives introduced
in Asia and in Latin America and the Caribbean. They were also frequently utilized in Africa
(24 per cent of all tax incentives), but far less common in Europe and North America
(13 per cent). They can be found in virtually every tax scheme for the establishment of an
SEZ across all regions.

Deductions and exemptions for taxes on labour and land and other payments are also
used extensively as tax incentives for investment. They accounted for over a quarter
of all tax incentives in Africa and in Europe and North America (adopted by 25 and 11
countries respectively). They are also relatively frequently used in Asia and in Latin American
and the Caribbean, where they represented 20 per cent of all new tax incentives in the
past decade.

In addition, several non-tax instruments to promote investment were introduced jointly with
the tax reform initiatives over the last 10 years. They include financial incentives (e.g. grants,
loans or State subsidies supporting salaries or production output), relaxed restrictions
on foreign ownership and business facilitation measures (such as simplified import and
export procedures, single-window mechanisms for permits and licences, and streamlined
procedures for employment visas). Business facilitation measures are particularly noteworthy
and represent the most significant non-tax promotion instrument adopted in every region
of the globe (62 per cent of all non-tax promotion instruments in Africa, 57 per cent in
Europe and North America, 56 per cent in Latin America and the Caribbean, 46 per cent
in Asia).

(iv) Target sectors change by region and level of development

Globally, 57 per cent of all tax-related investment policy measures more favourable to
investment are sector-specific. In particular, developing countries (70 per cent) and LDCs
(55 per cent) often implement reduced-CIT incentives that are based exclusively on
sectoral requirements. In contrast, almost two thirds of reduced-CIT incentives adopted by
countries in Europe and North America are granted fully or partially on the basis of minimum
investment thresholds.

Most sector-specific tax incentives for investment introduced in the last decade target
manufacturing and services (figure II.14). Tax incentives for the services sector are particularly
relevant in Europe and North America (53 per cent of all incentives), and Latin America and
the Caribbean (38 per cent) and fairly relevant in Africa (28 per cent). In contrast, Asian
countries adopted more tax incentives for investment in the manufacturing industry than
for all other sectors combined (52 per cent). Notably, all tax incentives specifically targeting
the agricultural and extractive sectors are concentrated in developing countries and LDCs.

Chapter II Recent policy developments and key issues 81

 Sectoral distribution of new tax incentives for investment, by region and world, 2011–2021
Figure II.14. (Per cent)

Manufacturing Agriculture, fisheries, forestry Services Extractive sector

Africa 18 26 28 28 14

37
Asia 19 14 53 14
17
World
Europe and North America 47 53

Latin America and

the Caribbean 13 1647 33 38 32

Source: UNCTAD, Investment Policy Monitor.

Tax incentives that specifically target manufacturing industries for the most part have been
designed to apply horizontally across all manufacturing activities (79 per cent). The balance
reveals a substantial share of incentives aimed at the manufacturing of transport equipment
(44 per cent), the production of computer and electronic equipment (33 per cent) and the
production of pharmaceuticals (22 per cent). Zooming in on tax incentives that specifically
target services, 73 per cent apply to the whole sector. The rest reflect a policy focus on
information technology (32 per cent), tourism (27 per cent) and transport (22 per cent).

(v) Specific policy objectives are often associated with new incentives

Over 60 per cent of tax-related measures more favourable to investment introduced

over the last decade are associated with the pursuit of one or more policy objectives,
such as the development of specific regions within a country (e.g. priority development
areas or rural areas), the promotion of exports, the
reduction of unemployment or the upgrading of
Policy objectives associated with skills, the promotion of research and development
Figure II.15. 
new tax incentives for investment, and the transfer of innovative technologies (figure
2011–2021 (Per cent) II.15). Individually considered, tax incentives that
aim at regional promotion are the most recurrent
globally (24 per cent), in Africa (33 per cent) and
Export in Asia (27 per cent). Among these incentives,
promotion
Regional 70 per cent aimed at promoting the development of
12 promotion an SEZ and 30 per cent targeted the development
24
R&D and of a specific location within the country. Employment
innovation 19 promotion is the most recurrent policy objective
promotion
associated with incentives in Europe and North
America (35 per cent), and in Latin America and the
23
22 Caribbean (33 per cent).
Employment
promotion
Other (vi) Only about half of new incentives worldwide
and one third in Africa are time-bound

Source: UNCTAD, Investment Policy Monitor. About half of all tax incentives for investment
Note: “Other” includes various policy objectives including the expansion of health-care introduced worldwide over the last decade were
and education markets, the internationalization of national enterprises and
support for the generation of domestic added value. time-bound (48 per cent), but the share is lower in

82 World Investment Report 2022 International tax reforms and sustainable investment
Africa (35 per cent) and in Asia (40 per cent), with important implications in terms of forgone
revenue, impact assessment and distortions in the market. Conversely, time-bound
incentives are more frequently used in Latin American and Caribbean countries (60 per
cent) and particularly significant in European and North American countries (79 per cent).

(vii) Investment laws are among the main instruments to introduce tax incentives
for investment

Investment laws and the associated secondary legislation were the primary legal basis
for the introduction of tax incentives in LDCs (55 per cent), followed by tax codes or
budget laws (16 per cent), ad hoc decrees (10 per cent) and other policy instruments
(19 per cent). African countries also enacted tax-related investment incentives mostly
through introducing or revising national investment laws (39 per cent) or through enacting
budgetary or taxation legislation (33 per cent). The use of ad hoc decrees for adoption
of tax-related incentive schemes is minimal in Africa, whereas it is very significant in Latin
America and the Caribbean (84 per cent of all measures) and in Europe and North America
(71 per cent) and remains substantial in Asia (45 per cent).

b. Tax incentives in investment laws

Over half of the investment laws worldwide contain tax incentives for investment, including
three quarters of investment laws in LDCs. In only 30 per cent of the laws, incentives are
granted on the basis of measurable criteria, and allocation decisions can involve several
stakeholders, including investment promotion agencies.

Of 126 investment laws in UNCTAD’s Investment Law Navigator,20 68 laws (54 per cent)
dedicate a section to the treatment of tax incentives for investment. LDCs lead the
trend, with three quarters of their investment laws including provisions on tax incentives,
followed by developing and developed countries (46 and 36 per cent of all investment
laws, respectively).

On a regional basis, almost two thirds of investment laws in Africa and Asia include a
section on tax incentives. In other regions, the treatment of tax incentives in investment
laws is less prominent (44 per cent in Latin America and the Caribbean, 42 per cent in
Europe and 10 per cent in Oceania).

One third of the investment laws dealing with taxation selectively reproduce or illustrate
incentives that are regulated by separate legislation (e.g. tax, customs or sectoral). This is
the case, notably, for all developed countries that deal with incentives in their investment
law (Bulgaria, Lithuania, Russian Federation, Serbia), but also of some developing countries
(the Plurinational State of Bolivia, Guyana, the Republic of Moldova, Qatar, Tajikistan,
the United Republic of Tanzania and Turkmenistan). However, the remaining two thirds
of investment laws (43 laws) are themselves the legal basis for the introduction of special
tax regimes for investment. This includes almost 50 per cent of investment laws in Africa,
38 per cent in Asia, 22 per cent in Latin America and the Caribbean and 10 per cent in
Oceania. These are the laws considered in the following analysis.

(i) Profit-based incentives are prevalent also in investment laws

Although there are significant differences in the range of incentives offered, over 80 per cent
of all investment laws dealing with tax incentives utilize profit-based incentives to promote
investment. In particular, tax holidays are offered in the investment laws of 31 countries
(16 countries in Africa, 12 in Asia, 3 in Latin America and the Caribbean), and reduced CIT in
those of 15 countries (9 countries in Africa, 4 in Asia, 2 in Latin America and the Caribbean).

Chapter II Recent policy developments and key issues 83

 Expenditure-based incentives can be found in more than 60 per cent of investment laws
dealing with tax incentives (27 investment laws), including those of 17 countries in Africa,
6 in Asia, 3 in Latin America and the Caribbean, and 1 in Oceania, with an almost equal
distribution among developing economies and LDCs (12 and 15 countries respectively).

Among incentives not based on CIT, the ones most frequently used are exemption from
customs duties on goods imported and directly involved in realizing the investment
(86 per cent), exemption from VAT (37 per cent), exemption from land taxes (26 per cent)
and exemption from stamp duty (16 per cent).

(ii) The governance of incentives varies greatly across countries

In only about 30 per cent of investment laws, investors are automatically eligible for
incentives based on measurable criteria, such as the invested amount, the volume of
employment generated or the location of the investment. In all other cases, the provision
of tax incentives and their scope and duration depend on the discretion of the authorities.
These are often the ministries of finance, industry or both. The process of approval can
also require an expert opinion of several governmental institutions (box II.2). These findings
were confirmed by the investment promotion agencies (IPAs) that responded to UNCTAD’s
Annual Survey of Investment Promotion Agencies for 2022. Of 126 respondents to the
survey, only 29 per cent indicated that incentives in their country are granted automatically
on the basis of objective criteria, whereas the large majority (63 per cent) indicated that
incentives are allocated on the basis of an assessment process that involves criteria that
may or not all be public. In all other cases, incentives are granted on an ad hoc basis
through negotiation with investors (8 per cent).

IPAs are also actively involved in the provision of tax incentives. Their role varies from
facilitating investment to actively participating in the allocation of incentives (figure II.16).
All respondents to the UNCTAD survey stated that their agency provides information to
investors on available incentives and the application processes. Most IPAs also act as
advisory agents by issuing recommendations to decision-making entities. Another core
function of IPAs is to support their clients in administrative tasks, such as collecting and
processing applications for incentives. Finally, almost one third of the IPAs actively participate
in decisions regarding the allocation of tax incentives. This can create conflicts of interest,
particularly when the IPA’s performance is assessed on the basis of the investment volumes
it helps to generate.

Figure II.16. Role of IPAs in the provision of tax incentives (Per cent of respondents)

Facilitator 100

Advisory 56

Administrative 33

Decision-making 31

Source: UNCTAD.

96

84 World Investment Report 2022 International tax reforms and sustainable investment
 Box II.2. Governance of tax incentives in investment laws (illustrative list)

Incentives granted on the basis of automatic criteria

In Algeria, investments registered with the National Agency of Investment Development automatically benefit from the tax incentives described
in the investment law, including exemption from custom duties, exemption from VAT and exemption from CIT for up to three years during the
operational phase.
In Mali, depending on the amount invested, investment projects can automatically benefit from a set of tax incentives that include exemption
from import duties and VAT, and reduction of CIT.
In Rwanda, a package of tax incentives is available to registered investors that meet the requirements set forth in the Annex to the Law on
Investment Promotion and Facilitation. Such investors are entitled to preferential CIT rates or tax holidays of up to seven years.

Incentives subject to approval by the IPA

In Kuwait, investors apply to the Direct Investment Promotion Authority for all or part of the incentives described in the investment law.
The Authority, in line with the approved general policy of the State and economic development plans, defines the value, type and duration of
incentives and exemptions granted.
In Libya, the IPA may offer additional advantages beyond those applicable under the standard tax incentive regime, for those investment
projects that contribute to the achievement of food security, regional development, environmental protection or the development of energy
and water infrastructure.
In Myanmar, the Myanmar Investment Commission, in charge of investment promotion activities, is responsible for granting and defining the
scope of available tax exemptions or relief for investors that apply for preferential treatment.
Under the investment laws of Senegal and Togo, the IPA defines the scope of the tax incentives and advantages granted. In case of refusal,
the IPA is required to provide justification.

Subject to approval by other authorities

In Burkina Faso and Niger, the preferential tax regimes are granted by joint decree of the ministers in charge of industry and finance.
In Benin, approval for preferential treatment for investments is given by the Government on the proposal of the Minister of National Planning
and following the opinion of the Technical Commission on Investments.
Cameroon may provide investors with tax incentives upon approval by the Minister in charge of private investment, with the assent of the
Minister of Finance.

Source: UNCTAD, Investment Laws Navigator.

c. Tax incentives in industrial policies

Most recent industrial policies call for the introduction of new tax incentives for investment
(61 per cent), while only few call for their review or streamlining (15 per cent). The most
recurrent motivations for introducing tax incentives in industrial policies are reducing
the cost of doing business, supporting innovation, stimulating local production and
developing SMEs.

Introduced under various names, such as strategic development plan, vision, industrial
strategy, five-year plan or economic development policy, industrial policies remain widely
employed around the world to impel long-term structural transformation and promote
sustainable development objectives. Tax incentives are often a key element in the policy
toolkit put forward by these documents.

Of 103 industrial policies implemented across the globe between 2011 and 2022 and
reviewed by UNCTAD, 61 per cent mention tax incentives, 10 per cent mention only non-tax
incentives (such as preferential loans, grants, export subsidies and credit guarantees), and
29 per cent do not refer to incentives at all. LDCs are more prone to utilize tax incentives
in industrial policies (they appear in 68 per cent of them), followed by developing countries
(61 per cent) and developed ones (56 per cent).

Chapter II Recent policy developments and key issues 85

 Unlike many investment laws, industrial policy documents are typically not the legal basis
for the adoption of incentives, but they often provide a motivation for their introduction. As
such, they are generally less detailed about the proposed nature of the tax incentives they
contain, particularly in developing countries, where less than one fifth of industrial policies
spell out the nature of the planned incentives, compared with one third of the industrial
policies in developed countries.

One third of the tax incentives in industrial policies worldwide have no other policy objective
than promoting investment by reducing the cost of doing business. The rest target one or
more development goals. Chief among them are promoting R&D and innovation (24 per
cent), promoting local production (19 per cent) and promoting SMEs and start-ups – also
often considered an avenue for encouraging innovation (13 per cent), exports (13 per cent)
and employment (9 per cent).

Other objectives pursued through tax incentives in industrial policies include goals as diverse
as avoiding capital flight, promoting digitalization, developing e-commerce, increasing
domestic savings or improving productivity, creating value, renewing equipment, taking
countercyclical actions, promoting migration from the informal to the formal sector, and
combating climate change.

Yet not all industrial policies call for the introduction of new incentives. About 15 per cent
of them seek to review, streamline or ensure that the existing fiscal rebates produce the
desired effects (box II.3).

Industrial policies calling for streamlining and rationalizing

Box II.3.
incentives (illustrative list)

Several countries have stressed the need to streamline, rationalize and review the tax incentives for investment
in their industrial policy documents. Some examples:
Belize – Growth and Sustainable Development Strategy 2016–2019: “Action 4: The [Ministry of Investment,
Trade and Commerce], in collaboration with the [Ministry of Economic Development], will lead efforts to review
the incentive regime (tax and non-tax incentives) aimed at attracting investments, to take account of the need
to minimize the provision of incentives to those who are not taking commensurate risks, balanced against the
need to provide appropriate incentives on a timely basis in areas where they could be most effective” (p. 22).
Cameroon – National Development Strategy 2020–2030: “It will also have to do with strengthening the policy
of mobilizing budgetary revenues by: (i) auditing tax exemptions in order to maintain only those with a proven
positive impact on the economy” (p. 130).
Jordan – Economic Growth Plan 2018–2022: “Implementation of this policy requires: Adopting the principle
of linking the increase in tax revenues to economic growth, addressing tax distortions, raising the efficiency
of collections, and rationalizing unwarranted tax exclusions and exemptions” (p. 29).
Liberia – Industry for Liberia’s Future (2011): “Policy 8: The Government will use incentives to promote
investment in industrial activities and capabilities, and it will track and measure the impact incentives granted
have to ensure the use of incentives is done in a transparent manner and serves the Government’s strategic
goals of generating investment, promoting sustainable economic growth, diversifying economic activities and
expanding the private sector” (p. 26).
Malawi – National Industrial Policy (2016): “3.2.3 Taxation. The Government will: Monitor implementation of
the Industrial Rebate Scheme to avoid misuse of the facility” (pp. 6-7).
Sri Lanka – Vision 2025: “We will rationalize the tax system by minimizing exemptions, holidays and special
rates, towards a fair and effective tax administration” (p. 17.) “We will clarify and reform investment incentive
policies to improve investment policy predictability. We propose to phase out tax holidays, which have
been the main traditional incentive offered to investors, and switch to other forms of efficiency improving
incentives” (p. 20).
/…

86 World Investment Report 2022 International tax reforms and sustainable investment
 Industrial policies calling for streamlining and rationalizing
Box II.3.
incentives (illustrative list) (Concluded)

Turkey – The Medium-Term Programme 2022–2024: “8. Efforts to review tax incentives, exceptions and
exemptions by considering the efficiency principle will continue.”
United Republic of Tanzania – National Five-Year Development Plan 2016/17–2020/21: “The Government
needs to close loopholes leading to revenue leakages (…). This will involve measures geared to: (…)
(viii) Reviewing tax holidays, tax exemptions and tax relief systems as incentives to investors in order to
minimize their abuse and thus increase tax collection. (…) efforts will further be directed at minimizing the
application of tax exemptions, building on existing reforms” (p. 91).

Source: UNCTAD, based on the documents listed in this box.

3. Taxation measures and international investment policies

a. IIA provisions and taxation measures

IIAs impose obligations on States that can create friction with taxation measures undertaken
at national level. The actions of tax authorities, as organs of the State, and tax policymaking
more generally can potentially engage the international responsibility of a State under an IIA
when they adversely affect foreign investors and investments.

Some 2,500 old-generation IIAs are in force today. They typically feature broad provisions
and include few exceptions or safeguards. Tax provisions do not usually form a principal
part of IIAs, in part owing to the existence of DTTs. Most IIAs do not exclude taxation from
their scope, which means that they cover a wide range of tax-related measures, whether of
general or specific application. They can expose States to tax-related claims brought under
the ISDS mechanism. Overall, investors have brought close to 1,200 ISDS cases based
on IIAs against 130 countries. UNCTAD data suggest that in some 160 of these cases,
investors have challenged tax-related measures undertaken by developed and developing
countries (box II.4).

Box II.4. Tax-related ISDS cases based on IIAs: facts and numbers

Investors have challenged tax-related measures in 165 ISDS cases based on IIAs. Tax-related claims
accounted for about 15 per cent of the 1,190 publicly known ISDS cases filed overall as of the end
of 2021.
Sixty per cent (99 cases) of the tax-related cases were brought against developed countries; the remaining
40 per cent (66 cases) were directed at developing countries. Spain was the most frequent respondent with
42 cases (about 25 per cent of all tax-related ISDS cases), followed by Ecuador and Italy with 10 cases each.
Overall, 47 respondent States have faced at least one known tax-related ISDS claim.
Developed-country investors brought over 90 per cent of tax-related IIA claims. The highest numbers of such
cases were initiated by investors from the Netherlands (30 cases), the United States (26) and Germany (24).
About 40 per cent of all such cases were intra-EU disputes between EU investors and EU member States
(63 cases).
The ECT (1994) was the IIA invoked most frequently in tax-related ISDS cases, with 68 cases, followed by
NAFTA (1992) with 12 cases and the Ecuador–United States BIT (1993) with 6 cases.

/…

Chapter II Recent policy developments and key issues 87

 Tax-related ISDS cases based on IIAs: facts and numbers
Box II.4.
(Concluded)

Several tax-related ISDS cases and awards have attracted public attention. High-profile examples include
cases challenging the following types of State conduct:
• Imposition of capital gains taxes (Vodafone v. India (I) and (II), Cairn v. India)
• Initiation of tax investigations and large tax assessments (Hulley Enterprises v. Russia, Veteran Petroleum
v. Russia, Yukos Universal v. Russia)
• Increases in windfall profit taxes and royalties (Burlington v. Ecuador, ConocoPhillips v. Venezuela)
• Legislative reforms in the renewable energy sector related to feed-in tariffs and incentives for solar
energy (The PV Investors v. Spain, Charanne and Construction Investments v. Spain)
• Withdrawal of subsidies or tax exemptions (Micula v. Romania (I))

Source: UNCTAD.
Note: These 165 cases were identified on the basis of UNCTAD’s ISDS Navigator and information from other public sources,
including notices of arbitration, arbitral decisions and specialized reporting services.

IIA provisions – particularly the unreformed clauses prevalent in old-generation IIAs – can
have a variety of implications for tax policymaking and tax-related measures (table II.3).

Definitions of investment and investor. Old-generation IIAs frequently rely on broad

definitions, covering an open-ended list of assets held by foreign investors. A major
challenge for host governments is to know whether an investment is foreign investment
and by which (if any) IIA relationships it could be covered. The ownership chains behind
a local investment may be complex and designed to access IIA benefits through indirect
ownership stakes. This means that tax administrations and policymakers may not be
able to determine whether certain actions or measures affect a foreign investor covered
by an IIA.

Substantive scope of IIAs. Most old-generation IIAs do not contain exclusions from their
substantive scope for taxation, which means that tax-related measures, whether of
general or specific application, are covered by such IIAs. This includes tax measures that
fall within the scope of a DTT between the two countries. Even where exclusions exist,
ISDS tribunals adopt their own interpretation or definition of “taxes” and do not necessarily
rely on domestic law guidance or international best practices.

Temporal scope of IIAs. Old-generation IIAs frequently extend treaty protection to

investments made before the agreement’s entry into force. A taxation measure that was
taken prior to the entry into force of the IIA but with “lasting effects” on such investments
could, under certain circumstances, give rise to ISDS proceedings, creating uncertainties
for tax policymakers.

National treatment. The NT provisions of IIAs cover de facto and de jure discriminatory
treatment. Distinctions based on residence are not specifically safeguarded under NT in IIAs.
Preferential treatment exclusively granted to national investors, such as tax exemptions,
may be challenged under IIAs even where this treatment is in accordance with the host
State’s legislation.

Most-favoured-nation treatment. Investors have rarely invoked the MFN standard to

challenge the actual level of material treatment of foreign investors from third States.
More frequently, investors have invoked the MFN clause to import more investor-friendly
provisions from the host State’s IIAs with third States, thereby “cherry-picking” advantageous
IIA standards. For example, investors can attempt to circumvent tax exceptions in the IIA
under which the ISDS case is brought, on the basis that another IIA signed by the host
country does not contain them.

88 World Investment Report 2022 International tax reforms and sustainable investment
 Table II.3. IIAs and their implications for tax policymakers
Selected IIA issue or
provision Description Implications for tax measures

• Old-generation IIAs frequently rely on broad • Tax administrations and policymakers may
definitions, covering an open-ended list of not be able to determine whether certain
Definitions of
assets. Ownership chains behind a local actions or measures affect a foreign investor
investment and
investment may be complex and designed covered by an IIA.
investor
to access IIA benefits through indirect
ownership stakes.

• Most old-generation IIAs do not contain • Tax-related measures are covered by most
Substantive scope exclusions from their substantive scope old-generation IIAs.
for taxation.

• ISDS tribunals’ interpretations of fair and • For tax administrations and policymakers
equitable treatment have expanded and working in an environment of evolving
covered expectations of regulatory stability tax regulations, FET concepts can create
Fair and equitable and compliance with the investor’s legitimate important challenges and potentially involve
treatment expectations, expectations of transparency ISDS claims.
and participation in governmental decision-
making, and proportionality tests for
State measures.

• Most old-generation IIAs include protection • There is no bright line separating permissible
in case of indirect expropriation, without tax measures from tax measures that
explicit safeguards for non-discriminatory amount to confiscation or expropriation of
Indirect
regulatory actions in the public interest. Tax investment and require compensation.
expropriation
measures with the effect of (substantially)
depriving the investor of the value of their
investment are vulnerable to challenge.

• Most IIAs provide for States’ advance • The types of tax-related claims that have
consent to international arbitration arisen under IIAs have been diverse and
proceedings between an investor and the often intertwined with non-tax measures.
Investor–State
host State. Recourse to domestic courts or
dispute settlement
exhaustion of local remedies is not required
under most IIAs. Tax matters are generally
not excluded from ISDS.

Source: UNCTAD.

Fair and equitable treatment. FET is the clause most frequently invoked by investors in
ISDS cases. Old-generation IIAs typically include an FET provision drafted in a minimalist,
open-ended way. ISDS tribunals’ interpretations of FET have expanded over time and
have covered expectations of regulatory stability and compliance with the investor’s
legitimate expectations, expectations of transparency and participation in governmental
decision-making and proportionality tests for State measures. For tax administrations and
policymakers working in an environment of evolving tax regulations, these FET concepts
can create important challenges and potentially involve ISDS claims.

Full protection and security. Many old-generation IIAs contain a full protection and security
clause that does not include clarifications. ISDS tribunals have, in some cases, extended
the scope of full protection and security to legal, economic or commercial, or other security
aspects. Notions and concepts such as stability of the tax framework, stability of the
commercial environment and protection against economic impairment of an investment
can be relevant under this provision.

Expropriation. The expropriation provision protects foreign investors in case of dispossession

of their investments by the host country. Most old-generation IIAs equally include protection
in case of indirect expropriation, without explicit safeguards for non-discriminatory
regulatory actions in the public interest. Tax measures with the effect of (substantially)
depriving the investor of the value of their investment are vulnerable to challenge.

Chapter II Recent policy developments and key issues 89

 Expropriation clauses constitute a source of uncertainty for States and tax authorities.
There is no bright line separating permissible tax measures from tax measures that amount
to confiscation or expropriation of investment and require compensation.

Transfer-of-funds obligation. The transfer-of-funds provision grants the right to free

movement of investment-related financial flows into and out of the host country. Many
old-generation IIAs contain a transfer-of-funds provision without exceptions. In most IIAs,
no explicit guidance is provided on the types of restrictive measures that may be
permitted or conditions for their application. While the good faith application of tax
measures is unlikely to violate this standard, including clear guidance in IIA texts can
provide certainty to tax policymakers and investors and limit arbitral tribunals’ discretion in
ISDS cases.

“Umbrella” clause. An umbrella clause establishes a commitment on the part of the host
State to respect its obligations regarding specific investments, for example, those arising
from contractual arrangements. Revising or withdrawing bilateral (and potentially unilateral)
commitments the host State entered into with respect to a foreign investor, such as tax
stabilization clauses in investment contracts or tax rulings, can come within the ambit of the
IIA. Through the umbrella clause, contractual obligations or unilateral commitments could
thus be elevated to IIA obligations and lead to ISDS proceedings.

Public policy exceptions. Largely absent from old-generation IIAs, public policy
exceptions permit measures otherwise inconsistent with the IIA to be undertaken under
specified circumstances. They can provide a higher degree of flexibility in implementing
tax measures when these are justified with respect to specific policy objectives
(e.g. protecting the environment or public health) and can have implications for the outcomes
of tax-related ISDS cases.

Investor–State disputes. About 95 per cent of IIAs provide for States’ advance consent
to international arbitration proceedings between an investor claimant and the respondent
State. Investors can directly challenge State measures before an ISDS tribunal. Recourse
to domestic courts or the exhaustion of local remedies is not required under most IIAs.
Tax matters are generally not excluded from ISDS. The types of tax-related claims that
have arisen under IIAs were diverse (e.g. withdrawal of incentives, increases in windfall
profit taxes). They were often intertwined with non-tax measures (e.g. forced liquidation,
interference with or termination of contracts). Such claims can but do not necessarily
overlap with the subject matter covered by DTTs and mutual agreement procedures.

b. IIA reform and taxation measures

The broad clauses of unreformed IIAs can expose States to legal challenges when raising
tax revenue or preventing tax avoidance or evasion. During the last decade, investment
policymakers worldwide have reassessed the role of IIAs in national development plans and
weighed the pros and cons of signing them. Many countries have embarked on reform of the
IIA regime to address challenges for public policymaking that arise from broad and vague
substantive protection standards coupled with wide access to investor–State arbitration
in IIAs. IIA reform efforts aimed at refining and limiting the scope of the key standards
have a direct bearing on taxation measures. These efforts can ensure that countries can
implement legitimate, non-discriminatory taxation measures while minimizing the risk
of ISDS claims. Since 2012, more than 80 countries and regional economic integration
organization have benefited from UNCTAD support in developing reform-oriented model
BITs and IIA reviews (WIR19). More than 1,000 government officials have been trained on
key issues in IIAs and ISDS.

90 World Investment Report 2022 International tax reforms and sustainable investment
The strongest safeguard for tax policymaking would perhaps be a complete and
unambiguous tax carve-out from the scope of an IIA (e.g. accompanied by a mechanism
that gives the host State discretion to determine whether the carve-out applies in a specific
dispute or that gives the competent authorities the power to decide). If the State parties
negotiating or renegotiating an IIA do not desire or cannot agree on a complete tax carve-
out, other options are available to limit a State’s exposure to ISDS claims and safeguard
the right to regulate in the public interest. Reform options can clarify and limit the scope
of IIA provisions, narrow the interpretive discretion of ISDS tribunals and give respondent
States a stronger legal basis in the IIA to defend themselves more effectively. In 2021,
UNCTAD released a guide for tax policymakers on IIAs and their implications for tax
measures (UNCTAD, 2021b). The guide was produced in cooperation with the WU Global
Tax Policy Centre of the Vienna University of Economics and Business, Institute for Austrian
and International Tax Law. It seeks to stimulate interaction between tax policymakers and
IIA negotiators and provides policy recommendations on minimizing the risks of taxation-
based ISDS claims.

c. Developments in the international tax system, DTTs and

investment policymaking
The Base Erosion and Profit Shifting (BEPS) Project was launched in 2013 by the
OECD and G20 to address tax planning strategies used by multinational enterprises
(MNEs) to avoid paying taxes. Tax-planning strategies exploit loopholes and mismatches
between national tax rules. Despite having done significant work to reduce opportunities
for tax arbitrage, countries – particularly developing countries – have continued to
raise concerns that increasing tax competition to attract FDI has frustrated revenue
mobilization efforts. Furthermore, the rise of the digital economy has also challenged
traditional tax rules, which generally attribute profits on the basis of physical presence in
a jurisdiction. Combined, these developments have reignited reform in the international
tax system not only to address the tax challenges arising from digitalization of the
economy, but also to restore stability to the international tax framework and prevent
uncoordinated unilateral tax measures (OECD, 2020b). A consensus-based response
has been the primary focus of the two-pillar solution developed by the OECD Inclusive
Framework on BEPS. The BEPS Project and other developments in this area shed light
on the interplay between the international tax system, DTTs and investment policymaking
(table II.4).

Among the key reform proposals, the members of the Inclusive Framework are negotiating
the adoption of a minimum tax for the largest MNEs (commonly referred to as Pillar II).
This reform is expected to dissuade MNEs from shifting profits and tax revenues to low-
tax jurisdictions and minimize the race to the bottom between countries, particularly
developing ones. Pillar II includes a Subject to Tax Rule that would be introduced by way
of a bilateral agreement between States and would allow them to tax certain intragroup
outbound payments such as interest and royalties if the residence country of the investor
does not tax the respective income up to a minimum predetermined rate. The minimum
taxation idea incorporated in Pillar II can have a profound impact on certain domestic tax
incentives; e.g. the benefit of tax holidays or SEZs to investors might be eliminated or
reduced when their application leads to an effective tax rate below a certain threshold for
large-scale MNEs. Other tax developments, related to Pillar I of the BEPS Project, provide
newly created taxing rights for market jurisdictions. Although these reforms are forward-
looking, a significant number of DTTs between countries have already had a demonstrated
impact on investment decisions.

Chapter II Recent policy developments and key issues 91

 Developments in the international tax system and their implications for
Table II.4.
investment policymakers
Selected international tax development
Implications for investment policymaking

• Reduces regulatory scope for tax avoidance

Base Erosion and Profit Shifting (BEPS)
• Aims to decrease for tax competition
Tax planning and tax avoidance
• Addresses situations in which no tax is paid, especially in the context of applying DTTs

• Expected to dissuade large MNEs from shifting profits and tax revenues to low-tax jurisdictions and minimize
BEPS Inclusive Framework the race to the bottom
Minimum tax for largest MNEs (Pillar II) • Affects tax incentive schemes for foreign investment
• Creates a minimum tax on foreign profits generated by large MNEs

• Focus on the interaction between and overlap of tax rules in two (or more) jurisdictions – i.e. the
cumulative tax result – and aim to avoid double taxation and double non-taxation arising from the tax
jurisdiction overlap
• Affects FDI depending on how favourable a country’s DTT network is
• Attribute taxing rights based either on country of source or country of residence, definitions that are
Double-taxation treaties (DTTs) challenged by digital economy activities
Functions, effects and challenges • Provide a set of tools to avoid tax abusive conduct (e.g. denial of benefits, beneficial ownership test)
• Cover taxes on income and capital, leaving other charges, such as VAT or social security contributions,
outside their scope
• Face particular challenges in taxing income from intellectual property
• Generally contain mutual agreement procedures, which provides for a best-efforts obligation to find a solution
to a DTT tax dispute

Source: UNCTAD.

DTTs are aimed at improving the conditions for cross-border trade and investment.
Whereas IIAs may come into play when actions of a given State or State agency (e.g.
through domestic tax policy measures) adversely affect an international investment and give
rise to international responsibility, DTTs tackle different barriers to cross-border activities.
DTTs are not primarily focused on the unilateral tax rules in a given jurisdiction but rather on
the interaction and overlap of these rules between two (or more) jurisdictions, each set of
rules producing equitable and non-discriminatory results if taken in isolation. DTTs address
the cumulative tax result of the overlapping domestic frameworks of the contracting
parties. They aim to prevent this overlap leading to international double taxation as well as
double non-taxation.

The underlying premise of DTTs is that double taxation is an impediment to cross-border

activities, including investment, since it puts such activities at a double burden as compared
to purely domestic situations. DTTs aim to prevent this double burden by attributing the
taxing rights between jurisdictions for activities with a cross-border element. They determine
which of the jurisdictions involved will have the right to tax the given income, thereby limiting
the taxing rights of the other jurisdiction. The following section highlights key provisions in
DTTs aimed at achieving this objective. Where one jurisdiction either cedes the right to tax
or agrees to tax at a reduced rate, there is a possibility that, because of BEPS structures,
the transaction is not taxed or is taxed at below a minimum rate in the other jurisdiction.
The BEPS Project aims to prevent no taxation from occurring in case of tax avoidance.
The goal of the most recent reforms revolving around Pillar II is to make sure that all profits
generated by MNEs are taxed at a minimum rate, no matter how DTTs attribute the taxing
rights or whether an arrangement can be classified as tax avoidance legally.

92 World Investment Report 2022 International tax reforms and sustainable investment
Personal scope. Just as IIAs determine their scope by defining which investors are covered,
DTTs do the same by defining which taxpayers are within their scope. Tax residence under
DTTs is mainly determined on the basis of factual ties, such as place of effective management
for companies and domicile for individuals. Although the factual ties requirement makes
treaty shopping relatively less straightforward, as it requires developing an objective link
with a jurisdiction, the phenomenon still exists and is at the centre of a number of provisions
and principles underpinning DTTs and broader international tax reforms. Research confirms
that the effect of a DTT on FDI depends on whether a newly agreed DTT introduces any
further benefits to the DTT network that a country already has (Petkova et al., 2018).
Due to treaty-shopping structures, FDI would generally flow through the jurisdiction that
offers the most favourable bilateral DTT with the targeted jurisdiction. Empirical observation
demonstrates that one particularly advantageous DTT has the potential to substantially
distort the FDI picture. A prominent example in this regard is the DTT between India and
Mauritius, signed in 1982 and later amended by way of a protocol in 2016, which caused
about one third of all FDI flows into India between 2000 and 2016 to come from the small
island country (Kotha, 2017).

Denial of DTT benefits. DTTs provide a set of tools that domestic authorities may rely upon
when a treaty has been invoked by a private party for abusive ends, including in case
of treaty-shopping structures. These tools might be of a different nature: some address
entitlement to the provisions of the DTT in general by allowing denial of benefits when
the principal purpose of an arrangement is a tax benefit rather than a valid business
rationale. Others, such as the beneficial ownership test, look at specific streams of income
(e.g. dividend, interest, or royalties) and ask whether the recipient entity is the ultimate
beneficiary of the payment. Moreover, DTTs generally allow contracting States to
rely on their domestic anti-tax avoidance provisions for the purposes of denying
DTT benefits.

Finding the right balance between allowing investors to take advantage of the most beneficial
legal framework available to them and determining when their behaviour can be classified
as abusive has been a challenge. Different jurisdictions have adopted different approaches
to finding this balance, leading to diametrically different legal qualifications of the same
underlying facts. For example, while some jurisdictions apply an economic substance
test to determine the beneficial owner of a transaction, others focus on the existence of
a legal obligation to pass on the income. Having vague and broad anti-avoidance rules
such as the principal purpose test introduced in DTTs is beneficial to the tax authorities
that are applying them as such rules require relatively limited administrative capacity. While
favoured by developing countries for this reason, broad anti-avoidance rules undermine
legal certainty and potentially open possibilities for arbitrary administrative practices.
More specific anti-avoidance rules, by contrast, not only require substantial resources of
the tax administrations but are also somewhat easier to circumvent as private parties can
be well advised about the specific requirements of such rules. Thus, more recently the
international tax landscape has seen a move away from introducing an ever-increasing
number of anti-avoidance provisions and towards more general measures, such as a
minimum tax for certain MNEs. These measures focus on creating a level playing field that
may minimize the incentive to engage in tax avoidance practices rather than on filling the
loopholes in a distortive international tax system.

Substantive scope of DTTs. DTTs generally include in their substantive scope only taxes
on income and capital. This leaves some taxes, such as VAT, and other public liabilities,
such as social security contributions, clearly outside their scope. However, there is no
uniform view on whether other taxes such as direct turnover taxes or digital levies fall
within the scope of DTTs. As some jurisdictions consider such taxes to fall outside the

Chapter II Recent policy developments and key issues 93

 scope of DTTs, they apply unilateral tax measures in their tax framework that might
result in double taxation for MNEs and potentially reduce FDI flows to the jurisdiction
that levies them.

Attribution of taxing rights and active business income. Traditionally, DTTs attribute taxing
rights to source countries only as long as the foreign tax resident has a “permanent
establishment” on the territory of the source country. When a permanent establishment is
missing, the income is taxed only in the country of residence. A permanent establishment,
under its current definition, presupposes some form of a physical presence in the source
country either through a fixed place of business or through a representative such as a
dependent agent. This substantially restricts the possibility of the source country taxing
income realized by digital business activity that requires no physical presence. International
tax reform in the past several years has centred on changing this imbalance between the
attribution of taxing rights between the source and residence countries for activities that are
directed at the market of the source country, where the foreign resident has a significant
digital presence in that market but does not meet the permanent establishment definition.
The UN Model Convention introduced the concept of a services permanent establishment
to enable source jurisdictions to establish a taxable presence.

The arm’s length principle. Many MNEs operate a number of subdivisions in a global value
chain, with the jurisdiction of each subdivision having taxing rights over a portion of the
total income realized. The attribution of this income cannot be left to the sole discretion
of the MNE, as it could opt to shift all profits to the country where the effective tax rate
is lowest, by engaging in intragroup transactions. Here, the arm’s length principle comes
into play, introducing a transfer-pricing rule. When the subdivisions of an MNE transact
with one another, they must valuate these transactions for tax purposes at market prices.
As with anti-avoidance rules, application of this provision has proven difficult, especially
for transactions that do not have meaningful free market comparators such as unique
intellectual property rights. Thus, MNEs can engage in profit-shifting activities, sometimes
with the active endorsement of the tax authorities of some jurisdictions that aim to provide
favourable transfer-pricing administrative practices for the purposes of attracting investment.
The result is to shift taxable base from both developed and developing countries into low-
tax jurisdictions or in some instances, where specific legal forms are utilized, to a loophole
referred to as “nowhere”.

Attribution of taxing rights and passive business income. The principle under DTTs is that
passive business income – dividends, interest and royalties – can be taxed also by the
source country without a permanent establishment of the foreign resident on its territory.
However, usually DTTs limit the taxing rights of the source country to a certain maximum
percentage (e.g. not more than 10 per cent on the gross amount of the interest). Different
DTTs contain different maximum percentages (or in some circumstances eliminate the
taxing powers of the source country altogether), often triggering treaty-shopping structures
where an investor chooses the cheapest tax route for repatriating the profits realized
(looking at the dividend tax rates under different DTTs) or for financing activities (looking at
the interest tax rates under different DTTs).

A common issue under DTTs is the treatment of royalty income from intellectual property.
On the one hand, although the OECD Model attributes the exclusive taxing rights of royalty
income to the State of residence, many DTTs (especially with developing countries) follow
the UN Model, which provides limited taxing rights also to the source country. However, if
the limited taxing rights of the source country go hand in hand with a beneficial intellectual
property box regime in the country of residence, whereby royalty income is taxed at a
favourable rate, the overall level of taxation of intellectual property income might be
especially low. At the same time, intellectual property income is often at the core of excess

94 World Investment Report 2022 International tax reforms and sustainable investment
profits generated by MNEs. The domestic minimum tax under Pillar II and the Subject to
Tax Rule might contribute to ensuring at least a minimum level of taxation of intellectual
property income.

Elimination of double taxation, capital import neutrality and capital export neutrality.
Attributing taxing rights to a source country under a DTT does not automatically mean
that the residence country is prevented from exercising taxing rights; it only means that
the residence country is under an obligation to alleviate any double taxation. DTTs provide
for two ways for residence countries to eliminate double taxation: the exemption method
and the credit method. The exemption method is based on the idea of capital import
neutrality, namely that all investment in a given jurisdiction must be subjected to the
same level of taxation irrespective of where the investor is resident. Under the exemption
method, therefore, the residence country exempts the foreign income from its tax base.
Capital import neutrality would generally favour FDI outflows to lower tax countries. The
credit method, by contrast, is based on the idea of capital export neutrality, namely that all
domestic investors must be subjected to the same level of taxation no matter whether they
have invested domestically or abroad. Under the credit method, therefore, the residence
country recognizes (and gives credit for) all taxes paid in the source country but then also
taxes the income up to its domestic corporate tax rate for the difference.

Tax disputes. DTTs contain a system for dispute settlement that differs from the ISDS
mechanism used in IIAs. First, taxpayers are never direct participants in the international
resolution of disputes and, therefore, the disputes are at the level of jurisdictions and never
between an investor and a jurisdiction directly. Second, only a handful of DTTs contain an
arbitration clause that can lead to a binding outcome in a State–State dispute. A number of
countries have been opposing such binding arbitration. The vast majority of DTTs contain
only the mutual agreement procedure, which provides for a best effort obligation rather
than a requirement to find a solution for any taxation that has allegedly occurred not in
accordance with the DTT in question. In principle, therefore, the first course of action
for taxpayers is usually to seek recourse before the domestic courts of the jurisdiction
involved. Tax-related disputes have also been brought to international arbitration under
IIAs. IIAs cover a wide range of State conduct across economic sectors, including tax
matters. The types of tax-related ISDS claims that have arisen under IIAs are diverse (e.g.
withdrawal of incentives, increases in windfall profit taxes) and often intertwined with non-
tax measures (e.g. forced liquidation, interference with or termination of contracts). They
can, but do not necessarily, overlap with the subject matter covered by DTTs and the
mutual agreement procedure.

Finally, it must be noted that DTTs form a rather consistent network with similar provisions.
Therefore, international tax reform has seen instances where the whole system of DTTs has
been amended simultaneously so that a recurring problem is addressed comprehensively.
An example in this respect would be the multilateral instrument to prevent the use of DTTs
for tax avoidance purposes, which covers DTTs between nearly 100 national jurisdictions
around the globe.21 Moreover, DTTs operate alongside other international agreements in
the tax area, such as tax information exchange agreements. Whereas countries would
generally be reluctant to conclude DTTs with offshore jurisdictions, tax information exchange
agreements offer the greatly needed transparency regarding tax-relevant information held
by such jurisdictions without involving the restriction on taxing rights that DTTs entail.

***

Chapter II Recent policy developments and key issues 95

 It is important to enhance cooperation between investment and tax policymakers to avoid
the formulation of investment and tax policymaking in vacuums. The joint expertise of these
two policy communities can help improve the coherence between tax and investment
policymaking. Equally important is the need to minimize the risk of friction between the
IIA regime and the global tax treaty network, with more than 3,000 agreements each.
IIA reform efforts require broad internal policy coordination, which can benefit from the
involvement of tax policymakers. Tax policymakers can provide information on past or
planned tax measures relevant to commitments under existing IIAs or IIAs under negotiation
and contribute to assessing the interaction between IIAs and DTTs. For example, special
agencies or interministerial task forces with a mandate to coordinate investment policy-
related work can provide a formal setting in which tax policymakers can share their expertise
(UNCTAD, 2018b).

Looking ahead, a key emerging issue that merits major efforts for policy research and
policymaking is the ever-growing interaction between industrial policy and trade, investment
and tax policy regimes. The worldwide proliferation of industrial policy has intensified such
interactions. According to the World Investment Report 2018, more than 100 countries
have put in place some sort of industrial policy package, 80 per cent of which were
formulated only in recent years. This has triggered extensive realignments between trade,
investment, and tax policies, as well as with the newly established industrial policies and
strategies. Although industrial policy may contribute to the sustainable development and
inclusive growth of individual countries, it may also pose challenges and opportunities for
the effort towards a coherent international approach to trade, investment, and tax policies
(Owens and Zhan, 2018). This will undoubtedly exert significant and far-reaching impacts
on tax regimes and reforms, as well as IIA regimes and reforms in the years to come.

96 World Investment Report 2022 International tax reforms and sustainable investment
 NOTES
1
Less favourable measures include those introducing limitations on the establishment of foreign investment
or new obligations for established investment, be it domestically controlled or foreign-controlled.
More favourable measures include those that aimed at liberalizing, promoting or facilitating investment.
2
For details on the nature of the measures adopted, see UNCTAD’s Investment Policy Monitor, at https://
investmentpolicy.unctad.org/investment-policy-monitor
3
The threshold for direct acquisition of control by foreign investors was reduced from $1.075 billion
to $1.043 billion for investors from countries that are members of the WTO; from $1.613 billion to
$1.565 billion for investors from countries that are members of a trade agreement with Canada.
4
For instance, in March 2021, the Federal Trade Commission in the United States joined with its EU,
United Kingdom and Canadian counterparts to announce that they would rethink their approach to
M&As by Big Pharma, noting the high volume of recent deals and fast-rising drug prices. See J. Smyth,
“Pharma dealmaking hit by greater scrutiny of prices and competition”, Financial Times, 28 February
2022, https://www.ft.com/content/697f27b3-6b23-4326-95b5-02c25623eee2.
5
The total number of IIAs is revised in an ongoing manner as a result of retroactive adjustments to UNCTAD’s
IIA Navigator.
6
The substantive IIAs for 2021 with texts available are: Australia–United Kingdom FTA, Colombia–Spain
BIT, Georgia–Japan BIT and Israel–Republic of Korea FTA. The scope and depth of commitments in each
provision varies across these IIAs.
7
For information on the status of Contracting Parties’ ratification, acceptance of approval of the agreement,
see https://www.consilium.europa.eu/en/documents-publications/treaties-agreements/agreement/?id=2
019049&DocLanguage=en.
8
European Commission, “Just and sustainable economy: Commission lays down rules for companies to
respect human rights and environment in global value chains”, 23 February 2022, https://ec.europa.eu/
commission/presscorner/detail/en/ip_22_1145.
9
ICSID, “ICSID Administrative Council Approves Amendment of ICSID Rules”, 21 March 2022, https://icsid.
worldbank.org/news-and-events/communiques/icsid-administrative-council-approves-amendment-icsid-rules.
10
World Trade Organization, “Joint Statement on Investment Facilitation for Development”, 10 December
2021, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/L/1130.pdf&Open=True.
11
For more information on the 10th UN Forum on Business and Human Rights, see https://www.ohchr.org/
en/events/forums/2021/10th-un-forum-business-and-human-rights.
12
Under Annex 14-C of the USMCA, the parties consent to the submission of so-called “legacy investment
claims” under NAFTA until three years after its termination, i.e. on 1 July 2023.
13
Studies and investor surveys have consistently found that incentives are second-order considerations
in determining decisions on investment location, behind factors such as political stability and security, a
stable and transparent legal and regulatory environment, and the quality of infrastructure and skills. They
appear mostly effective in determining the final choice between similar options. See World Bank (2018) or
Freund and Moran (2017).
14
In a recent survey of 305 MNE affiliates operating in 34 developing countries, tax relief was cited among
the most important areas of government support for businesses to address the challenges of the COVID-19
pandemic, and over half of the surveyed companies were receiving some form of tax relief (e.g. tax cuts,
tax credits, deferred payments) as of the end of 2020. See Kronfol and Steenbergen (2020).
15
For details on this classification, see UNCTAD (2000).
16
The analysis carried out in this section is based on the data on the statutory CIT rate available at https://
taxfoundation.org/publications/corporate-tax-rates-around-the-world/ for economies (sovereign States
and other types of territorial units) included in the UNCTAD classifications of geographical groups and
regional development status https://unctadstat.unctad.org/EN/Classifications.html. The list of economies
included in the UNCTAD classifications may differ from the M49 standard of the Statistical Division of the
United Nations Secretariat. The data set includes historic statutory CIT rates for 1980–2021.
17
An analysis of a large pool of LDCs shows that unlike in developed countries, corporate rather than
personal tax is the greater source of public finance for LDCs. It also highlights that although the corporate
tax rate has been decreasing in LDCs, corporate tax revenues have been increasing as a share of total tax
revenues and gross domestic product (Baker, 2017).

Chapter II Recent policy developments and key issues 97

 18
For the purposes of this section, a measure is the enactment of an investment policy instrument (e.g.
law, decree) that modifies either favourably or unfavourably the tax regime applicable to investment. Each
measure may include the introduction of one or more new or revised incentives or their removal.
19
A recent study of tax incentives for investment across 36 developing countries confirmed that tax
exemptions were the CIT instrument they used most often (Celani et al., 2022).
20
Most investment laws were adopted by developing countries (59 per cent), followed by LDCs (32 per cent)
and developed countries (9 per cent).
21
https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-
prevent-beps.htm

98 World Investment Report 2022 International tax reforms and sustainable investment
CHAPTER III

THE IMPACT
OF A GLOBAL
MINIMUM
TAX ON FDI
 INTRODUCTION

International investment and tax policies are inextricably linked. Tax influences the
attractiveness of a location for international investors. Taxation, tax relief and other fiscal
incentives are key policy tools to attract investors. Investors, once established, add to
the economic activity and the tax base of host economies and make direct and indirect
fiscal contributions. And international investors and multinational enterprises (MNEs),
by the nature of their international operations, have opportunities for tax arbitrage between
countries and for tax avoidance. This last issue has been the subject of intense debate
over the past decade.

In 2013, the Organisation for Economic Co-operation and Development (OECD) and the
G20 countries adopted the 15-point Action Plan on Base Erosion and Profit Shifting,
commonly referred to as BEPS. Other organizations have also been active in promoting
the reform of the international corporate tax system, including, most notably, the United
Nations Committee of Experts on International Cooperation in Tax Matters (which has a
particular focus on securing the interests of developing countries). The goal of the BEPS
project was to curb the tax avoidance practices of MNEs and to make the international tax
system fairer. Historically, policy coordination on international taxation has been rare, but
the BEPS project is an exception. To date, 141 jurisdictions, including many developing
countries, have joined the initiative through the OECD-led Inclusive Framework. In 2015
the BEPS project delivered a comprehensive package of 14 actions aimed at tackling
tax avoidance, improving the coherence of international tax rules and ensuring a more
transparent tax environment. That left one action to be completed: the taxation of the
digital economy.

This has been the central focus of the BEPS project since then. Digitalization has caused
a rapid increase in the share of intangibles in international trade and investment, with a
corresponding increase in opportunities for MNEs to disconnect profits from real economic
activities and to shift them to low-tax locations. To restore the nexus between where
value added activities take place and where profits are taxed, BEPS participants reached
agreement in 2020 to work on a two-pillar approach.

Pillar I aims to realign the reporting of MNE profits with value creation. It has three core
elements. The first partly reallocates the right to tax the largest and most profitable
MNEs towards “market” (or “destination”) countries where they sell goods and services.
The second simplifies the transfer pricing of distribution activities. The last element
introduces mechanisms to tackle tax disputes.

Pillar II proposes a global minimum tax on the profits of MNEs. It applies to multinational
groups with revenues of €750 million or more. Pillar II rules follow a “common approach”,
which means that the Inclusive Framework members adopt the rules on a voluntary basis.
The OECD published model rules for Pillar II rules in March 2022, along with technical
commentary and concrete examples of how to apply the Global Anti-Base Erosion (GloBE)
model rules (OECD, 2022b). The goal is to start implementation in 2023.

The global minimum corporate income tax (CIT) is a major step in international tax regulation
and coordination. Whereas the two-pillar proposal arose to address tax issues caused by
digitalization, the scope of Pillar II is now much broader and involves fundamental changes
to the international tax architecture. It not only aims to reduce profit shifting by MNEs,

100 World Investment Report 2022 International tax reforms and sustainable investment
improve the fairness of tax systems and increase revenue collection. It also aims to reduce
damaging tax competition between countries and to set a limit to the race to the bottom in
CIT rates caused by countries competing to attract foreign direct investment (FDI).

From an investment perspective, the relevance of Pillars I and II differs substantially.

Pillar I is designed to reduce profit shifting and lead to a fairer distribution of tax revenues, but
it is not expected to affect real investment decisions to any significant degree. It will affect only
the largest MNEs; these include many digital firms, which are asset-light in their international
operations, and new tax liabilities will arise only above a defined profitability threshold. In
contrast, because it introduces a global minimum tax, which could affect the locational
choices of investors, Pillar II could have far-reaching consequences for FDI recipient countries
and especially for those that compete to attract inward FDI through fiscal measures.

The OECD acknowledges the potential implications for investment, addressing them in a
dedicated chapter of its Economic Impact Assessment (EIA). Yet, the EIA considers the
overall effect of BEPS measures on investment to be small (box III.1). The EIA confirms the
greater relevance of Pillar II, which generates all the impact, while Pillar I is substantially
investment neutral. The focus of the economic and policy debate has thus been largely on
the impact on tax revenues and on the overall tax bill for MNEs, with comparatively little
attention paid to the effects on countries’ ability to attract investment.

Box III.1. Assessments of the investment impact of Pillar II

The OECD Economic Impact Assessment (EIA) (OECD, 2020) extensively evaluates the reforms of Pillar I and Pillar II and quantifies their potential
impact on international investment. The assessment brings together two sets of analyses. One, based on Hanappi and Gonzalez Cabral (2020),
estimates the increase in tax rates from the reform; the other, based on Millot et al. (2020), links changes in tax rates to changes in investment.
In the first study, the authors follow the classic effective tax rate (ETR) framework of Devereux and Griffith (2003), described in more detail in
the next section. They assume a stylized investment and work out the after-tax profits, deriving also the average and the marginal effective
tax rate (AETR and METR) as well as the overall cost of investment, under different assumptions. The authors find that Pillar I and Pillar II do
not substantially increase the AETR or METR in general, but they substantially increase them in offshore financial centres (OFCs). The overall
expected impact on investment is limited. The second study performs a firm-level analysis based on ORBIS data, using 26,000 distinct
MNE affiliates located in 17 mostly European countries. The analysis shows a negative relationship between METR and investment. The tax
sensitivity of investment is higher in groups with low profitability.
Using the results from the two studies, the EIA finds that the reform will have only a small negative effect on global investment because the
tax proposals target mainly large MNEs that are less sensitive to changes in tax levels. The average global change in the AETR is projected to
be only about 0.5 percentage points, with a corresponding change in METRs of 1.85 percentage points. The total business investment rate
(including by firms other than MNEs) would fall by 0.05 percentage points.
Beyond specific methodological choices, such as the use of forward-looking ETRs, two modelling assumptions in these analyses are worth
specific mention. The most critical one is the focus on investment carried out in the country of the ultimate parent of the MNE group
(“at home”) rather than in any of the foreign locations where the MNE has operations. As highlighted by the OECD, this approach prioritizes
a group-level perspective (what is the investment impact of BEPS for the MNE group?) rather than a project- or FDI-level perspective (what
is the impact of BEPS on foreign investment by the MNE, i.e. on FDI?).
The second important assumption is that Pillar II, at least for the purpose of the investment impact assessment, is assumed not to change
the profit-shifting behaviour of MNEs. All other things equal, this implies that increased costs for the MNE group due to an expected reduction
in profit shifting as a result of Pillar II are not incorporated in the assessment of the investment impact. It is important to observe that both
assumptions result in a smaller investment impact than otherwise.
The EIA further argues that the decline in investment following BEPS resulting from higher tax rates is likely to be offset by the positive effect
from other less quantifiable but significant channels, such as increased tax certainty. It identifies six policy areas in which the response of
individual governments to the changes in the international tax system could have important effects on investment: (i) greater fiscal space,
(ii) lower compliance costs for firms given uniform rules, (iii) a reduction in tax competition, (iv) greater use of non-tax incentives by countries
and policies encouraging innovation, (v) more efficient use of tax incentives and better allocation of capital, and (vi) more beneficial competition
between firms, including a level playing field among MNEs and non-MNEs.
/…

Chapter III The impact of a global minimum tax on FDI 101

 Box III.1. Assessments of the investment impact of Pillar II (Concluded)

The EIA has the merit that it acknowledges the importance of incorporating the investment dimension in the overall assessment of the
economic impact of BEPS, together with the revenue dimension. It is the only study to date to embark fully on the challenging task of
modelling the investment impact of a global minimum tax. A few other studies have addressed specific aspects of the investment impact of
Pillar II. Bares at al. (forthcoming) examine the effect for a subset of countries. Devereux et al. (2020) use a stylized two-country scenario to
look at the effects on AETRs as a result of the interaction between the introduction of a global minimum tax and changes in profit-shifting
patterns. Bauer (2020) raises the issue of the impact of Pillar II on investment in small, highly integrated economies.
Apart from the EIA and these three studies there has been no other attempt to systematically analyse the investment impact of BEPS
measures. This follows a trend across all BEPS-related studies – even prior to the introduction of the two pillars – in which the analysis of
the revenue impact has been largely dominant (see Cobham et al., 2022). The investment dimension has been much less explored, with the
World Investment Report 2015 (WIR15) remaining the main reference on the interface between international investment and BEPS.
Source: UNCTAD; Casella and Souillard (2022).

The EIA’s assessment of the implications of Pillar II for the overall tax bill of MNEs at the
group level is helpful for gauging the impact on global investment flows – and the results
have been reassuring. Nevertheless, where those taxes are due and what resulting tax
rates are paid by foreign affiliates in individual countries (i.e. at the FDI level) are both likely
to be highly significant for the ability of those countries to attract and retain investment.
In addition, because tax rates and fiscal incentives are important investment promotion
instruments, a minimum tax is bound to necessitate major adjustments to countries’
investment policy toolkits.

In recognition of the important role of FDI for development, the role of tax as an FDI
determinant and the extensive use of tax policies to attract FDI, this chapter aims to
investigate more fully the impact of the introduction of a global minimum tax on investment
and investment policies. It does so with a particular focus on developing countries, not only
as tax collectors but also, and especially, as investment recipients.

The chapter is structured as follows:

• Section A explains the mechanics of the Pillar II proposals and provides a framework
for the analysis of their effect on FDI.
• Section B provides a quantitative assessment of the impact on effective tax rates
(ETRs) faced by foreign affiliates and of the possible changes in the volume and
distribution of FDI.
• Section C discusses the implications of minimum taxation for tax incentives to attract
foreign investment.
• Section D brings together the findings in a set of policy options for countries that depend
on their current tax positioning and on their use of preferential schemes for investors.

The BEPS reforms represent a rare and remarkable achievement of economic multilateralism
in recent years. The two pillars are a synthesis of almost a decade of efforts to tackle
international tax avoidance and profit shifting – a key priority for most countries and for
the international community. The objective of this chapter is not to question the proposed
solutions but rather to analyse their impact on FDI and their implications for investment
policy. The aim is to help investment policymakers, and especially those from developing
countries, to identify the most effective investment policy responses.

102 World Investment Report 2022 International tax reforms and sustainable investment
 A. H
 OW A MINIMUM
TAX AFFECTS FDI –
A THEORETICAL
FRAMEWORK
This section reviews key elements of the theoretical foundations of the links between tax
and investment, focusing on the level and location of investment, on the role of profit shifting
and on tax competition. The theory is instrumental to understanding spillover channels and
directional impacts of the Pillar II tax reform on FDI.

1. Tax-investment spillover channels

In a global economy characterized by internationally mobile capital, corporate tax policies
can affect multiple aspects of the global investment landscape: where a given investment
flows (location of investment), how much is invested (scale of investment), how much taxes
are paid on the income generated by the investment and where they are paid (profit shifting),
and how countries compete in designing their tax systems so as to attract investment (tax
competition) (table III.1).

Table III.1. Tax-investment spillover channels

• Tax affects investor choices between different locations. If investments are equally profitable in different locations,
investors will choose the location where taxes are lowest.
• Even if the profitability of investments differs between locations, investors may still locate in the lower-profitability
a. Location of investment
location if the tax rate differential is sufficiently high. This is the distortionary effect of tax on investment allocation.
• A key concept in assessing the location effect of tax is the average effective tax rate (AETR), which is used in cross-
country comparisons of the tax cost of investments, and hence a key factor in the analysis of the impact of Pillar II.

• Taxing the income (return) on an investment affects how much an investor will commit. That is because tax will increase
the amount of profit that the investment needs to generate in order to provide the minimum after-tax return that the
investor requires.
• An important concept in assessing the impact of tax on investment scale is the marginal effective tax rate (METR),
b. Scale of investment
which represents the amount by which, because of taxation, the pre-tax return on a project exceeds the investor’s
required after-tax return.
• It is possible to devise tax rules to minimize the METR (and hence the size-impact of tax on investment decisions),
while still raising revenues.

• If profits generated by an investment in one location are declared for tax purposes in another (lower tax) location,
the average tax rate for those profits becomes a weighted average of those in the countries involved; the overall AETR
will thus be lower than the AETR in the country where the investment is located.
c. Profit shifting • Because the possibility to shift profits generated by an additional investment to a lower-tax country reduces the tax
payable on the additional earnings, it also reduces the METR, potentially increasing the scale of investment.
• Profit shifting thus affects both the scale and location of investment. The goal for BEPS is therefore to tackle profit
shifting while minimizing the potential negative effects on investment.

• A key objective of the global minimum tax is to set a limit on the downward tax competition between countries for the
attraction of real investment and tax base.
• Tax competition can take many forms. It is not only about the generally applicable tax regime, but also occurs through
d. Tax competition tax incentives such as reduced rates, allowances for investment or R&D spending, or special economic zones.
Incentives have proliferated over the last few decades.
• Because preferential tax schemes in one country can harm others, there is a strong rationale for collective action to
limit tax competition.

Source: UNCTAD.

Chapter III The impact of a global minimum tax on FDI 103

 a. Location of investment
At the heart of tax effects on FDI are those affecting the location decision: in which country
to invest. For an MNE that simply has to choose where to undertake an investment of
some fixed scale, what matters is the proportion of the pre-tax profit it generates that
each country will take in tax. This is known as the average effective tax rate (AETR). If the
investment is equally profitable wherever it is located, then the MNE will locate it wherever
the AETR is lowest. Even if the project is less profitable in one country than another –
perhaps because it is harder to find the necessary labour skills there or because the public
infrastructure is less supportive – it may nonetheless locate the project there if the AETR is
sufficiently low.

The consequence is that cross-country differences in AETRs can distort location decisions,
leading to investments being undertaken in places where their pre-tax profitability is actually
lower. An efficient cross-country allocation thus calls for minimal differences in AETRs –
especially for efficiency-seeking investments which are relatively mobile, in the sense that
their pre-tax profitability does not inherently vary greatly across locations. (For location-
bound market- and resource-seeking investments, the AETR matters less.)

In terms of practical measurement, the AETR depends not only on the statutory rate
of tax but also on the nature of the tax base.1 Additional investment will, for instance,
generate additional depreciation or other tax allowances. The AETR can be calculated
in two ways. One, the forward-looking approach, rests on calculating the tax due on a
hypothetical project of some assumed pre-tax profitability. This has the advantage
of being readily recalculated to assess the effects of tax changes, but it rests on
untested assumptions and abstracts from many complications of the tax rules. The
alternative, backward-looking approach rests instead on taxes actually paid. This is less
well suited to mechanical simulation of tax changes but has the merit of being rooted
in experience rather than simplification and hypotheticals. As discussed in detail in
section B, it is the backward-looking approach that is adopted in the empirical work of
this chapter.

b. Scale of investment
When considering a possible location, the investor must also decide on the scale of the
investment. Taxation matters here too. To maximize earnings, investors will invest up to the
point at which the additional profit, net of the additional tax that becomes due, just covers
the return they require. If, for example, the net profit exceeds the required return, then
the investor has an incentive to invest more, likely leading to a reduced pre-tax return – a
process that continues until the post-tax return generates just enough to make the last
investment worthwhile. Taxation thus affects the scale of investment by driving a wedge
between the pre-tax return on an investment that just breaks even and the after-tax return
received by the investor. That wedge is the marginal effective tax rate (METR).2

From a policy perspective, the neutrality criterion for good tax design – that the tax
system insofar as possible does not distort private decisions but leave them as they
would be in the absence of the tax (unless there is good reason to do otherwise, e.g. to
limit pollution) – calls for an METR as close to zero as possible. It is important to balance
average and marginal considerations in setting tax policies. It is possible to have a low
and even a zero METR while still having a positive and possibly quite high AETR. This is
because the METR reflects only the tax paid on the last dollar of investment that breaks
even, whereas the AETR reflects the tax paid on all the profit generated by the totality
of investment.

104 World Investment Report 2022 International tax reforms and sustainable investment
Take, for example, a “cash flow” form of CIT, under which all investment expenditure is
immediately deductible. The government is then in effect a silent partner in all investments:
it takes a fixed share in the returns as tax revenue, but it also bears the same fixed share of
costs (as reduced tax revenue). The tax leaves investors worse off, but they will still find any
investment that covers its costs to be worth undertaking, so the METR is zero.3 But the AETR
is positive because the government is sharing in the excess of earnings over costs. This is
one instance of the more general point that a tax which bears only on “rents” – meaning
earnings in excess of the minimum required – will have no impact on investment decisions.
Intuitively, faced with giving up some fixed share of the pie, investors still want the pie to be
as large as possible. And that remains so, however large is the government’s share; however
high, that is, is the rate at which rents are taxed. Indeed, since a tax on corporate rents does
not distort private decisions – something that is not true of other standard tax instruments,
such as personal income tax or value added tax – structuring the corporate tax to bear on
rents has had considerable appeal for economists, with some impact on practical design
of taxes.4

In practice, of course investors must choose both the location of their investments and
their scale, so that both the AETR and the METR come into play. For the location choice,
the comparison of AETRs is critical, whereas for the scale decision the local METR is
key.5 The ideal of tax policy, as just seen, is to combine a low METR with a high enough
AETR to meet revenue needs. The primary (though not exclusive) focus of the BEPS
project has been on how much tax MNEs pay and where (broadly corresponding to the
pattern of ETRs) rather than on the impact on marginal incentives to invest (captured by an
appropriate METR). It is thus the impact on the level and the cross-country dispersion of
AETRs that is central to the empirical analysis in this chapter.

c. Profit shifting
By profit shifting is meant the use of artificial transactions and arrangements to shift tax
base from higher- to lower-tax countries. MNEs have plenty of instruments they can use
to this end: setting artificially high or low internal transfer prices, borrowing from related
entities in low-tax countries, using treaty networks to repatriate earnings in tax-minimizing
ways (treaty shopping) and many others (for an overview of these techniques, see IMF,
2014). A core focus of the BEPS project has been on making such avoidance harder.

Profit shifting has potentially significant effects on both the location and the scale of
investments. For the location choice, profit shifting has the important implication that since
the profit generated by an investment in one location may be shifted and declared for tax
purposes in others, the total tax paid on those profits – and hence the overall average ETR
– depends on where those profits are declared for tax purposes and how they are treated
there. The overall AETR on an investment then becomes a weighted average of the AETRs
across all countries in which some of the related profits are declared, the weights reflecting
the amount of profit shifted. This is captured in the empirical work in this chapter by a new
ETR metric, the FDI-level [average] ETR (this metric will be presented in detail in the empirical
section B, box III.5). As the purpose of profit shifting is to reduce total taxes paid, this FDI-level
ETR can be expected to be lower than the AETR for the country in which the investment is
located. All else equal, investors will locate an investment in the country that offers the lowest
FDI-level ETR. In assessing the effect of a minimum tax on the cost of locating investment in
any country, it is the impact relative to the FDI-level ETR that is relevant.

As the ability to shift the profits generated by an additional investment in a high-tax country
to a lower-tax country reduces the tax payable on those additional earnings, it also reduces
the METR. Profit shifting can thus be expected to increase the scale of investment in

Chapter III The impact of a global minimum tax on FDI 105

 such countries. To the extent, moreover, that substance tests and business realities make
it easier to shift profits to low-tax countries if the MNE has some physical presence there,
profit-shifting opportunities reduce the METR there, too.

There is extensive empirical evidence that profit shifting is indeed sizeable (for an overview,
see Bradbury et al., 2018). Tørslov et al. (2021) estimate that MNEs shifted about 40 per
cent of their profits to offshore financial centres (an estimate generally seen as on the high
side). In terms of revenues, Clausing (2020) puts the loss for the United States alone in
2017 at about one third of corporate tax revenue. Importantly, there is some consensus
that whereas the revenue lost by developing countries from profit shifting is likely to be
smaller in dollar terms than it is for developed economies, relative to their gross domestic
product and tax revenue it is likely to be greater (e.g. Crivelli et al., 2016; Johannesen et
al., 2020). Particularly relevant to the discussion in this chapter is the connection between
profit shifting by MNEs and FDI. The large share of FDI stock – between 30 and 40 per
cent of the total – reported by few, relatively small, offshore financial centres (OFCs) attests
to the important role of FDI in the tax optimization strategies of MNEs (WIR15; Bolwijn et
al., 2018; Casella, 2019; Damgaard et al., 2019). UNCTAD (WIR15; Bolwijn et al., 2018)
estimates the tax revenue losses for recipient countries from exposure to FDI through
OFCs to be on the order of $200 billion globally, evenly distributed between developed and
developing economies (see also Janský and Palanský, 2019; Guvenen et al., 2022).

d. Tax competition
A primary rationale for the minimum taxation that Pillar II will establish is to set a limit to
the downward tax competition that arises from governments’ efforts to attract (or retain)
real investment and tax base by offering favourable tax treatment relative to that available
elsewhere. Empirical evidence confirms a marked (but perhaps recently decelerating)
downward trend – in all parts of the world – in statutory rates of corporation tax. Since
cross-country differences in these headline rates are the primary driver of profit shifting,
that would be consistent with governments acting to increase (or protect) their tax base by
tilting those differences in their favour.

But tax competition, especially for real investment, is not only about the generally applicable
business tax regime. Countries may, and in many cases do, offer preferentially favourable
tax treatment for particular sectors, activities or regions. Such “tax incentives” may take
the form, for instance, of a reduced tax rate (the extreme form being a tax holiday, which
provides a zero rate for some specific period of time) and/or a narrowing of the tax
base, such as accelerated depreciation for investment or enhanced deductions for R&D
spending. Special economic zones (SEZs), which generally offer some kind of favourable
tax treatment, are another prominent example. Incentives intended to lower effective tax
rates have proliferated in the last decade (see chapter II, section C).6 This is another strong
indicator of intense tax competition at work.7

It is difficult to be precise about the intensity of international tax competition. It might

in principle be that the trends in headline rates and incentives reflect not cross-border
interactions in tax setting but, for example, common intellectual or political developments
favourable to lower business taxes. And it might in principle also be that, as discussed
further in section D, countries respond to lower taxation abroad, all else equal, not by
reducing their own rates (“strategic complementarity”) but by raising them (“strategic
substitutability”). Economists have found it hard to identify these interactions in countries’
tax-setting behaviour. For statutory rates, there are signs of the strategic complementarity
that the trends mentioned suggest, with studies showing a 1 point cut in the corporate tax
rate in all other countries inducing a cut in response of 0.25 to 0.67 points.8

106 World Investment Report 2022 International tax reforms and sustainable investment
The policy problem caused by tax competition, for which minimum taxation may serve as a
partial remedy, is that in choosing the tax system best suited to a country’s own interests,
each country neglects the potential harm the choice does to others. A country may benefit
from attracting inward profit shifting, for example, but this is damaging others, which are
left with a reduced tax base. These kinds of interaction create scope for collective gain by
coordinating tax policies in ways that limit the downward spiral that can result,9 such as
by setting a floor on how low taxes can go – as Pillar II aims to do. This is not to say that
all countries stand to benefit from limiting tax competition. Some low-tax countries are
likely to lose.

2. The mechanics of Pillar II

The two core objectives of Pillar II, reducing the scope for profit shifting (thereby aligning
the payment of tax more closely with the location of productive activities) and limiting tax
competition, are closely related but nonetheless distinct. Conceptually, at least, measures
could be undertaken to inhibit profit shifting without limiting tax competition for real
investment.10 Views differ, moreover, as to the relative importance of these objectives,
leading to a degree of compromise that is reflected in the structure of Pillar II.

A further objective sometimes referred to is reducing the importance of tax considerations

in determining the location of investment. These considerations are likely to be greater
the wider is the cross-country dispersion of AETRs, so that this objective translates to
reducing that dispersion – with the relevant notion of AETR here being, for the reasons
described in the previous section, the FDI-level ETR. Location, however, is only one aspect
of efficiency in patterns of investment. Scale also matters, and therefore so too does the
impact on METRs. The impact of the minimum tax on this dimension has received less
attention in the design of Pillar II.

The structure of Pillar II is more complex than the headline feature of establishing a minimum
effective rate of 15 per cent may sound. Broadly, the idea is to top up domestic taxes,
if need be, to ensure that in each country the affiliates of large MNEs pay an amount
of tax that is equal to at least 15 per cent, not of their profits but rather of those profits
that exceed an amount – known as the carve-out – that is related to indicators of their
real activities in the country. Reflecting differing views as to the purpose of Pillar II, the
carve-out tempers the desire to limit tax competition by limiting the extent to which the
minimum bears on real activity. The implication is that the total tax payable by an affiliate
that is subject to the minimum will not be 15 per cent but lower, to an extent that depends
on the amount carved out and the domestic taxes covered by the agreement (primarily
corporation tax) payable before the top-up applies.

Implementing this minimum effective tax rate – under what is referred to more formally as
the Global Anti-Base Erosion (GloBE) rules – requires four steps:11

(i) Establish whether a foreign affiliate is in scope for Pillar II, which requires that it be part
of a multinational group with revenues of at least €750 million. This brings in only the
largest MNEs, though these account for about two thirds of FDI projects worldwide.
Moreover, it is widely expected that the threshold will fall over time.
(ii) For an in-scope entity, calculate its12 GloBE ETR (or GloBE ratio), broadly defined as
the ratio of covered taxes to accounting profit, these taxes being essentially any that
are charged on income, most prominently the CIT. Potentially important for many
developing countries is that resource rent taxes will be covered, but taxes related to
turnover – such as royalties or the turnover-based minimum taxes that many levy – may
well not be, nor are withholding taxes (WHT) on payments made by the entity.

Chapter III The impact of a global minimum tax on FDI 107

 (iii) If the ETR thus calculated is less than 15 per cent, apply a top-up tax, at a rate equal
to the excess of 15 per cent over the ETR. The base to which that top-up tax will be
applied is excess profit, calculated as the amount by which accounting profit exceeds
a carve-out that is calculated as specified percentages (declining over time) of tangible
assets (including natural resources) and payroll.13 The carve-out is formally called the
Substance-Based Income Exclusion.

From the perspective of the investor, total tax payable on an in-scope entity is the sum of
covered taxes and any top-up calculated following these steps. The overall liability when
the top-up applies, which emerges from the algebra of these arrangements (box III.2), is
readily seen to be equivalent to the sum of (1) 15 per cent of excess profit (accounting
profit less the carve-out), and (2) tax at the ETR on the amount carved out. One further
implication of this will be helpful below. The lowest value that covered taxes can take
is zero,14 so that element (2) above is zero and only element (1) remains. There is thus
generally no way in which the entity’s tax liability can be reduced below 15 percent of
excess profit: this can thus be thought of as an “absolute minimum” on its liability.

Box III.3 provides an example of these calculations. It also illustrates another important
aspect of Pillar II: because of the operation of the carve-out (this amount being in effect
taxed at the ETR rather than the higher minimum rate), the overall average tax rate –
taking into account both the top-up and the covered taxes – is less than the 15 per
cent minimum.

(iv) Having calculated the top-up, the question arises of which country will collect it: the
host country in which the income arises, or the country in which the parent company
is resident for tax purposes? For investors, which government collects the top-up tax
is immaterial (compliance issues aside), because the amount payable is the same. For
governments, however, it matters a good deal. The ultimate parent of a multinational
group may levy the top-up under the Income Inclusion Rule (IIR).15 If it does not, the
source country may do so under an undertaxed payment rule.

Box III.2 The algebra of Pillar II

Denoting the total of covered domestic taxes by T and accounting profit by P, a top-up tax will be levied to the extent that the relevant
effective tax rate (also referred to as the GloBE ratio) T/P is below the prescribed minimum rate, denoted by m (which is in practice 15 per
cent). This top-up is applied only to financial profit in excess of carve-out C. The total tax payable, T*, is then

where the first term is the top-up and the second is covered tax payments. The impact of these arrangements becomes clearer on rewriting
this equation as

The effect is thus that total tax – domestic and top-up combined – is the sum of (1) tax at the minimum rate m on excess profit P-C and (2)
tax at the effective tax rate T/P on the amount carved out.
Expressed relative to accounting profit, total tax payable is thus

Hence the average rate is lower than the minimum rate and is more so the lower are the covered tax payments and the higher is the carved-
out amount as a share of financial profit. That average rate, nonetheless, is higher than it would be in the absence of Pillar II.
Source: UNCTAD.
Note: The notation here follows Devereux et al. (2022) and sets aside a number of complications that can arise in practice (for example, in the treatment of losses and
accelerated depreciation, discussed in section C).

108 World Investment Report 2022 International tax reforms and sustainable investment
 Box III.3. The GloBE rules of Pillar II: an example

An in-scope affiliate has accounting profit of 1,000 and pays covered taxes of 110. Its ETR is thus 11 per cent. Top-up tax is therefore due
on excess profit at a rate of 4 (= 15 – 11) per cent.
The carve-out is calculated by applying (at 2023 rates) 10 per cent of the value of the affiliate’s payroll (of 200, say) and 8 per cent of the
value of its tangible assets (of 4,125, say), for a total carve-out of 350. Excess profit is thus 650 (= 1,000 – 350).
Applying the 4 per cent to the excess profit of 650 gives a top-up tax liability of 26.
In total, the entity is thus liable for taxes of 136: top-up of 26 plus covered taxes of 110. As shown in box III.2, this can alternatively be calculated as
the sum of (a) a tax at 15 per cent on excess profit, 97.5 (= 0.15 × (1,000 – 350)) and (b) a tax at the ETR on the carve-out, 38.5 (= 0.11×350).
Overall, the average tax rate paid by the affiliate – top-up and covered taxes combined – is 13.6 per cent (= 136/1,000).
Source: UNCTAD.

In any case – and as a late addition to the development of Pillar II – the source country
may charge a qualified domestic minimum top-up tax (QDMTT): this is a domestic
tax that is structured to achieve exactly the same effect as an IIR, which will be fully
creditable against any IIR. The effect, simply put, is that the QDMTT enables the host
country to do the topping up.

Even this description, complex though it is, abstracts from a range of issues likely to be
important in particular contexts.16 These include, in particular, the prospective adoption
by multilateral treaty of a Subject to Tax Rule (STTR), enabling WHT to be topped up to 9
per cent (in order to limit outward profit shifting).17 There are also mechanisms related to
specific forms of incentive. These additional features of the Pillar II arrangements will be
addressed later (see section C).18

3. Pillar II and FDI

a. Primary targets: profit shifting and tax competition

A primary rationale for minimum taxation is to counter the artificial shifting of profits to low-
tax countries. In practice, Pillar II is likely to mute profit shifting but not eliminate it: while it
may no longer be possible to shift profits from a country in which the rate is 25 per cent
to one in which it is 10 per cent, there is still a gain – smaller, but a gain nonetheless –
from shifting to a 15 per cent one.

The possibility also remains of shifting profits between countries that are not directly
constrained by the minimum. These options are unaffected by Pillar II but may become
relatively more attractive as the route to a rate of less than 15 per cent is closed. With a
generalized narrowing of rate differentials, the total amount of profit shifting from high-tax
countries can nonetheless be expected to fall significantly – and so too will the overall
benefit that multinationals derive from it. This effect is likely to be made more marked by
the apparent tendency for profit shifting to increase at a rate greater than in proportion to
such differentials (Dowd et al., 2017).

The setting of a floor on effective tax rates on excess profits inherently limits the downward
potential for international tax competition. Higher-tax countries may also set tax rates
higher than otherwise, a possibility examined further in section D. Moreover, raising the
lowest AETRs is likely to ease distortions in the cross-border allocation of real investment,
a further objective of Pillar II.

Chapter III The impact of a global minimum tax on FDI 109

 b. Spillover effects: investment location
In general, there is no location in which total tax payments are likely to fall as a consequence
of Pillar II. They may be unaffected, if there is no impact of profit shifting under current
arrangements and the GloBE ratio exceeds the minimum 15 per cent. In all other cases,
tax liabilities can be expected to rise. In some cases, this may be an indirect effect of Pillar
II, through a reduced ability to gain by shifting profits to third countries that are directly
affected by the minimum. The largest effect, however, is to be expected in countries that
are constrained by Pillar II: the average rate there will rise as a direct consequence of the
application of the minimum.

The consequence is clearly to disfavour locating real investment in countries that will be
directly affected by the minimum. With a general rise in AETRs, it is conceivable that there
is no country in which a particular investment project under consideration can profitably be
undertaken. More important, however, is the increased relative attractiveness of locations
that are not constrained by the minimum. For example, if prior to Pillar II an MNE could
undertake a project either in a country with a tax rate of 25 per cent on profits of 1,000,
or in another country with the lower rate of 10 per cent but where profits are only 835,
it would receive a net profit of 750 in either case and so would be indifferent as to the
location of the project. But if the low tax rate were now raised to 15 per cent, locating in
the country with the 25 per cent rate becomes the more attractive possibility. For any given
level of investment, adoption of Pillar II may thus lead to reallocation of the investment
towards higher-tax countries not directly constrained by the minimum.

c. Spillover effects: investment scale

With a particular location already decided on, the profit-maximizing scale of investment
depends on the METR in that location. For countries that are not directly affected by the
minimum, the impact is clear: the reduced opportunities for profit shifting increase not
only the FDI-level AETR but also the METR, and through exactly the same mechanism.
As shown in the next section, which focuses on the impact of Pillar II on FDI-level ETRs –
the most directly impactful for decisions on the location of real investment – this means that
the magnitude of changes in FDI-level ETRs also provides an indication of the magnitude
of changes in the METR.

The situation is more complex for countries that are directly affected by Pillar II. METRs in
those countries will rise to the extent that real investments were undertaken there simply
to facilitate inward profit shifting. But there are other effects, arising for example from the
role of the carve-out. It is even theoretically conceivable that METRs in those countries
could actually fall.19 To the extent, however, that the effects of the minimum are akin to an
increase in the STR in these countries, the effect is most likely to be an increase in METR20
– and one that is again likely to be larger the greater is the increase in the AETR.

110 World Investment Report 2022 International tax reforms and sustainable investment
 B. E STIMATING THE IMPACT
OF PILLAR II ON FDI

The empirical analysis in this section aims to quantify the potential impact of Pillar II on FDI.
The analytical exercise is performed in three steps:

(i) Section B.1 provides a comprehensive account of current ETRs paid by foreign
affiliates and of the underlying profit-shifting dynamics. The two aspects – the host
countries’ ETRs and the exposure to profit shifting – are combined in a new synthetic
indicator for tax rates, the FDI-level ETR.
(ii) This indicator is the key analytical input to the quantification in section B.2 of the
increase in CIT paid by MNEs on their foreign investment.
(iii) The increase in FDI-level ETRs is the basis for the estimation in section B.3 of the
expected impacts of Pillar II on the volume, distribution and route of global FDI.

1. Corporate income taxes on FDI

a. Statutory tax rates and effective tax rates

Over the two decades around the turn of the century, global STRs declined markedly but
gradually, from almost 40 per cent in 1990 to just over 25 per cent in 2010 (figure III.1). A key
factor, it is generally accepted, was competition between countries to attract and retain FDI –
especially efficiency-seeking FDI – which put significant pressure on governments to decrease
corporate tax rates and led to a “race to the bottom” in corporate taxation (Abbas et al., 2012).

Average statutory corporate income tax rates, 1990–2018

Figure III.1. (Per cent)

45
40
35
30
25
20
15
10
1990 2000 2010 2018

World -6 pp -5 pp -2 pp

OFCs -3 pp -7 pp 0 pp

World OFCs

Source: UNCTAD; Tax Foundation.

Notes: Top statutory corporate income tax rates, simple averages across countries. OFCs = offshore financial centres. World does not include
OFCs. The list of OFCs follows that of Tørsløv et al. (2021). Only countries for which statutory tax rates are available for all years between
1990 and 2018 are included.

Chapter III The impact of a global minimum tax on FDI 111

 The desire to protect against (or induce) profit shifting no doubt also played a role.
In the decade since 2010, STRs have followed a flatter downward trend. This indicates that
competition among countries, at least at the level of STRs, has cooled down. However,
STR trends do not reflect cross-border competitive dynamics such as tax competition
through tax incentives and profit shifting. Offshore financial centres display STRs some 10
percentage points below the global average.

Looking beyond STRs, countries offer fiscal incentives aimed at encouraging some type
of investment by reducing corporate tax bills. Tax holidays, exemptions, deductions
and credits are some examples (section C). ETRs – defined in the standard way as the
ratio between CIT paid and reported profits21 – enable accounting for the effects of tax
incentives. ETRs from country-by-country reporting (CbCR)22 employed in this chapter
are first computed at the country level and then averaged across countries within various
groups. The analysis covers 208 host countries, of which 53 are classified as developed
and 155 as developing; 39 countries qualify as OFCs.23 Notably, the perimeter of firms
covered by CbCR – including only MNEs with more than €750 million annual revenues –
matches the scope of Pillar II. CbCR data place the average ETR paid by foreign affiliates
of large MNEs at 19 per cent globally, 6 points below the average STR (figure III.2).

The difference between ETRs and STRs is similar for both developed and developing
economies. Generally, across all countries, differences in STRs remain an important factor
explaining ETR variation. By contrast, firm nationality (foreign and domestic) and size
(foreign affiliates of large MNEs or SMEs) do not appear to affect ETR levels substantially
(box III.4).24

OFCs exhibit a remarkably low ETR, at 7 per cent on average, in part due to their lower-
than-average STRs (18 per cent) but more importantly to greater resort to fiscal incentives
and preferential tax treatments, as hinted at by the large difference between their ETRs and
STRs of 11 percentage points.

Average statutory and effective tax rates of foreign affiliates of large

Figure III.2.
MNEs, by economic grouping and region, 2017 (Per cent)

25
World 19
Developed 22
economies 16
Developing 26
economies 20

Africa 29
25

Asia 21
17
Latin America 28
and the Caribbean 21

Memorandum

LDCs 27
22

OFCs 18
7

Statutory tax rate Effective tax rate

Source: UNCTAD; Tax Foundation for statutory tax rates and Garcia-Bernardo and Janský (2022) for CbCR-based effective tax rates.
Note: Simple averages across countries. CbCR = country-by-country reporting, LDCs = least developed countries, OFCs = offshore financial
centres.

112 World Investment Report 2022 International tax reforms and sustainable investment
Box III.4. Metrics of corporate income tax rates

Statutory tax rates and [average] effective tax rates

It is critical to distinguish between STRs, established by law, and AETRs, reflecting the average rate at which reported profits are effectively
taxed. Whether to use one or the other depends on the research question (Bradbury et al., 2018). The empirical analysis in this report is
based entirely on AETRs, with the only exception being the historical trend in figure III.1, for which reliable and sufficiently long time series of
AETRs are not available. For the purpose of this analysis, AETRs provide a more comprehensive picture of corporate taxation. Unlike STRs,
they absorb deductions, exemptions and other tax breaks designed by governments to reduce the tax burden of companies. For BEPS-related
analysis, in which aggressive tax practices by OFCs play a critical role, this point is even more relevant as the gap between STRs and AETRs
in OFCs is considerable, two times larger than in other countries. Yet, STRs remain an important determinant of variations in ETRs across
countries: i.e. countries with higher STRs tend also to have higher ETRs.

Forward-looking and backward-looking effective tax rates

“Forward-looking” and “backward-looking” ETRs both aim to measure effective corporate tax liability but, as touched on in section A, are
conceptually and analytically quite different. Forward-looking ETRs are model based, consider a hypothetical investment project and include
all corporate taxes due. They are particularly suited for simulating alternative tax regimes. Although abstract by nature and dependent
on a number of assumptions (such as on interest rates, profitability and inflation), forward-looking (marginal and average) ETR analyses
of corporate taxation and investment have a long-established theoretical tradition (Devereux and Griffith, 2002, 2003). Updated and
comparable forward-looking ETRs are reported by the Centre for Business Taxation of Oxford University for 43 countries, limited to OECD
and G20 countries (see also Bazel et al. (2018), which reports METRs for 2017 for a larger sample of 92 countries, but also excluding most
developing economies).
Backward-looking ETRs do not require assumptions about future scenarios. They are based on the taxes actually paid in a given year relative
to the (pre-tax) income generated in that year. They are data based, computed directly from reporting by countries or firms and calculated as
the ratio of CIT paid over pre-tax profits. Recent major improvements in the availability and reliability of data on the international activity of
multinational groups has given impulse and added credibility to the use of backward-looking ETRs in the analysis of international corporate
taxation, particularly in the BEPS context (e.g. Garcia-Bernardo and Janský, 2022).
So far, the (few) analyses on the investment impact of Pillar II have employed both forward-looking ETRs (Hanappi and Gonzalez Cabral,
2020) and backward-looking ETRs (Devereux et al., 2020). The analysis in this report follows the latter approach for two main reasons. First,
backward-looking ETRs are more directly comparable with the actual GloBE ratio – the main trigger of Pillar II – as they are based on reported
taxes and profits from financial accounts. (They nonetheless differ, because, for instance, of timing differences in the calculation of the GloBE
ratio; see section C). Second, forward-looking ETRs are largely not available for developing countries.

Backward-looking effective tax rates based on country-by-country reporting

The construction of an empirically consistent measure of backward-looking ETRs is challenging. Until the introduction of CbCR reporting,
the main source for calculating backward-looking ETRs of foreign affiliates was the United States Bureau of Economic Analysis (BEA)
database on outward activities of MNEs from that country. The database reports income taxes paid by, and net income accrued to, foreign
affiliates of United States–headquartered MNEs in nearly 70 countries, including several developing economies. The ratio between the
two variables provides in principle a consistent ETR measure, after some corrections for double counting of equity income (Blouin and
Robinson, 2020). Yet, the focus on outward investment from only the United States is clearly problematic. As an alternative, Tørsløv et al.
(2021) use national accounts, also available for many countries but encompassing all firms operating in a country, both domestic firms
and MNEs. Data from both the BEA and Tørsløv et al. (2021) pool together profit- and loss-making firms, with the result of overestimating
ETRs actually faced by firms. Firm-level data have also been used to derive ETRs (Marckle and Shackelford, 2012), but their application
in developing economies – particularly in Africa and in Latin America and the Caribbean – is severely limited by poor data availability
(Tørsløv et al., 2021).
In this context, the publication of CbCR data as part of BEPS Action 13 has been an information breakthrough. Large MNEs – those with
annual revenues over €750 million – are required to prepare reports and give details about their activities in the countries where they operate.
The information is then aggregated at the level of the headquarter-host country pair and made publicly available by the OECD. At the time of
this analysis (December 2021), data were available for only 2016 and 2017. It is important to note that the reporting was not yet mandatory
in 2016, but the data from 2017 used in this report capture all large MNEs from 38 countries that signed the multilateral agreement for the
automatic exchange of country-by-country reports.
CbCR reporting is thus very recent and as CbCR practice consolidates, it is expected to improve. Yet, there is little doubt – and a general
consensus among experts (Garcia-Bernardo et al., 2021) – that CbCR data are already both richer and more empirically consistent than
alternative sources. They cover the largest investors worldwide (almost 40 countries, corresponding to 90 per cent of outward FDI stock
globally) and almost all recipient countries (about 200, compared with nearly 50 in Tørsløv et al. (2021) and 70 in the BEA database).

/…

Chapter III The impact of a global minimum tax on FDI 113

 Box III.4. Metrics of corporate income tax rates (Concluded)

In addition, loss- and profit-making companies are separated, and national companies can be excluded to focus the calculation on
foreign affiliates. Furthermore, in the context of the analysis of Pillar II, the CbCR perimeter exactly matches the scope of the tax reform,
targeting foreign affiliates of large MNEs. Finally, in the version used in this report from Garcia-Bernardo and Janský (2022) – excluding
stateless entities – CbCR data are less prone than BEA data to double counting (although some residual double counting is possible on
intracompany dividends, especially for the United States and developed economies in general; see discussions in Clausing (2020), Garcia-
Bernardo et al. (2021) and Garcia-Bernardo and Janský (2022)).
For the case of United States MNEs, for which there are reliable comparative data, recent studies (Garcia-Bernardo et al., 2021) provide
extensive cross-validation of CbCR-based ETRs, adding significant transparency about their strengths and weaknesses. Box figure III.4.1
compares average backward-looking ETRs based on three different sources. Overall, despite differences in data sources and perimeters
– CbCR covering foreign affiliates of large MNEs, BEA covering foreign affiliates of United States MNEs and national accounts covering all
firms – results and patterns are aligned, most notably between CbCR and BEA data, as expected.

Average effective tax rates, by economic grouping, different perimeters

Box figure III.4.1.
and sources, 2017 (Per cent)

19
World 18
17
16
Developed economies 15
17 Foreign affiliates of large MNEs (CbCR)
20 Foreign affiliates of United States MNEs (BEA)
Developing economies 19
17 All firms (National accounts)

Source: UNCTAD; CbCR data based on Garcia-Bernardo and Janský (2022), USDIA BEA database, national accounts data based on Tørsløv et al. (2021).
Note: Simple averages across countries. World and economic groupings do not include OFCs. BEA = Bureau of Economic Analysis, CbCR = country-by-country reporting,
ETR = effective tax rate.

Source: UNCTAD, based on Casella and Souillard (2022).

b. ETRs and the global minimum tax

The global average ETR stands at 19 per cent (excluding OFCs). Fewer than a third
of developing economies report an average ETR below 15 per cent, with the share
increasing to 50 per cent for developed economies. Thus foreign affiliates generally face
higher ETRs than the minimum Pillar II rate of 15 per cent and tend to pay higher ETRs in
developing economies than they do in developed economies (figure III.3). Among affiliates
in developing economies, it is mainly those in small countries that report lower ETRs. As a
result, weighting by the size of countries – captured by share of FDI stock – increases the
average ETR in developing economies from 20 per cent to 23 per cent.

Developing economies with average ETRs below 15 per cent account for 6 per cent of total
inward FDI stock to developing economies (figure III.4), suggesting that the large majority
of FDI stock will not be directly affected by the minimum tax rate.25 For comparison, the
share of developing countries with an average ETR below 21 per cent – the alternative
threshold originally discussed in the context of BEPS negotiations – would be about 55 per
cent (double the proportion of those with ETRs below 15 per cent), and corresponding to
a sizeable 35 per cent of the FDI stock of developing countries.

Notably, whereas the Pillar II threshold at 15 per cent appears conservative for the levels of
taxation in most countries, it is high for OFCs, more than half of which face an average ETR
of less than 5 per cent. This is a key consideration when incorporating profit-shifting dynamics
into the analysis of ETRs and considering the impact on ETRs of the Pillar II global minimum tax.

114 World Investment Report 2022 International tax reforms and sustainable investment
Figure III.3. Distribution of average effective tax rates of foreign affiliates of large
MNEs across host countries, 2017 (Per cent)

Share of countries with average ETR in range

Simple average (FDI-weighted average) 0–5 5–10 10–15 15–21 >21

34

World 19 (17) 7 9 17 27 39

50
Developed 16 (15) 3 8 39 29 21
economies
29
Developing
20 (23) 9 10 11 27 44
economies
20

Africa 25 (26) 7 4 9 26 54

34

Asia 17 (22) 10 15 10 29 37

22
Latin America
21 (23) 4 9 9 26 52
and the Caribbean

Memorandum
23

LDCs 22 (25) 10 8 5 26 51

79

OFCs 7 (5) 55 14 10 7 14

Source: UNCTAD; CbCR-based ETRs from Garcia-Bernardo and Janský (2022).

Note: World, economic groupings and regions do not include OFCs. CbCR = country-by-country reporting, ETR = effective tax rate,
LDCs = least developed countries, OFCs = offshore financial centres.

Distribution of inward FDI stock by average effective tax rates of

Figure III.4. foreign affiliates of large MNEs in host countries, developing
countries, 2017 (Per cent)

Share of FDI stock,

developing countries
70
62
60

50
Pillar II
minimum
40

30 26

20

10 5 6
1
0
0–5 5–15 15–25 25–35 >35 ETR range

Share of developing
9 20 37 20 14
countries

Source: UNCTAD; CbCR-based ETRs from Garcia-Bernardo and Janský (2022).

Note: Developing countries exclude OFCs. CbCR = country-by-country reporting, ETR = effective tax rate.

Chapter III The impact of a global minimum tax on FDI 115

 c. FDI-level ETRs
It is important to recognize that ETRs calculated as the ratio of taxes paid in some host
country to the profits reported there do not fully reflect the actual tax rates paid on the
income generated by the underlying investment. This is because of profit shifting: part of
the FDI income created in host countries may well be shifted offshore and subjected to
lower ETRs in OFCs.26 ETRs reported in host countries are thus higher than the effective
rates ultimately faced by MNEs on income generated by their investments there. A more
comprehensive notion of ETR, encompassing all income generated by FDI – including
shifted income – is defined here as FDI-level average ETR, or simply FDI-level ETR
for convenience.27

The FDI dimension implies a shift in the analytical focus from the foreign affiliate’s country of
operations (host country) to the underlying, value-creating FDI project itself. More concretely,
for a given host country C, the FDI-level ETR can be defined as the ratio between CIT on
the income generated by the FDI stock in country C and the FDI income itself – recognizing,
crucially, that those taxes may be paid and income reported in countries other than C itself
(box III.5). In the absence of profit shifting, FDI-level ETRs are the same as standard ETRs.
The difference between the two depends on the extent of profit shifting – i.e. the share of
FDI income shifted to OFCs – and the difference between the ETR in host countries and
in the OFCs. With profit shifting estimated to affect between 20 and 40 per cent of MNE
profits (WIR15; Tørsløv et al., 2021; Garcia-Bernardo and Janský, 2022) and the difference
in ETRs between OFCs and other countries larger than 10 percentage points, FDI-level
ETRs are on average 2 to 3 percentage points lower than standard ETRs – from 17.3 to
15 per cent at the global level, after weighting by FDI stock (figure III.5, left-hand side).

For developing economies, the difference between standard ETRs and FDI-level ETRs is
higher than in developed economies, at 3.4 percentage points (from 23 per cent to 19.6
per cent) against 1.9 points (from 15 per cent to 13.1 per cent). This is consistent with
evidence that outward profit shifting is especially marked in developing countries. These
differences correspond to a decrease in CIT paid on FDI income of about 15 per cent.
This effect can be seen as the CIT “saving” made by MNEs on their foreign profits as a result
of profit shifting – and, conversely, the collective revenue loss suffered by governments.

Incorporating profit-shifting dynamics – i.e. switching from the standard ETR view to the
FDI-level view – not only decreases the average but also changes the distribution of ETRs
(figure III.5, right-hand side). With the new metric, the share of developing countries with tax
rates below 15 per cent increases to 48 per cent (from 29 per cent) and the corresponding
share of FDI to 26 per cent (from 6 per cent). Given the high concentration of host-country
ETRs in the range between 15 and 20 per cent, a shift of even a few percentage points
in their distribution has a significant impact on the positioning of countries relative to the
Pillar II minimum threshold. In other words, the Pillar II threshold of 15 per cent does not
appear as low anymore when assessed from the perspective of FDI-level ETRs rather than
that of the standard ETRs (though it is of course the latter to which the Pillar II rules directly
apply). The Pillar II minimum rate of 15 per cent is thus more ambitious and far-reaching
than it may seem. Investments in locations where ETR exceeds 15 per cent might appear
to be unaffected by the minimum; but to the considerable extent that investors achieve
a lower effective rate by shifting profits to countries with rates lower than 15 per cent,
they will be. The next task is to assess quite how powerful this effect is likely to be.

116 World Investment Report 2022 International tax reforms and sustainable investment
Figure III.5. Average FDI-level effective tax rates of large MNEs, by economic grouping and region,
2017 (Per cent)

Stylized distribution of inward FDI stock by average (FDI-level)

World 15 ETR in the host countries, developing countries
Developed 13
economies Effect of profit shifting
Developing
20
economies

Africa 22

Asia 20

Latin America
19
and the Caribbean
0 5 15 20 25 35 ..100
Memorandum
Share of
1 25 60 10 5
LDCs 20 FDI stock
Share of
9 39 33 14 6
OFCs 5 countries

FDI-level ETR Average FDI-level ETR

Delta to ETR FDI-level ETR ETR

Source: UNCTAD estimates.

Note: FDI-weighted averages. World, economic groupings and regions do not include OFCs. ETR = effective tax rate, LDCs = least developed countries, OFCs = offshore financial centres.

Box III.5. A new ETR metric: the FDI-level ETR

As a result of profit shifting, taxes paid by MNEs on profits generated by FDI do not align with ETRs reported by foreign affiliates in host
countries. Part of the FDI income is shifted offshore and subject to lower ETRs.
Thus, the ETR observed in host country C will be higher than the actual ETR faced by MNEs on income generated by FDI there. To account
for this effect, an FDI-level ETR is then introduced:

The standard host-country ETR, in contrast, is:

implying that if profit shifting takes place. The two ETRs are related as:

where are OFCs to which foreign affiliates operating in country C shift a share of their profits, respectively .
Bilateral profit-shifting shares can be calibrated using one of the available methodologies to estimate profit shifting. Casella and Souillard
(2022) discusses and compares different approaches including the profit misalignment method (Garcia-Bernardo and Janský, 2022) – the
baseline approach adopted in this report – as well as the method of comparison with domestic firms (Tørsløv et al., 2021) and the semi-
elasticity method (Heckemeyer and Overesch, 2017).

Source: UNCTAD, based on Casella and Souillard (2022).

Chapter III The impact of a global minimum tax on FDI 117

 2. Pillar II and the taxation of FDI income

a. The increase of FDI-level ETRs

The increase in corporate taxation for MNEs caused by a minimum tax rate applied to foreign
affiliates operates through two main channels: host countries’ ETRs and profit shifting.

The first, and most obvious channel, is through the ETRs of the host countries whose
GloBE ETRs are below the minimum of 15 per cent and so are subject to some top-up
under Pillar II rules. How foreign affiliates in host countries distribute around the threshold
determines the increase in the tax rates applied to their locally reported profits. In practice,
for empirical purposes, given the prohibitive task of tracking within-country firm-level
variations in ETRs, the analysis in this chapter uses countries’ average ETRs as proxies
for GloBE ETR distributions. In this context, the trigger of the ETR channel is the difference
between the 15 per cent threshold and the host country’s average ETR.

The second driver of change in corporate taxation paid by MNEs is the profit-shifting
channel, which arises even when the standard ETR in a particular host country exceeds
15 per cent. Accounting for profit shifting substantially increases the estimated impact of
Pillar II based on host countries’ ETRs alone. The profit-shifting channel works through two
related dynamics. On the one hand, higher taxation of income reported in OFCs leads the
MNE to reduce the proportion of profit it shifts; on the other, the residual shifted profits are
subject in those OFCs to higher ETRs – from an average of 7 per cent to the minimal rate of
15 per cent.

The calibration of the residual share of shifted profits after the introduction of the minimum
is ultimately an empirical and modelling matter. The analysis that follows uses two scenarios
to assess the impact on FDI-level ETRs: one that is likely to provide a conservative estimate
of the induced increase in FDI-level ETRs (“baseline scenario”), and one that provides an
upper bound on this increase (“upper bound scenario”). The baseline (conservative) scenario
allows the share of shifted profits to decrease proportionally (linearly) to the reduction
of the gap in the rate between host countries and OFCs.28 The upper bound assumes
that there is no longer any profit shifting after the introduction of the Pillar II minimum (a
full reversal of profit shifting).29 The actual effect is very likely to lie between the two, as
confirmed by recent profit-shifting literature supporting significant non-linearity (namely,
convexity in rate differentials) of profit shifting (Dowd et al., 2017; Garcia-Bernardo and
Janský, 2022).

As a synthetic indicator combining both ETR levels and profit-shifting shares, the FDI-
level ETR provides a flexible metric that allows account to be taken of both channels.
From this perspective, it gives a more realistic picture of the increase in the CIT rate paid
by MNEs on their foreign investment than do standard host-country ETRs alone, which
cannot incorporate the effects on profit-shifting dynamics in the calculation of the ETR
impact (box III.6).

Applying the FDI-level ETR framework described in box III.5 and box III.6 – and leaving
aside for now the impact of the carve-out – this report estimates an increase of 2.4
percentage points in FDI-level ETRs faced by MNEs globally as a result of Pillar II, with
an upper bound of 3 percentage points. This estimate is computed by averaging across
host countries – accounting for all FDI (including by MNEs not in scope of Pillar II, i.e. with
annual revenues below €750 million) – with host countries weighted by the size of their FDI
inward stock (figure III.6, left-hand side, shaded quadrant). The assessment of the impact
assumes that all countries covered by the analysis (more than 200) implement Pillar II.

118 World Investment Report 2022 International tax reforms and sustainable investment
Figure III.6. Impact of Pillar II on average FDI-level effective tax rates without carve-out, by economic
grouping and region (Percentage points)

Increase in average FDI-level ETR, world

World 2.4 3.0

FDI of large
MNEs All FDI Developed 2.7 3.0
economies
ii i
Developing 1.9 3.1
economies
Simple Africa 2.1 3.4
4.3–5.9 3.4–4.7
average
Asia 1.6 2.4

Latin America
2.3 4.2
and the Caribbean
FDI-weighted Memorandum
3.0–3.6 2.4–3.0
average
iv
LDCs 3.0 5.4
iii

OFCs 7.3

Partial reduction in profit shifting

Delta to full elimination of profit shifting

Source: UNCTAD estimates.

Note: World, economic groupings and regions do not include OFCs. ETR = effective tax rate, LDCs = least developed countries, OFCs = offshore financial centres.

Box III.6. How Pillar II changes FDI-level ETRs

The (average) FDI-level ETR in host country C defined in box III.5 can be written as:

where denote OFCs to which foreign affiliates operating in country C shift a share of their profits, respectively .
For foreign affiliates of large MNEs (in scope), the impact of the Pillar II minimum on the FDI-level ETR is given as follows:

where ETR’ is equal to the maximum between ETR and 15 per cent and are the profit-shifting shares after implementation of Pillar II.
Intuitively, the first term in the right-hand side represents the ETR channel, while the second and third capture the profit-shifting channel.
The ETR channel depends simply on the level of the host country’s ETR relative to the minimum, while the profit-shifting channel depends on
the change in exposure to profit shifting, through adjustments to both the (shifted) tax base and to the tax rates (differentials). In a world without
profit shifting, then . Thus, the impact of Pillar II would be limited to the difference between the minimum and the host-country
ETR if positive, or 0 if not positive.
With profit shifting, the impact depends on the assumptions about the change in profit-shifting behaviour as a result of Pillar II. This analysis
considers two scenarios. The baseline conservative scenario allows profit shifting to decrease gradually after Pillar II, with ,
where the latter shares are empirically calibrated at the bilateral level. The upper-bound scenario – maximizing the impact of the profit-
shifting channel – assumes the elimination of profit shifting after Pillar II: and , for all i.
Finally, to obtain the impact of Pillar II at the host-country level – including all foreign affiliates, both in and outside the scope of Pillar II – the
impact in the equation above is weighted by some (host country–specific) factor that reflects the share of income generated by foreign
affiliates of large MNEs in the income generated by all foreign affiliates

Source: UNCTAD, based on Casella and Souillard (2022).

Chapter III The impact of a global minimum tax on FDI 119

 As small countries tend to report lower (pre-Pillar II) rates, unweighting increases the
estimated impact of the reform, from 2.4 to 3.4 percentage points in the baseline scenario
(from quadrant IV to quadrant I in figure III.6, left-hand side). FDI by large MNEs – falling within
the scope of application of Pillar II – are subject to a stronger increase: in the baseline scenario,
the increase in their FDI-level ETRs is 4.3 and 3.0 percentage points in the unweighted and
weighted versions, respectively (quadrants II and III in figure III.6, left-hand side).

Comparing developing and developed countries, it is only in the upper-bound case

(maximal response) that the impact on FDI-level ETRs is substantially the same, at about
3 percentage points (figure III.6, right-hand side). In the baseline scenario, where a part
of profits continues to be shifted to OFCs, the increase in FDI-level ETRs in developing
countries is two thirds of that in developed economies (1.9 percentage points against
2.7 percentage points). In this case, the growth in the tax rate faced by MNEs on their
investment in developing economies is about half of that in developed economies. Among
developing countries, those in Latin America and the Caribbean and in Africa see the largest
increase in FDI-level ETRs (2.3 and 2.1 percentage points in the conservative scenario),
while the impact in Asia is more moderate (1.6 percentage points). Excluding OFCs, LDCs
are the most affected, with an increase in the average FDI-level ETR of 3 percentage points
in the baseline scenario, with an upper-bound of 5.4 percentage points.

Different patterns of impact across regions in the two scenarios can be largely explained by
exposure to the two channels, host-country ETRs and profit-shifting. Countries that have
relatively lower ETRs and that are less prone to profit shifting tend to display a more limited
gap between the baseline scenario and the upper bound, since the difference between
scenarios depends on MNE profit shifting behaviour. This is fully exemplified by OFCs,
which have very low ETRs and no outward profit shifting. To a lesser extent, this is also
the case for developed economies. Developing countries, particularly in Africa and in Latin
America and the Caribbean, are in the opposite situation, with relatively high ETRs and
significant exposure to profit shifting, explaining a sizable difference between the baseline
and the upper bound scenario for those countries.

These insights are further confirmed and qualified through an explicit decomposition of
the impact, into the ETR channel and the profit-shifting channel (figure III.7). For ease
of exposition, the decomposition is made under the assumption of full reversal of profit
shifting (upper bound). All profits shifted pre-Pillar II are then simply reassigned to the host
countries where they are generated.30

Globally, of the 3 percentage point increase in the FDI-level ETR, 2 percentage points can
be attributed to the impact of the profit-shifting channel. By contrast, the increase in FDI-
level ETR due to the (upward) realignment of host-country ETRs to the minimum (the ETR
channel) drives a more modest increase.

Yet, the effects are very different between developed and developing economies.
In developed economies, the contribution to the impact is evenly shared between the two
channels. In developing economies, including LDCs, the profit-shifting channel is the more
prominent, owing to the combination of greater exposure to profit shifting and their higher
pre-Pillar II ETRs. As a result, the weight of the ETR channel is less than 10 per cent
in developing economies, compared with almost 50 per cent in developed economies.
Among developing economies, LDCs are somewhat different, with a stronger weight of the
ETR channel. Conversely, in OFCs, the ETR channel drives all the difference, an increase
of 7.3 percentage points.

Looking through the lens of the FDI-level ETR at the objectives of the tax reform
– countering profit shifting on the one hand and limiting tax competition on the other – it
appears that Pillar II acts mainly through the impact on profit shifting from applying the
minimum rate to OFCs rather than through the application of the minimum elsewhere.

120 World Investment Report 2022 International tax reforms and sustainable investment
 Decomposition of the impact of Pillar II on FDI-level effective tax
Figure III.7.
rates, by economic grouping and region (Percentage points and per cent)

Change in average FDI-level ETRs (pp) Weight of the profit-shifting

channel (per cent)

World 3.0 (upper bound) 65

Developed 3.0 53
economies
Developing 3.1 91
economies
Africa 3.4 81

Asia 2.4 91

Latin America
4.2 96
and the Caribbean
Memorandum

LDCs 5.4 79

OFCs 7.3 0

Profit-shifting channel ETR channel

Source: UNCTAD estimates.

Notes: FDI-weighted averages. World, economic groupings and regions do not include OFCs. Upper-bound scenario assumes full elimination
of profit shifting after Pillar II and no carve-out. ETRs = effective tax rates, LDCs = least developed countries, OFCs = offshore
financial centres.

This is particularly true for developing countries. Put differently, in a world without profit
shifting, the increase in corporate taxation on FDI income as a result of Pillar II would
be very limited in developing economies. The empirical evidence of this limited impact
demands two important caveats.

First, an FDI-weighted average understates the impact of the ETR channel across individual
countries. Since smaller countries generally apply lower ETRs, a simple (unweighted)
average across countries would result in a higher impact – a global 4.7 percentage point
increase in the FDI-level ETR in the upper-bound estimate (compared with 3 percentage
points in the weighted version), with most of the additional impact driven by the ETR channel.

Second, and more importantly, the calculation of the impact of the ETR channel assumes
that all foreign affiliates are subject to the average ETR in the host country. This assumption
captures de facto the impact on average ETRs rather than, more relevant for considering
investment effects of Pillar II, the average impact on ETRs (box III.7). It can be proved that
the impact on the average ETR is smaller than the average impact on ETRs. From this
perspective, the baseline estimate in this study understates the actual impact.

A key feature of Pillar II is the application of a substance-based carve-out to reduce the tax
base to which the Pillar II top-up tax rate applies (section A). This is intended to preserve
the possibility for countries to compete for real and productive investment. As such, the
share of profit that can be carved out – i.e. the share of a foreign affiliate’s total profit that
can be spared from the application of the minimum tax rate – is anchored to indicators of
tangible assets and employment. The existence of this carve-out leaves an “open window”
for countries to engage in a degree of tax competition through their domestic tax system,
as highlighted in section D.

Chapter III The impact of a global minimum tax on FDI 121

 Box III.7. Accounting for ETR variance within countries

Tax incentives are one important reason why ETRs are generally lower than STRs. However, tax incentives are not granted uniformly to all
foreign affiliates: the average ETR observed at the country level is the result of very different tax rates faced by individual foreign affiliates.
As Pillar II applies to those individual foreign affiliates, impact assessments based solely on average ETRs have their limitations. However, for
developing countries, data that can be used to infer the full distribution of ETRs are extremely scarce.
Assuming ETRs concentrated at the country level leads to a systematic underestimation of the impact of a minimum tax. In the case where
the country-average ETR is higher than the minimum threshold – the most common situation in developing countries – the direction of
the bias is obvious. The analysis records no impact (excluding, for the moment, profit-shifting considerations) whereas in practice Pillar II
produces an increase of the ETR faced by a subset of foreign affiliates, and hence of the average ETR as well. However, underestimation of
the impact of the minimum can be shown to hold also in the general case.
The degree of underestimation of the impact depends on the distribution of the ETRs, which varies by country and is not empirically
observable for most countries. A rough indication can be provided by a simulation-based analysis, assuming for each host country a discrete
distribution of ETRs with only two values, at zero and at the STR, and with the mean at the national average ETR. This loosely corresponds to
the case where host countries provide exemptions (zero rate) as the only type of tax incentive; when exemptions do not apply, FDI income is
taxed at the full STR. The impact on average (FDI-level) ETRs globally then becomes around twice the impact calculated in the scenario that
disregards ETR variance (box figure III.7.1).

Simulation of the additional impact of Pillar II in presence of variance of effective

Box figure III.7.1.
tax rates within countries (Percentage points)

Simulation
• For each host country C, assume a distribution of
ETRs with two values: at 0 and at STRc.
• The corresponding shares are computed such World 3.0 3.2
that the mean of the distribution is the country's
national ETR, ETRc. Developed 3.0 3.7
economies
Example*
Developing 3.1 2.0
Share of foreign
economies
affiliates Mean
Africa 3.4 2.3
76%
75
Asia 2.4 1.4

50 Latin America
4.2 3.0
and the Caribbean
25 24% Memorandum

LDCs 5.4 1.9

0 Foreign
0 ETRc = 19 STRc= 25
affiliates'
ETRs (%) OFCs 7.3 1.1

* Example based on the global average values for STR

(25 per cent) and ETR (19 per cent). Impact on average FDI-level Additional impact from
ETR (upper bound) ETR variance, simulated

Source: UNCTAD estimates.

Notes: World, economic groupings and regions do not include OFCs. FDI-weighted averages. Upper-bound scenario assumes full elimination of profit shifting after Pillar II and no
carve-out. The list of OFCs follows that of Tørsløv et al. (2021). ETR = effective tax rate, LDCs = least developed countries, OFCs = offshore financial centres.

Source: UNCTAD, based on Auclair and Casella (forthcoming).

The introduction of the carve-out mitigates the impact of the Pillar II minimum tax rate on
FDI-level ETRs, to the extent that it reduces the tax base to which the top-up applies in host
countries (hence affecting the ETR channel).31 The magnitude of the reduction depends on
the size of the carve-out. Proper calibration of the carve-out shares is empirically challenging.

122 World Investment Report 2022 International tax reforms and sustainable investment
 Impact of Pillar II on average FDI-level effective tax rates with a
Figure III.8.
carve-out, by economic grouping and region (Percentage points and per cent)

Change in average FDI-level ETRs (pp) Growth relative to before

Pillar II (per cent)

World 2.0 14

Developed 2.1 16
economies
Developing 1.8 9
economies
Africa 1.8 8

Asia 1.5 8

Latin America
2.2 12
and the Caribbean
Memorandum

LDCs 2.5 13

OFCs 4.4 80

Source: UNCTAD estimates.

Notes: FDI-weighted averages. This baseline estimate refers to a conservative scenario with a partial (linear) reduction of profit shifting after
Pillar II. World, economic groupings and regions do not include OFCs. ETR = effective tax rate, LDCs = least developed countries, OFCs =
offshore financial centres.

Available data on reported payroll, intangible assets and profits from the OECD CbCR and
the OECD Activity of Multinational Enterprises (AMNE) Database hint at an average carve-
out share of about 40 per cent of reported profits across host countries. This share implies
an increase in FDI-level ETRs at the global level of 2 percentage points in the baseline
estimate, from a pre-Pillar II level of 15 per cent. This corresponds to a relative growth in
tax liabilities faced by MNEs of 14 per cent (figure III.8).

Combining the results across different scenarios and assumptions on the carve-out (see
figures III.6 and III.8), the increase in FDI-level ETR brought about by Pillar II is estimated
to be between 2 and 3 percentage points globally. This implies a growth relative to the
pre-Pillar II level between 14 per cent, in the baseline conservative scenario with a carve-
out, and 20 per cent as an upper bound. This relative increase will be higher for FDI in
developed economies (16 per cent in the baseline scenario) than in developing economies
(9 per cent). The ETR impact on FDI by large MNEs alone (with annual revenues above
€750 million) may be up to 17 per cent in the baseline. It should also be noted that the
baseline estimate reflects the average increase faced by FDI (an FDI-weighted average);
this is smaller than the simple average change in FDI-level ETR across countries, as high
as 17 per cent too.

The baseline estimate of the ETR impact of Pillar II in this report is higher than that provided
by the OECD in its EIA (OECD, 2020; Hanappi and Gonzalez Cabral, 2020; see also box
III.1). Based on a smaller subset of 66 countries, the results in Hanappi and Gonzalez
Cabral (2020) indicate that the average effective tax rate of MNEs would increase on
average by 0.46 percentage point (with the estimated impact on the marginal effective
tax rate significantly higher, at 1.85 percentage points). While also adopting different
methodological approaches, a more fundamental difference between the estimates in this
report and the OECD estimates is that they reflect different underlying perspectives on the

Chapter III The impact of a global minimum tax on FDI 123

 investment impact of Pillar II. Whereas the objective of this chapter – focusing specifically
on policy implications for developing (recipient) countries – is to analyse the impact of Pillar
II on corporate income taxation of FDI, the analysis of the OECD looks at the impact on CIT
associated with group-level investment. This fundamental difference is reflected analytically
in the two different notions of ETR introduced to measure CIT impact – the FDI-level ETR
introduced in this report (see box III.5) and the OECD’s group-level ETR (OECD, 2020,
section 4.4). Intuitively, impacts of Pillar II on group-level tax bills are lower than at the FDI
level because MNEs have the opportunity to optimize investment decisions by choosing
the best location within their geographic network, an obvious option being to invest in the
home country, where the minimum does not apply. In fact, the OECD study investigates
the effect of Pillar II on the group-level ETR associated with an investment conducted in the
home country of the MNE.

b. Mitigation of tax rate differentials

By setting a floor to the race to the bottom in CIT, the introduction of a minimum tax rate
mitigates tax rate differentials between countries by mechanically compressing standard
ETRs into a smaller range. Without profit-shifting considerations, the reduction in tax
rate differentials caused by the Pillar II minimum (at 15 per cent) is particularly sizeable.
Assuming for simplicity that there is no carve-out, a third of developing countries – and
about half of developed ones – will see their standard ETRs re-aligned (upward) to the
minimum, reducing the gap between those countries and others that have ETRs above
15 per cent. The post-Pillar II distribution of the average ETR across countries appears
“truncated” at the minimum tax rate, resulting in a 30 per cent lower standard deviation
(figure III.9; compare first box plot in the left-hand side with right-hand side).32

Comparison between the distributions of effective tax rates and FDI-level effective
Figure III.9.
tax rates across host countries, before and after Pillar II implementation (Per cent)

Pre-Pillar II Post-Pillar II (with full elimination of profit shifting)

ETR
8.8 16.6 23.9

FDI-level ETR 15 16.6 23.9

7.7 13.6 18.7

0 10 20 30 40 0 10 20 30 40

Standard deviation, ETR: 11.7 -30% Standard deviation ETR = Standard

-15% deviation FDI-level ETR: 8.4
Standard deviation, FDI-level ETR: 9.6

Min Max
Interquartile range:
Source: UNCTAD estimates. 25th 50th 75th
Note: No carve-out assumed. ETR = effective tax rate.

124 World Investment Report 2022 International tax reforms and sustainable investment
Accounting for profit shifting decreases the impact of the Pillar II minimum on ETR
differentials. Generally, FDI-level ETRs are less dispersed than standard ETRs. That
occurs because profit shifting mitigates tax rate differentials: widespread access to fiscal
benefits provided by OFCs partially offsets differences in tax rates across host countries.
This mitigating effect can be observed by comparing the dispersion of ETRs and FDI-
level ETRs pre-Pillar II (compare first and second box plot in the left-hand side of figure
III.9). As the minimum kicks in, however, some profit shifting does not take place anymore.
The difference between the dispersion of ETRs and FDI-level ETRs will then narrow,
as the distribution at the FDI level will become closer to that of ETRs. In the extreme
case, assuming full reversal of profit shifting (upper bound), the distributions of ETRs and
FDI-level ETRs after Pillar II coincide (right-hand side of figure III.9).

As a result, the effects of Pillar II on differentials of FDI-level ETRs are more limited than
those on standard tax rate differentials. In the upper-bound case, the standard deviation
of the distribution of the FDI-level ETRs decreases by a more moderate 15 per cent, i.e.
half of the reduction observed with standard ETRs (compare right-hand side and left-hand
side of the figure). The alternative scenario, with a partial reduction in profit shifting, shows
a stronger decrease of tax rate differentials, but smaller than with standard ETRs. Thus,
interestingly, on the one hand profit shifting adds to the direct impact of Pillar II on the level
of host countries’ ETRs; on the other, it partially mitigates its impact on their differentials.

c. Implications for revenue collection

The combined effect of the introduction of a minimum tax rate on host countries’ ETRs and
the reduction in profit shifting generates an increase in the government revenues collected
by host countries on the income generated by FDI up to 20 per cent globally.33 This result
refers to the upper-bound case with full reversal of profit shifting and no carve-out (figure
III.10; see World). Taking into consideration more conservative assumptions on profit shifting

Impact of Pillar II on tax revenues generated by FDI income, by economic grouping

Figure III.10.
(Per cent)

Share in world tax revenues

Growth in tax revenues generated by FDI income post-Pillar II generated by FDI income

Pre-Pillar II Post-Pillar II

World 20

OFCs -100 2.8 0.0

Developed
31 52.1 56.8
economies

Developing 15 45.1 43.2

economies

-100 -20 0 20 40

Source: UNCTAD estimates.

Notes: Three simplifying assumptions were used for this analysis: (a) full elimination of profit shifting without a carve-out, providing an upper bound for the impact; (b) application of a QDMTT by host
countries; (c) all income in OFCs pre-Pillar II is shifted. The analysis excludes income generated in OFCs. Preliminary estimates indicate that the application of the IIR instead of the QDMTT in
assumption (b) does not significantly modify the distributional effect. IIR = Income Inclusion Rule, OFCs = offshore financial centres, QDMTT= qualified domestic minimum top-up tax.

Chapter III The impact of a global minimum tax on FDI 125

 and assuming a carve-out share would lead to a growth in revenues in an approximate range
between 15 per cent and 20 per cent. As expected, the increase in government revenues
fully aligns with the increase in FDI-level ETR faced by MNEs (at some 3 percentage points or
20 per cent in the upper-bound case with no carve-out; see figure III.6).

Which government receives this additional tax revenue, while essentially immaterial to
investors, is of considerable importance to the governments involved, and the allocation
of this revenue has been a subject of great controversy. As discussed in section A,
Pillar II envisages two possibilities. One is that the top-up is allocated to the home country
of the entity involved, through the application of the IIR. The other is that it is allocated to
the host country, through the application of a QDMTT. The latter has been widely welcomed
as more favourable to low-income countries. Yet, even assuming that all host countries
adopt a QDMTT regime, as is the case in the simulation of the revenue effects of Pillar
II in figure III.10, developing countries will gain relatively less revenue from the tax reform
than developed ones (a 15 per cent increase, compared with 31 per cent for developed
countries). As a result, despite the gain in absolute terms, the share of developing countries
in the allocation of total government revenues slightly declines, while that of developed
countries increases by almost 5 percentage points.

It is likely, and consistent with the policy discussion in this chapter (section D), that host
countries will adopt a QDMMT regime; in that case, the results from the simulation in figure
III.10 represent a realistic picture of the revenue effects of the reform. Questions remain on
what the distributional effects would be of the application of the IIR instead. Notwithstanding
the same growth in global terms, the allocation of the government revenues under the
IIR is expected to favor developed economies over developing ones. Quite surprisingly,
however, preliminary insights from ongoing analysis suggest that the difference between the
two possibilities in terms of the overall impact of Pillar II on tax revenues in developed and
developing countries is quite small. In other words, the larger gain in government revenues
of developed economies would not be due to the allocation of the top-up tax to the parent
entity but rather to the relatively higher increase in taxes paid by MNE on FDI in developed
economies compared with developing economies.34 As a possible explanation, the expected
redistribution of taxing rights from developing to developed economies as a consequence of
the IIR is limited by the fact that the impact of the ETR channel in developing countries (i.e.
the component triggering the distribution effect under the IIR regime) is small, with the profit-
shifting channel accounting for the bulk of the increase in taxation.

Importantly, these considerations are based on highly aggregated weighted averages,

thus providing only big-picture directional indications. For smaller developing countries –
which generally apply lower ETRs – the allocation of the top-up tax can make a major
difference in revenue collection. Similarly, accounting for ETR variance within countries
would substantially increase the impact of the ETR channel and amplify the distributional
effects of the top-up in developing countries.

3. The effect of higher taxes on global FDI

Pillar II is expected to affect all three dimensions of the global FDI network: volume,
distribution and route (figure III.11):
• Volume: The previous section estimates an increase in tax liabilities faced by MNEs on
their FDI of about 15 per cent, due to a reduction in profit shifting and to the realignment
of host countries’ ETRs to the Pillar II minimum. This will exert downward pressure on
the total volume of productive investment; however, indirect effects may compensate.
Less scope for tax competition could intensify competition for investment based on
non-tax factors, such as an improved business climate.

126 World Investment Report 2022 International tax reforms and sustainable investment
Figure III.11. Framework for assessing the impact of Pillar II on FDI

CIT rate level + 15%

Impact of Pillar II
on tax rates CIT rate differentials -15 to -30%
on FDI income Host countries’
Profit shifting
ETRs
a

A higher corporate income tax will put pressure Less scope for tax competition may intensify
FDI volume on costs, possibly resulting in a decrease competition around other factors –
of total volume of (productive) investment offsetting high tax costs to some degree

Productive
b
investment
The decrease in investment is likely uneven – The Pillar II minimum tax will improve competitive
the countries where FDI drops relatively positions of higher tax countries as differentials
FDI distribution
more will also see a decrease in their close, resulting in a shift of investment weights
share in global (inward) FDI from low-tax to high-tax FDI recipients

Expected reduction
in profit shifting
Conduit would lead to lower
FDI route
investment incentives for complex
corporate structures
and indirect FDI

Direct effect, focus

Source: UNCTAD.
Note: Impact figures rounded. CIT = corporate income tax.

• Distribution: The introduction of the Pillar II floor will reduce tax rate differentials between
host countries – measured by the standard deviation of the distribution of FDI-level
ETRs – by 15 to 30 per cent globally. As tax rate differentials narrow, low-tax countries
will become less appealing investment destinations and MNEs will have stronger
incentives to redirect investment to higher-tax locations. This may open opportunities
for countries that are not OFCs and particularly for developing countries, which tend to
have higher average ETRs.
• Route: Along with productive investment, the FDI perimeter includes a financial
component. A sizeable share of FDI passes through special purpose entities (SPEs)
– offshore vehicles often used in tax planning – thereby generating sizeable conduit
investment. As Pillar II erodes incentives to shift profits, conduit FDI through these
structures are expected to become less prevalent and investors to establish more
direct connections with recipients. While this does not affect productive investment
(but only the conduit component), changes in the financial component of FDI
may be large.

The analysis in this section focuses on the quantification of the direct effects for each
dimension. It draws on a large body of empirical research looking at the relationship
between tax and FDI. However, there is a significant degree of uncertainty about how
Pillar II will affect productive investment, because the reform is unprecedented in scale,
scope and the extent to which it is coordinated across a large number of countries.
Most empirical studies on tax and FDI (or MNE investment) capture uncoordinated tax
rate changes by individual countries. This introduces several caveats into the analysis
(discussed in box III.8).

Chapter III The impact of a global minimum tax on FDI 127

 Figure III.12. Pillar II volume effect: decrease in a. Impact on FDI volume
global FDI flows (Per cent)
The baseline scenario places the potential downward
effect of increased CIT on FDI global volume at
Baseline impact: High impact: about -2 per cent (figure III.12). This estimate refers
1 535FDI-level ETR FDI-level ETR
up 14% globally up 20% globally to productive investment only, and thus it cannot
1 485
be directly compared with historical trends in
• Partial reduction in • Full elimination of standard FDI flows, which are characterized by large
profit shifting after profit shifting after
Pillar II Pillar II variations caused by the financial component of
• Carve-out • No carve-out FDI. Nevertheless, even removing the most volatile
component – looking at the underlying FDI trend
(WIR19) – the estimated decline remains moderate,
although not negligible. This estimate rests on the
-2.0
-3.0 assumption that some profit shifting continues after
the BEPS reform is implemented (the baseline scenario
in the ETR impact analysis) and that the carved-out
share on (non-shifted) profits is 40 per cent. At the
Source: UNCTAD estimates.
Note: The estimate of change in volume refers to productive investment and excludes upper end, the full elimination of profit shifting and the
conduit FDI. ETR = effective tax rate.
absence of a carve-out result in a decline in global FDI
flows of 3 per cent. Applying different assumptions
about tax elasticity of investment produces a range of
estimates of impact between -1 per cent and -4 per
cent (box table III.8.2).

Box III.8. The tax (semi-)elasticity of investment

The estimates of the impact of Pillar II on the total volume of investment draw on a large body of empirical research attempting to measure the
response of FDI to changes in tax rates. Yet, FDI can encompass stocks and flows at different levels (country, sector, industry or firm), on an aggregate
or bilateral basis. Summary measures of tax effects used in the literature include STRs, AETRs and/or METRs and bilateral tax differentials between
countries. Accordingly, estimates of the tax elasticity of investment vary with the data source, the type of data used and the estimation technique.
The tax (semi-)elasticity of investment used in this analysis represents the percentage change in investment for a 1 percentage point increase in
the tax rate. Estimates of the semi-elasticity of MNE investment from a number of prominent studies are reported in box table III.8.1.

Box table III.8.1. Studies focusing on the response of MNE investment to changes in tax rates

Study Basis Estimated semi-elasticity

Arnold et al. (2011) User cost of capital -0.69
Becker and Riedel (2012) STR -1.42
De Mooij and Ederveen (2008) METR -0.80
De Mooij and Liu (2020) STR -1.26
Feld and Heckemeyer (2011) STR -0.57
Vartia (2008) User cost of capital -0.60
Note: METR = marginal effective tax rate, STR = statutory tax rate.

The upper and lower bounds for the tax (semi-)elasticity of investment encompass a relatively confined range (-0.6 and -1.4), reflecting
the range of notionally consistent estimates in the literature. The baseline of -1 used for this report is the middle value. The range includes
elasticities reported by studies using METRs and STRs. Calculation of the investment impact is a straightforward multiplication of the tax
(semi-)elasticity by the (percentage point) change in the relevant tax rate, which is taken here to be the increase in the FDI-level ETR.
In principle, for the reasons discussed in section A, the change in an appropriately defined METR might be preferable, but adequate
information for a wide set of countries on pre- and post-Pillar II METRs is not available. Nevertheless, the AETR, METR and STR are generally
positively correlated, with the AETR tending to lie (under some conditions) between the STR and the METR. The literature review reported by
/…

128 World Investment Report 2022 International tax reforms and sustainable investment
 Box III.8. The tax (semi-)elasticity of investment (Concluded)

box table III.8.1, using different measures of ETRs, including not only METRs but also (most notably for this analysis) STRs, is reassuring: the
range of values for the tax semi-elasticity remains relatively confined across different definitions of tax rates.
Different scenarios indicate a decline in global FDI flows between 1 and 4 per cent as a result of lower investment volume by MNE affiliates
post-Pillar II (box table III.8.2), with the upper bound reflecting the full elimination of profit shifting, no carve-out and a high tax elasticity of
investment (-1.4), and the lower bound reflecting continued profit shifting, a carve-out at 40 per cent of profits and a low tax semi-elasticity
(-0.6). Overall, results are most sensitive to assumptions on the tax semi-elasticity followed by the assumptions on profit shifting, whereas
the calibration carve-out is less important.

Box table III.8.2. Expected change in FDI flows post-Pillar II

Semi-elasticity Baseline scenario Upper-bound scenario

Low response -0.6 -1.2% -1.8%

Baseline -1.0 -2.0% -3.0%

High response -1.4 -2.8% -4.0%

Note: Baseline scenario assumes partial elimination of profit shifting post-Pillar II and a carve-out. Upper-bound scenario assumes full elimination of profit shifting
post-Pillar II and no carve-out.

Source: UNCTAD.

b. Impact on FDI distribution

Bilateral tax rate differentials are a determinant of efficiency-seeking FDI, and the change in
the distribution of FDI-level ETRs post-Pillar II may reshape the competitive landscape for
MNEs’ foreign investment and divert some investment from (previously) low-tax to higher-
tax countries (figure III.13; box III.9). As OFCs lose their tax advantage, developing countries
are likely to gain investment from diversion. The largest gains are expected in Africa and
Asia, where conservative estimates indicate a 2.4 per cent and 1.7 per cent increase in FDI
inflows, respectively. Gains in Latin America and the Caribbean and in developed economies
are likely more limited but still positive. Overall, this analysis shows that, in developing

Figure III.13. Pillar II diversion effect: change in FDI inflows by region (Per cent)

Developed
economies 0.4 0.6

Developing
economies 1.5 2.9

Africa 2.4 4.6

Asia 1.7 3.1

Latin America 0.9 1.7

and the Caribbean
OFCs -7.3 -4.0

-8 -6 -4 -2 0 2 4 6

Source: UNCTAD estimates, based on Keen et al. (forthcoming).

Note: Economic groupings and regions do not include OFCs. Lower bound and upper bound reflect the 95 per cent confidence interval and
the point estimates reported by Keen et al. (forthcoming), respectively. Baseline scenario and constant FDI volume assumed.

Chapter III The impact of a global minimum tax on FDI 129

 Box III.9. Estimating the FDI diversion effect post-Pillar II

In setting limits on international tax competition, Pillar II will diminish the competitive advantages of particularly low tax rates and of many tax
incentives. Without their former advantage, low-tax countries risk attracting fewer projects, and higher-tax countries will become relatively
more attractive for investment. Aside from effects on the global level of investment, there may thus be a reallocation of investment towards
higher-tax countries.
Assessing the likely strength of this “diversion” effect is not straightforward. The approach here builds on the work of Keen et al. (forthcoming),
who find that real investment in a potential host country C from MNEs with a parent in country P is significantly higher, the lower is the tax
rate in C relative to the average tax rate that MNEs in country P face elsewhere. Applying their methodology to FDI-level ETRs, bilateral tax
rate differentials, , are calculated. This measure is the difference between the tax rate in a host country and the weighted average of the
tax rates in all the other potential investment destinations j that the parent might invest in, as given by:

, where:

For each country pair, the change in tax rate differentials induced by Pillar II is given by post-Pillar II – pre-Pillar II, with the
countries’ tax rates measured by the FDI-level ETRs. MNE bilateral sales’ shares across countries are not always available however, so bilateral
ultimate FDI stocks from Casella (2019) are used as a proxy. The data closely match sales by foreign MNEs as reported in OECD inward data
on foreign affiliate trade in services (FATS) (a univariate regression gives a coefficient of 1.03 and a R2 of about 0.87). The semi-elasticity
of MNE investment reported by Keen et al. (forthcoming) of 3.04 – meaning that an improvement in the tax rate differential of a country by
1 percentage point will increase FDI by 3 per cent – is then applied to the change in differentials in FDI-level ETRs to find the expected
change in the allocation of investment following the implementation of Pillar II. To isolate the reallocation effect, a constant level of global FDI
pre- and post-Pillar II is assumed.
Source: UNCTAD, based on Keen et al. (forthcoming).

countries in particular, the diversion effect has the potential to counterbalance investment
losses caused by the volume effect. Yet this potential will not be realized automatically.
Developing countries will be able to fully leverage the competitive gains associated with a
decrease in tax rate differentials if they push on other more critical investment determinants
such as those associated with economic or institutional fundamentals.

c. Impact on FDI routes

UNCTAD estimates the share of FDI stock through OFCs at about 35 per cent of all inward
FDI stock (WIR15).35 This share corresponds to more than $10 trillion of FDI stock. This
component does not reflect productive investment and is associated with conduit FDI
and tax planning practices.36 To the extent that Pillar II will reduce profit shifting, it can be
expected that some FDI stock in OFCs will be dismantled. Ultimate investors will be more
likely to establish direct links with recipients, reducing the share of conduit FDI. Assuming
for illustrative purposes that the decrease in FDI stock in OFCs as a result of Pillar II is the
same as the expected reduction in profit shifting, the effect on total FDI stock would range
from -10 per cent (baseline case, with partial reduction of profit shifting) to -35 per cent
(upper-bound case, with full elimination of profit shifting). The value of the FDI stock “at
stake” in OFCs would be large, ranging from $4 trillion to $12 trillion. Major disinvestment
of the FDI stock in OFCs would also weigh heavily on trends in FDI flows.37

130 World Investment Report 2022 International tax reforms and sustainable investment
 C. IMPLICATIONS OF
PILLAR II FOR TAX
INCENTIVES

This section focuses on the implications of Pillar II for tax incentives, a key policy tool
adopted by countries to attract FDI. There are both policy and analytical arguments calling
for specific analysis of the effects of the reforms on tax incentives. The transformation
of tax incentives will ultimately be determined by how the new tax environment affects
each specific category of incentives, especially those most commonly used to attract
FDI. The granular assessment here can serve as a guide for investment policymakers and
investment promotion institutions as they assess and review their incentive systems in light
of the innovations brought about by Pillar II.

1. Tax incentives and ETRs

Tax incentives are one of the main reasons for the observed gap at the country level
between average STRs and average ETRs (see figure III.2). Although the cost-benefit
ratio of such incentives is debated, the investment they attract can bring job creation
and knowledge spillovers, help develop local industries and connect countries to global
value chains (GVCs).

A few incentives are unaffected by Pillar II. Others – for example, tax holidays and blanket
exemptions – may be largely negated. All countries will have to reconsider their incentive
system, even those with an average ETR significantly above the minimum of 15 per cent,
because incentives may well bring the ETR for individual investors below the minimum.
It should be noted that, even though some incentives may appear small in absolute terms,
they can be strategic for countries’ economic and industrial development objectives.

In rethinking tax incentives, countries may shift to non-tax measures, such as subsidizing
project infrastructure. As an alternative, countries can change their tax structures and
lower other taxes, such as payroll or value added taxes. Pillar II leaves ample scope for
such measures; critically, however, their own cost-benefit ratios will need close attention.

The diversity of tax incentive systems implies that the impact of the reform will fall unevenly
across countries and firms. This uneven impact has analytical implications for the estimation
of the fiscal effects of Pillar II. Assessments that rely on countries’ average ETRs – such
as those in the previous section and in other analyses of the investment impact of Pillar II
so far – are based on summary statistics that reflect the average level of CIT faced by
FDI in host countries. This is likely the best approximation, given the data available, to the
ETRs of entities present in the country; however, distribution of (firm-level) ETRs across
foreign affiliates are highly relevant for the impact of Pillar II. These distributions are largely
determined by the structure of tax incentives and can vary significantly (figure III.14).
Any realistic distribution curve that implies some variance of ETRs would lead to greater
impact than the assumption of a uniform (“representative”) country-level ETR. The effect of
accounting for the variance of ETRs can be so large as to double the fiscal impact of Pillar II
(see box III.7; Auclair and Casella, forthcoming).

Chapter III The impact of a global minimum tax on FDI 131

 Illustrative distribution of effective tax rates of foreign affiliates
Figure III.14.
in a host country

Incentives

Exemptions Reduced rates Deductions, etc.

Foreign affiliates
affected

0 15 19 25 ETR (%)
Impact of the minimum Pillar II Average effective Statutory
minimum tax rate tax rate

Source: UNCTAD.
Notes: Illustrative shape of an ETRs’ distribution for a generic host country (with STR and ETR equal to the global averages).
In this example, a large group of foreign affiliates pays the full statutory rate (resulting in a "peak" at the STR). Host countries provide a
variety of incentives to specific subsets of foreign affiliates; these firms face ETRs lower than the STR. Incentives can range from
deductions to reduced rates to exemptions, for which the tax reduction is maximized. The example shows that the country's average
effective tax rate (19 per cent) is not a fully representative indicator for the impact of Pillar II. Simply based on the average ETR, the host
country would not be affected by a minimum at 15 per cent; however, a subset of foreign affiliates is. As they align their ETR to the
minimum, the country’s overall average increases above 19 per cent.

2. Pillar II and tax incentives: an empirical assessment

As a general rule, the GloBE model rules will have an impact only when an MNE is within its
scope of application, an incentive brings the ETR below 15 per cent and accounting profit
exceeds the carve-out. This means that any incentive will remain intact if these conditions are
not met – e.g. when it brings the ETR to, say, 16 per cent; when an MNE has global turnover
of less than €750 million; or when the industry to which the incentive applies runs on tight profit
margins and is intensive in labour and tangible assets, thereby causing the substance carve-
out to produce a negative result for GloBE net tax. Envisaged as acting parallel to existing
corporate tax systems, the GloBE rules hence do not affect any incentive in all circumstances.
Even when a given incentive is rendered economically ineffective up to the minimum rate of
15 per cent it is never legally prohibited by Pillar II, as the latter aims to ensure a minimum level
of taxation of excess profits without interfering directly with the domestic system of corporate
taxation. Moreover, some tax measures – such as accelerated depreciation, loss carry-forward
or participation exemption regimes – do not reduce the ETR calculation for GloBE purposes,
thus minimizing the impact of Pillar II on such domestic regimes.

As not all incentives are affected and not all are affected to the same extent, to establish
the implications of Pillar II on tax incentives, it is important to discriminate between them:
that is, to determine how large is the set of tax incentives affected by the reform and, within
this group, what is the share of the categories that are most affected. A precise quantitative
assessment would require an empirical mapping of tax incentives through the lens of Pillar
II, which is not possible given current data availability. Nonetheless, the new Government
Tax Expenditure Database (GTED), published for the first time in the fall of 2021, reports
tax expenditure provisions published by countries worldwide from 1990 onwards and
allows some empirically informed high-level sizing.38 As a main feature, each provision in
the database is classified according to four key dimensions: beneficiary, tax base, policy
purpose and type of reduction. Each of these dimensions provides useful information on
the possible relevance of Pillar II for the current structure of overall tax incentive systems.39

132 World Investment Report 2022 International tax reforms and sustainable investment
As a first approximation, the scope of Pillar II can be delimited by tax expenditures
addressed to business beneficiaries, and within that subset, those targeting income-
related taxes – mainly CITs but also other income-based taxes such as taxes on capital
gains. This perimeter includes (but is not limited to) incentives affected by Pillar II.40 Yet, it is
notable that the vast majority of tax expenditures lies outside this perimeter, targeting non-
corporate beneficiaries and/or taxes other than income-based ones.

Only one fifth of global tax expenditure provisions reported by countries in the last 30
years are targeting corporate income (figure III.15). More specifically, of about 17,000 tax
expenditures reported by the GTED database, 41 per cent have a business beneficiary.
Within this group, about half target income-based taxation – the focus of Pillar II – with the
other half covering other tax categories such as taxes on goods and services or on payroll.
The relative share of tax expenditures targeting corporate income in the total number of tax
expenditures does not differ substantially between developed and developing economies;
however, LDCs are a notable exception, with income-related tax expenditures amounting to
less than 10 per cent of the total number of tax expenditures reported by these economies.
The (forgone) revenue pool associated with provisions targeting corporate income equals
some 5 per cent of total tax revenues of the reporting countries, a limited but non-negligible
value. As a share of GDP, forgone revenues associated with income-related expenditures
amount to about 1 per cent, for both developed and developing countries.

Importantly, the share of income-related tax expenditures in the total number of tax
expenditures with business beneficiaries increases from 50 per cent to 75 per cent when
focusing on expenditures aimed at attracting FDI. This suggests that the coverage of Pillar
II is higher for those incentives that are more directly targeted by the scope of the reform.

The focus on income-related incentives is only the first and most obvious filter that can
be used to size the relevance of Pillar II for tax incentives. Zooming in on the dimension of
policy purpose allows some additional refinement. More affected will be incentives whose
main purpose is to attract foreign investment and/or target investment from large MNEs
and/or those that have a heavier intangible component (owing to the lesser tax reduction

Figure III.15. Tax expenditure provisions targeting business beneficiaries, 1990–2020 (Per cent)

Income-related tax expenditures

(corporate income + other income)
Share in number
of tax expenditures
Share in total number Breakdown
Share in total targeting business
of tax expenditures by tax base
number beneficiaries

World 41 43 8 38 21 51

Developed
economies 46 44 5 44 23 50

Developing 35 41 12 43 18 53
economies

LDCs 27 20 7 70 7 27

Corporate income Goods and services

Other income Property
Payroll
Others

Source: UNCTAD, based on the Government Tax Expenditure Database.

Note: Number of tax expenditure provisions reported = 16,900. LDCs = least developed countries.

Chapter III The impact of a global minimum tax on FDI 133

 in that case from the substance-based carve-out). How large these categories are within
the group of income-related incentives is difficult to assess from the provisions reported in
the GTED database.41

Nevertheless, it is reasonable to exclude from the relevant group up to a third of tax

provisions with reported objectives that focus on domestic and/or small business (figure
III.16, left-hand side). It is indicative that among the most frequently cited policy objectives
in the group of income-related tax expenditures reported by the GTED database are
“develop the agricultural sector” – an industry that typically has low FDI intensity – and
“promote SMEs”, which are likely outside the scope of Pillar II. For about 40 per cent of
tax provisions the allocation is not straightforward, as they have objectives that cut across
the scope of Pillar II. Finally, one quarter report policy objectives that generally place them
in the domain of application of Pillar II. These include a minority of provisions that explicitly
state as their objective to “attract FDI” as well as provisions aimed at promoting activities
at high degrees of internationalization such as knowledge-intensive activities or exports,
or at developing sectors that have high FDI intensity. Although necessarily high-level,
this analysis shows that, even within the perimeter of Pillar II (income-related incentives),
countries still retain an unaffected policy space on a large range of tax incentives, aimed at
promoting policy objectives that do not interfere with the scope and objectives of Pillar II.

The fourth dimension in the GTED database, “type of reduction”, allows further
discrimination between incentives in terms of their design and expected interaction with
GloBE rules (figure III.16, right-hand side). In the set of incentives with broad focus on
foreign investment and/or large MNEs, two main categories emerge: those reducing the
CIT rate, including exemptions, tax holidays and reduced rates (42 per cent of the total),

Income-related tax expenditures, by policy objective and type

Figure III.16.
of reduction, 1990–2020 (Per cent)

By policy objective By type of reduction

100 100

High High
Main focus on
foreign investment 25 Exemptions and
29
and/or large MNEs tax holidays
Relevance to GloBE scope

13 Reduced rates
Impact on GloBE ratio

42 14 Others (tax deferral,

Cross-cutting tax credit)
objective

Deductions
(accelerated depreciation,
Main focus 44 capital allowances,
on domestic 33 deductions for special
and/or expenses)
Low small business Low

Income-related tax Tax expenditures with

expenditures (n = 920) main focus on foreign investment
and/or large MNEs (n = 230)

Source: UNCTAD, based on the Government Tax Expenditure Database.

134 World Investment Report 2022 International tax reforms and sustainable investment
and those reducing the tax base (44 per cent), including deductions, accelerated
depreciation and capital allowances. Generally speaking, the former group will be much
more heavily affected by Pillar II. The remaining categories (14 per cent), including for
example tax credits, will also be only moderately affected by Pillar II.

Despite some important limitations – particularly related to the incomplete reporting of

tax expenditures across countries – this high-level analysis helps put the impact of Pillar
II on tax incentives in some perspective. Although Pillar II has certainly significant and
direct effects on tax incentives to attract FDI, countries still retain ample policy space on
a large range of tax incentives: those falling outside the perimeter of Pillar II; those aimed
at promoting policy objectives that do not interfere with the scope and objectives of Pillar
II; and those covered by Pillar II in principle, but ultimately not significantly affected by
the GloBE rules. The next section focuses on this latter analytical dimension, providing
a detailed assessment of the impact of the GloBE rules for the most common incentives
used by countries to attract FDI.

3. Impact of the GloBE rules on tax incentives

A detailed assessment of the implications of GloBE rules on specific incentives to attract
FDI involves understanding the impact of each category of incentives on the GloBE
ratio, defined by the GloBE rules as the ratio between covered taxes and GloBE income.
This GloBE ratio (or GloBE ETR) is the trigger for the application of the Pillar II top-up.

The key rationale for granting an income-based tax incentive is to stimulate certain
responses from a corporate entity by reducing its ETR (relative to the standard treatment).
In this respect all tax incentives operating through the corporate tax and other covered
taxes potentially produce some kind of reduction in the ETR faced by the beneficiary, and
hence in the resulting GloBE ratio. However, the nexus is not so straightforward, and an
assessment of the Pillar II impact on specific categories of incentives demands a number
of considerations and steps (figure III.17). In exploring them, this analysis focuses on the
implications, through the GloBE ratio, for any top-up tax. Yet, it is important to bear in mind
that the total liability of the MNE is the sum of that top-up tax plus the usual domestic
liability. So, incentives also affect investors through the latter route, just as they do at
present. The net effect is that topping up may reduce the impact of an incentive but does
not in general eliminate it.

i. Is the tax incentive in scope?

Among income-related tax incentives, the GloBE rules establish some important
exceptions. These exceptions include incentives that target out-of-scope entities (SMEs
and excluded entities) and specific portions of the income tax base (excluded income).

SMEs. In general, the application of the top-up tax is limited to MNE groups with annual
consolidated revenues of at least €750 million.42

Excluded entities. Some entities are not subject to the GloBE rules because they are
excluded from the definition of constituent entities. These include government bodies,
international organizations, non-profit organizations, pension funds and investment funds,
and real estate investment vehicles that are the ultimate parent of an MNE group.

Excluded income. Income derived from international shipping is excluded from the
computation of the GloBE income. This means that such income will not be included in the
GloBE tax base in the ETR calculation and, thus, tax benefits granted to such income may
not be affected by the GloBE rules, as they will not reduce the ETR for a country.43

Chapter III The impact of a global minimum tax on FDI 135

 Figure III.17. Framework to assess the impact of Pillar II on (income-related) tax incentives

Examples (from detailed

assessment in table III.2)

iii. Is the
incentive YES
expected to High impact • Tax holidays
have a large of Pillar II • Exemptions
impact on
GloBE ratio?
YES
NO
ii. Is the
incentive Unclear/variable • Reduced rates
expected to impact of Pillar II • IP box
modify the
GloBE ratio?
YES
NO

i. Is the tax Little or no impact • Accelerated depreciation

incentive of Pillar II • Loss carry-forward
in scope?

NO

GloBE does
not apply

Source: UNCTAD.

ii. Does the tax incentive modify the GloBE ratio?

A decrease in the standard ETR generated by a tax incentive does not necessarily translate
into a corresponding decrease in the GloBE ratio. It does so unless the GloBE model
rules, recognizing the distinctive nature of some categories of incentives, prescribe specific
adjustments to the GloBE ratio. These adjustments are generally aimed at offsetting the
downward pressure exerted by the incentive on the standard ETR.

This offset usually happens either through a deduction of some relevant part of the
tax base from the GloBE income in the denominator of the GloBE ratio or through the
inclusion of some additional tax items in the taxes covered in the numerator. One of the
most important cases arises in the GloBE treatment of timing differences, where the model
rules prescribe an approach based on deferred tax accounting, seeking to match taxes to
the period when the income or expenses is recognized for tax purposes. This in general
implies that covered taxes in the numerator of the GloBE ratio are adjusted to align with
the GloBE income in the denominator, resulting in small or no impact of GloBE rules on the
underlying incentive. This general treatment of timing differences involves several types of
tax incentives, including for example accelerated depreciation and loss carry-forward (see
the detailed assessment in table III.2).

These adjustments have the effect of preserving a higher GloBE ratio. In the end, it is
the GloBE ratio, not the standard ETR, that triggers the top-up. Thus, in these cases the
intended benefits of the incentive are not limited or affected by Pillar II (i.e. the incentive
brings down the standard ETR, resulting in a benefit for the investor, but not the GloBE
ratio, which determines the top-up tax). The impact of the GloBE rules on the tax incentive
is therefore expected to be small or null.

136 World Investment Report 2022 International tax reforms and sustainable investment
iii. Does the tax incentive have a significant impact on the GloBE ratio?

In general, if the incentive is in scope and not regulated by the model rules – and thus has
no specific adjustment prescribed – the GloBE ratio is expected to decrease consistently
with the standard ETR. In this general case, to the extent that a specific incentive brings
the GloBE ETR faced by an entity below the minimum, its intended benefits will be partially
or totally offset by the Pillar II top-up (notwithstanding the mitigating effect of the carve-
out). The tax incentive is then assessed to be generally affected by Pillar II.

The magnitude of the impact depends on the gap between the fiscal benefits of the incentive
prior to the application of the top-up and the benefits that remain after. This assessment is
difficult a priori for broad categories of incentives, as it is country-, entity-, and incentive-
specific. However, some categories of incentives, because of their design, are expected to
have a greater impact on the GloBE ratio; these are thus prone to being highly affected by
Pillar II. For other categories, the impact remains unclear and case-specific.

Two key factors underpin this assessment. The first concerns the magnitude of the fiscal
benefit. A total CIT exemption that brings the tax rate down to 0 per cent has greater
impact than a reduced rate. In addition, impact is clearly not linear in the decrease of the
GloBE ratio but instead starts “biting” only when the ratio falls below 15 per cent. The
second factor is the relevance of the tax base to which the incentive applies in total GloBE
income of the entity concerned. Even generous incentives on a relatively limited portion of
income, say on income from capital gains or intellectual property, will generally produce a
smaller effect on GloBE income than broad-based discounts applied to total income.

4. Detailed assessment of impact on in-scope incentives

Table III.2 summarizes an overall assessment of the impact of Pillar II on the main categories
of tax incentives typically adopted to attract FDI, focusing on in-scope incentives.
The table is followed by a brief explanation of the assessment. More detailed elaboration
and discussion is provided by Lazarov et al. (2022).

a. Reduced rates
Zero rated and less than 15 per cent: high impact

Governments may set a lower CIT rate as an exception to the general tax regime in order
to attract FDI into specific sectors or regions. If the statutory corporate tax rate is less than
15 per cent, it is likely that the ETR under the GloBE rules will also be less than 15 per
cent. It is important to note that “covered taxes” for the purpose of calculating the GloBE
ETR do not rely only on the CIT rate. The ETR calculation also depends on other taxes
on corporate income, such as taxes on resource rents and taxes on capital gains. Where
the GloBE ETR is less than 15 per cent, it would trigger the top-up tax and to that extent
eliminate the effect of the low CIT rate up to the minimum.

Rates above 15 per cent: little/no impact

In general, a tax incentive that decreases the CIT rate to a level that remains above 15 per
cent should not trigger any impact of Pillar II, though it may do so if the base is sufficiently
narrow relative to accounting profit (in the denominator of the ETR). As many countries
have an STR of 30 per cent this (unaffected) reduction could be as large as half of the CIT
due. Yet, it is important to consider that the standard ETR does not necessarily coincide
with the relevant ratio according to the GloBE rules, which provide their own formulas that
are separate from similar calculations under CIT systems. /…

Chapter III The impact of a global minimum tax on FDI 137

 Table III.2. Summary assessment of the impact of Pillar II on incentives to attract FDI
Incentive type Pillar II impact Overview

a. Reduced rates

Zero-rated Reduced rates below 15 per cent, or even down to zero, will generally result in a GloBE ratio below
the minimum, triggering the activation of the Pillar II top-up. Magnitude of impact depends on the
Below 15 per cent size of the reduction.

Generally, reduced rates to a level above 15 per cent would not be affected. Yet, countries would
Above 15 per cent need to calculate the effective rate under GloBE rules as this may still lead to a result below the
minimum threshold.

b. Deductions

Accelerated depreciation Impact on accelerated depreciation and immediate expensing will be limited as deferred tax
and immediate expensing adjustments are taken into account when calculating covered taxes in the GloBE ratio.

Impact on loss carry-forwards will be limited as deferred tax adjustments are taken into account
Loss carry-forward
when calculating covered taxes in the GloBE ratio.

Special tax exclusions, deductions or tax accounting conventions that are common among Inclusive
Deductible qualified expenses Framework members are deductible from GloBE income for purposes of calculating the GloBE tax
base; those that are less common may not be deductible.

c. Exemptions

Tax holiday regimes are not expressly addressed under the GloBE rules and are likely to bring the
Tax holidays
GloBE ratio below 15 per cent.

Exemptions granted to specific sectors, entities or locations (other than out-of-scope situations) are likely
Specific exemptions:
to be affected as they may bring the GloBE ratio below 15 per cent. However, exemptions applying
location, sector, entity to out-of-scope situations such as SMEs, excluded entities or excluded income are not affected.

Dividends received under participation regimes are excluded from the tax base for the computation
Participation exemptions
of the GloBE ratio, resulting in little or no impact.

d. Other incentives on income-related taxes

Taxation of outbound passive income by the source country is not included in the computation of
Incentives on withholding taxes
the GloBE ratio, resulting in little or no impact in the source country.

Not directly addressed by the GloBE rules, may bring GloBE ratio below 15 per cent by reducing
IP box
covered taxes, depending on the regime.

Lead either to inclusion in the income of the MNE (if credit is refundable within four years) or to a
Tax credits
reduction in covered tax expenses (if not). Both may bring the GloBE ratio below 15 per cent.

Incentives on capital Not directly addressed by the GloBE rule, may bring the GloBE ratio below 15 per cent by reducing
gains taxes covered taxes, depending on the regime.

Source: UNCTAD, based on Lazarov et al. (2022). Little/no impact High impact Variable/unclear impact
Note: ETR = effective tax rate.

b. Deductions
Accelerated depreciation and immediate expensing: little/no impact

Accelerated depreciation rules permit a taxpayer to expense the cost of an asset faster than
its expected economic depreciation. Immediate expensing permits the deduction of the
entire cost of the asset in the year it was purchased. Both incentives lower taxable profits
for the years when they are applied and give rise to timing differences when compared with
financial accounts.

138 World Investment Report 2022 International tax reforms and sustainable investment
Since the GloBE rules rely on consolidated financial accounts to calculate the tax base,
they do not take into account domestic tax treatment of depreciations that is more
beneficial than under the accounting rules, including the timing benefits of immediate
expensing and accelerated depreciation. To prevent this reversal, the model rules rely
on the deferred tax accounting method used by the constituent entity with respect to
assets eligible for these incentives for tax purposes. The GloBE rules permit the inclusion
of accelerated depreciation and immediate expensing as deferred taxes when computing
the adjusted covered taxes. This treatment arises from the recognition in the Inclusive
Framework that these are the most common tax incentives offered by countries and that
their elimination could cause challenges for capital-intensive businesses, in particular.
This adjustment therefore prevents the GloBE ETR from falling below the minimum solely
as a result of accelerated depreciation.

Loss carry-forward: little/no impact

A tax loss may occur when allowable expenses exceed taxable income. This loss may
be carried forward to future years as long as national tax rules permit or until the loss
has been completely offset against future tax liability, returning the company to a payable
position. The GloBE rules permit adjustments for carry-forward of losses. Since loss carry-
forwards create timing differences in a similar way as does accelerated depreciation,
the GloBE model rules also provide for entities to use the deferred tax accounting
approach to neutralize the effect on the ETR. As a result, loss carry-forwards are
permitted as deferred tax adjustments that will be taken into account in computing the
covered taxes.

Deductible qualified expenses: variable/unclear impact

Deductions for qualified expenses refer to the allowable expenses that businesses are
permitted to deduct for tax purposes. Tax-allowable expenses sometimes differ from those
permitted by accounting rules. For GloBE computation purposes, this means that even if
the actual costs of doing business have been taken into account under the accounting
rules, the local tax rules might disallow certain deductions for tax purposes. Moreover,
the reverse is also possible where a certain expense might be treated more beneficially
for tax purposes as compared to the accounting expensing: e.g. super-deductions
(150 per cent allowance for manufacturing equipment). The GloBE model rules recognize
that it is not possible or desirable to develop a comprehensive set of adjustments that will
bring the GloBE tax base fully into line with the tax base calculation rules of all Inclusive
Framework members. Instead, the rules establish a list of the most common expenses
that may be allowed in order to calculate the GloBE tax base. Special tax expenses
that fall outside of this list or are not common may not be deductible from the GloBE
income base.

c. Exemptions
Tax holidays and other specific exemptions: high impact

Tax holiday schemes are government incentive programmes that offer a temporary
reduction or elimination (full exemption) of corporate income taxes. Alternatively, specific
exemption regimes may apply, such as those exempting certain sectors of the economy,
types of entities or locations from taxation. These categories are likely to be affected by the
application of the rules because the GloBE documents do not explicitly exclude untaxed
income from the GloBE tax base, which may bring the ETR for a relevant group of entities
below 15 per cent. Therefore, unless exemptions are granted to out-of-scope situations,
they will be affected by the application of the GloBE rules and the levy of the top-up tax.

Chapter III The impact of a global minimum tax on FDI 139

 Participation exemptions: little/no impact

To prevent economic double taxation, many countries exclude dividends from the taxable
income of a corporate shareholder, usually through a mechanism referred to as participation
exemption. To tax these dividends under the GloBE rules would give rise to the risk of
overtaxation; thus the model rules ensure that participation exemption regimes will not be
affected by the application of those rules.

As dividends received under participation exemption regimes are excluded from the GloBE
tax base, they will not reduce the GloBE ETR. These excluded dividends refer to any
distributions paid on shares or other equity interests where the MNE group holds 10 per
cent or more of the ownership interests in the issuer, or the full economic ownership of the
ownership interest has been held for a period of at least 12 months. An exception is made
for dividends received from short-term portfolio shareholdings, which are not excluded
from the GloBE tax base and will likely be affected by the application of the GloBE rules.

d. Other incentives on income-related taxes

Incentives on withholding taxes: little/no impact

Some countries provide foreign investors with favourable treatment of WHT by eliminating
or greatly reducing their domestic WHT on outbound passive payments such as on
dividends (or liquidation payments), interest or royalties.

The GloBE rules calculate the minimum level of taxation in each State where an MNE group
has subsidiaries or permanent establishments. For this reason, Pillar II does not affect
directly the WHT treatment of passive income streams that this group receives because
WHT is a tax imposed by the source State on a foreign resident that has no subsidiary or
permanent establishment on its territory to which the passive income is attributable.

Nevertheless, if the GloBE rules lead to topping-up of the taxation on passive income in
the hands of the recipient, the fiscal benefits of WHT incentives may be partially or totally
offset.44 For this reason, countries may wish to revisit their WHT incentive policy, granting
such incentives only as long as no neutralization takes place in the State of residence.

Thus, WHT incentives might be still granted on dividend payments when the residence
State operates a participation exemption regime, which is recognized and endorsed by the
GloBE rules. For interest and royalties, the applicability of the GloBE rules would depend
on whether the ETR in the residence State is below 15 per cent and, if that is the case,
whether the GloBE net tax result is positive. In such circumstances, the source State may
wish to consider introducing WHT that equals the difference between the actual ETR and
15 per cent: e.g. if the ETR in the residence State is 10 per cent, the source State may
wish to levy 5 per cent WHT so that the WHT incentive is not collected by another country.

In addition, the Pillar II rules introduce a Subject to Tax Rule (STTR), mentioned briefly in
section A. This will have an impact on WHT incentives. The STTR applies to the WHT
arising with respect to payments between connected persons. It will be a rule in tax
treaties and will be triggered when a payment is subject to a nominal tax rate in the payee
country that is below the minimum nominal rate of 9 per cent. It covers interest, royalties
and other payments for mobile factors such as capital, assets or risks owned or assumed
by the person entitled to the payment; it is not yet clear if management and technical fees
will be covered. The STTR can be applied even where the IIR or the Undertaxed Payments
Rule have been implemented. Where it applies, its adoption would risk diminishing the
incentive effect of reduced WHT rates; the possible advantage is in discouraging outward
profit shifting.

140 World Investment Report 2022 International tax reforms and sustainable investment
IP box: variable/unclear impact

The intellectual property (IP) box regime is a tax incentive related to favourable tax treatment
of income derived from IP rights. As the GloBE rules do not explicitly regulate the treatment
of such regimes, to the extent that they lead to an ETR below 15 per cent for an MNE
in a given country, the effects of the incentive are limited or neutralized in computing the
GloBE ratio. The specific effects of IP box regimes depend on the exact activities that an
MNE group performs in the country that offers the regime. If the IP income is diluted in
other income, it is possible that even if the ETR on the IP income is less than 15 per cent,
the ETR on the overall income (which is what matters for the GloBE calculation) is more
than 15 per cent. Moreover, in terms of the impact on the total tax faced by the investor,
IP box regimes compatible with BEPS Action 5 – i.e. regimes in which the IP rights were
developed by substantive activities in the country in question – might be positively affected
by the substance carve-out under the GloBE rules since non-harmful IP box regimes
presuppose that there is substantive development activity.

Tax credits: variable/unclear impact

Refundable tax credits are instances of negative tax liability, providing a business with a
refund when the taxes it owes are lower than its entitlement to a tax credit. They seem to
be rarely used at present, but the GloBE rules may give them heightened importance.

Those rules divide refundable tax credits into two main groups – qualified (refundable within
four years) and non-qualified (refundable for more than four years). Under the GloBE rules,
qualified credits are treated as income for the company, while non-qualified credits reduce
tax expenses. Both of these measures have the potential of reducing the GloBE ETR below
the 15 per cent mark: the qualified credits by increasing GloBE income, and the non-
qualified by reducing covered tax expenses. As discussed further in section D, refundable
tax credits can even reduce total tax payable below what would otherwise be the absolute
minimum of 15 per cent of excess profit.

Incentives on capital gains taxes: variable/unclear impact

The capital gains incentive relates to differentiating the treatment of capital gains from the
general treatment of income – e.g. in a country that maintains a CIT regime, any income
realized from capital gains is treated more beneficially. Save for some exceptions, the
GloBE rules treat (realized) capital gains as part of GloBE income. Therefore, if a country
treats capital gains income preferentially and this preferential treatment leads to an ETR
below 15 per cent, the GloBE rules may affect the incentive, up to the minimum tax rate
of 15 per cent. However, just as with IP box regimes, the eventual outcome depends on
the activities that the MNE performs in the given country and whether the beneficial capital
gains treatment can be compensated by other items of income that are taxed above
15 per cent, leading in this way to an overall ETR above 15 per cent.

***

This overview of the impact of Pillar II on different categories of tax incentives can help
countries reconsider existing incentives schemes, potentially with a view to restructuring
categories that are highly affected, and prioritize unaffected categories as well as considering
whether non-tax measures might be more effective in encouraging inward investment.

Chapter III The impact of a global minimum tax on FDI 141

 D. RESHAPING INVESTMENT
POLICY FOR A GLOBAL
MINIMUM TAX
ENVIRONMENT

This section explores options available to countries, particularly developing countries, to

optimize their investment policy response to the Pillar II reforms. It looks first at the practical
implications of the global minimum tax for the investment policy toolkit, including fiscal and
other instruments. It then discusses the broader implications for investment policy in the
context of sustainable development strategies.

1. Fiscal investment policy responses

MNE investment decisions depend on much more than taxation. Determinants such as
the availability of a suitable workforce, infrastructure quality and political stability are at
the top of the list of investor concerns.45 Nonetheless, countries continue to deploy tax
measures as one of their primary tools to attract (or retain) inward investment, through
both the generally applicable tax rules and incentives. As discussed in previous sections,
widespread adoption of Pillar II will fundamentally alter the framework within which these
policies are set. Policymakers will face new challenges in their efforts to achieve an
appropriate balance between the desire to attract inward investment and the need – now
heightened in many countries by the pandemic – for tax revenues.

There is little experience for countries to build on in adapting to the new global environment
for tax and FDI. The idea of minimum corporate taxation is not new, but implementation
has been rare and limited in scope. Only two trading blocs in sub-Saharan Africa, CEMAC
(Economic and Monetary Community of Central Africa) and WAEMU (West African
Economic and Monetary Union), have adopted minima, and these differ substantially from
Pillar II in structure and in breadth of application. It has only been in the course of designing
Pillar II that real thought has been given to how the concept of how a minimum effective
corporate tax rate can be turned into practice. This, as seen in section A, has turned out to
require a more complex set of rules than the headline idea of a global minimum tax might
suggest. Countries are entering into unnavigated territory in both business tax policies and
– the ultimate concern in this chapter – investment strategies.

No country can afford to ignore the implementation of Pillar II (table III.3). The most
obviously affected, of course, will be those that endorse the prospective Inclusive
Framework agreement and find that some of the MNE affiliates they host will be subject
to the application of the minimum. But the changes that such countries will be obliged to
make will have cross-border effects on countries that are not directly affected, whether
because they have endorsed the agreement but set sufficiently high ETRs so that the
minimum does not bite, or because they are outside the Inclusive Framework and have
not endorsed the agreement. The effects on such countries are indirect, but – as the
empirical results have made clear – such indirect effects, notably through the impact on
profit shifting, can be powerful.

142 World Investment Report 2022 International tax reforms and sustainable investment
 Table III.3. Adjusting the fiscal investment policy toolkit: key insights

a. Outside the Inclusive Framework • Investment strategies need rethinking even in countries not endorsing Pillar II

• Applying the Qualified Domestic Minimum Top-Up Tax protects revenue without affecting investment
b. Direct effects of Pillar II (lower-tax
• The effectiveness of traditional tax incentives will be diminished
regimes, preferential rates for investors)
• Some scope remains for domestic tax measures to reduce ETRs on investment

c. Indirect effects of Pillar II (higher-tax

• Higher-tax countries will also need to respond strategically to the changing tax-investment landscape
regimes)

d. Implications for regional cooperation • Regional tax cooperation still has a role in facilitating investment and economic integration

e. Implementation issues • Complexities related to implementation should be timely addressed to ensure investor certainty

f. Effects on tax competition • Tax competition is blunted, but not ended – and will likely take new forms

Source: UNCTAD.
Note: ETRs = effective tax rates.

Once the effects of layering Pillar II on top of current tax policies are understood, the
question arises as to how countries – including those not directly affected – can best
configure their own tax and investment policies.

a. Outside the Inclusive Framework

Investment strategies need rethinking, even in countries not endorsing Pillar II.

About 140 jurisdictions have indicated acceptance of Pillar II in principle. That is a very
large number and covers about 95 per cent of global FDI stock. But many developing
countries, including small island States, in particular, remain outside the agreement.

It might seem that countries that adhere to the minimum are placing themselves at a
disadvantage relative to low-tax countries that remain outside the agreement – and that
there is consequently a gain to not participating in the agreement. But this is far from
clear, so long as the countries where the ultimate parents of in-scope MNEs are based do
participate. This is because these residence countries will apply the top-up tax under the
IIR to countries that have not accepted the agreement in exactly the same way as they will
to countries that have. The key point is that topping up to the minimum can be achieved
unilaterally by the residence country. Measures of this kind – bringing the income of foreign
affiliates immediately into tax in their parent country and so topping up the tax paid in the
host country to a higher level – have operated for decades through foreign tax credits and
controlled foreign corporation rules. Pillar II is to a large degree the global extension of
the idea of residence-enforced minimum taxation brought to the fore by the GILTI (global
intangible low-taxed income) provisions of the 2017 United States tax reforms.46

What lends Pillar II its force is thus not the acceptance of minimum taxation by low-tax
countries, but the willingness of higher-tax parent countries to enforce it. In that sense, the
effective global minimum tax envisaged in Pillar II does not require global agreement and,
moreover, is hard for host countries to escape.

Thus, for the most part participating countries need not fear being undercut by countries
that have not signed on to the Pillar II agreement. Their policy calculus can proceed as if all
other countries had signed on to it. By the same token, there may be little for countries to
gain by not signing on. Indeed, the possibility of applying the QDMTT to capture revenue
that would otherwise accrue to others, with no impact on the overall tax liability of investors,
suggests a positive gain from participation.

Chapter III The impact of a global minimum tax on FDI 143

 It is, of course, the sovereign right of any country to remain outside the Inclusive Framework.
Prudence may perhaps warrant a wait-and-see approach of postponing a decision on
participation until the timing, breadth and detail of the application of Pillar II are fully clear.
This decision also needs to be taken in light of the full consequences of membership,
including in relation to Pillar I (see for example Eden, 2020). In relation to Pillar II, however,
adoption by the major capital importers will make it difficult for low tax countries to escape
increased tax liabilities on inward investment in line with the global minimum.47 Participation
allows this to be pre-empted by a QDMTT. In terms of Pillar II, as currently envisaged, if a
critical mass of investor home countries signs up, the case for determined non-participation
appears to be weak.

b. Direct effects of Pillar II

The number of countries directly affected by the minimum tax may appear relatively limited.
In terms of national average ETRs, it comprises primarily investment hubs (with limited
real investment), and only about a third of the other countries, as shown in the empirical
analysis in section B. Nevertheless, as also discussed in section B, the national average
effective rate is made up of a range of rates applicable to individual investors, some of
which may well fall below the minimum rate. Therefore, even countries with average rates
above the minimum may be affected to some degree. Moreover, the impact of Pillar II on
directly affected countries (whether or not they are formally within the agreement) and
how they respond is important not only for them but as the trigger that sets off indirect
effects on others.

Applying the qualified domestic minimum top-up tax protects revenue without
affecting investment.

The essence of the minimum tax is the application of a top-up tax to ensure that a
rate of at least 15 per cent applies to the “excess profit” – profit, that is, in excess of
the substance-based carve-out – of all affiliates of MNEs large enough to be in scope
of the new rules. Critically, as noted in previous sections, it is immaterial to investors
whether this top-up is levied by the country that hosts the investment or that in which
the affiliate’s parent resides: their tax liability is the same whichever collects the tax.
There may be differences in the practicalities of compliance but none, in principle, in
actual liability. Which country collects the revenue from the top-up tax therefore does not
affect investment decisions.

From the perspective of tax policy, however – and hence for governments seeking to
balance investment promotion against revenue concerns – it clearly does matter who
collects the top-up revenue. The “rule order” issue of which government this should be,
host country or home country, was a heated aspect of the debate in developing Pillar II.
The final model rules provide a clear route for the host country to assert a first right to
collect this revenue by applying the QDMTT.

There is a very strong case for countries that are affected by Pillar II to apply the QDMTT:
failure to do so potentially cedes tax revenue to the parent country while conveying no
tax benefit to investors. One concern might be that application of a QDMTT could create
dissimilarities in the treatment of out-of-scope domestic enterprises and affiliates of
large multinational groups; but the difference would favour the former and so, politically
at least, appears unlikely to be problematic. Not applying the QDMTT might also be
seen as sending a signal of a country’s business-friendly inclinations: but that is an
inclination upon which, in terms of the minimum tax, it cannot deliver. Preliminary results
on the effects of the reform on national revenues suggest that, in the broad comparison

144 World Investment Report 2022 International tax reforms and sustainable investment
between developed and developing economies, it makes surprisingly little difference
to the final impact which rule order is adopted (likely, because the impact of the profit-
shifting channel on revenues – the same whichever rule is adopted – is particularly large in
developing economies). For specific countries, however, the difference can be substantial.
For developing countries in particular, adoption of a QDMTT can do little harm and may do
much good.48

The effectiveness of traditional tax incentives will be diminished by Pillar II.

The model rules of Pillar II make no reference to the tax holidays or other types of fiscal
incentives that many countries provide as a central element of their national investment
strategies.49 They are not grandfathered and they are not removed from application of
the GloBE rules. The minimum tax rules are simply laid on top of existing regimes and will
directly reduce the attractiveness of any incentives that investors might enjoy.

Yet, application of Pillar II does not mean that pre-existing incentives become wholly
ineffective, as discussed in section C. Their attractiveness does not change for entities that
are not part of MNE groups large enough to fall within the new rules. And even for those
that are, there are some ways – discussed here – to mitigate the effect. Nonetheless, Pillar
II dampens the effectiveness of incentives, and this will become increasingly the case if, as
expected, the threshold of MNE size for application of the minimum tax is reduced over time.

This prospect raises challenges for countries that deploy tax incentives as a core element
of their investment policy toolkit. Views on the efficiency and effectiveness of tax incentives
differ. Many experts believe that tax incentives have generally not delivered effects on
investment commensurate with the revenue forgone, and that tax incentives feed mutually
disadvantageous tax competition between countries.50 From their perspective, one of
the attractions of a global minimum tax is to discourage the proliferation of tax incentives
and encourage greater reliance on other ways to create a business-friendly environment.
Opinions will continue to differ (not least within countries, between sceptical ministries of
finance and activist line ministries). The aim here is not to pronounce on the merits of tax
incentives as tools to promote investment but simply to assess how they are affected by
the global minimum tax.

The key fact in considering the implications of Pillar II for tax incentives is thus that such
incentives are not excluded from its application. There are some respects in which they will
retain an impact, and – as will be seen next – some ways in which domestic tax measures
can still reduce the tax liability even of entities directly affected by the global minimum tax.
Nonetheless, the change in the landscape in which tax incentives have operated so far is
fundamental. The adoption of Pillar II will require countries to review not only their design
but also their role in national investment strategies.

Some scope will remain for domestic tax measures to reduce effective tax
rates on investment.

Once a sufficient number of investor home countries adopt Pillar II rules, there is (almost)
no escaping the absolute minimum of a 15 per cent tax on profit in excess of the carve-out
implied by Pillar II. There are, however, three notable ways in which domestic tax policy can
be used to bring effective tax rates closer to – and in one case even below – that minimum.51

Reducing domestic covered taxes amplifies the benefit to investors of the

substance-based carve-out.

The effectiveness of reducing corporate taxes in order to attract investment is substantially

diminished by Pillar II. Leaving aside (potentially important) complications regarding
tax credits taken up later, a foreign affiliate’s total tax liability when it is subject to the
minimum is the sum of (1) a tax of 15 per cent on profits in excess of the carve-out,

Chapter III The impact of a global minimum tax on FDI 145

 and (2) a tax on the carve-out itself at the effective rate of domestic taxation, this being the
GloBE ratio of covered taxes (including corporate income tax in particular) to accounting
profit. With the amounts of both the carve-out (mechanically related to tangible assets and
payroll) and accounting profit (essentially determined by business realities), tax design can
have no effect on amount (1). As such, it represents an absolute minimum on the entity’s
tax liability. Only amount (2) can be directly affected by domestic tax design, through the
total liability of covered taxes. Reducing these will still convey some benefit to investors,
but the effect is reduced: if the carve-out is 40 per cent of accounting profits, for instance –
which it was suggested in section B is broadly plausible – then cutting covered taxes by $1
benefits the investor by only 40 cents.52 At a lower carve-out (e.g. 5 per cent) the effect is
correspondingly less (2 cents).

Through this route incentives continue to benefit the investor despite the topping up under
Pillar II. However, there are downsides and risks in considering a reduction in covered
taxes. The benefits to investors will fall as the carve-outs are gradually reduced over
the coming decade. More fundamentally, simply reducing corporate taxation will have
implications for the taxation of the many firms, including domestic firms, that are out of
the scope of Pillar II. In principle, this could be limited by restricting access to reduced
corporate taxation to firms that are directly affected by Pillar II (including, to avoid non-
discrimination issues, domestic ones) – perhaps by tying it to taxation under the QDMTT.
Beyond the legal issues this might raise, it would be politically difficult: observers are likely
to notice the corporate tax break being given to large MNEs more than they will the top-up
that leads MNEs to pay more.

While bearing in mind those downsides, it is important to note that some traditional tax
incentives will serve to reduce covered taxes and so will continue to have some effect.
In the example above, the $1 reduction in corporate tax might come, for instance, from
application of a preferentially reduced rate. That will still benefit the investor – but by only
40 (or 5) cents, not, as at present, by the full $1.

Covered tax payments – primarily, domestic corporate tax – can be reduced by either
lowering the applicable statutory rate or narrowing the tax base. For the impact on the
affiliate’s total tax liability, it is immaterial which path is taken. It is only the amount of
covered taxes that enters the calculation, not how they are computed. In terms of the
marginal effective rate, however, both rate and base matter – but essentially just as they
do now in the absence of the global minimum tax (with an investment-based case for
corporate tax structures that imply low METR, as set out in section A).

Accelerated depreciation, however – a common form of incentive – is treated differently

(section C.4). The attraction of accelerated depreciation for investors is that, without
changing the total value of depreciation allowances over the lifetime of the investment
it brings them forward in time, and so increases their present value. Under Pillar II, an
adjustment for deferred taxes negates the effect this would otherwise have on the
calculation of covered taxes (and the same is true for other incentives that operate through
similar timing effects). While the impact on the top-up tax is thus undone, accelerating
depreciation still conveys a benefit to investors, to the extent of the carve-out, in terms of
their domestic tax liability.

Worth noting too is that in one case traditional tax incentives will continue to have
their full effect – though its practical importance may well be limited. This is the case in
which other members of the same MNE operating in the same country pay a sufficient
amount of covered taxes for the ETR of all within-country entities to exceed 15 per cent.
There appears, in principle, to be some incentive for MNEs to structure themselves to
exploit this feature.

146 World Investment Report 2022 International tax reforms and sustainable investment
Refundable tax credits can also be used to benefit investors.

The model rules do include one mechanism by which total tax liability can be reduced
below the otherwise-absolute minimum of 15 per cent on profit in excess of the carve-
out. This is by offering tax credits (provisions that reduce liability dollar for dollar)53 that
are refundable, meaning that, if the credit exceeds the tax liability, the investor receives a
payment from the government. Refundable tax credits do not reduce covered taxes in the
way just described,54 but instead are taken to increase accounting profit. That reduces the
ETR used to determine the amount of the top-up, while also increasing the base to which
that top-up applies. The net effect, taking account of the credit itself, can be to reduce total
tax payable below the otherwise-absolute minimum.55 In effect, refundable tax credits are
treated like cash grants, i.e. as an increase in the firm’s income.

It is not yet fully clear how much scope refundable tax credits might provide for incentivizing
investment. The refundability provision is critical: a government seeking to encourage
investment in this way would need to recognize that, should the credit exceed tax liability,
it will need to make a payment to investors.56 Outright grants may be the more transparent
route to achieving the same effect.

Reducing non-covered taxes remains an option – but not all taxes bear
on investment.

With the application of Pillar II increasing the average effective rate paid by affected affiliates,
the impact on investors of taxes that are not covered by the agreement may become more
prominent. From the perspective of investment promotion this calls for consideration of
non-covered taxes too. One possibility is to cut them; however, the danger in doing so
– beyond the loss of tax revenue – is of reducing taxes that convey little real benefit to
investors because they do not bear the real burden they impose.57 An additional possibility
is to restructure non-covered taxes into covered taxes, thereby reducing the top-up while
having little effect on total domestic liability.

Precisely which of the non-covered taxes are most important in this context will be
country- and sector-specific. In some cases, it may be customs duties; in the extractive
industries it may be royalties, with pressure to rebalance towards income-type taxes that
would be covered. In many developing economies, thought may also need to be given
to the minimum taxes that are often levied on turnover, perhaps converting these too to
income-type taxes.58

c. Indirect effects of Pillar II

Higher-tax countries will also need to strategically respond to the changing tax-
investment landscape.

Higher-tax countries will clearly be relatively less exposed to the impact of Pillar II, but
they will still be affected as a result of two dynamics. The first is the reduction in outward
profit shifting, leading to an increase in the FDI-level ETRs on the income generated by
inward FDI. The second is the possible presence in such countries of a subset of foreign
affiliates that do face an ETR below the minimum, even if the national average ETR is above
the minimum. Both factors – a key insight of the empirical analysis in section B – can
significantly increase the corporate taxes paid by MNEs on FDI taking place in higher-tax
countries. Most notably, in developing countries, the role of reduced profit shifting in the
increase of the average FDI-level ETR caused by Pillar II is dominant.

This means that higher-tax countries are not spared from the potential downside effects
on investment caused by the introduction of the Pillar II minimum. The empirical analysis
shows that, as a consequence of the increase in FDI-level ETRs associated with Pillar II

Chapter III The impact of a global minimum tax on FDI 147

 (14 per cent globally in the baseline estimate), the overall amount of investment may
decrease by 2 per cent, or up to 3 per cent under more pessimistic assumptions. Thus,
when evaluating the potential impact of and response to Pillar II, high-tax countries
should consider all relevant aspects beyond the headline average national tax rates. In a
generalized context of increasing taxation on FDI, specific measures may be needed to
support investment and shift the focus from fiscal measures to other investment facilitation
tools. This is true for low-tax countries and high-tax countries alike.

In relative terms, though, even if they do not change their own tax policies, higher-tax
countries are likely to become relatively more attractive locations for real investment.
This is because their FDI-level ETRs, while they may increase, will generally fall relative to
those in countries that are substantially affected by the minimum. The effect will no doubt
be more marked for some countries than for others, but the general direction is clear. In
revenue terms too, these higher-tax countries, especially if they are home to large MNEs,
are also likely to gain through the profit-shifting channel: even if the topping-up is done by
host countries under a QDMTT, higher tax countries become less vulnerable to outward
profit shifting.

These countries may be able to do even better by changing their tax policies. The key
question here is whether they will find it in their interests to raise their tax rates in a post-
Pillar II world (or reduce them less than they otherwise would) or, to the contrary, to reduce
them. The latter possibility – that the floor set by the minimum will also prove to be a ceiling
– has troubled some observers who see current corporate tax rates as generically too low.
The answer to this question also matters for low-tax countries that are directly affected by
the minimum. To the extent that higher-tax countries respond to the minimum by raising
their rates, that will convey an indirect benefit to low-tax countries, mitigating the effect of
their own need to raise rates. Indeed, for countries that are initially only modestly below
the minimum, it is possible that this effect, arising from the strategic response of countries
that are not affected directly by Pillar II, will mean that they too benefit from adoption of
the minimum tax.59

The likely direction of response by higher-tax countries remains one of the imponderable
aspects of implementing Pillar II. On the one hand, higher-tax countries have less to fear
from paper profits and real investment being shifted to lower-tax countries, reducing
pressures on them to keep their tax rates low; higher taxes abroad may thus lead to higher
taxes at home (the case of “strategic complementarity”). On the other hand, the increased
tax revenue that these countries are likely to experience at their initial tax rates creates
some fiscal space to cut those rates in order to compete for investment more aggressively:
higher taxes abroad then lead to lower taxes at home (“strategic substitutability”).60

Existing empirical evidence provides little guidance as to which of these forces is most
likely to dominate. There is some sign of strategic complementarity in headline rates of
corporation tax. But the adoption of a generalized minimum has no precedent, so that
experience is an inherently unreliable guide. Different countries may react differently,
depending on the relative weight they attach to revenue and investment promotion
objectives. Yet, the need to enhance revenue collection has been a primary motive for
the development of Pillar II, and the deceleration of reductions in statutory corporate tax
rates suggests a diminished appetite for corporate tax cuts. In the current fiscal climate,
few governments are expected to react to a revenue increase induced by actions elsewhere
by cutting rates and effectively transferring that additional revenue in large part to the
domestic private sector; some have indicated an intention to increase statutory rates.
This reduces the risk of the floor becoming a ceiling, at least in the short term.61

148 World Investment Report 2022 International tax reforms and sustainable investment
d. Implications for regional cooperation
Regional tax cooperation still has a role in facilitating investment and economic
integration.

Regional economic integration efforts often lead to calls for coordination in corporate
taxation in order to facilitate cross-border investment within the bloc while limiting potentially
mutually damaging tax competition between members. In Europe, such proposals date
back to the 1960s; however, only in Africa, in CEMAC and WAEMU, have measures of
this kind been adopted. And they have had only mixed success. In WAEMU, for example,
the statutory rate is restricted to between 25 and 30 per cent, and there are provisions for
a common base. Any intent to limit downward tax competition has been undermined by
the exclusion from the restriction of incentives provided for in investment codes or other
laws. As a consequence, tax holidays, for example, have continued.62

This difficulty in implementing a minimum tax at the regional level reflects an inherent
limitation of agreements to restrict tax competition among only a subset of countries:
the problem posed by outsiders. While countries participating in such an agreement may
benefit, by worsening their position relative to non-participants they convey even greater
benefits to those remaining outside of the agreements.63

The global nature of Pillar II, implied by participation of the largest capital exporters,
means that it faces no outsider problem. Yet, there will remain a potential role for regional
cooperation, to establish and implement within-bloc minimum levels of taxation that are
consistent with investment promotion.64

One reason is that Pillar II applies only to the affiliates of the largest MNEs. The significance
of in-scope affiliates varies across regional blocs and across countries but, in all, many firms
will remain out of scope. The case for coordination therefore does not disappear. In fact,
the lesser ability to compete to attract entities of the largest MNEs may make competition
for these out-of-scope firms more aggressive, reinforcing the case for coordination towards
an effective minimum applicable to them. Just as Pillar II naturally provides an opportunity
to review policy towards tax incentives, so it may also usefully prompt a parallel review of
regional coordination agreements.

In addition, implementation of Pillar II may be facilitated by regional cooperation on a range of

practical issues, supporting investment and economic integration within a bloc by easing MNE
compliance costs and enhancing certainty in their tax treatment. This might involve, for instance,
developing common templates for national QDMTTs, refundable tax credits or accounting
standards. Regional cooperation can also be useful in fostering a common understanding of
the new tax environment and in presenting a common position – not only within the Inclusive
Framework but in other influential fora, such as the United Nations Committee of Experts on
International Cooperation in Tax Matters – on technical issues that remain to be resolved.

e. Implementation issues
Complexities related to implementation should be timely addressed to ensure
investor certainty.

The two-pillar agreement is not a simplification. Significant changes to tax and investment
policies will be needed. A period of adjustment and some uncertainty is inevitable. Several
tax administrations of developed economies have already indicated that the 2023 target
for implementation is very ambitious, and this is surely even more true for weaker-capacity
countries. Moreover, significant political hurdles to final adoption of Pillar II remain. This may
create a natural inclination for countries to “wait and see”, but the potential impact is so

Chapter III The impact of a global minimum tax on FDI 149

 great that they would be well advised not to delay in reviewing the proposals (and providing
input into any final changes), evaluating their policy options and preparing their responses.
Such preparedness will also help in dealing with MNEs, which also face increased uncertainty,
and so help alleviate the tax uncertainty that can act as a bar to investment. Not least, in
this period of adjustment, it is important for policymakers to avoid missteps (such as, for
example, extending long-lasting legal commitments to provide tax incentives) and reassure
investors that they are aware of and sensitive to the concerns that they too will naturally have.

Moreover, although the tax rules have been agreed in principle, there may be further
changes ahead. The model rules already embody a lengthy transition to the final carve-out
rates, and the general expectation is that the minimum tax will come to affect an increasingly
large set of MNEs. Many fine but important details of the arrangements also remain to
be addressed. More fundamentally, while it is a remarkable achievement in multilateralism
and consensus-building, the two-pillar agreement is nonetheless a compromise between
several quite different approaches to international business taxation, including in Pillar
I elements of arms-length pricing, taxation in the destination country and some use
of formulaic methods as well as the minimum tax in Pillar II itself. It is possible that the
tensions this compromise creates will eventually lead to further reform of international tax
arrangements. The minimum tax element, however, is to a large degree separable from the
rest. Once adopted, it seems likely to become a permanent and increasingly significant
element of the international tax framework and, hence, for investment strategies.

Looking ahead, it will then be key for developing countries to strengthen mutual support
and cooperation as well as technical capacities to increase their influence in the negotiation
of the next steps and the follow-ups of Pillar II within the context of the Inclusive Framework
(Christensen et al., 2022).

f. Effects on tax competition

Tax competition is blunted, but not ended – and will likely take new forms.

As laid out earlier, Pillar II sets an (almost) absolute minimum tax liability for in-scope
affiliates. It substantially reduces, though it does not necessarily wholly eliminate, the
opportunities for shifting profits to low-tax countries; hence it also reduces the motivation
for reducing tax rates in order to benefit from (or prevent) profit shifting. SEZs, tax holidays
and other forms of tax incentives, where they are affected, will convey much lower tax
benefits to investors. The floor may even enable some countries to raise their tax rates, as
they become less constrained by the downward pressures they felt in the absence of the
minimum. In these respects, Pillar II thus will reduce international tax competition.

But tax competition is not eliminated. Scope remains for reshaping domestic tax regimes
to encourage investment, particularly real investment. Tax competition is thus set to
continue, particularly for real investment. Reducing covered taxes – primarily the CIT –
can bring effective rates closer to the absolute minimum. And reducing non-covered taxes,
or converting them to covered ones, can also dull the impact on affected affiliates.

Domestic measures can also still be crafted to benefit the many investors not directly
affected by the global minimum tax. In those cases, traditional tax incentives retain their full
force. In fact, with a reduced ability to use tax measures to compete for investment by the
largest MNEs, pressures to compete for the smaller ones may intensify.65

Measures beyond tax policy also seem likely to receive heightened attention. There may be
more focus on tax administration processes and practices that reduce compliance costs
for firms and increase certainty about their tax treatment, addressing what survey evidence
shows are significant concerns for many investors, including in developing countries.

150 World Investment Report 2022 International tax reforms and sustainable investment
Finally, a lessened ability to lure investment by large MNEs through tax incentives may lead
countries to use spending measures instead, whether tailored to particular investments
(providing easy road access, for instance) or improving general infrastructure (reliability of
energy supply, for example). Experience shows that spending measures can be used very
aggressively to compete for large investments. Tax competition may thus shift towards
competition in public spending. This can be beneficial: spending measures are generally
seen as more transparent than tax incentives, and social returns from infrastructure
investments are high in many countries. But there are risks too. Public spending may
become distorted by investment objectives (e.g. too many airports and not enough health
spending), 66 and governance issues arise in relation to spending just as they do in relation
to tax incentives. Ultimately, mutually damaging international competition may re-emerge in
a different form – and Pillar II may result in even greater importance of measures to control
and monitor public spending.67

2. Challenges for investment policymakers and institutions

The adjustments to fiscal investment policy discussed above have major implications for
national investment policymakers and institutions dealing with investment promotion, and
for international investment policymakers and treaty negotiators.

Investment promotion agencies (IPAs) will see important changes in their standard toolkit.
Worryingly, the current awareness of the reforms among IPAs and SEZs is still very low.
UNCTAD’s annual IPA survey, carried out in the first quarter of 2022, revealed that more than
one third of respondents were not yet aware of the reforms, and only about a quarter had
begun an assessment of the implications. Given the planned start of the implementation
of Pillar II in 2023, investment policymakers and institutions will need to act quickly.
At a minimum, they should review their current use of incentives, evaluate the implications
for their portfolio of existing investors and identify the best approach for both investment
retention and promotion (box III.10). This review should go hand in hand with strengthening
the overall governance of incentives, in any form (fiscal, financial or other). In particular,
incentives should be granted on the basis of a set of pre-determined, objective, clear
and transparent criteria. Their long-term costs and benefits should be carefully assessed
prior to implementation, and they should be periodically reviewed to ensure continued
effectiveness in achieving the desired objectives. Finally, their administration should be the
responsibility of an independent entity or ministry that does not have conflicting objectives
or performance targets for investment attraction (UNCTAD, 2015). SEZ authorities and
management companies, which rely on very much the same toolkit, will have to follow suit.

The implications of Pillar II are not limited to national investment policies. Negotiators of
international investment agreements (IIAs) may come to play a significant role in enabling
the necessary national policy adjustments. Where countries have committed, contractually
or in practice, to providing preferential tax treatment to investors, removing such benefits
to apply top-up taxes or rescinding fiscal incentives could potentially lead to investor–
State dispute settlement cases. Changes to preferential tax regimes have been challenged
by investors in international arbitration under IIAs in the past (e.g. Micula v. Romania;
Charanne v. Spain; Eiser v. Spain; Antaris Solar v. the Czech Republic). There is no clear
jurisprudential trend in investor–State dispute case law concerning changes in tax regimes,
which increases unpredictability for States that wish to make changes to their tax regimes.

Contrary to stabilization clauses in State contracts, which protect investors against

perceived adverse legislative change, IIAs do not include explicit obligations that guarantee
the stability of the regulatory regime, and they rarely include obligations relating specifically
to taxation. However, most IIAs include the fair and equitable treatment (FET) standard,

Chapter III The impact of a global minimum tax on FDI 151

 and many also contain umbrella clauses. The FET standard can be interpreted as including
elements of legal stability. Changes in laws perceived as arbitrary, sudden or radical can
be challenged by investors as breaching FET. Umbrella clauses oblige States to honour
commitments they have undertaken with regard to the investment. This obligation generally
relates to contractual obligations; in a limited number of cases, umbrella clauses have been
interpreted as extending to the stability of the general legislative framework.

States can minimize potential challenges in various ways. First, they may incorporate
references to and clarifications of the relationship between IIAs, State contracts and the
QDMTT in a multilateral treaty instrument, to ensure that the tax implementation is not
considered as breaching these commitments. Such a multilateral instrument could be
envisaged as part of the OECD/G20 Inclusive Framework on BEPS, although that would
benefit only Inclusive Framework participants. Second, they may clarify the relationship
between IIAs and the QDMTT bilaterally. This can be done through either IIA amendments

Box III.10. How should IPA and SEZ managers respond to the global minimum tax?

The global minimum tax is due to take effect from 2023, so the need for action is now. As essential first steps:
• The changes envisaged are profound and highly technical. Obtain expert tax advice and seek collaboration with institutions
such as UNCTAD.
• The changes raise fundamental issues of tax policy and administration. Seek views and advice from the ministries of finance and
tax administration.
• Investors will be wondering how their tax treatment will change, and how to react. Engage with relevant stakeholders, including
MNEs, to convey the message that serious evaluation is under way and that law and regulations will be adjusted in a transparent and
participatory way.

Drawing on this support and dialogue, assess the likely impact of the global minimum tax:
• Advocate for a comprehensive mapping of all tax incentives currently offered and the entities making use of them, including the
extent of their activities and the revenue directly forgone as a result of the incentives.
• Identify all cases in which taxes paid are likely to be less than 15 per cent of an entity’s accounting profits, as adjusted under the GloBE rules.
• Assess, where the rate is less than 15 per cent, whether the increase in total tax payments implied by the global minimum is likely
to be material for the investor.
• Identify all cases in which legal commitments have been made to provide incentives for some period of time, and obtain legal advice
as needed (because, from the perspective of government revenue, their effect may be undesirable).

To develop the most effective tax framework for investment promotion in the changed global environment:
• Review the effectiveness of incentives in attracting investment relative to the revenue loss they imply. Independent expert advice is
the most credible way to do this.
• Recognize that Pillar II will fundamentally and substantially reduce the benefit of tax incentives to investors. The rules of the
investment promotion game will be fundamentally changed.
• Strengthen the overall governance of tax incentives. Make sure incentives are granted on the basis of a set of pre-determined,
objective, clear and transparent criteria.
• Consider, and discuss with the finance ministry, possible tax policy changes to support investment promotion: reviewing corporation
tax, reviewing other taxes not covered by the agreement (but only if there is evidence that doing so will affect investor costs) or
restructuring taxes to be covered.
• Recognize that it may be inappropriate to restrict these changes to affected entities and too costly in revenue to extend them to all firms.
• Examine how the tax administration can provide greater certainty and predictability to investors.

Perhaps most important, explore the potential for non-tax measures to promote investment, including the following:
• Investment facilitation measures, including information provision, transparency on rules and regulations, and streamlined
administrative procedures for investors
• Spending on local infrastructure (such as energy supply and transport facilities) and development of local human capital
• Advocacy and support for improved tax services, such as the speed with which value added tax refunds are paid and tax
disputes resolved

Source: UNCTAD.

152 World Investment Report 2022 International tax reforms and sustainable investment
or joint interpretative notes related to IIAs. Third, in case of a dispute arising under an IIA,
they can argue that the QDMTT represents a global consensus on corporate taxation,
embraced by States and international organizations worldwide.

Due to the risk of costly challenges to top-up applications arising from potential tax-related
ISDS cases, policymakers would do well to take potential conflicts into account as part of
the IIA reform process and under the Inclusive Framework.

3. Strategic investment policy implications

The strategic implications of the reforms for investment promotion are important.
The global minimum tax will apply only to MNEs with consolidated revenues over €750
million. This threshold may seem high, but it captures more than two thirds of new
investment projects carried out over the past five years, with even higher shares in
developing regions (figure III.18). Moreover, even if initially many firms will remain out of
scope, the fact that more and more FDI is carried out by the largest MNEs (overseas
investment by SMEs is in decline; see chapter I), combined with the likely gradual reduction
of the threshold, could mean that over time almost all FDI will be subject to the minimum.

Attracting international investment in productive assets, especially in GVC-intensive

manufacturing sectors, will become harder. Already in recent years, global investment in
such activities has seen a backlash against production offshoring and increased barriers
to cross-border trade and investment. The removal of fiscal arbitrage opportunities for
efficiency-seeking firms, for which investment decisions are often driven by small margins,
could mean that developing economies looking to attract investment to build productive
capacity and to increase participation in GVCs will be competing for a shrinking pool of
such investment.

That observation is critical for industrial policies. The “transformation of international

production” (see WIR20) that was already under way – characterized by reshoring,
regionalization and resilience-driven restructuring – could be reinforced and accelerated by
the tax reforms. Industrial policies can no longer rely exclusively or predominantly on attracting
efficiency-seeking investment by large-scale industrials and in GVC-intensive sectors.

Figure III.18. Share of greenfield investment projects by MNEs with annual

revenues of more than €750 million, 2015–2021 (Per cent)

World 67

Developed economies 66

Developing economies 70

Africa 73

Asia 68

Latin America and

72
the Caribbean

Source: UNCTAD, based on information from the Financial Times Ltd., fDI Markets (www.fDImarkets.com).

Chapter III The impact of a global minimum tax on FDI 153

 In the meantime, domestic and regional market-seeking investment, smaller-scale, asset-
light digital investment, and investment in green and blue economies, as well as investment
in domestic services and infrastructure, may provide more opportunities for promotion and
targeting. All of these are less affected by the tax reforms, at least initially.

While, on the one hand, the partial depletion of the investment promotion toolbox will
make attracting investment more difficult for some countries, on the other, competition
from low-tax locations will be much reduced. That could benefit developing economies
which, on average, have higher ETRs. Nevertheless, as competition shifts from tax
levers to alternative investment determinants, and from fiscal incentives to financial
incentives, many could still find themselves at a disadvantage because they are unable
to afford the substantial upfront financial commitments associated with infrastructure
provision or subsidies. Levers such as easing administrative procedures for tax
payment and reducing tax uncertainty, as well as improving regulatory transparency
and streamlining in general, will become more important. More attention will thus be
paid to investment facilitation, also driven by the prospective agreement on investment
facilitation for development under discussion among more than 110 members of the World
Trade Organization.68

The need to review the portfolio of incentives on offer to foreign investors provides an
opportunity to rethink them wholesale. In recent years, UNCTAD has urged countries to
engage in such an evaluation, with a view to shifting incentives towards the promotion of
investments with better performance in terms of sustainable development – specifically
linking incentives to the Sustainable Development Goals (SDGs). The shift from reduced-
rate incentives and exemptions towards incentives linked to real capital expenditures
– which are affected less by Pillar II – fits well with this objective, because investment in
SDG sectors is often capital intensive and relatively low margin. It should be noted that
the degree to which SDG-relevant investment will be affected by Pillar II – the extent to
which relevant investments and investors are in scope – is not yet fully clear, because a
significant part of such investment is carried out through international project finance and
split between multiple investors, including financial institutions.

The SDG financing imperative raises further important strategic considerations. It highlights
the trade-off that could emerge – under specific circumstances and particularly in
low-income countries – between the need to boost domestic resource mobilization for
the SDGs and the need to promote investment in SDG-relevant projects. Investments in
some sectors important for the SDGs or for climate change mitigation and adaptation can
yield social returns in excess of private and thus call for incentives or subsidies, or they
may have risk-return profiles that require public support to make them viable. In LDCs,
the upfront financial cost of subsidies are usually unaffordable, and fiscal advantages may
be the only available lever. In such cases, careful consideration of the flexibilities that exist
under the Inclusive Framework and the Pillar II rules is warranted.

What flexibilities exist has been briefly discussed in the earlier section on fiscal investment
policy responses. The strategic options for countries appear to be (i) joining or not joining
the Inclusive Framework and signing up to Pillar II, and (ii) applying or not applying top-up
taxes. In reality, the mechanics of Pillar II are such that the options for individual countries are
very much constrained by the fact that the actions of investor’s home countries can undo
any advantage for investors that host countries might provide through preferential tax rates.

The flexibilities and mitigating factors within the Pillar II framework are important to bear
in mind for the promotion of investment in sustainable development. A few forms of fiscal
incentives, such as accelerated depreciation, will still be effective, although the most common
forms of investment incentives – tax holidays and exemptions – will be severely affected.

154 World Investment Report 2022 International tax reforms and sustainable investment
The carve-out related to investment in physical assets will be an important mitigating factor
for SDG investment. By definition, investments in SDG or climate change sectors such as
renewable energy, water management or other forms of adaptation will be highly capital
intensive and hence have a high carve-out (i.e. the expected increase in ETRs will be lower).

Still, in moving forward with implementation, the need to promote investment in the SDGs
and in climate change mitigation and adaptation should be front of mind for policymakers,
at the same level as domestic resource mobilization.

***

This chapter has shown that the introduction of a global minimum tax in BEPS Pillar II will
have significant implications for FDI and for investment policy. The chapter has provided
a guide through the complex reforms and indications as to possible fiscal investment
policy responses. It has categorized investment incentives, describing the impact of Pillar
II for each category. The concluding section highlighted the potential implications for
industrial policy, for the promotion of sustainable investment, and for investment promotion
institutions and international investment agreement negotiators.

The BEPS reforms are a major achievement of multilateral policymaking on a critical issue
that is a priority for the international community. The reforms have the potential to bring
substantial benefits, including to developing economies, in terms of increased government
revenues and reduced distortions to international business.

Three final considerations for tax and investment policymakers and for the international
community engaged in the reform process are worth highlighting:

1. As observed in this chapter, developing economies have obtained an important

instrument in the Pillar II rules allowing them, in principle, to apply top-up taxes first,
before investor home countries can do so. Yet, some developing countries that have
weaker tax collection capabilities or that are more constrained by old-generation IIAs
may be unable to exercise this benefit, at least for a foreseeable initial implementation
period. Where this is the case, developed home countries may wish to consider pooling
any revenues raised through the IIR and converting them to development assistance.
2. As discussions are ongoing in the Inclusive framework, due attention should be given
to the constraints to implementation that may be posed by IIAs. A multilateral solution
would be the most effective option to avoid disputes arising from host countries
removing or reducing preferential tax treatment for investors. The IIA regime itself is
also undergoing a process of reform. The urgency brought on by the implementation
of Pillar II may provide further impetus to this process.
3. In developing countries, many institutions will struggle not only with the evaluation
of policy options and the implementation of the – highly technical – tax reforms but
also with the implementation of investment policy responses. International support
and technical assistance in both areas, including from organizations such as
UNCTAD, will be crucial to ensure that the potential benefits from the reforms are
realized, while negative effects on international private investment for sustainable
development are minimized.

Chapter III The impact of a global minimum tax on FDI 155

 NOTES
1
A further complication that arises in the cross-border setting is the potential application of taxes by both
the host and the home country (or – language differs – the “source” and the “residence” jurisdiction).
Note that this chapter will generally prioritize investment-driven terminology over tax-driven terminology;
i.e. the notion of “country” or “economy” over that of “jurisdiction” and the notion of “home” and “host”
over those of “residence” and “source”. For the purpose of this chapter, however, these concepts
can generally be used interchangeably, but when this is not the case, the precise qualification will
be applied.
2
Suppose, for instance, that the investor requires a 5 per cent rate of return. In the absence of tax,
the investor would invest up to the point at which the pre-tax return is also 5 per cent. Imagine, though,
that taxation leads the investor to invest less, only to the point at which the pre-tax return is 7 per cent.
Then the METR, expressed in absolute terms, is 2 percentage points; expressed relative to the required
return, it is 40 per cent. By contrast, the AETR reflects tax paid on the totality of profits, not just on the last
dollar, and will typically be higher.
3
For elaboration on this point, see chapter 1 of Devereux et al. (2021).
4
Elements of cash-flow taxation appear in, for example, the United States tax reform of 2017, which
provided for immediate expensing while limiting – though not eliminating – interest deductibility.
Another form of rent tax is the Allowance for Corporate Equity (which gives a tax deduction for a notional
required return on equity), experience which is assessed in IMF (2016). Explicit rent taxes are also quite
widely used in the extractive industries.
5
The scale decision in any country is independent of the METR in others (unless the MNE is constrained in
the total amount of investment it undertakes). Cross-country comparisons of METRs are thus less relevant
to understanding cross-border investment than are such comparisons of AETRs. There is one however
respect in which the METR affecting FDI may differ from that affecting a purely domestic investment.
Expanding the scale of an MNE’s investment in one country – the exercise underlying the METR – may
affect its tax liability in others (expanding operations in one affiliate, for example, may require diverting
scarce managerial expertise from others); see Keen et al. (forthcoming).
6
Also from James (2014), cited in figure 1 of Platform for Collaboration on Tax (2016a) and table 2 of Keen
and Mansour (2010): about 85–90 per cent of low-income countries offered tax holidays in 2015 as
compared with 75 per cent in 2005.
7
To the extent that countries are able to use tax incentives to compete aggressively for especially mobile
capital, this may result in less aggressive competition for less mobile capital. See Keen and Konrad (2013),
which, more generally, provides a review of the theory of tax competition and responses to it.
8
The evidence on interactions in tax-setting is reviewed in Leibrecht and Hocgatterer (2012) and OECD
(2020). The numbers cited are from Devereux et al. (2008), who find, for a sample of developed countries,
a response of 0.34–0.67 points to a 1-point increase in the average statutory rate abroad; in a sample that
includes developing countries, Crivelli et al. (2016) find a response of 0.25–0.3 points. IMF (2022, online
annex 2.2) reaches broadly similar conclusions.
9
Some (notably Brennan and Buchanan, 1980) have argued that downward tax competition can be socially
beneficial because it limits the ability of governments to finance wasteful spending. Yet, given governments’
pressing revenue needs, now amplified by the pandemic, and the increased use of fiscal rules to control
aggregate tax and spending, this argument is now rarely heard. There may also be circumstances –
for example, when domestic firms are held largely by foreigners – in which international considerations
lead countries to set taxes not lower but higher than would otherwise be the case (a possibility highlighted
by Mintz, 2022b).
10
Indeed, this was arguably the objective of the BEPS project prior to the Pillar II proposal.
11
As set out in the model rules and commentary issued by the OECD (2021, 2022a).
12
More precisely, the calculation is across all entities within a particular country that belong to the same
multinational group.
13
These are initially at rates of 10 per cent for payroll and 8 per cent for tangible assets, transitioning
gradually to 5 per cent on each in 2033.
14
Leaving aside here tax refunds of various kinds.

156 World Investment Report 2022 International tax reforms and sustainable investment
15
This is similar to (and likely inspired by) the GILTI (Global Intangible Low-Taxed Income) provisions of the
2017 United States tax reform, with the difference that those provisions apply the minimum with blending
across affiliates in different countries (rather than, as in Pillar I, country by country). Controlled foreign
corporation rules – which bring an affiliate’s earnings immediately into taxation in the parent country –
have a similar effect.
16
These issues relate, for instance, to the treatment of deferred taxes (ones that are reasonably expected to
be payable in the future) and – an issue that has as yet received little attention – the differences between
the various accounting standards that multinationals may apply.
17
At the time of writing, draft rules for the STTR had not yet been issued.
18
Relating, for instance, to the treatment of “deferred” taxes (ones that are reasonably expected to be
payable in the future) and the differences between the various accounting standards that multinationals
may apply (an issue that is receiving increased attention).
19
This will be the case, for instance, if all taxes are initially zero and the carve-out more than covers the
investors’ required return: the investor is then in effect able to deduct more than the full costs of investment
– in effect, a subsidy from the government that makes the METR negative.
20
In general, if the tax base is such that the initial METR is positive, an increase in the statutory rate of tax
increases the METR. Simulations by Bares et al. (forthcoming) and Mintz (2022a) find an increase in the
METRs for countries directly affected by Pillar II.
21
ETRs based on the common ratio between taxes paid and reported profits are sometimes referred to in this
chapter as “standard ETRs” to emphasize their difference from related, but nonetheless different, tax rates
such as the FDI-level ETR or the GloBE ETR.
22
CbCR was introduced in the context of the BEPS project (Action 13). The data set contains information
about the activities of large MNEs (i.e. with annual revenues over €750 million) at the bilateral parent-host
country level.
23
The sample includes the 193 host countries directly covered by CbCR data from 2017; a few additional
ones were imputed using available STR data. The list of the 39 OFCs is from Tørsløv et al. (2021), largely
consistent with other OFC lists, including that adopted in WIR15.
24
Evidence reported in chapter II (section II.C) confirms that tax incentives are usually not granted to foreign
firms only; even when their main objective is to attract foreign investment, their perimeter tends to cover
both foreign and domestic firms.
25
In each host country, however, average ETRs disguise significant heterogeneity across ETRs paid by
individual foreign affiliates. Some foreign affiliates will face an ETR below 15 per cent even when the
country average is above that level – a compositional effect not captured by country-level analysis. The
treatment and interpretation of within-country variance in the analysis of ETRs is one key methodological
and empirical issue in this analysis (see discussion in box III.7 and Auclair and Casella (forthcoming)).
26
In theory, profit shifting does not occur only through the use of OFCs. However, the bulk of it is coordinated
by a limited set of countries that qualify as OFCs (WIR15).
27
As the impact analysis is entirely based on FDI-level ETRs, the text may refer only to “ETR” or “ETR impact”,
omitting the qualification “FDI-level” when the context is clear. By contrast, the wording “standard ETR” is
used to refer to the common ETR ratio (between average taxes paid and profits reported), if the context
requires emphasizing the difference with the FDI-level ETR.
28
The OECD EIA adopts an even more conservative assumption of no change in shares of profit shifting
(OECD, 2020; Hanappi and Gonzalez Cabral, 2020). This scenario can be useful to set a theoretical lower
bound. In practice, it is unlikely, and its occurrence would imply that Pillar II would be ineffective in tackling
profit shifting, an outcome that is neither realistic nor desirable. In all circumstances, the gap in terms of
the estimated impact of Pillar II on FDI-level ETRs between the most extreme cases – “full reversal of profit
shifting” and “no impact on profit shifting” – is relatively limited, at less than 1 percentage point on average
(see Casella and Souillard, 2022).
29
The empirical evidence on profit shifting – largely caused by a limited set of countries with very low
ETRs – lends some credibility to this scenario. In addition, the reputation and transaction costs
associated with profit shifting are high for MNEs and expected to grow further as a consequence of the
BEPS process.
30
In the upper-bound scenario, it is more intuitive to neatly separate the impact of the profit-shifting channel
and the ETR channel. First, profits are “brought back” from OFCs to the host countries where they are
generated; the corresponding increase in ETR is due to the application of host countries’ (higher) ETRs
to the entire FDI income base (profit-shifting channel). Second, the host countries’ ETRs are adjusted
upward, if need be, to align with the minimum tax rate, given the entire FDI income as the tax base
(ETR channel).

Chapter III The impact of a global minimum tax on FDI 157

 31
To exemplify, consider the case of an investment for which part of the income is reported in the host country
and part is shifted to an OFC. On shifted profits, the carve-out must be close to zero, as the underlying
substance is expected to be small or negligible. Hence the minimum top-up fully applies (without the
carve-out exclusion). In this context, the introduction of the carve-out does not change the motivation to
reduce profit shifting, relative to the case without a carve-out. If anything, it further strengthens it because
the OFC (which does not benefit from the carve-out) becomes relatively more expensive. In the upper-
bound case, profit shifting will still be fully eliminated so that the profit-shifting channel will continue to
exert its full impact (2 percentage points). Instead, the ETR channel will be affected, as the post-Pillar II
average ETR in the host country may be reduced by the carve-out. In the extreme case of a 100 per cent
carve-out, no top-up applies and thus the impact of the ETR channel is zero. The overall impact then
remains confined to the profit-shifting channel, at 2 percentage points, a floor bounded away from zero.
More generally, depending on the share of the carve-out in the host country, the overall impact ranges from
2 percentage points (100 per cent carve-out) to 3 percentage points (no carve-out). Similar considerations
apply to the alternative, more conservative, scenario of a partial reduction of profit shifting.
32
Bares et al. (forthcoming), adjusting the AETR for profit shifting in a different way from that here, find that
dispersion may actually increase at modest levels of the minimum (because those in higher tax countries
are affected by the reduced opportunities to shift profits outward).
33
This simulation of the revenue impact is done by applying for each host country (non-OFC) the estimated
increase in FDI-level ETRs to the (FDI-)income base reported by CbCR data (2017).
34
Recalling figure III.8, under the baseline scenario, the growth in the average FDI-level ETR caused by Pillar
II is 16 per cent in developed economies against 9 per cent in developing ones.
35
Similar estimates have been produced by Damgaard et al. (2019) and Turban et al. (2020).
36
The analysis in WIR15 observes a negative relationship between direct investment from OFCs and the
reported rate of return on this investment in host countries, which is indicative of FDI-enabled profit shifting
(see also Bolwijn et al., 2018; Janský and Palanský, 2019).
37
UNCTAD FDI statistics (stock and flows) will be mostly unaffected as they already remove FDI in and by
SPEs (as reported by countries) and Caribbean financial centres.
38
The GTED database is the first of its kind, collecting all publicly available data on tax expenditure provisions
published by national governments worldwide from 1990 onwards, including many developing countries
(as long as they report tax expenditures) (Redonda et al., 2022). One appealing feature of the database is
that it reports all and only the information reported by countries in their tax expenditure reporting, limiting
as much as possible the degree of discretion while ensuring significant coverage. As a major downside,
the results are affected by heterogeneity in the quality of reporting across countries, particularly between
developed and developing countries. Importantly, the GTED database also provides information on the
forgone revenues associated with each tax expenditure, whenever reported. While the primary approach
adopted in this analysis is based on a simple “counting”, the main findings do not change substantially
when results are “weighted” by forgone revenues.
39
The notion of tax expenditure is different from that of tax incentive, although the two are strongly linked.
While the objective here is to map and size the relevant categories of tax incentives, the empirical analysis
uses tax expenditure data as proxies – mainly the number of provisions but also the corresponding forgone
revenues, as reported by the GTED database.
40
For example, it does not discriminate between foreign and domestic firms or between foreign affiliates
of large MNEs and others. Throughout this section, incentives targeting taxes on corporate income – the
broad perimeter of Pillar II – will be identified for convenience as “income-related incentives”, where the
qualification “corporate” may be omitted when implied by the context.
41
The GTED database provides information on the main policy purpose of the tax expenditures, as stated
by publishing countries. This information is available for about half of (corporate) income-related tax
expenditure provisions. The list of objectives includes “attract FDI”. This category of objectives – only 2
per cent of the relevant sample – is expected to heavily underestimate the share of incentives aimed at
attracting foreign investment, as a major part of them falls under other categories of policy objectives, such
as “promote priority activities” or “promote priority industries”.
42
In addition, a de minimis exclusion may apply: the filing constituent entity may elect to deem the top-up tax
as zero if, for that country, its average revenue is less than €10 million and the average of GloBE income
or loss is less than €1 million in the current and the two preceding fiscal years.
43
This exclusion exists because the industry is generally subject to special tax rules in a number of countries,
which have introduced alternative or supplementary tax regimes for them outside the scope of CIT.
44
Suppose that an MNE based in country X (ultimate parent country) has a foreign subsidiary in country Y.
The subsidiary in country Y provides an interest-bearing loan to an entity in country Z. Country Z levies
no WHT on outbound interest payments. The subsidiary in country Y realizes only interest income and is

158 World Investment Report 2022 International tax reforms and sustainable investment
 subject to 10 per cent ETR under the GloBE rules. If we assume that country Y levies a QDMTT or that
country X levies an IIR as the country of the ultimate parent, the lack of WHT in the ultimate source country
Z would be offset by the minimum rate of 15 per cent in another country (country Y in an QDMTT scenario
or country X in an IIR scenario).
45
See WIR99 on determinants of FDI and UNCTAD (2000) on importance of tax incentives to attract FDI.
46
For details on the United States tax reforms and their impact on investment, see UNCTAD’s Global Investment Trends
Monitor Special Edition on Tax Reform in the United States (UNCTAD, 2018a), and WIR18 (box I.2, page 17).
47
The only way to escape topping up, in the absence of a QDMTT recognized by others, would be to ensure
a domestic GloBE ratio of 15 per cent. This, however, would actually imply a higher average tax rate than
does the top-up tax (because of the carve out available under the latter).
48
Though not addressed here, attention will also need to be given to the possible adoption of the STTR,
balancing the additional protection from outward profit shifting that this may provide against the
discouragement of inward investment; see Perry (forthcoming).
49
Except for a few sectoral exceptions.
50
This is the established view, for instance, of the IMF, the OECD and the World Bank. Their arguments are
set out in Platform for Collaboration on Tax (2016a, b).
51
There are others too: the focus here is on those that are most evidently inherent in the structure of the
envisaged arrangements.
52
If a QDMTT applies, it also costs the host country only 40 cents in forgone revenue, because the reduction
in the covered tax ratio increases the amount of the top-up that the QDMTT enables the host country to
collect. In the absence of QDMTT, the revenue cost to the host country would be the full $1.
53
A 60 per cent R&D tax credit, for example, reduces tax due by 60 per cent of the firm’s expenditure on R&D.
54
This is in contrast to non-refundable credits, or refundable credits that do not meet the qualifying conditions,
which simply reduce covered taxes.
55
An example may help. Suppose that the carve-out is zero, so that total tax is at its otherwise-absolute minimum
of 15 per cent of accounting profit. Then, a $1 tax credit conveys a direct benefit to the investor of $1 while (by
the addition to accounting profit) increasing the investor’s liability by only 15 cents: a net gain of 85 cents.
56
In order to qualify for the treatment just described, for instance, credits in excess of tax liability must be
refundable within four years of their arising.
57
The role of MNEs in “collecting” rather than “paying” taxes is touched on briefly in the WIR15 discussion
on the contribution of MNEs to government fiscal revenues (p. 182).
58
See for instance Perry (forthcoming).
59
The reason is that in this case the low-tax country is only negligibly affected by the induced increase in
its own rate, since it has already chosen the rate that best serves its interests, given the tax rates set by
others; however, tax increases elsewhere convey a non-negligible benefit (see Hebous and Keen, 2022).
Other aspects of the welfare impact of minimum corporate taxation are addressed in Hines (2022), Janeba
and Schjelderup (2022) and Johannesen (2022).
60
See for instance Vrijborg and De Mooij (2016).
61
The effects of such strategic reactions might be considerable: IMF (2022a) finds that the addition to
global revenues arising from strategic reactions by high-tax countries can be larger – given the strength of
strategic complementarity suggested by the literature – than the gain assuming no change in their policies.
62
See Mansour and Rota-Graziosi (2013).
63
See for instance Konrad and Schwedler (1999).
64
It may also be that some regions come to find the rate of 15 per cent on in-scope affiliates to be too low.
If so, in addressing this they will face the same problem of outsiders, but mitigated because the gap in
effective rates created by more ambitious regional minima will likely be lower than it was when there was
no minimum in force.
65
In aggregate, it is even theoretically possible that the damaging consequences of tax competition will be
exacerbated by adoption of a minimum tax applying only to a subset of investments. See for instance the
discussion in Keen and Konrad (2013).
66
Keen and Marchand (1997).
67
This might mean for example, wider adoption of State aid rules similar to those of the European Union.
68
WTO, “Investment faciliation for development”, Informal Discussions, https://www.wto.org/english/
tratop_e/invfac_public_e/invfac_e.htm.

Chapter III The impact of a global minimum tax on FDI 159

160 World Investment Report 2022 International tax reforms and sustainable investment
CHAPTER IV

CAPITAL
MARKETS AND
SUSTAINABLE
FINANCE
 INTRODUCTION

During the pandemic, and partly as a result of pandemic recovery plans, sustainable
finance saw strong growth across equities, fixed income products and alternative assets,
and in both public and private markets (WIR20, WIR21). This is related to several factors.
The accelerating and cascading impacts of climate change are rapidly revealing the
physical and transition risks of non-sustainable investments. More recently, the war
in Ukraine has also provoked reflection on the energy transition and its consequences
for investors. Inflationary pressures and supply chain resilience, for example in energy,
are adding further impetus to sustainability concerns. At the same time, the regulatory
response to environmental and other sustainability-related issues, including climate change
commitments, has accelerated and will support moves towards more sustainable financial
markets in both developed and developing countries.

In 2021, the sustainable finance market continued to grow, in terms of both the number
and the value of sustainable products. UNCTAD estimates the total value of sustainable
financial products at $5.2 trillion, up by 63 per cent from 2020. They were made up of
sustainable funds, whose assets grew by 53 per cent to $2.7 trillion, and sustainable
bonds (including green, social and mixed-sustainability bonds), whose assets grew by
72 per cent to $2.5 trillion. However, UNCTAD analysis shows that not all of this investment
is truly sustainable and that alignment with the SDGs remains limited.

The growing importance of sustainable finance is not just a question of market growth and
expanding interest in related investment opportunities. It has also been supported by the
increasing number of actions being taken by investors and asset owners to support more
sustainable investments and to mitigate sustainability-related risks. This chapter shows
that institutional investors, such as pension and sovereign wealth funds, are becoming
more active in their assessment of sustainability risks and the responsiveness of their
investment strategies to these risks. However, many investors still do not disclose or report
on sustainability-related risks and are not moving quickly enough to reorient portfolios,
especially with regard to climate-related action.

Stock exchanges and other market operators continue to integrate environmental, social
and governance (ESG) factors into public market infrastructure. The number of exchanges
with written guidance on ESG disclosure for issuers, for example, continues to grow
rapidly, from just 13 in 2015 to 63 at the end of 2021. Likewise, the number of exchanges
providing training on ESG topics to issuers and investors continues to increase, with more
than half of exchanges offering annual training in this area. Mandatory ESG reporting has
also been on the rise in recent years, supported by both exchanges and securities market
regulators. The number of exchanges covered by mandatory rules on ESG disclosure,
currently 30, has more than doubled in the past five years.

Overcoming fragmentation through the harmonization and comparability of frameworks

and standards for corporate sustainability accounting and reporting is important to the
achievement of SDG 12.6, sustainability reporting, and the further development of
sustainable finance. Member States, working through UNCTAD’s Intergovernmental
Working Group of Experts on International Standards of Accounting and Reporting (ISAR),
are playing an active role in this area. Since ISAR’s publication of guidance in this area
(UNCTAD, 2019), UNCTAD has been implementing capacity-building projects to assist
member States in addressing regulatory, institutional and training needs.

162 World Investment Report 2022 International tax reforms and sustainable investment
The International Organization of Securities Commissions (IOSCO) continues to develop
its work in this area to provide guidance to securities regulators, and development of
international standards for ESG disclosure is accelerating. Between 2021 and 2022,
the International Financial Reporting Standards (IFRS) Foundation formally launched its
International Sustainability Standards Board (ISSB) (which is now recognized by the G7 and
the G20) and signed a new agreement with the Global Reporting Initiative (GRI): combined,
these developments aim to create a new global baseline for corporate sustainability
reporting that is now recognized by the G7 and the G20. The consolidation of standards
will further accelerate the integration of ESG into market infrastructure.

At the national level, the regulatory response to both sustainability-related risks and
the growth of the sustainable finance market has been gathering pace. This chapter
presents findings from a new UNCTAD project on national sustainable finance regulations.
The findings are based on data from 35 economies, accounting for about 93 per cent
of the world’s gross domestic product (GDP), and show the accelerating efforts of major
economies to introduce regulatory frameworks as well as standards and other policies in
support of sustainable finance. The proliferation of regulations and standards by national
governments (and regional groupings) relates both to country commitments, for example
on climate change, and to the need to regulate financial markets in this space and mitigate
problems such as greenwashing.

While it is a truism that investors face uncertainty and risk in many guises, one risk is
foreseen and even financially quantifiable: climate change. As the world tries to move on
from the pandemic while dealing with inflation, supply chain disruptions and the impact of
war, investors, governments and international organizations should remain focused on the
physical and transition risks of climate change. Towards this end, UNCTAD is mandated to
support international efforts to finance climate change adaptation and other sustainability
issues, as well as monitor the sustainable finance market and efforts to enhance its impact
and contribution to sustainable development.1 Through its programmes on sustainable
finance, in particular its Global Sustainable Finance Observatory, UNCTAD will continue
to provide analysis, advocacy and networking arrangements for governments, investors,
regulators and other stakeholders to improve the sustainability of capital markets.

Chapter IV Capital markets and sustainable finance 163

 A. SUSTAINABILITY-THEMED
CAPITAL MARKET
PRODUCTS

UNCTAD estimates that the value of sustainability-themed financial products amounted

to $5.2 trillion in 2021, up 63 per cent from 2020. These capital market investments
consist mainly of sustainable funds (over $2.7 trillion) and sustainable bonds (including
green, social and mixed-sustainability bonds) ($2.5 trillion). Most of these products are
domiciled in developed countries and targeted at assets in developed markets. Most are
self-labelled. Although these products tend to outperform their peers in the overall capital
market in terms of sustainability, preliminary analysis reveals that the low-performing ones
may not fulfil their sustainability credentials.

1. Sustainable funds

a. Market trends
The global market for sustainable funds experienced another year of exceptional growth
in 2021, mainly driven by developed markets. According to Morningstar data, the number
of sustainable funds reached 5,932 by the end of 2021, up 61 per cent from 2020.
The total assets under management (AUM) of these funds reached a record $2.7 trillion,
an increase of 53 per cent from the previous year (figure IV.1).

Investment inflows to sustainable funds also accelerated. Net investment in 2021 reached
$557 billion, up 58 per cent from 2020 and more than 200 per cent from 2019 (figure
IV.2). This trend reflects robust demand for mixed-sustainability products. Institutional
investors are increasingly integrating sustainability in their portfolios to mitigate long-term
climate and other environmental and social risks while tapping into opportunities offered by
the energy transition. European funds attracted net investment inflows of $472 billion, or
85 per cent of the world’s total.

Much of the growth of sustainable funds remained concentrated in developed markets.

Europe dominates the market with an 81 per cent share of all such assets (figure IV.3).
In 2021, assets in sustainable funds in Europe were boosted by record inflows (up 63 per
cent), strong product development and rising equity prices. Sustainable funds accounted
for 18 per cent of the assets of the European fund market, reflecting the relative maturity of
the market and the catalytic impact of sustainable finance regulation in Europe.

The United States is the second largest market; however, in terms of assets, sustainable
funds represent roughly 1 per cent of the total United States fund market. Changes to
regulations implemented by the Labor Department to make it easier for retirement plans
to invest in sustainable funds2 and new regulations adopted by the Securities Exchange
Commission on disclosure of climate risk may speed up development of the sustainable
fund market in the United States.

164 World Investment Report 2022 International tax reforms and sustainable investment
 Sustainable funds and assets under management, 2010–2021
Figure IV.1.
(Billions of dollars and number)

Europe United States Rest of the world

Billions of dollars Number

3 500 5 932 6 000

3 000
5 000

156
2 500
357 4 000

2 000

94 3 000
1 500 236

2 231 2 000
1 000
91
1 304 68 140 1 460
56 1 000
500 40 89
82
49 51 63 673
30 28 31 40 389 428
165 158 189 222 277 262 302
0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: UNCTAD, based on Morningstar data.

Note: The numbers for 2020 were updated based on the latest data.

Net flows to sustainable funds, The global sustainable fund

Figure IV.2. Figure IV.3.
2010–2021 (Billions of dollars) market, by region, 2021 (Per cent)

557 Rest of the world

United States 6
352
13

159

72 60
28 33 81
8 2 12 24
-6
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Europe

Source: UNCTAD, based on Morningstar data. Source: UNCTAD, based on Morningstar data.

Sustainable funds in other developed markets also expanded rapidly in 2021, albeit from
a relatively low level. The total assets of sustainable funds in Australia and New Zealand
(combined), Canada and Japan reached $30.6 billion, $27.3 and $35.2 billion respectively.

In Asia (excluding Japan), sustainable fund assets grew to $63 billion, up 70 per cent
from 2020. In total, 118 sustainable funds were launched in the region in 2021, more
than double the number launched in 2020 (55). This growth was mainly driven by China
(49 funds) and the Republic of Korea (36). China remains the dominant player in the region

Chapter IV Capital markets and sustainable finance 165

 and the third largest sustainable fund market worldwide, with AUM of nearly $50 billion.
Asset managers in major emerging economies in other regions, such as Brazil and South
Africa, also launched sustainable funds in recent years, but their market size remains small.

The growth momentum of sustainable funds is expected to continue. Demand remains

strong and governments in both developed and emerging economies have stepped up
their efforts to support the growth of sustainable investment. A large number of countries
are putting in place necessary frameworks, industry standards and regulations (see section
D), which will bring more transparency and credibility to the market and help build a viable
ecosystem for its further growth.

However, a number of challenges need to be addressed in order to fully tap into the
potential of the sustainable fund market. Despite the surge in recent years, sustainable
funds account for only about 4 per cent of the global fund market in terms of assets. Most of
these funds are self-labelled, and the lack of consistent standards and high-quality data to
assess their sustainability credentials and impact has given rise to greenwashing concerns
and credibility issues. While regulation efforts at national level can help address these
issues, international cooperation is needed to enhance interoperability and harmonization
of regulations and standards across countries to facilitate international investment.

Another structural issue that needs to be addressed is the absence of most developing
economies in the sustainable fund market. Despite positive developments in recent years
in a few leading emerging markets such as Brazil, China, India, South Africa and some
economies in the Association of Southeast Asian Nations, sustainable funds remain
largely a developed-market phenomenon. Most developing economies, in particular the
least developed ones, face tremendous barriers to developing their own sustainable fund
market or benefiting from the international sustainable fund market, owing to their limited
market size and the perception of relatively high risks in their capital markets.

The relative scarceness of company-level sustainability data in developing economies

does not work to their advantage either. In this regard, UNCTAD and the ISAR facilitated
the creation of regional partnerships in Latin America and in Africa to promote a
communication channel among peers in the region and to support the development of
national strategies and policies. The partnerships aim to (i) establish and/or strengthen
the national infrastructure to prepare high-quality sustainability reports by companies;
(ii) implement the new global sustainability reporting standards; (iii) measure the contribution
of the private sector to the implementation of the SDGs; and (iv) promote sustainable
enterprise development.

To support the growth of the sustainable fund market, developing economies need to
address these issues. Small developing economies may also consider developing a regional
market for sustainable investment, one in which high-quality companies, including small and
medium-size enterprises (SMEs) and social enterprises that meet necessary sustainability
and reporting standards, can be listed and traded, and sustainable financial instruments
can be developed to meet the needs and requirements of international investors.

b. Sustainability performance
The rapid rise of sustainable funds shows the huge potential of this emerging financial
instrument in financing sustainable development. However, the risk of ESG- or sustainability-
washing constitutes a severe challenge to the future growth of the sustainable fund market.
So far, sustainable funds have been self-labelled. Although several economies, such as the
European Union (EU) and Hong Kong (China), have introduced regulations on sustainability
disclosure by issuers at the product level, there are no industry standards for qualifying

166 World Investment Report 2022 International tax reforms and sustainable investment
sustainable funds at the national or international level. Meanwhile, the lack of high-quality
sustainability data and the inconsistent company sustainability ratings available in the market
make it challenging to evaluate the sustainability performance of these funds. All these issues
have led to legitimate concerns about the credibility of the sustainable fund market and its
potential damage to investor confidence, which could hold back further growth of the market.

To shed more light on the sustainability profile of these funds, UNCTAD, with the support of
its data partner Conser, has been monitoring more than 800 sustainability-themed equity
mutual funds since 2020. This research builds on ESG data based on the average of leading
ratings available in the market and in this sense reflects the “consensus” of the market
(UNCTAD, 2021). This section provides the preliminary results of the monitoring assessment.

(i) Overall sustainability

Sustainable funds are highly heterogeneous in their approaches to integrating sustainability.

For analytical purposes, the sustainable integration strategies of these funds are grouped into
three categories: (i) sustainability engagement, a strategy of mainly engaging with portfolio
companies, for example through voting or other specific actions, to push for positive changes
in terms of sustainability integration; (ii) general incorporation, a strategy that incorporates
ESG or other material sustainability factors into investment selection processes to mitigate
risks or enhance returns, including by using positive or negative screening or by applying
responsible investment principles; and (iii) sustainability thematic strategy, which focuses
on one concrete sustainability theme (for example low carbon or gender equality) for asset
allocation. A sustainable fund can use one or a combination of these strategies.

Overall, the sustainable funds covered by the monitoring exhibit a better sustainability profile
than their conventional peers. As a group, these funds have a mean sustainability score of 7.2
(out of 10) in the assessment,3 significantly higher than the 4.0 average sustainability rating
of the MSCI global equity index (the MSCI ACWI).4 This shows that, on average, sustainable
equity funds tend to outperform the mainstream equity markets on sustainability ratings,
regardless of their choices of sustainability integration strategies.

However, the sustainability ratings of the funds, as a whole and by strategy, are distributed
over a wide range, and the low-performing funds in each group may not fulfil their self-
claimed sustainability credentials (table IV.1). Most notably, the quartile of funds with the
lowest scores, in each strategy category and overall, have an average sustainability rating
below 6, owing to significant exposure to ESG or climate-related risks or sensitive sectors
(such as fossil fuels, tobacco and alcohol, and weapons). This raises legitimate concerns
about their sustainability claims. Their sustainability integration practices and performance
therefore require careful examination, and external auditing may be warranted.

Distribution of sustainability score by fund strategy, 2021

Table IV.1. (Average sustainability rating)
Percentile

Strategy 0–25 25–50 50–75 75–100

Overall 4.6 6.6 8.1 9.5

Sustainability engagement 4.6 6.5 8.1 9.5

Sustainability incorporation 4.7 6.7 8.3 9.5

Thematic funds 5.3 7.9 9.2 10

Source: UNCTAD, based on Conser data.

Note: The distribution of fund sustainability ratings by strategy is broken into four quartiles; e.g. percentile 0–25 represents the bottom quartile
of funds that have the lowest sustainability ratings.

Chapter IV Capital markets and sustainable finance 167

 Exposure of sustainable funds to (ii) Climate impact
Figure IV.4. climate-positive and -negative assets,
With respect to the funds’ impact on climate
2021 (Per cent)
sustainability, the analysis shows that both thematic
funds with a green investment focus and the
Green thematic funds 26 sustainable fund universe in general tend to perform
3
better than the overall fund market. On average, low-
Sustainable funds overall 8 carbon thematic funds have a net exposure of 23 per
3
cent of their portfolio to climate-positive assets (low-
3
MSCI ACWI Index 9 carbon assets minus fossil fuels), compared with a
net exposure of -6 per cent for the MSCI ACWI index.
Green assets Fossil fuels It should be noted that, although some sustainable
funds are fossil-fuel-free by prospectus, most are not.
Source: UNCTAD, based on Conser data. About 25 per cent of self-declared green funds have
an exposure of more than 5 per cent to fossil fuels,
and some cases nearly 20 per cent, which calls into
question the “greenness” of these funds (figure IV.4).

Morningstar data also show that sustainable funds are improving their low-carbon
performance. At the end of 2021, 63 per cent of United States sustainable funds had a
Morningstar low-carbon risk rating, up from less than 50 per cent in 2019. The share is
significantly higher than the 48 per cent of the United States fund universe that has a low-
carbon risk rating (Morningstar, 2021).

This trend reflects a steady rise of climate funds in the sustainable fund market, driven
by opportunities offered by renewable energy, electric vehicles, energy efficiency and
storage, and other cleantech industries. Meanwhile, more fund managers have committed
to greening their portfolios. According to the Net Zero Asset Managers initiative, 236 asset
managers, with $57.5 trillion in AUM, have signed up to the initiative with a commitment to
support the goal of net zero greenhouse gas (GHG) emissions by 2050 or sooner. However,
these commitments need to be substantiated by an accurate evaluation of, and reporting
on, the greenness of asset managers’ portfolios, in particular in light of the unsatisfying
ratings of some low-performing products in the market. A solid evaluation and disclosure
of their carbon footprint and related risks is not only necessary but, thanks to the growing
availability of carbon emissions data, also feasible. For example, an increasing number
of banks and asset owners have started to assess their exposure to climate risk through
systematic stress tests (UNCTAD, forthcoming); however, there is limited disclosure at the
product level, and fund issuers need to do more in this respect.

(iii) SDG alignment

As sustainable investment products, sustainable funds can play an important role in

filling the Sustainable Development Goals (SDGs) financing gap, in both developed and
developing economies. Leading fund providers, such as BlackRock, Amundi and Robecco,
have launched funds dedicated to the SDGs, and some funds have used the SDGs as a
framework to evaluate the impact of their portfolio. However, the lack of a taxonomy to
define what counts as SDG investment as well as the poor quality of existing SDG ratings
for individual companies make it challenging to measure or assess the SDG alignment
of investment funds and determine how much of their portfolio is invested in assets that
contribute to delivery of the SDGs.

UNCTAD has identified several key SDG sectors (encompassing all 17 SDGs), which are
critical for achieving the SDGs and represent the largest investment needs and opportunities
in terms of SDG financing (WIR14). Accordingly, UNCTAD has been monitoring private
sector investment in these sectors (WIR21).

168 World Investment Report 2022 International tax reforms and sustainable investment
Examining the holdings of the more than 800 sustainable equity funds in the sample,
the analysis identified assets of these funds across eight of the key SDG sectors: transport
infrastructure, telecommunication infrastructure, water and sanitation, food and agriculture,
climate change mitigation (renewable energy and cleantech), health, education and
ecosystem diversity (figure IV.5). This investment totalled $156 billion, or 26 per cent of
their total AUM at the end of 2021. Four sectors – health, renewable energy, food and
agriculture, and water and sanitation – account for almost 95 per cent of the assets
committed to these SDG sectors. The health sector, which covers health infrastructure,
medical services, pharmaceuticals and medical devices, is the most common and single
largest SDG sector for fund investments, followed by climate change mitigation. Compared
with 2020, the funds’ investment in the health sector declined by 1.7 per cent, while their
investment in climate change mitigation rose by 1.5 per cent, pointing to increased interest
in green assets.

Allocated assets by sustainable funds across eight SDG sectors, 2021

Figure IV.5.
(Per cent)

Health 12.7

Climate change mitigation 7.5

Food and agriculture 3.1

Water and sanitation 1.5

Ecosystems and biodiversity 0.9

Telecommunication infrastructure 0.4

Transport infrastructure 0.2

Education 0.1

Source: UNCTAD.

Chapter IV Capital markets and sustainable finance 169

 2. Sustainable bond markets
The sustainable debt market is primarily composed of use-of-proceeds bonds. They include
any type of debt instrument from which the net proceeds are used exclusively to finance, in
part or in full, eligible green or social projects. There are three main subcategories:

(i) Green bonds: Instruments that raise funds for projects that have environmental benefits
including renewable energy, green buildings and sustainable agriculture
(ii) Social bonds: Instruments that raise funds for projects that address or mitigate a
specific social issue and/or seek to achieve positive social outcomes, such as improving
food security and access to education, health care and financing, especially but not
exclusively for target populations
(iii) Mixed-sustainability bonds: Instruments that raise funds for projects that have both
environmental and social benefits

In addition to use-of-proceeds bonds, sustainability-linked bonds (SLBs) are a new and

rapidly growing product class within the sustainable bond market that can be useful for
corporations funding their sustainability transitions (box IV.1).

Global issuance of sustainable bonds surpassed $1 trillion in 2021, and industry estimates
project that it will exceed $1.5 trillion in 2022 (figure IV.6). The green bond market exceeded
$517.4 billion in 2021, with a five-year growth rate of 70 per cent. Social and mixed-
sustainability bonds repeated the strong growth trend observed in 2020 and totalled $395
billion in 2021. The EU and the corporate sector are set to be key players in 2022 and
continue to push social and mixed-sustainability bond issuance to new heights as the
market is driven by projects that support the SDGs and the 2030 Agenda.

Sustainable bond issuance has been increasing, especially in emerging markets, where it
almost tripled in 2021 (figure IV.7), with China accounting for 60 per cent of the emerging-
markets total and estimated to surpass $100 billion in 2022 (figure IV.8).

Box IV.1. Sustainability-linked bonds

Unlike established green and social bonds, sustainability-linked bonds (SLBs) come with no constraints on how
the proceeds can be used. Instead, they are based on predefined sustainability or ESG objectives set by the
issuer, which links this guarantee directly to the coupon paid to investors. For example, Italian utility group Enel
issued a sustainability-linked $1.5 billion five-year bond in September 2019, which had a 2.65 per cent annual
coupon if the company reached a target of 55 per cent renewable energy installed capacity by 2021. If that
target was not achieved, a step-up mechanism would be applied, increasing the rate by 25 basis points until
the bond matures in September 2024. A third-party expert report confirmed that by December 31, 2021, Enel’s
renewable installed capacity has reached 57 per cent. This flexibility in customizing objectives is particularly
relevant for enterprises transforming their business to more sustainable modalities. Thus, SLBs are a forward-
looking, performance-based instrument and the issuer’s objectives should be measured through predefined key
performance indicators (KPIs) and assessed against predefined sustainability performance targets.
While the market for SLBs is still small, these instruments were a highlight of 2021, growing by more than
tenfold to reach $92 billion. To date, 70 per cent of all KPIs have centred on reduction of scope 1 and 2a GHG
emissions. This is mainly due to the availability of data on scope 1 and 2 emissions performance. However,
some diversification is becoming evident. It appears that KPIs linked to scope 3 emissions reduction are
gaining market acceptance, with only 22 issuers reporting in 2021 compared with only one in 2020. It is also
important to note the growing importance of KPIs linked to gender diversity, which goes in line with the trend
observed in social bonds where gender will be a key theme in 2022.

Source: UNCTAD, based on information from Environmental Finance.

a
Scope 1 emissions are direct emissions from the reporting entity. Scope 2 are emissions derived from the production of electricity
consumed by the reporting entity. Scope 3 are emissions derived from the production of goods and services consumed by the
reporting entity. For more details on the GHG Reporting Protocol, see https://ghgprotocol.org.

170 World Investment Report 2022 International tax reforms and sustainable investment
 Global sustainable bond issuance by bond category, sector and region, 2021  
Figure IV.6.
(Billions of dollars and per cent year-on-year growth)

+43% +70% Corporate 382

Supranational 167
517

+25% Financial institution 158

1 004
205 +41% Government agency 149

190 +989%
Sovereign 104
92
Total sustainable Green Social Mixed- Sustainability-
Municipal 64
bond market sustainability linked

473 172 167 157 45

10
Europe Asia and Oceania Supranational North America Latin Middle
America East
and Africa

Source: UNCTAD, based on information from the Climate Bonds Initiative and Environmental Finance.
Note: Total market value can vary slightly by data source and provisional value calculations.

Annual sustainable bond issuance China: green bond issuance,

Figure IV.7. in emerging-market economies, Figure IV.8.
2016–2021 (Billions of dollars)
2019–2021 (Billions of dollars and per cent)
95

59
56
183%
43 44
24
37
35 12
22
130 15
14

36
31 32
21 22 22

2016 2017 2018 2019 2020 2021

45 46
Internationally aligned Nonaligned

Source: UNCTAD, based on information from Environmental Finance.

Note: Volume includes bonds aligned with international standards and bonds
2019 2020 2021 aligned with only local standards. Internationally aligned green bonds are
limited to those where at least 95 per cent of proceeds are designated for
green projects aligned with the Climate Bonds Taxonomy, produced by the
Source: UNCTAD, based on information from Environmental Finance. Climate Bonds Initiative.

Chapter IV Capital markets and sustainable finance 171

 a. Green bonds
Green bonds are meant to promote investment in environmentally based SDGs such as
climate action (SDG 13), affordable and clean energy (SDG 7), and sustainable cities and
communities (SDG 11). The industries receiving the largest investment through green
bonds all fund key elements of basic infrastructure: energy, buildings, transport and water
(figure IV.9). Initially the energy industry received most of the funds invested through green
bonds (50 per cent of the total market in 2014). In recent years, the buildings and transport
sectors have caught up, making up 30 per cent and 18 per cent, respectively, in 2021.
Although the renewable energy sector still has the largest share of green investment across
categories, with 35 per cent of the market, the share invested in low-carbon buildings
has grown by 33 per cent since 2014. This shows increasing effort to achieve the Paris
Agreement goals since GHG emissions of cities are significant: up to 70 per cent of a large
city’s emissions relate to its buildings.

Europe remains a clear leader in the green bond market. After adopting the independently
evaluated NextGenerationEU Green Bond framework, the European Commission
proceeded with the issuance of the first NextGenerationEU green bond in October 2021.
The 15-year bond was more than 11 times oversubscribed, and the proceeds went
on to finance the share of climate-relevant expenditure in the Recovery and Resilience
Facility (non-repayable financial support and loans to member States to support public
investments and reforms). Also in 2021, the United Kingdom (£10 billion), Italy (€8.5 billion)
and Spain (€5 billion) issued their first sovereign green bonds, which attracted record
investor demand. These successful entries will pave the way for new sovereign green
bonds from other countries in 2022.

In 2021, issuance of green bonds by the corporate sector saw a yearly increase of 49 per
cent (figure IV.10). The rapid growth in corporate green bonds will likely continue, given
global campaigns such as Race to Zero (see section E).

Green bond market size by industries financed, 2014–2021

Figure IV.9. (Billions of dollars)

500
Other
Water
400
Transport

300

Buildings

200

100
Energy

0
2014 2015 2016 2017 2018 2019 2020 2021

Source: UNCTAD, based on information from Climate Bonds Initiative.

172 World Investment Report 2022 International tax reforms and sustainable investment
Figure IV.10. Annual green bond issuance by sector (Billions of dollars)

500
Financial institution

400

300 Corporate

200
Government agency

Municipal
100
Supranational

Sovereign
0
2017 2018 2019 2020 2021

Source: UNCTAD, based on information from Environmental Finance.

b. Social and mixed-sustainability bonds

In 2021, the pandemic continued to push issuance of social and mixed-sustainability bonds
to new heights, with year-on-year growth of 25 per cent and 41 per cent, respectively
(figure IV.11). The total social bond issuance of about $205 billion represents an increase of
more than 10 times over the level in 2019; the same holds for mixed-sustainability bonds,
which totalled $190 billion, a 77 per cent increase over 2019.

Figure IV.11. Social and mixed-sustainability bond issuance, 2017–2021

(Billions of dollars and per cent)

400

300

Pandemic-
driven surge
200
415%

100

0
2017 2018 2019 2020 2021

Social bonds Mixed-sustainability bonds

Source: UNCTAD, based on information from Environmental Finance.

Chapter IV Capital markets and sustainable finance 173

 Social bonds will likely continue to have a prominent
Social bond issuance by issuer
Figure IV.12. share of the sustainable bond market even as
type, 2021 (Per cent)
the immediate effects of the pandemic subside.
Government and supranational agencies will lead
Municipal the way to new types of social issuance (figure IV.12).
Corporate
Sovereign 4 However, the impacts of the global pandemic and
6
7 Government the growing focus on the SDGs and the 2030
38 agency
Agenda have been driving investor demand to
Financial 12
institution socially minded investments. In this scenario, it
is probable that financial institutions will take the
opportunity to launch innovative financing schemes
33 and drive private sector social bond issuance. It is
expected that in 2022 the areas to receive more
Supranational focus will be SMEs, affordable housing and credits
with a gender focus, particularly to empower women
Source: UNCTAD, based on information from Environmental Finance. entrepreneurs (UN Women, IFC, ICMA, 2021).

174 World Investment Report 2022 International tax reforms and sustainable investment
 B. INSTITUTIONAL
INVESTORS

Institutional investors can exert significant influence over their investees and the sustainable
investment market through both the size of their holdings and the active nature of their
ownership. UNCTAD research shows that institutional investors that have a long-term
investment horizon, such as pension and sovereign wealth funds, are taking action on
risks associated with sustainability, especially climate change. Nevertheless, more than half
of the world’s 100 largest public pension and sovereign wealth funds do not disclose or
report on sustainability issues, and institutional investors as a group have a long way to go
in mainstreaming sustainability.

Pension and sovereign wealth funds, as asset owners and investors at the very upstream
end of the investment chain, are in a strong position to drive sustainability integration
in capital markets, especially in view of the size of their total assets and the often large
stakes they hold in publicly listed companies. In 2021, the AUM of the global pension
industry grew to $56.6 trillion, up from $52 trillion the year before (Thinking Ahead Institute,
2022). Public pension funds (PPFs) account for $22.3 trillion, or roughly 39 per cent, of
global pension assets.5 The AUM of sovereign wealth funds (SWFs) in 2021 grew to $10.9
trillion, up from $9.2 trillion the year before.6 UNCTAD has been monitoring sustainable
investment-related practices of the world’s largest public pension funds and SWFs.
This section examines the latest developments in sustainability integration by these
institutional investors in their operations.

In recent years, the real risks to investments of a rapidly heating planet, as well as the
transition risks stemming from regulatory and other responses related to CO2 emissions,
have been recognized and acted on by an increasing number of investors (WIR21). Indeed,
for a small number of front-runner funds, the need to address sustainability concerns or
ESG integration, including climate action, is so obvious that it is no longer seen as even a
priority focus area for boards.7 There is now a clear recognition that institutional investors
with a longer-term investment horizon, such as pension and sovereign wealth funds,
which own a growing share of equity markets, need to pivot rapidly to a more sustainable
investment portfolio that can help contribute to sustainable financing through, for example,
investment in renewable energy or clean technologies.

There are many ESG-related issues of material concern to investors, but, in the past year,
net zero has come to dominate attention. The latest instalment of the sixth assessment
report of the Intergovernmental Panel on Climate Change (IPCC) makes clear that global
CO2 emissions have to peak before 2025 if the world is to remain on track to achieve net
zero along a 1.5-degree Celsius warming pathway by 2050 (IPCC, 2022). The report notes
that, while investors may understand and report on climate risks (through, for example,
the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD),
they in fact have a long way to go on taking action on fossil fuels:8 the report states that
“despite [regulatory and voluntary] initiatives, climate-related financial risks remain greatly
underestimated by financial institutions and markets, limiting the capital reallocation needed
for the low-carbon transition” (IPCC, 2022).

UNCTAD has analysed the sustainability integration practices of the world’s top 100 PPFs
and SWFs. They included the top 70 PPFs, accounting for $13.1 trillion of AUM – or almost
60 per cent of total AUM of PPFs – and the top 30 SWFs, accounting for $9 trillion of AUM –

Chapter IV Capital markets and sustainable finance 175

 or 83 per cent of total AUM of SWFs (UNCTAD, forthcoming). Of the top 100 funds,
47 published meaningful reporting on sustainability and ESG integration in their investment
decisions (38 PPFs and 9 SWFs). Although this number is slightly up from 2020, when
40 per cent of funds reported (UNCTAD, 2020), the results appear to reflect the point
made by the IPCC – that many investors are underestimating climate-related risks and they
need to do more to address the climate challenge.

Of the 100 funds in the sample, 53 still do not report on ESG integration. They include 21
SWFs, accounting for 70 per cent of the SWFs in the sample, and 32 PPFs, accounting
for 43 per cent of the PPFs. As discussed in the 2020 UNCTAD report, SWFs remain
relatively less transparent and have further to go in terms of sustainability performance
disclosure. Geographically, the non-reporting funds are based mainly in Asia and North
America. Funds in China, Japan, Saudi Arabia and the United Arab Emirates are typically
non-reporting, and a large share of funds in the United States also do not report on ESG.
The non-reporting funds rarely include any information regarding ESG and sustainability
on their websites and only occasionally in their annual reports, if at all. The size of the
fund does not have a significant influence on non-reporting: all non-reporting funds had an
average of $229 billion in AUM, as compared with reporting funds which had average AUM
of $227 billion. Geographical location and governance seem to have the largest influence
on whether a fund publishes an ESG report, and both are likely influenced by the strength
of regulations within the national framework. This highlights the importance of national or
regional regulatory frameworks and the need for technical assistance in some cases.

Nevertheless, among the 47 per cent of front-runner funds that do publish information on
sustainability integration, there is serious acknowledgement of the material risks posed by
ESG issues, and funds have changed their investment strategies and policies accordingly.
The great majority of reporting funds have made efforts to elaborate a clear vision for their
sustainable investments and have introduced internal policies and guidelines to support the
integration of an ESG or SDG perspective in their investment strategy, often anticipating
transition risks.9 While an ESG perspective is often integrated into existing investment teams,
two thirds of funds have put in place a dedicated team to coordinate ESG-related investments.
Despite many funds now targeting net zero by 2050 in their asset allocation, less than half
of reporting funds set an overall target or goal for sustainable investment or asset allocation
in their portfolios (figure IV.13).

Relevant sustainability-related policies of funds, 2022

Figure IV.13. (Per cent of reporting funds)

Clear vision for sustainable investment 98

Internal policies or guidelines regarding

89
ESG/SDG integration
International ESG/SDG-related standard,
taxonomy or benchmark employed 70
in investment decisions
Dedicated team to coordinate 66
ESG/SDG investments
Meets relevant national, regional or
66
international ESG-related regulations

Setting of overall targets or goals on

sustainable investment or asset allocation 47

Source: UNCTAD, based on fund annual reports or sustainability reports, n = 47.

176 World Investment Report 2022 International tax reforms and sustainable investment
Most reporting funds are using at least one Relevant sustainability-related
international standard or benchmark in their Figure IV.14. reporting standards used by funds,
investment decision-making and reporting. In 2022 (Number of reporting funds)
particular, they are increasingly using a couple of
international sustainability disclosure standards.
The most common reporting framework is that
TCFD 28
of the TCFD; many funds also use the Principles
of Responsible Investment (PRI) Scorecard and
PRI 22
Transparency Report to evaluate and improve their
sustainability performance (figure IV.14). More than
SASB 16
two out of three funds now need to meet relevant
national, regional or international regulations,
GRESB 6
such as the EU’s Sustainable Finance Disclosure
Regulation, in the case of European funds, and more
GRI 6
disclosure and reporting is expected to accompany
compliance with these regulatory changes.
CDP 5
With regard to how funds implement sustainability
concerns in their investment strategies, both PPFs
and SWFs employ a combination of strategies that Source: UNCTAD, based on fund annual reports or sustainability reports, n = 47.
Note: The funds use a total of 66 standards, initiatives and partnerships. CDP =
are not mutually exclusive. The majority integrate a Carbon Disclosure Project, GRESB = Global Real Estate Sustainability
sustainability perspective across their investment Benchmark, GRI = Global Reporting Initiative, PRI = Principles for Responsible
Investing, SASB = Sustainability Accounting Standards Board, TCFD = Task
activities, including equities, fixed income, alternative Force on Climate-Related Financial Disclosures.
assets, and public and private markets, which may
also employ a negative screening of certain assets
(in particular, tobacco, weapons and thermal coal). Nearly three out of four reporting funds
now have an impact investment strategy. This strategy either targets thematic sectors,
such as renewables, or uses a specific ESG-related instrument, such as green bonds, and
sometimes targets emerging-market-based climate-solutions companies (Cheema-Fox,
Serafeim and Wang, 2022). The SDGs are themselves becoming a benchmark for
sustainability performance, and almost half of funds explicitly consider one or more SDGs
in their investment decision-making process or have made attempts to align their holdings
with the SDGs. However, this sometimes equates to mapping holdings against the
17 goals and is more of a reporting exercise than an investment strategy. Over a third of
reporting funds use a positive or best-in-class screening strategy (figure IV.15).

Sustainability investment strategy of funds, 2022

Figure IV.15. (Per cent of reporting funds)

General ESG integration 93

Impact investment targeting ESG-oriented

sectors, instruments or markets 91

Exclusion or negative screening 67

SDG investment 48

Positive screening or best-in-class screening 39

Source: UNCTAD, based on fund annual reports or sustainability reports, n = 47.

Chapter IV Capital markets and sustainable finance 177

 The results of UNCTAD’s study on the sustainability practices and investment strategies
of the largest PPFs and SWFs provide a mixed picture. While there is good practice to be
applauded, there is also room for improvement, especially on disclosure and reporting where
there is a great variance among even reporting funds in terms of what and how to report.
Meanwhile, the use of key performance indicators is still rare, making sustainability disclosure
highly subjective in some cases. In this respect, the regulatory environment is critical, and
some regions are more advanced than others. What is needed is greater harmonization of
standards and regulations to promote more widespread action on sustainability integration
and performance.

178 World Investment Report 2022 International tax reforms and sustainable investment
 C. STOCK EXCHANGES
AND MARKET
INFRASTRUCTURE

The number of stock exchanges with written guidance on ESG disclosure for issuers (SDG
12.6) continues to grow rapidly, from 13 in 2015 to 63 at the end of 2021. Likewise, the
number of exchanges providing training on ESG topics to issuers and investors continues
to increase, with more than half offering at least one training course or workshop per
year. Mandatory ESG reporting has also been on the rise in recent years, supported by
both exchanges and security market regulators. The num ber of exchanges covered by
mandatory rules on ESG disclosure more than doubled in the past five years, to 30.

1. Stock exchanges and derivatives exchanges

The sustainability activities of stock exchanges – those related to ESG factors – have
increased exponentially since the beginning of the century (figure IV.16). Collectively these
trend lines show a sharp uptick in sustainability activities among the world’s exchanges.
The number of exchanges with ESG bond segments continues to grow rapidly, from
5 exchanges in 2015 to at least 44 at the end of 2021 (Key instruments and developments
supporting these trends are discussed in more detail in section C.) Likewise, the number of
stock exchanges providing training on ESG topics to issuers and/or investors continues to
rise rapidly, from fewer than 10 in 2013 to more than 60 by the end of 2021.

Figure IV.16 Stock exchange sustainability trends, 2000–2021 (Number of exchanges)

70
Written guidance on ESG reporting
Training on ESG topics
60 Sustainability reports

50 Markets covered by an ESG index

ESG bond segments
40

Mandatory ESG listing requirements

30

20

10

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: UNCTAD, SSE database.

Note: ESG = environmental, social and governance.

Chapter IV Capital markets and sustainable finance 179

 SSE initiative members, a. Sustainable Stock Exchanges
Figure IV.17. 2012–Q1 2022 (Number of exchanges) initiative
123 126
Since its launch in 2009, the United Nations
Sustainable Stock Exchanges (SSE) initiative
98
94 has grown to include most of the exchanges in
13
81 derivatives
exchanges
the world: as of Q1 2022, the initiative had 113
68 113 stock stock exchange members, collectively listing
62 exchanges
more than 58,000 companies with a combined
49 58,692 market capitalization of more than $127 trillion
companies
(figure IV. 17). The growth of this United Nations
$127 trillion
18 market cap partnership programme illustrates the demand for
9
6 ESG guidance and peer learning in the exchange
industry. The SSE has emerged as the premier
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Q1 2022
platform for collaboration and learning for stock
Source: UNCTAD, SSE database. exchanges, together with capital market regulators,
investors, issuers and financial service providers, to
meet global sustainability goals.

In 2021, derivatives market operators joined the SSE for the first time, as members of the
SSE derivatives network, which was launched with 12 founding members from across
the world.10 The establishment of this network recognizes the next step in the market’s
evolution towards aligning market signals with sustainable development imperatives
across all markets.

b. ESG disclosure: stock exchange guidance, listing

requirements and standards
Stock exchanges continue to play an important role in helping markets navigate emerging
ESG disclosure and management demands. By the end of 2021 the number of exchanges
providing formal guidance to issuers on reporting ESG information had reached 63 (figure
IV.18). Only 13 did so in 2015, when the UN SSE launched its global campaign and
model guidance to encourage exchanges to provide guidance on sustainability reporting.

Figure IV.18. Global trends in ESG disclosure rules and guidance (Number of exchanges)

Voluntary guidance on ESG disclosure Mandatory ESG disclosure rules

70

60
Launch of
SSE Model Guidance
50
and global campaign
to promote ESG
40
disclosure guidance
30

20

10

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: UNCTAD, SSE database.

180 World Investment Report 2022 International tax reforms and sustainable investment
There has also been a steady increase in mandatory ESG disclosure rules, with a five-year
growth rate of 60 per cent. This trend suggests that SDG 12.6 on sustainability reporting
should be achieved by 2030.

UNCTAD and UN Environment, as co-custodians of SDG indicator 12.6.1, “number of

companies publishing sustainability reports”, have developed a measurement methodology
for the indicator and are overseeing data collection and the reporting process to the global
SDGs database used to assess progress up to 2030. This promotes harmonization of
SDG reporting by companies and facilitates countries reporting on the contribution of the
private sector to the implementation of the SDGs.

The spectrum of approaches to reporting ESG data incorporates a few key reporting
instruments (figure IV.19). An overwhelming majority of guidance documents reference
the instruments of the GRI, followed by those of the Sustainability Accounting Standards
Board (SASB) and the International Integrated Reporting Council (IIRC), which are each
referenced in about three quarters of guidance documents. Climate-specific reporting
instruments such as the recommendations of the Financial Stability Board’s TCFD and
the Carbon Disclosure Project (CDP) are referenced by over half of the guidance, and
about a third reference the work of the Carbon Disclosure Standards Board (CDSB).
Developments in the global ESG reporting landscape may see reviews of guidance as
necessary (see section 2.b).

Exchanges are also starting to provide focused guidance on climate disclosure since the
growing demand for decision-useful, climate-related financial information in annual reports
and financial filings has led to an increased need for issuers to update their knowledge
on climate-related risks and reporting frameworks. Following the UN SSE initiative
launch of the Action Plan to Make Markets Climate Resilient and a Model Guidance on
Climate Disclosure in 2021, the Johannesburg Stock Exchange launched for comment its
Sustainability and Climate Change Disclosure Guidance, specifically tailored to the South
African context. It is expected that more exchanges will start providing guidance on climate
disclosure as global financial markets take steps towards better integrating climate risks
and opportunities into pricing mechanisms (see section E).

ESG reporting instruments referenced in stock exchange guidance,

Figure IV.19.
as of Q1 2022 (Per cent of guidance documents referencing the instrument)

GRI 95

SASB 78

IIRC 75

CDP 68

TCFD 57

CDSB 32

Source: UNCTAD, SSE database.

Note: CDP = Carbon Disclosure Project, CDSB = Climate Disclosure Standards Board, GRI = Global Reporting Initiative, IIRC = International
Integrated Reporting Council, SASB = Sustainability Accounting Standards Board, TCFD = Task Force on Climate-Related Financial
Disclosures.

Chapter IV Capital markets and sustainable finance 181

 c. Derivatives exchanges
While the incorporation of ESG into products traded on the derivatives market is
considered nascent compared with the growth seen in equity and bond markets, the
pace of change continues to intensify in this sphere of the financial sector, spurred by
factors such as demand in the physical market, regulatory changes and commitments by
market players (including exchanges) to play a role in the transition to more sustainable
economies and capital markets. It seems inevitable that this market will also experience
exponential advancement on ESG issues in the coming years, with industry experts noting
that a marketplace previously considered niche has “a key role to play in the advancement
of ESG objectives in the financial markets and the global transition to a green economy”.11

Already exchanges have seen significant growth in the ESG index-based derivatives
segment, with futures and options tracking equity indices that incorporate ESG
weightings and ratings.12 More conventional “ESG-linked” derivatives (which involve such
environment-linked underlying commodities as carbon credits, sustainability prescriptions
in contract requirements of the underlying asset and hedging products that focus on
the use of proceeds for ESG purposes) have also become increasingly commonplace.
More recently derivatives markets are seeing mounting interest in sustainability-linked
derivatives (SLDs), which link ESG components to traditional derivatives. The first SLD
was traded in August 2019. Similar to sustainability-linked bonds, sustainability-linked
derivatives (SLDs) provide flexibility by not prescribing the use of proceeds. Although SLDs
are still mostly bespoke products, it remains a challenge to ensure that the intended ESG
objectives are achieved; hence, to enable measurement and monitoring, KPIs must be
agreed and incorporated into the contractual documents. To support the safe and efficient
progression of the SLD market, to attract new market participants and to grow liquidity, in
2021 the International Swaps and Derivatives Association (ISDA) published guidelines and
regulatory considerations.

In addition to exchanges, industry a ssociations and regulators in the derivatives market are
keenly following developments and conducting their own research to keep track of progress
while ensuring that they are positioned to respond as needed or to take the lead on new
initiatives. The newly established derivatives network of the SSE aims to provide a platform
for exchanges and other market participants to gain learning by sharing information and
experiences in this regard. During 2022, the SSE will also engage and collaborate with key
industry players such as the Futures Industry Association to examine developments in the
market and provide insights into the role of derivatives and exchanges in supporting the SDGs.

2. Advancing gender equality

Gender equality is a human right and a critical component of the SDGs. It is also a driver of
economic growth and enterprise development: progress towards gender equality is a core
contributor to more economically prosperous and socially cohesive societies. Exchanges
play a central role in the economies in which they operate, and as such they have the direct
and indirect ability to influence listed companies’ actions on gender equality.

The number of exchanges supporting greater gender equality in businesses has soared
over the past decade. For example, seven years ago, seven exchanges started to raise
awareness about the Women’s Empowerment Principles and the importance of gender
parity to businesses, by jointly ringing the bell for gender equality. Organized by UN SSE,
UN Women, UN Global Compact, WFE and Women in ETFs, this event developed into an
annual activity and by 2022, more than 100 exchanges around the world participated and
organized events.

182 World Investment Report 2022 International tax reforms and sustainable investment
Apart from awareness-raising, further exchange action on gender equality falls into three
broad categories, as detailed in the joint UN SSE–IFC gender equality action plan for
exchanges (figure IV.20), included in the report How Exchanges Can Promote Gender
Equality (UN SSE and IFC, 2022). Two of these categories are market-focused, and one is
focused on what exchanges can do internally. Exchanges can lead by example when they
increase internal efforts for gender equality, but it is their market-focused actions that have
the potential to initiate large-scale changes. These actions include mobilizing finance and
improving women’s access to financial markets by providing products and services as well
as strengthening market performance on gender equality by improving transparency.

Figure IV.20. Gender equality action plan for exchanges

Exchange
-foc
Lead by
exam use
ple d
Evaluate and disclose Promote gender equality
the exchange’s internally: Targets;
progress on gender Recruitment; Pay gap
equality: Internal elimination; Harassment
assessment; Reporting prevention

Foster broader market Integrate gender equality

action on gender equality: into stakeholder relations:
Networks; Awareness-raising Philanthropy and charitable
spending; Procurement;
Events
Strengthen market perform

Support the listing of

Set gender targets/requirements
gender-focused products:
for listed companies:
Bonds; ETFs; Gender-lens
Listing requirements; Minimum
finance
representation targets
vices
d ser

Promote transparency on Adapt SME offerings for

the market’s gender gender inclusiveness:
ance

s an

performance: ESG Access to finance; Training;

disclosure; Research; Gender-specific data
uct
on

Indices/data products
rod
gen

Address barriers to
dp
de

gender equality on
se
re

company boards:
Enhance women’s
cu
qu

Market education;
ty
-fo

ability to invest: r
ali

Toolkits; Mentorship/
Women-focused de
training; Board-ready
women; Databases education; Targeted gen
te
mo
offerings
Pro

M a r ke t-f o c u s e d

Source: SSE, IFC (2022).

Chapter IV Capital markets and sustainable finance 183

 D. POLICIES, REGULATIONS
AND STANDARDS

With the rise of sustainability-themed financial products, governments around the world are
stepping up their efforts to develop regulatory frameworks for sustainable finance. Thirty-five
leading developed and developing economies and country groupings had 316 sustainable
finance-dedicated policy measures and regulations in force by the end of 2021. Sustainability
disclosure and sector-specific measures account for the majority of these measures; policy
and regulation developments concentrate in emerging policy areas such as taxonomies,
product standards and carbon pricing. Although sustainable finance policies and regulations
need to take a nation’s specific development context into consideration, international
collaboration is also needed to ensure necessary coherence with international standards.
At the international level, more work is being done within IOSCO to standardize the approach
of securities regulators on sustainable finance, including efforts to strengthen product and
corporate ESG disclosure. The second half of 2021 and first half of 2022 also saw a historic
consolidation in ESG corporate reporting standards with the merger of several instruments
into the new ISSB of the IFRS Foundation and the agreement between the latter and the GRI,
which now sets a clear global baseline for corporate sustainability reporting.

1. National sustainable finance policies and regulations

a. An overview
The rise of sustainability-dedicated financial products that can also help finance sustainable
development has been accompanied by a proliferation of principles and standards.
These have been primarily driven by the private sector and international initiatives, as
exemplified by a large number of voluntary standards on products, disclosure and
sustainability integration. More recently, governments in both developed and developing
economies are stepping up their efforts to support the growth of sustainable finance by
putting in place the necessary policies and regulatory frameworks.

UNCTAD has been monitoring the latest developments in sustainable finance measures
and regulations in 35 economies and country groupings. These include the G20 member
states and Switzerland, as well as 13 developing economies (Bangladesh, Chile, Colombia,
Egypt, Hong Kong (China), Kenya, Malaysia, Nigeria, the Philippines, Singapore, Thailand,
the United Arab Emirates and Viet Nam) and ASEAN, which together account for about
93 per cent of the world’s GDP. According to the UNCTAD sustainable finance regulation
database, by the end of 2021 these economies had 316 sustainable finance-dedicated
policy measures and regulations in force (figure IV.21). Over 40 per cent of these measures
were introduced in the last five years, and 41 new measures were adopted in 2021 alone.
At least 45 more measures are under development. These trends illustrate the accelerating
pace of growth in sustainable finance policymaking.

This large pool of policy measures and regulations covers seven key policy areas (table IV.2).
Almost half of policies are dedicated to sustainability disclosure. Sector-specific regulations
with respect to asset management, sustainable banking and sustainable insurance are the

184 World Investment Report 2022 International tax reforms and sustainable investment
 Key sustainable finance policy areas covered by major developed and developing
Table IV.2.
economies, 2022

National Sector-
National framework and Product Sustainability specific Carbon
Economy strategy guidelines Taxonomy standards disclosure regulations pricing
G20 Argentina

Australia

Brazil

Canada

China

European Union

France

Germany

India

Indonesia

Italy

Japan

Mexico

Republic of Korea

Russian Federation

Saudi Arabia

South Africa

Turkey

United Kingdom

United States
Other
developed Switzerland
economies
Other Bangladesh
developing
economies Chile
and
Colombia
groupings
Egypt

Hong Kong (China)

Kenya

Malaysia

Nigeria

Philippines

Thailand

United Arab Emirates

Viet Nam

Singapore

ASEAN

In use In development No measures No measures at the national level but EU measures apply

Source: UNCTAD sustainable finance regulation database.

Chapter IV Capital markets and sustainable finance 185

 Sustainable finance policy measures and regulations in selected developed
Figure IV.21.
and developing economies, 2010–2021 (Number)

G20 members Other selected economies

350

300

90
250
82
67
200
61
56
150
48
41
34 226
100 32 193
28 179
25 155
21 135
107 117
50 95
75 81
56 67

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 226

Source: UNCTAD.
Note: Other selected economies include Switzerland, as well as 13 developing economies (Bangladesh, Chile, Colombia, Egypt, Hong Kong (China), Kenya, Malaysia,
Nigeria, the Philippines, Singapore, Thailand, the United Arab Emirates and Viet Nam), and ASEAN. Relevant measures of the EU are included in the number for the G20.

second biggest policy area, representing about 20 per cent of all measures. The majority
of the 35 economies already have in place either a national sustainable finance strategy
or framework, or guidelines on sustainable finance. Policy and regulatory gaps are more
visible in three relatively new policy areas: taxonomies, product standards and carbon
pricing. Most measures under development concentrate in these areas, and the situation
may change in the coming years.

G20 members account for 226 of the 316 measures identified by the database. The EU
(and its member states) and China take the lead, with policies developed in all seven areas.
Significant progress has been made by non-G20 economies covered by the UNCTAD
sustainable finance regulation database. These economies have been proactively pushing
ahead with their sustainable finance agenda and have played an important role in shaping
the global sustainable finance policy landscape.

b. Latest developments in key policy areas

(i) National strategies and frameworks

A well-developed national strategy, framework or action plan is imperative in setting national

goals and galvanizing efforts to support the growth of sustainable finance. In response
to the 2030 development agenda and the pandemic, many governments in developing
and emerging economies have recognized the need to focus on economic resilience and
have started including climate mitigation and adaptation measures and green investment
targets in their national recovery plans (Zhan and Santos-Paulino, 2021). In this context,
several countries launched national strategies, frameworks and action plans to support the
development of sustainable finance in 2021.

186 World Investment Report 2022 International tax reforms and sustainable investment
After announcing its intention to achieve peak carbon by 2030 and carbon neutrality
by 2060, China adopted a national action plan to achieve the goal in October 2021. As
another milestone in achieving the European Green Deal, in July 2021 the EU published
the renewed EU Sustainable Finance Strategy, which sets a clear policy agenda to finance
the sustainable transition to 2024. Indonesia launched the Sustainable Finance Roadmap,
Phase II (2021–2025) to accelerate the transition of the financial sector to sustainability
through the establishment of a sustainable finance ecosystem. In Japan, the Ministry
of Economy, Trade and Industry launched a Green Growth Strategy to enable industry
alignment with 2050 carbon neutrality. The Japanese Government also established a task
force on transition finance and published the Basic Guidelines on Climate Transition Finance
for sustainable bonds and loans. Singapore adopted the Singapore Green Plan to advance
its national agenda on sustainable development, including through the implementation of
its Green Finance Action Plan. The National Treasury of South Africa published an updated
version of “Financing a Sustainable Economy” to encourage long-term investments in
sustainable economic assets, activities and projects. The United Kingdom launched
Greening Finance: A Roadmap to Sustainable Investing, setting out the long-term ambition
for a green financial system. Phase one of the road map will focus on “ensuring decision-
useful information on sustainability is available to financial market decision-makers”. By the
end of 2021, most of the 35 economies in the database had in place a national sustainable
finance strategy, framework or guidelines.

(ii) Taxonomies and product standards

As a fundamental building block of the sustainable finance ecosystem, taxonomies help

clarify what economic activities are considered environmentally or socially sustainable for
investment purposes. As such, they help bring more clarity, credibility and transparency
to the sustainable investment market. Taxonomies have become a very active policy area
in recent years.

In 2021, ASEAN, China, Japan and Malaysia launched or revised their sustainable finance
taxonomies on sustainable finance. Together with Bangladesh and the EU, six of the 35
economies in the UNCTAD sustainable finance regulation database have developed a
taxonomy. Meanwhile, 16 other economies (Australia, Bangladesh, Brazil, Canada, Chile,
Colombia, India, Indonesia, the Philippines, the Republic of Korea, the Russian Federation,
Singapore, South Africa, Thailand, the United Kingdom and Viet Nam) are in the process
of developing one.

Most of the taxonomies in use, and under development, are dedicated to climate transition
and environmental protection. However, a few countries have started to incorporate social
development into their taxonomies. After the launch of its green taxonomy, the EU is
working on a comprehensive taxonomy for social sustainability. The Bangladesh taxonomy
pursues both climate and social development objectives, and covers cottage, micro and
SME development and socially responsible investment. South Africa also included social
resilience activities, such as education, skills development and knowledge management
in its draft taxonomy, and it plans to further strengthen the social dimension in the future.
Given the acute need to mobilize more investment for social development in less developed
countries, inclusion of the social aspect in their sustainable finance taxonomies is necessary.

The expanding taxonomy universe varies significantly in objectives, scope, technical

criteria, verification and disclosure requirements, and countries use different approaches
to define sustainable activities (IPSF, 2021a). This inconsistency hinders interoperability
of standards and can raise transaction costs and discourage sustainable investment
flows across economies (Ehlers, Gao and Packer, 2021). A certain level of international
coordination and cooperation is necessary.

Chapter IV Capital markets and sustainable finance 187

 As an instrument for identifying sustainability-compatible investment activities, taxonomies
can serve as a useful framework for sustainable financial product labelling and for standards
setting. Following the adoption of the EU Taxonomy, the EU Commission presented the
European Green Bond Standard in 2021, with the aim of improving the effectiveness,
transparency and credibility of the market and encouraging market participants to issue
and invest in green bonds. Also in 2021, the Japan Bank for International Cooperation
launched a Green Bond Framework to guide the issuance of green bonds.

With the proliferation of taxonomies, the number of labelling standards for sustainable
investment products at the national level is expected to increase. However, most of the
existing standards are dedicated to green bonds. More work needs to be done on the
development of standards of other sustainable investment products, including social
bonds, SDG bonds and sustainable funds.

(iii) Sustainability disclosure

Sustainability disclosure is a dynamically evolving field that accounts for almost half of
all sustainable finance policy measures and regulations in the 35 economies analysed.
Most of these measures target companies, with 75 per cent applying to large corporations,
in particular listed companies, and 28 per cent to financial institutions.

Sustainability integration and related requirements are the main focus of disclosure
(36 per cent), followed by corporate governance (32 per cent) and environmental and
climate issues (26 per cent). Most climate disclosure measures were introduced in the last
five years and their number is growing rapidly. Yet the use of KPIs remains rare, including in
environmental and climate disclosure. To help improve the comparability and credibility of
disclosures, the introduction of more KPIs, aligned with international standards such as the
Paris Agreement or the SDGs, is necessary.

Another trend in corporate sustainability disclosure is the rise of mandatory measures,

although voluntary measures remain more common (figure IV.18). Almost all economies
in the database have at least one mandatory sustainable disclosure measure in place,
and new mandatory measures are planned by many economies, including Brazil, Canada,
Chile, China, the EU, Hong Kong (China), India, Japan, Singapore, Switzerland, the United
Kingdom and the United States.

Disclosure measures at the product level are rare, and much work needs to be done in this
area. The EU, China and Hong Kong (China) have introduced disclosure measures that
apply to sustainable bonds or funds and other financial products. The United Kingdom and
Singapore are working on similar measures. The absence of product-level sustainability
disclosure regulations makes it difficult to address the lack of sustainability data for financial
products and the associated greenwashing concerns.

Leading international corporate reporting standards, such as the TCFD, the SASB and the
GRI, have started to make their way into national regulations. For example, the Financial
Conduct Authority of the United Kingdom is planning to introduce product- or portfolio-
specific disclosure guidelines connected to the TCFD. The EU’s Corporate Sustainability
Reporting Directive integrated all the key concepts of the TCFD recommendations.
The Japanese Government has also launched initiatives to support TCFD-aligned
disclosure by large companies (IPSF, 2021b). The formation of the ISSB could accelerate
the consolidation of international disclosure standards (see the following section) and thus
lead to improved harmonization of sustainability reporting at the national level.

Although SMEs represent a significant part of the economy, they are largely exempted from
corporate sustainability disclosure regulations, especially when it comes to mandatory
measures. This can help reduce the burden of disclosure for SMEs but also makes it

188 World Investment Report 2022 International tax reforms and sustainable investment
harder for them to benefit from sustainable finance. One solution is to implement adapted
frameworks and requirements that are more suitable for SMEs, such as UNCTAD’s Core
SDG Indicators for Entity Reporting.

(iv) Sector-specific policies

Climate, other environmental and social issues are increasingly recognized as systemic
risks to the financial sector, precipitating increased policymaking and the introduction of
regulations on sustainability incorporation for financial institutions. This has encouraged
financial sector supervisors and central banks to include climate transition and environmental
protection into their mandates (WWF, 2021). Among the 35 economies in the database,
27 have put in place sector-specific measures designed to promote the integration
of climate, environmental or social considerations in the governance, strategy, risk
management, investment decision-making and disclosure practices of asset managers,
banks or insurance companies. About 75 per cent of these measures target asset
management, focusing on climate change and environmental issues, with the rest being
shared between sustainable banking and insurance roughly equally.

An important development in investment management regulation is that advanced

economies are taking action to modernize fiduciary duty rules, focusing on specifying
institutional investors’ obligations and duties in relation to sustainability integration. In
2021, the EU Commission published six amendments to delegated acts on fiduciary duties
and investment and insurance advice, which require financial firms (e.g. asset managers,
advisers and insurers) to include sustainability factors in their procedures (PRI, 2021).
In the United States, the Labor Department enacted changes to the fiduciary duties of
retirement plans to make it easier for them to invest in sustainability-themed financial funds.
The Pension Schemes Act 2021 of the United Kingdom strengthened the obligations of
trustees of occupational pension schemes on governance and reporting with respect to
climate and environmental issues.

Emerging economies are also putting in place sector-specific measures to leverage the
potential of financial institutions to finance sustainable development. Bangladesh, China,
Colombia, Nigeria and Turkey have developed guidelines for sustainable banking with the
aim of directing more investment into key sustainable development areas, including SME
development, job creation, social infrastructure and agriculture.

(v) Carbon pricing

Carbon-pricing measures, including carbon taxes and emission trading schemes, have
been gaining further momentum in recent years as a policy tool to internalize negative
externalities and reduce carbon emissions. Among the 35 economies covered by the
database, carbon-pricing measures have been implemented by 18 economies and are
under development in a 7 others. Most notably, all the new development activities are
happening in emerging economies, which include Brazil, Indonesia, Malaysia, the Russian
Federation, Thailand, Turkey and Viet Nam. Emission trading schemes have become more
popular in recent years and account for a majority of carbon-pricing measures in use and
under development.

The multiplication of net-zero commitments not only by governments but also by

companies is driving growth in the carbon market. Meanwhile, climate-related disclosure
policies, such as those aligned with the TCFD, are also pushing companies to internalize
carbon prices (World Bank Group, 2021a).

One challenge associated with carbon-pricing measures, in particular for developing

economies, is to determine an appropriate price or tax level for carbon and GHG emissions.
Such a price or tax needs to be high enough to achieve meaningful emissions reductions

Chapter IV Capital markets and sustainable finance 189

 aligned with a country’s climate change commitments while not imposing an excessive
fiscal burden on business. In order to avoid any unexpected macroeconomic impacts,
in particular in developing economies, it is important to assess countries’ readiness to
deploy carbon-trading schemes or participate in international carbon markets (World
Bank Group, 2021b).

2. International regulations and standard setting

a. Securities regulation and sustainability

Securities regulators are now actively considering their role in supporting the transition
to more sustainable capital markets. IOSCO intends to professionalize all aspects of
sustainable finance and work intensively in 2022 to deliver acro ss a range of focus areas.13

(i) Corporate reporting: pathway towards endorsement of ISSB standards

The work to consider whether the IOSCO Board will endorse the ISSB standards began
in earnest with the publication of the ISSB exposure drafts on 31 March 2022 (see section
2.b). IOSCO will base its analysis of the drafts on a set of criteria published in June 2021
(IOSCO, 2021a). Overarching considerations include whether the proposed requirements
can serve as an effective global baseline of investor-focused standards; whether they
are fit for purpose in helping financial markets accurately assess sustainability risks and
opportunities; and whether they can form the basis for the development of a robust audit
and assurance framework.

(ii) Sustainability assurance

IOSCO’s work stream on sustainability assurance began in February 2022 with an

international round table of 140 participants, including such key stakeholders as the
International Federation of Accountants, the International Auditing and Assurance
Standards Board and the International Ethics Standards Board for Accountants. The round
table showed strong support for IOSCO in coordinating and promoting global consistency
for sustainability assurance standards, similar to what IOSCO has done with sustainability
reporting and its support for the establishment of the ISSB. Building upon the round table,
IOSCO will publish its vision for sustainability assurance, including the following aspects:
(i) issuer readiness, (ii) investor needs and practices, (iii) auditors’ current practices and
future needs, and (iv) the state of play with regard to assurance standards and any future
considerations required.

(iii) Promoting good industry practices and supervisory approaches

IOSCO issued two reports in November 2021, one covering asset managers and one
covering ESG ratings and data providers (IOSCO, 2021b and 2021c). Both contained
recommendations and good practices that are expected to be implemented by both
regulators and industry. IOSCO will engage with market participants and regulators to
promote these good practices. With regard to industry, IOSCO will collaborate with voluntary
standard-setting bodies and industry associations and other relevant stakeholders to ensure
that market participants begin implementing the IOSCO recommendations. This will also
enable stakeholders to comply with national rules and regulations, which aim to be consistent
with the IOSCO recommendations. With regard to supervisors, IOSCO will also act as a forum
where members can exchange their experiences on implementation and supervision, with a
view to ultimately achieving consistent implementation of the IOSCO recommendations.

190 World Investment Report 2022 International tax reforms and sustainable investment
 (iv) Carbon markets

IOSCO’s carbon markets work aims to promote the understanding and sound functioning
of carbon markets – of both the compliance and the voluntary kinds, while being mindful
that cross-border trading of carbon credits may expand. The underlying objective is to
better understand the set-up and potential vulnerabilities of these markets, with a view to
identifying essential attributes that foster market integrity. IOSCO plans to publish a report
by COP27, setting out recommendations on the good functioning of compliance markets
and identifying key facets and risks for further consideration in voluntary markets.

(v) Capacity-building

IOSCO’s capacity-building efforts will encompass a comprehensive programme to assist

its members in assessing their readiness and achieving implementation of ISSB standards
and asset management obligations. This is particularly important for emerging markets,
as they need to develop appropriate resources to be able to conduct this analysis in their
efforts to implement the ISSB standards.

b. Consolidation of global ESG disclosure standards

During the second half of 2021 and the first half of 2022, the world witnessed a major
shift towards consolidation of ESG disclosure standards, frameworks and tools. In June
2021, the IIRC and the SASB merged to form the Value Reporting Foundation. At the
COP26 climate summit in November 2021, IFRS Foundation trustees announced the
establishment of the ISSB) as well as consolidation of the Value Reporting Foundation and
the CDSB into the IFRS Foundation.

The ISSB’s formation responds to strong demand from public authorities and market
participants for a high-quality, consistent global baseline of sustainability disclosures that
enable investors to evaluate sustainability-related risks and opportunities when making
investment decisions and assessing enterprise value. The concept has been welcomed
by the G7,14 the G20,15 IOSCO, Financial Stability Board and by companies and investors
from around the world.

The IFRS Foundation expects the consolidations to be completed during 2022. Meanwhile,
the relevant instruments remain in place (i.e. the CDSB Framework, the SASB Standards
and the International Integrated Reporting Framework). The ISSB is developing sustainability
standards; in March 2022 it published for public comment its first two proposed standards –
a draft climate standard and a general requirements standard, complete with industry-based
requirements.16 Its goal is to issue final requirements by the end of 2022, depending on the
feedback received. The ISSB’s future agenda and priorities will be determined on the basis
of further public consultations commencing in Q3 2022, but it has also announced a working
group to enhance compatibility between the global baseline and jurisdictional initiatives.

In another significant move affecting the broader spectrum of ESG disclosure, in March
2022, the IFRS Foundation signed a memorandum of understanding with the GRI,
which provides global best practices for multi-stakeholder sustainability reporting. Under
the collaboration, the sustainability standard-setting boards of the IFRS Foundation
(the ISSB) and GRI (the GSSB) will seek to coordinate their work programmes and standard-
setting activities and join each other’s consultative bodies related to sustainability reporting
activities.17 In the interests of all stakeholders, together they aim to reinforce a corporate
reporting system based on two pillars: one for reporting information on economic value
creation at the level of the reporting entity for benefit of investors, and one for reporting
information on the impact of the reporting entity on the economy, environment and people.
The two pillars will have a core set of common disclosures and be on equal footing.

Chapter IV Capital markets and sustainable finance 191

 The GRI is also working with the European Financial Reporting Advisory Group on
the development of the European Sustainability Reporting Standards, following an
agreed statement of cooperation in July 2021. The effort is complementary to that of
the IFRS and ISSB.

The developments described here are an unprecedented shift to reduce the existing
fragmentation and prevent further fragmentation of sustainability disclosure instruments.
The efforts build directly upon and protect the heritage of the leading sustainability disclosure
instruments, with widespread adoption and use likely to reduce market confusion and
costs for data preparers while improving usability of the information for a range of data
users. Implementation of this global baseline will require action by others, including public
authorities, stock exchanges and market participants, to contribute towards developing the
baseline and to require or encourage its widespread use.When the new standards come
into effect, exchanges and regulators will need to review their ESG disclosure requirements
and/or guidance to ensure that they adhere to the new standards.

3. Lessons learned
Overall, sustainable finance regulations have flourished in recent years, both resulting
from and reinforcing the mainstreaming of sustainable finance. An increasing number of
economies across the globe are developing regulatory frameworks for sustainable finance.
Both the number and the scope of policy measures and regulations are expanding rapidly.
New policy tools, such as taxonomies, sustainable financial product standards, climate
disclosure and carbon pricing, are being developed in a push for a green transition.

Yet, sustainable finance policies and regulations cannot work in silos. Countries need to
take a holistic approach, by integrating sustainable finance regulations into their overall
sustainable development strategy and ensuring coherence between sustainable finance
and fiscal, technology, industry and other policies. For this purpose, it may be necessary
to review all the policies that could have implications for sustainable finance regulation
and policy consolidations may be needed. A well-developed national sustainable finance
strategy or framework could serve as a useful tool to provide overall guidance for policy
review and could thus be a good starting point for the exercise.

Meanwhile, government policies and regulations need to be complemented by market-

driven standards and guidelines on disclosure, governance and other issues (“soft
regulations”). It is important to engage all stakeholders to create a viable ecosystem
that embeds sustainability along the entire investment chain. Given the early stage
of development of sustainable finance and the quickly evolving market, policies and
regulations need to be adapted in response to changes in specific market situations and in
the overall development environment within which the investment system functions.

While sustainable finance policies and regulations need to take into consideration a
nation’s specific development context, international collaboration is important to ensure
necessary coherence with international standards. This can help facilitate and attract
cross-border investments, since consistence with international standards may be required
by international investors (as is the case for green bonds issued in developing markets).

192 World Investment Report 2022 International tax reforms and sustainable investment
 E. CLIMATE ACTION

Capital market participants along the whole investment chain are making progress
to decarbonize and to embed climate conscious decision-making into their activities.
To promote transition to a net zero economy, stock exchanges are tracking the carbon
emissions of listed companies. An indicator of the momentum and demand for capacity-
building on climate-related disclosures is the number of exchanges now hosting training on
TCFD-aligned disclosure. In the last quarter of 2021 and the first half of 2022, more than
20 stock exchanges hosted training sessions on climate-related disclosure for more than
6,000 companies around the world. Several initiatives have been created to assist public
markets and investors in navigating regulations and reporting standards, including the SSE
Model Guidance on Climate Disclosure. Despite the many institutional investors that do
not publish information on climate action, UNCTAD’s continuous monitoring reveals that
an increasing number of institutional investors have been taking action on climate risk with
regard to their investment strategies and their active ownership of assets.

The global efforts to rapidly decarbonize the world’s economies has important implications
for business and the investment community. Increasingly, physical risks from climate change
such as droughts, sea-level rise and flooding pose financial risks to listed companies and
investors. For example, between 2017 and 2019 natural catastrophe losses intensified by
climate change exceeded $600 billion (TCFD, 2021). Simultaneously, transition risks (such
as technological and energy-mix changes, policy and legal implications, and changes
in market trends) have financial impacts on an organization’s financial performance and
financial position. The total value of manageable assets at risk as a result of climate change
by 2100 is estimated to exceed $40 trillion (The EIU, 2015). In addition to the risks posed
by climate change, new opportunities are emerging that both investors and issuers can
capitalize on. Many of the world’s largest companies have identified and quantified financial
impact from climate change, estimating a potential impact nearing $1 trillion ($970 billion).
The same companies have also identified $2.1 trillion in climate-related opportunities
(CDP, 2019). Capital markets have witnessed intensified actions on climate challenges and
related investment opportunities along the investment chain.

1. Carbon emissions in public markets

In 2021, world leaders met in Glasgow, Scotland, for the 26th United Nations Climate
Change Conference (COP26) to emphasize the urgent need to address the climate crisis.
Moving towards a net zero emissions world is a key action point on the international
agenda to ensure that the average global temperature rises no more than 1.5°C above
pre-industrial levels. Tracking the carbon emissions of listed companies provides a useful
benchmark for exchanges and other key stakeholders to assess progress in promoting
transition to net zero emissions among listed companies (figure IV.22).

Research into the scope 1 GHG emissions of the top 100 issuers by market capitalization on
G20 stock exchanges shows that the top companies listed on the Shenzhen exchange in
China and on the Nasdaq exchange in the United States have the lowest scope 1 emissions
among G20 exchanges. Together the top 100 companies on each of these exchanges
combined represent only 0.6 per cent of emissions from the top 100 companies listed on
the remaining G20 exchanges. By contrast, over half of the scope 1 emissions from the
companies analysed in the G20 are emitted by companies listed on just five exchanges.

Chapter IV Capital markets and sustainable finance 193

 G20 stock exchanges by scope 1 carbon emissions
Figure IV.22.
of top 100 issuers (Million metric tonnes CO2 equivalent)

Shenzhen (China)
NASDAQ (United States)
JPX Tokyo (Japan)
Shanghai (China)
BYMA (Argentina)a
JSE (South Africa)
BMV (Mexico)
Borsa Istanbul (Turkey)
B3 (Brazil)
ASX (Australia)
Borsa Italiana (Italy)
TSX (Canada)
Euronext Paris (France)
G20 average
Saudi Exchange (Saudi Arabia)
LSE (United Kingdom)
DBG Xetra (Germany)
NYSE (United States)
HKEX (China)
KRX (Republic of Korea)
IDX (Indonesia)
MICEX (Russian Federation)
NSE/BSE (India)
0 100 200 300 400 500 600 700 800

Source: UN SSE (2021).

a For the exchange in Argentina, which has fewer than 100 issuers, all the issuers were included in the analysis.

Significant differences can also be observed between individual exchanges; for example,
the market with the highest-emitting top 100 issuers produces 50 times the level of
scope 1 emissions as the market with the lowest-emitting issuers. Even within the same
jurisdiction, exchanges’ markets can vary significantly, highlighting the difference in industry
and sector composition of the companies listed on those markets, which may be used by
the exchanges to estimate their markets’ risk of being affected by forthcoming regulations
on carbon emissions.

2. The Net Zero movement

GHGs are the key driver behind global warming and climate change. Over the past
decade, global GHG emissions have risen steadily, contrary to the goals set by the 2015
Paris Agreement, which defined the goal to limit global temperature rise to 1.5°C. In order
to remain within the parameters set out in Paris, global emissions need to be halved by
2030 and have to be “net zero” by 2050 at the latest. In contrast to the absolute reduction
of emissions, the concept of “net zero” allows the removal of unavoidable emissions
through technical innovations or natural means (e.g. plants that remove carbon dioxide
from the atmosphere).

194 World Investment Report 2022 International tax reforms and sustainable investment
To assist private and public sector organizations in reducing their overall emissions and
moving towards net zero emissions, the United Nations Framework Convention on Climate
Change created the global campaign “Race to Zero” (figure IV.23). With 1,049 cities,
67 regions, 5,235 businesses, 441 of the biggest investors, 1,039 higher education
institutions and 120 countries, Race to Zero has become the largest alliance committed to
achieving net zero carbon emissions by 2050. Collectively, actors involved in the initiative
cover nearly 25 per cent of global CO2 emissions and over 50 per cent of global GDP.18

To coordinate efforts of the financial sector, United Nations Special Envoy on Climate Action
and Finance Mark Carney created the Glasgow Financial Alliance for Net Zero (GFANZ).
As part of the Race to Zero, GFANZ is a global coalition of leading financial institutions
committed to accelerating the decarbonization of the economy (SSE, 2021b). Financial
institutions join sector-specific alliances that establish science-based commitments and
targets for each individual industry to fulfil. There are currently seven sector alliances
active within GFANZ, catering to asset owners and asset managers, insurers, investors,
banks and investment consultants. Each alliance is supported by a secretariat, which in
some cases is led by the United Nations. Together, the actors involved publish guidance
and targets to achieve within the next 12 months and the coming years. Exchanges are
included in the Net Zero Financial Service Providers Alliance (NZFSPA).

The NZFSPA is a diverse group of 23 financial service provider organizations, including 6

exchanges. Members are committed to elevating the urgency of net zero alignment and
integrating net zero efforts into their operations, services and products. The UN SSE acts
as an accelerator for the growth of the alliance and offers secretariat services to exchanges
within the alliance to guide, support and speed up their net zero efforts. Due to the diversity
of members, the commitment and the action points developed by the NZFSPA must
be interpreted within each individual subgroup, to ensure they align with each sector’s
operations and abilities.

Figure IV.23. Structure of the Race to Zero movement in the finance industry

Race to Zero

Businesses Cities

Regions Finance Universities

GFANZ
Net Zero
Net Zero Net Zero
Net Zero Net Zero Net Zero Financial Paris Aligned
Asset Investment
Asset Owner Banking Insurance Service Investment
Managers Consultants
Alliance Alliance Alliance Providers Initiative
Initiative Initiative
Alliance

Source: UNCTAD, adapted from GFANZ/NZFSPA presentation.

Chapter IV Capital markets and sustainable finance 195

 3. Climate action by public pension and sovereign wealth funds
Climate and environmental concerns are the dominating subjects of sustainability action
taken by PPFs and SWFs, with a focus on the identification and mitigation of the impact of
climate change on future returns. Climate action by funds focuses principally on five areas:

1. Risk identification and mitigation related to transitional and physical risks

2. The application of metrics and reporting or disclosure of climate-related risks
3. The use of targets and benchmarks to reorient portfolio holdings and investment
strategies in response to climate-related risk
4. The institutional response to climate-related risks – and ESG integration more broadly –
through resource mobilization and organizational change
5. Increasingly active ownership on climate risk, through engagement, voting and
exclusion or divestment

Their climate action usually starts with the identification of both physical and transitional
risks. For example, climate change is considered the primary portfolio risk for many
funds, such as AP Fonden (Sweden), and several funds, such as HOOPP (Canada), have
developed in-house climate models to identify at-risk investments. The focus on climate
is partly related to the scale of the risks involved and their impact on future financial
returns and partly related to reporting and other initiatives that facilitate disclosure on
carbon emissions.

Most reporting funds now elaborate a specific strategy on climate or CO2 emissions
(figure IV.24). This is often linked to a specific goal, which for the majority of funds means
net zero carbon emissions in their portfolios by 2050, if not before. A majority of reporting
funds use an international reporting framework for reporting on climate action and have
signed up to an international climate response initiative, one of the most popular being
Climate Action 100+, signalling their commitments on climate action to shareholders and
beneficiaries and to policymakers. Over two thirds of reporting funds now publish specific
information on climate risk, sometimes in a report separate from either their annual or
sustainability report.

Information on the size of investments in climate-related assets is not comprehensive,

but anecdotal evidence from fund reports suggests that they are making rapid changes
to portfolios and that the actual or potential impact of regulatory changes will accelerate

Climate-specific action by funds, 2022

Figure IV.24.
(Per cent of reporting funds)

Use of international reporting framework

83
or guidelines on sustainability

Specific strategy on climate

83
or CO2 emissions

Part of an international climate 74

response initiative

Use of specific climate target or goal 72

Climate risk reporting and publication 67

of a climate risk report

Source: UNCTAD, based on fund annual reports or sustainability reports, n = 47.

196 World Investment Report 2022 International tax reforms and sustainable investment
investment decisions in this area. For example, funds such as ABP (Netherlands)
have developed specific investment instruments for investing in the energy transition.
Meanwhile, two Californian pension funds, CalPERS and CalSTRS (United States), are
facing a proposed state law requiring them to divest all their fossil fuel assets – about
$9 billion – by 2027.19

Despite calls for divestment from beneficiaries and the likely impact of regulatory changes,
funds often choose to engage with investees rather than exclude them. The rationale
for engagement, from the fund’s perspective, is the understanding that the fund has a
huge degree of influence and leverage through engagement and voting that it would not
otherwise have if it divested. For this reason, funds privilege engagement in the expectation
that investees will be encouraged to implement their own transition strategy to net zero.
Most reporting funds exercise their voting rights, either directly or through a proxy, and
actively engage with their investees. Nearly two thirds of funds provide guidance on ESG
integration to asset managers or investees (figure IV.25).

UNCTAD’s continuous monitoring reveals that an increasing number of institutional

investors have been taking action on sustainability and climate risk, in line with their long-
term outlook and fiduciary responsibilities. This goes beyond reporting to implementing
meaningful actions with regard to fund investment strategies and their active ownership of
assets. Yet, a majority of the world’s largest funds, either by number or AUM, still do not
publish information on ESG integration or climate action. The first step towards reallocating
capital towards sustainable outcomes and mobilizing more finance to support climate
change mitigation and adaptation is to recognize and quantify risk through disclosure and
reporting. Such reporting needs to improve and become mandatory in financial markets
and among institutional investors as it already is in several countries and regions, such as
in the EU and in the Republic of Korea.

With the IPCC clear that further rises in emissions after 2025 puts a 1.5°C warming
scenario out of reach, and facing the cascading risk impacts related to hydrocarbons and
energy security arising from geopolitical crises, such as the war in Ukraine, investors should
be taking more urgent action to decarbonize their portfolios through reorienting assets or
engaging investees. UNCTAD, through its Global Sustainable Finance Observatory and
its Sustainable Institutional Investment programme, is contributing towards accelerating
the reorientation of investments and in channeling more finance to sustainable outcomes,
including the energy transition.

Active ownership by funds, 2022

Figure IV.25.
(Per cent of reporting funds)

Exercising voting rights

(either directly or through a proxy) 93

Active engagement activities 91

Guidance on ESG (and SDG) integration

67
provided to asset managers and/or investees

Source: UNCTAD, based on fund annual reports or sustainability reports, n = 47.

Note: ESG = environmental, social and governance, SDG = Sustainable Development Goal.

Chapter IV Capital markets and sustainable finance 197

 4. Stock exchange strategies for climate action
Stock exchanges are playing an important role in helping their markets navigate the low-
carbon transition. An indicator of the momentum and demand for capacity-building on
climate-related disclosures is the number of exchanges now hosting training on TCFD-
aligned disclosure. In the last quarter of 2021 and the first half of 2022, more than 20 stock
exchanges have hosted training sessions on climate-related disclosure for more than 6,000
participants around the world, working with UN SSE, IFC and other partners. Key areas
of concern that participants highlight in these sessions are how to identify the financial
impact of climate-related risks and opportunities and how to integrate this information into
mainstream financial reports.

The TCFD has identified climate-related risks and opportunities that are more likely to have
a financial impact on a company’s financial position or financial performance. Companies
can use these risks and opportunities as a starting point by incorporating them into their
risk management processes and identifying their strategic relevance to the organization. By
conducting a materiality analysis or identifying how risks and opportunities may affect the
organization’s financial position and performance, companies can integrate this information
into their mainstreaming reports. The risks and opportunities deemed to have a financial
impact should be a part of their strategic planning and risk management processes in
order to mitigate risks and capitalize on opportunities pertaining to climate.

To help exchanges lead a transition to more climate-resilient markets, the UN SSE,

in collaboration with the UN Special Envoy on Climate Action and Finance, launched
a voluntary practical Action Plan (SSE, 2021c) together with a set of tools for guiding
markets on climate-related disclosures (SSE, 2021d). The Action Plan highlights two
streams of activities which focus either on changing the internal operations, disclosure and
governance within a stock exchange, or on influencing the external market’s operations,
disclosure and governance practices. The SSE provides exchanges with a template,
the SSE Model Guidance on Climate Disclosure, that can be used to create bespoke
guidance for each unique market, and a TCFD checklist to conduct a gap analysis of
current reporting practices. Building on the tools and guidance developed specifically for
stock exchanges, the SSE, together with the World Bank Group’s International Finance
Corporation and the CDP, developed a three-part training programme on aligning disclosure
practices with the recommendations of the TCFD recommendations.

***

With the rapid proliferation of sustainability-themed financial products, the growth of

the sustainable finance market has reached a tipping point. Its growth is expected to
further accelerate in the coming years, with more institutional investors mainstreaming
sustainability in their investment decisions and more governments, stock exchanges and
industry associations making systematic efforts to create a viable policy and regulatory
ecosystem for sustainable investment.

Much remains to be done to fully leverage the potential of the capital market for
sustainable finance. The current focus is on strengthening the integrity of sustainability-
themed products and corporate ESG disclosure. The biggest challenge that needs to be
addressed is the sustainability-washing concern and the credibility of sustainable financial
products associated with it. UNCTAD analysis shows that huge variance remains in the
sustainability profiles in self-labelled sustainable funds and that the low-performing ones
may not fulfil their sustainability credentials. Meanwhile, although an increasing number
of asset owners and asset managers have announced their commitment to carbon
neutrality, more than half of the world’s 100 largest PPFs and SWFs are not disclosing or

198 World Investment Report 2022 International tax reforms and sustainable investment
reporting on sustainability issues. This situation needs to change, and the most effective
way to address the credibility issue is to further strengthen sustainability reporting, at
both the entity and the product levels, covering both companies and financial institutions.
Regulators and stock exchanges can drive the change by making more disclosure
and external auditing requirements mandatory, especially for sustainability-oriented
products traded in securities markets. Taxonomies and product standards can also
bring more clarity and credibility to the market and have been multiplying in recent years.
However, the lack of standards for sustainable funds and other emerging sustainable
financial products at national and international levels needs to be addressed, and better
alignment of existing standards for sustainable bonds across countries is necessary to
enhance transparency.

To make sustainability a norm of investment, a holistic approach is necessary. National

strategies and policies aimed at supporting sustainable finance and the growth of the
market need to be embedded in the national development strategy, and fiscal, financial,
industry, technology and other relevant policies may need to be reoriented to work together
to facilitate sustainable investment. Meanwhile, in order to build a viable ecosystem for
sustainable finance to flourish, the entire investment value chain needs to be involved,
including asset owners and asset managers, exchanges, issuers and regulators.

A coherent market with better geographical balance will not be achieved without more
international cooperation and support. Already, regional approaches have helped
harmonize standards and policies across markets and, ultimately, harmonization at the
international level would be beneficial, perhaps on existing standards and policies. For
countries with less developed markets and infrastructure, particularly with regard to
regulation and standard setting, technical assistance would be helpful to support market
development and beneficial outcomes.

Through the work of its Global Sustainable Finance Observatory (box IV.2) and other
sustainable investment-related programmes, such as the SSE, the Sustainable Institutional
Investment and the International Standards of Accounting and Reporting programmes,
UNCTAD is committed to working together with key stakeholders from both the public
and the private sector to make the financial market ecosystem more sustainable and
better contribute to sustainable outcomes, including the SDGs, as mandated by the UN
General Assembly.20

Box IV.2. UNCTAD Global Sustainable Finance Observatory

The Global Sustainable Finance Observatory was launched by UNCTAD in the 2021 World Investment Forum
with a vision to build a future global financial ecosystem in which sustainable development, as defined by
the SDGs, is fully embedded into the business model and investment culture and to bring more credibility,
transparency and consistency to the market.
The Observatory is committed to addressing the challenges of fragmentation in standards, proliferation in
benchmarking, complexity in disclosure and sustainability-washing. It works in tandem with the standard-
setting processes of the financial industry and regulatory bodies to promote the full and effective integration
of sustainable development into all aspects of the global financial ecosystem.
In particular, the Observatory
• Promotes the integration of SDGs into the sustainability assessment ecosystem in a coherent and
synergistic manner, including through the Guidance on Core Indicators for Entity Reporting on Contribution
towards Implementation of the SDGs published by the ISAR.
• Manages a global database of sustainable investment funds and other products to improve the open-
source availability of sustainability data for key stakeholders and the public.
/…

Chapter IV Capital markets and sustainable finance 199

 Box IV.2. UNCTAD Global Sustainable Finance Observatory (Concluded)

• Conducts sustainability assessments of “self-labelled” sustainable products on global capital markets, and
awards best performers.
• Establishes a pool of sustainability ratings on capital markets to encourage better reporting methodologies
in different industries.
• Maintains a global inventory of good regulatory and policy practices for sustainability integration and to
facilitate peer learning.
• Provides a capacity-building platform for assisting developing countries on policies, regulatory measures,
product development, industry standards, reporting and other related issues to ensure they benefit from
sustainable finance.
The Observatory leverages UNCTAD’s partnership with leading sustainable finance-related initiatives, such as
the UN Global Compact, the PRI, the UNEP Finance Initiative, IOSCO and the World Federation of Exchanges,
in the area of sustainable investment.

Source: UNCTAD.

200 World Investment Report 2022 International tax reforms and sustainable investment
 NOTES
1
United Nations General Assembly resolution on “Promoting investments for sustainable investment”
(A/RES/74.199) and (A/RES/75/207).
2
Tergesen, A., “ESG funds easier for 401(k)s to buy under Labor Department plan”, The Wall Street Journal,
13 October 2021, https://wsj.com/articles/esg-funds-for-401-k-s-easier-to-buy-under-labor-department-
plan-11634160291.
3
The score is based on the relative rating, with 10 for the highest-rated funds and 1 for the lowest-rated ones.
4
The MSCI ACWI covers about 3,000 holdings from 23 developed and 27 emerging markets and
approximately 85 per cent of the free float-adjusted market capitalization in these markets. The index is
the benchmark against which the relative sustainability performance of sustainable funds is evaluated in
this section.
5
According to data from the Global SWF data platform, 2022, https://globalswf.com.
6
According to data from the Global SWF data platform, 2022, https://globalswf.com.
7
Cybersecurity was seen as the biggest risk warranting focus from boards (a bigger risk focus than ESG).
KPMG (2022).
8
About 30 per cent of oil, 50 per cent of gas and 80 per cent of coal reserves will remain unburnable if
warming is limited to 2°C (IPCC, 2022).
9
For example, Temasek (Singapore) has introduced an internal carbon-pricing policy in response to its
assessment that carbon pricing may need to surpass $100 per tonne of carbon dioxide equivalent (tCO2e)
by 2030 to drive effective decarbonization and deliver on the Paris Agreement. The fund has set an
initial internal carbon price of $42 per tCO2e to inform its investment decisions. The fund will further
refine its carbon-pricing strategies as it gets further clarity on the economic and policy levers of change
(https://temasekreview.com.sg/.
10
The 12 founding members of the SSE Derivatives Network are the Australian Securities Exchange (ASX)
(Australia), Borsa Istanbul (Turkey), Bursa Malaysia (Malaysia), CBOE Global Markets (United States), CME
Group (United States), Deutsche Börse AG/Eurex (Germany), Matba Rofex (Argentina), MexDer (BMV Group)
(Mexico), NZX Limited (New Zealand), Singapore Exchange (Singapore), The Intercontinental Exchange
(ICE) (United States) and TMX Group/Montreal Exchange (Canada).
11
MayerBrown Perspectives, “ESG derivatives: a sustainable trend”, 21 October 2021.
12
BDO Insights, “ESG Derivatives: a new way to promote sustainability”, 22 October 2021.
13
Investment News “IOSCO targets greenwashers”, 15 March 2022.
14
G7 Finance Ministers and Central Bank Governors Communiqué, 5 June 2021.
15
G20 Third Finance Ministers and Central Bank Governors meeting, Communiqué, 9–10 July 2021.
16
IFRS, “ISSB delivers proposals that create comprehensive global baseline of sustainability disclosures”,
31 March 2022.
17
GRI, “IFRS Foundation and GRI to align capital market and multi-stakeholder standards, 24 March 2022.
18
UN Climate Change, “Race to Zero Campaign”, https://unfccc.int/climate-action/race-to-zero-campaign.
19
“Proposed bill would require CalPERS, CalSTRS to divest fossil fuels”, Chief Information Officer, 15 March
2022, https://ai-cio.com.
20
United Nations General Assembly resolution on “Promoting investments for sustainable development”
(A/RES/74.199) and (A/RES/75/207).

Chapter IV Capital markets and sustainable finance 201

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WWF (World Wildlife Fund) (2021). 2021 SUSREG Annual Report: A Baseline Assessment of Sustainable
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Zhan, J., and A. U. Santos-Paulino (2021). “Investing in the sustainable development goals: mobilization,
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208 World Investment Report 2022 International tax reforms and sustainable investment
ANNEX
TABLES

List of annex tables available on the UNCTAD website, www.unctad.org/wir

 Annex table 1. FDI flows, by region and economy, 2016–2021 (Millions of dollars)
FDI inflows FDI outflows
Region/economy 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021

Worlda 2 045 424 1 632 639 1 448 276 1 480 626 963 139 1 582 310 1 596 716 1 610 113 941 293 1 123 894 780 480 1 707 594
Developed economies 1 384 814 937 683 753 320 764 456 319 190 745 739 1 210 679 1 162 247 565 200 736 840 408 195 1 269 212
Europe 794 426 513 250 398 049 404 756 80 786 219 033 653 726 544 012 467 785 342 648 -20 572 551 598
European Union 342 615 274 904 366 347 401 677 209 509 137 541 495 406 347 293 293 339 368 335 66 412 397 637
Austria -8 508 14 953 5 390 3 035 -15 044 5 823 -2 033 10 251 5 612 12 509 -2 400 10 781
Belgium 59 243 -708 35 713 1 752 11 913 25 577 36 374 29 698 40 882 -3 371 10 588 45 624
Bulgaria 1 040 1 814 1 143 1 835 3 423 1 496 405 331 249 449 242 150
Croatia 273 539 1 203 397 136 569 -1 938 -725 201 -116 35 122
Cyprus 10 928 9 438 -413 34 362 4 669 463c 8 690 8 932 -6 941 34 454 255 -3 329c
Czechia 9 815 9 522 11 010 10 108 9 411 5 806 2 182 7 560 8 663 4 128 2 990 5 583
Denmark 235 3 749 1 715 7 073 3 210 5 541 10 110 10 023 -75 16 843 10 899 22 399
Estonia 1 059 1 951 1 517 3 184 3 395 989 487 890 45 1 966 220 1 547
Finland 8 582 2 864 -2 172 13 456 -1 427 9 393 24 277 -574 11 455 4 865 5 863 4 092
France 23 077 24 833 41 833 28 363 4 870 14 193 64 848 35 985 102 042 33 818 46 010 -2 839
Germany 15 633 48 641 72 098 52 665 64 589 31 267 63 661 86 518 97 233 137 293 60 624 151 690
Greece 2 765 3 485 3 973 5 019 3 213 5 732 -1 667 168 477 642 549 926
Hungary -5 439 3 515 6 460 4 328 6 800 5 459 -8 272 1 220 3 364 3 211 4 222 2 882
Ireland 39 414 52 835 -12 017 149 433 80 871 15 702 30 086 -2 048 5 154 32 083 -44 997 61 979
Italy 28 469 24 047 37 682 18 146 -23 622 8 487 16 181 24 531 31 542 19 787 -1 856 11 759
Latvia 255 711 964 901 1 013 5 325 161 141 207 -103 266 3 361
Lithuania 303 1 021 977 3 022 3 492 2 053 43 80 704 1 747 2 874 663
Luxembourg 17 581 -27 370 -26 045 12 801 102 269 -9 054 -1 241 15 019 -25 478 -2 576 102 624 25 398
Malta 4 248 3 407 4 024 3 778 3 944 4 005 5 409 7 237 7 442 6 960 7 122 7 247
Netherlands 55 124 13 925 87 633 -14 141 -105 394 -81 056 186 139 25 660 -47 484 16 313 -191 397 28 861
Poland 15 690 9 172 15 996 13 510 13 831 24 816 11 600 2 169 891 1 854 1 295 178
Portugal 5 066 7 752 7 115 12 361 7 756 8 020 872 -749 799 3 638 2 333 -1 441
Romania 5 000 5 419 6 219 5 791 3 432 8 610 5 -97 379 363 53 -31
Slovakia 806 4 017 1 675 2 511 -1 931 59 96 1 325 322 43 235 389
Slovenia 1 246 898 1 384 1 463 206 1 517 290 338 281 610 509 922
Spain 31 569 41 966 57 463 17 417 5 678 9 777 43 945 56 045 37 546 24 827 23 567 -1 625
Sweden 19 141 12 509 3 806 9 108 18 803 26 973 4 699 27 363 17 829 16 100 23 687 20 347
Other Europe 451 811 238 346 31 702 3 079 -128 723 81 491 158 321 196 719 174 447 -25 688 -86 984 153 961
Albania 1 101 1 149 1 290 1 288 1 108 1 234 64 26 83 128 88 63
Belarus 1 238 1 279 1 421 1 293 1 397 1 233 114 70 50 16 82 -85
Bosnia and Herzegovina 350 492 581 342 395 519 39 79 2 31 57 38
Iceland -427 -41 -381 -225 -933 174 -1 147 -208 76 479 -391 19
Moldova 83 152 297 508 150 264 9 13 38 40 -2 25
Montenegro 226 559 490 416 529 664 -185 11 109 75 -5 11
North Macedonia 375 205 725 446 230 606 24 2 12 40 53 91
Norway -3 900 -5 849 226 16 715 -1 326 -1 628 3 092 -2 220 11 408 12 524 7 669 1 382
Russian Federation 37 176 25 954 13 228 32 076 10 410 38 240 26 951 34 153 35 820 22 024 6 778 63 602
Serbia 2 352 2 878 4 091 4 270 3 469 4 563 250 147 363 294 112 275
Switzerland 150 241 111 201 -83 155 -105 807 -162 704 1 016 166 569 21 944 43 599 -56 174 -36 152 -19 120
Ukraine 4 055 3 727 4 732 6 017 -36 6 549 100 281 -127 842 22 -198
United Kingdom 258 699 96 354 87 837 45 454 18 194 27 561 -37 606 142 373 82 961 -6 081 -65 363 107 741
North America 495 475 331 723 240 896 275 257 174 004 427 052 353 976 403 968 -99 357 107 985 281 446 492 975
Canada 36 056 22 767 37 662 50 149 23 176 59 676 69 507 76 188 58 049 79 389 46 527 89 874
United States 459 419 308 956 203 234 225 108 150 828 367 376 284 469 327 780 -157 406 28 596 234 919 403 101
Other developed economies 94 913 92 710 114 375 84 442 64 400 99 655 202 977 214 267 196 772 286 207 147 321 224 638
Australia 48 401 46 114 68 322 39 406 16 726 25 085 2 304 7 800 7 141 9 858 9 935 9 224
Bermuda 82 -288 95 5 112 1 72 -42 -35 -38 -11 -25
Israel 11 988 16 893 21 515 17 363 24 283 29 615 14 579 7 624 6 087 8 690 6 375 9 713
Japan 19 359 9 356 9 963 13 755 10 703 24 652 155 937 164 588 144 982 232 627 95 666 146 782
Korea, Republic of 12 104b 17 913 12 183 9 634 8 765 16 820 29 890b 34 069 38 220 35 239 34 832 60 820
New Zealand 2 979 2 723 2 298 4 279 3 810 3 482 196 227 377 -169 523 -1 876
Developing economiesa 660 609 694 955 694 956 716 170 643 949 836 571 386 037 447 866 376 093 387 054 372 284 438 382
Africa 46 250 40 176 45 384 45 678 38 952 82 991 8 425 11 813 8 189 4 914 -622 2 653
North Africa 13 841 13 275 15 407 13 550 9 800 9 335 1 514 1 370 2 269 1 727 356 813
Algeria 1 636 1 232 1 475 1 382 1 143 870 46 -18 854 31 15 -52
Egypt 8 107 7 409 8 141 9 010 5 852 5 122 207 199 324 405 327 367
Libya - - - - - - 440 110 276 377 -487 -55c
Morocco 2 157 2 686 3 559 1 720 1 419 2 153 580 1 021 782 893 458 506
South Sudan -8c 1c 60c -232c 18c 68c .. .. .. .. .. ..
Sudan 1 064 1 065 1 136 825 717 462 .. .. .. .. .. ..
/...

210 World Investment Report 2022 International tax reforms and sustainable investment
Annex table 1. FDI flows, by region and economy, 2016–2021 (Continued)

FDI inflows FDI outflows

Region/economy 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021

Tunisia 885 881 1 036 845 652 660 242 57 34 22 43 47

Other Africa 32 409 26 901 29 978 32 128 29 152 73 655 6 911 10 443 5 920 3 187 -978 1 840
West Africa 11 726 10 112 8 102 10 863 9 340 13 849 1 246 1 222 1 098 1 280 297 2 593
Benin 132 201 194 218 174 242 17 32 10 27 22 28
Burkina Faso 391 3 268 163 -102 137 51 10 68 16 -7 26
Cabo Verde 126 111 112 103 74 118 -8 16 -20 -9 -11 -7
Côte d'Ivoire 578 975 620 936 713 1 382 29 676 145 120 1 490
Gambia -28 18 52 71 190 252 -1 2 0.5 -2 -3 -3
Ghana 3 485 3 255 2 989 2 827 1 876 2 614 15 16 81 588 542 192
Guinea 1 618 578 353 44 176 173c 21 1 -0.3 1 2 -4c
Guinea-Bissau 24 16 21 72 21 24 0.5 0.3 -0.4 0.4 0.3 0.2
Liberia 453 248 129 87 87 46c 168 54 84 102 80 91c
Mali 356 563 467 721 537 660 97 15 0.3 1 1 40
Mauritania 271 587 773 887 928 22c 1 10 4 5 6 5c
Niger 301 339 466 717 361 755 40 29 39 32 15 58
Nigeria 3 453 2 413 775 2 305 2 385 4 844c 335 311 566 285 -338 1 237c
Senegal 472 588 848 1 065 1 846 2 232 224 82 53 71 99 217
Sierra Leone 138 129 218 301 135 218c .. .. .. .. .. ..
Togo -46 89 -183 346 -59 130 257 -33 70 43 -112 225
Central Africa 5 403 8 946 9 353 8 858 9 506 9 409 338 291 290 257 263 323
Burundi 0.1 0.3 - 1 8 8 - - - 1 2 1
Cameroon 664 814 762 1 027 675 850c -39 22 110 127 84 105c
Central African
7 7 18 26 35 30c .. .. .. .. .. ..
Republic
Chad 245 363 461 567 558 562c .. .. .. .. .. ..
Congo 1 612 4 417 4 315 3 366c 4 016c 3 691c 10 45 14c 23c 27c 25c
Congo, Democratic
1 205 1 340 1 617 1 488 1 647 1 870 272 292 209 134 149 192
Republic of the
Equatorial Guinea 54 305 396 452 530 491 c
.. .. .. .. .. ..
Gabon 1 244 1 314 1 379 1 553 1 717 1 635c 45c -84c -63c -34c - -
Rwanda 342 356 382 354 274 212 48 16 18 5 - -
Sao Tome and
31 29 23 24 47 60c 1 0.3 2 1 1 -0.1c
Principe
East Africa 8 302 8 784 8 054 7 893 6 062 8 179 140 215 233 168 139 164
Comoros 4 4 6 4 4 4c .. .. .. .. .. ..
Djibouti 160 165 170 175 158 167 .. .. .. .. .. ..
Eritrea 52c 55c 61c 67c 74c 70c .. .. .. .. .. ..
Ethiopia 4 143 4 017 3 310 2 549 2 381 4 259 .. .. .. .. .. ..
Kenya 1 139 1 404 1 139 1 098 717 448c 11 14 11 11 -7 -35c
Madagascar 451 358 353 474 358 300c 90 106 118 102 119 115c
Mauritius 379 480 461 444 225 253 28 89 98 58 16 86
Seychelles 155 192 120 144 122 157 10 6 5 -2 10 -3
Somalia 330c 369c 408c 447c 464c 456c .. .. .. .. .. ..
Uganda 626 803 1 055 1 274 874 1 142 0.1 0.3 0.3 0.3 0.3 0.3
United Republic of
864 938 972 1 217 685 922c .. .. .. .. .. ..
Tanzania
Southern Africa 6 978 -941 4 469 4 514 4 244 42 219 5 188 8 715 4 299 1 481 -1 677 -1 241
Angola -180 -7 397 -6 456 -4 098 -1 866 -4 150 273 1 352 6 -2 349 91 -1 057
Botswana 143 261 286 94 32 55 170 -1 82 -20 -68 -53
Eswatini 21b -56b 36b 130b 41b 126b -7b 65b -11b 22b -14b 59b
Lesotho 159 123 129 36 30 27 .. .. .. .. .. ..
Malawi 116 90 959 55 45 50c 42 -3 1 -23 -19 -21c
Mozambique 3 093 2 293 2 703 2 212 3 035 5 102 35 26 -25 -31 153 194
Namibia 356 280 209 -179 -156 412 -5 -66 98 9 52 17
South Africa 2 235b 2 008b 5 450b 5 125b 3 062b 40 889b 4 474b 7 371b 4 076b 3 147b -1 951b 19b
Zambia 663 1 108 408 860 -173 -457 177 -72 45 696 35 -453
Zimbabwe 372 349 745 280 194 166 29 42 27 31 44 55
Asia 478 148 501 382 496 898 511 632 518 893 618 983 366 619 400 135 360 653 336 213 378 382 394 118
East and South-East Asia 371 987 407 841 403 110 407 316 406 836 504 232 322 376 345 990 301 021 282 388 330 067 320 227
East Asia 258 665 253 391 254 334 232 339 284 726 328 918 272 810 257 442 243 474 202 886 267 680 244 389
China 133 711 136 315 138 305 141 225 149 342 180 957 196 149 158 288 143 037 136 905 153 710 145 190
Hong Kong, China 117 387 110 685 104 246 73 714 134 710 140 696d 59 703 86 704 82 201 53 202 100 715 87 450d
Korea, Democratic
People's Republic 89c -13c 2c 30c 6c 18c .. .. .. .. .. ..
of
Macao, China 1 942 1 509 2 494 6 687 -7 104 -298c -1 002 864 141 869 1 728 1 528c
/...

Annex tables 211

 Annex table 1. FDI flows, by region and economy, 2016–2021 (Continued)
FDI inflows FDI outflows
Region/economy 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021

Mongolia -4 156 1 494 2 174 2 443 1 719 2 140 14 49 37 127 26 113

Taiwan Province of
9 692b 3 401b 7 114b 8 240b 6 053b 5 405b 17 946b 11 537b 18 058b 11 783b 11 500b 10 108b
China
South-East Asia 113 322 154 450 148 776 174 976 122 110 175 314 49 565 88 548 57 546 79 502 62 387 75 838
Brunei Darussalam -150 460 517 375 577 205 .. .. .. .. .. ..
Cambodia 2 476 2 786 3 208 3 662 3 625 3 484 79 115 124 102 127 92
Indonesia 3 921 20 579 20 563 23 883 18 591 20 081 -12 215 2 077 8 053 3 352 4 448 3 596
Lao People's
Democratic 935 1 686 1 358 756 968 1 072 15 10 - - - -
Republic
Malaysia 11 336 9 399 7 618 7 813 3 160 11 620 8 011 5 638 5 114 6 231 2 419 4 750
Myanmar 2 930 4 409 2 892 2 509 1 907 2 067 .. .. .. .. .. ..
Philippines 8 280b 10 256b 9 949b 8 671b 6 822b 10 518b 2 397b 3 305b 4 116b 3 351b 3 562b 2 402b
Singapore 67 502 82 483 73 932 106 323 75 437 99 099 36 872b 62 706b 22 169b 55 607b 31 758b 47 395b
Thailand 3 486 8 285 13 191 4 790 -4 849 11 423 13 393 14 217 17 373 10 395 18 999 17 303
Timor-Leste 5 7 48 75 72 85c 13 - - - 694 -c
Viet Nam 12 600 14 100 15 500 16 120b 15 800b 15 660b 1 000 480 598 465b 380b 300b
South Asia 54 281 51 640 52 262 59 086 70 957 52 417 5 520 11 493 11 630 13 275 11 206 15 986
Afghanistan 94b 52b 119b 23 13b 21c 14b 11b 39b 26 37b 31c
Bangladesh 2 333 2 152 3 613 2 874 2 564 2 896 41 142 23 28 12 92
Bhutan -34 -10 7 3 1 2 .. .. .. .. .. ..
India 44 481 39 904 42 156 50 558 64 072 44 735 5 072 11 141 11 447 13 144 11 109 15 522
Iran, Islamic Republic
3 372 5 019 2 373 1 508 1 342 1 425c 104 76 75c 85c 78c 82c
of
Maldives 457b 458b 576b 956b 348b 443b .. .. .. .. .. ..
Nepal 106 198 67 185 126 196 .. .. .. .. .. ..
Pakistan 2 576 2 496 1 737 2 234 2 057 2 102 52 52 -21 -85 -45 242
Sri Lanka 897b 1 373b 1 614b 743b 434b 598b 237b 72b 68b 77b 15b 17b
West Asia 38 499 33 103 34 502 36 732 34 824 55 334 43 917 41 599 49 009 43 139 39 191 56 383
Armenia 334 253 267 101 47 379 71 29 7 -133 -27 25
Azerbaijan 4 500 2 867 1 403 1 504 507 -1 708 2 574 2 564 1 761 2 432 825 77
Bahrain 243 1 426 1 654 1 501 1 021 1 766 -880 229 111 -197 -205 64
Georgia 1 654 1 981 1 317 1 336 572 1 153 407 269 340 282 23 322
Iraq -6 256 -5 032 -4 885 -3 508 -2 859 -2 613 304 78 188 194 147 135
Jordan 1 553 2 030 955 730 760 622 3 7 -8 43 26 16
Kuwait 419 348 204 351 -142 198c 4 528 9 013 3 715 -2 696 7 988 3 631c
Lebanon 2 568 2 522 2 658 1 361 1 306 273c 1 005 1 317 631 338 10 66c
Oman 2 265 2 918 5 940 4 377 2 861 3 619c 356 2 424 715 627 536 581c
Qatar 774 986 -2 186 -2 813 -2 434 -1 093 7 902 1 695 3 523 4 450 2 730 160
Saudi Arabia 7 453 1 419 4 247 4 563 5 399 19 286 8 936 7 280 19 252 13 547 4 911 23 860
State of Palestine 297 188 252 132 80 256 45 3 31 56 59 -78
Syrian Arab Republic - - - - - - .. .. .. .. .. ..
Turkey 13 651 11 113 12 573 9 594 7 821 12 530 2 954 2 626 3 658 2 966 3 229 4 979
United Arab Emirates 9 605 10 354 10 385 17 875 19 884 20 667 15 711 14 060 15 079 21 226 18 937 22 546
Yemen -561 -270c -282c -371c - - 1c 6c 4c 3c - -
Central Asia 13 381 8 797 7 023 8 499 6 276 7 000 -5 194 1 052 -1 006 -2 589 -2 082 1 522
Kazakhstan 8 514 4 714 3 898 3 284 3 675 3 172 -5 235 913 -1 095 -2 620 -2 156 1 468
Kyrgyzstan 616 -107 144 404 -402 248 - -29 5 5 2 4
Tajikistan 345b 307b 360b 364b 107b 84b 35b 159b 82b 23b 70b 48b
Turkmenistan 2 243c 2 086c 1 997c 2 129c 1 169c 1 453c .. .. .. .. .. ..
Uzbekistan 1 663b 1 797b 625b 2 316b 1 726b 2 044 6b 9b 2b 3b 2b 3
Latin America and the
136 221 153 536 151 978 158 744 86 172 134 458 10 887 35 815 7 515 46 766 -4 664 41 770
Caribbeana
South America 90 989 103 727 103 943 110 805 50 671 88 149 9 929 31 111 -1 370 35 061 -7 706 41 411
Argentina 3 260 11 517 11 717 6 663 4 019 6 534 1 787 1 156 1 726 1 539 1 294 1 363
Bolivia, Plurinational
335 712 302 -217 -1 129 594 89 80 -84 48 -111 104
State of
Brazil 53 700 66 585 59 802 65 386 28 318 50 367 -5 901 19 040 -16 336 19 031 -12 935 23 083
Chile 12 503 4 064 10 348 15 231 9 637 12 719 7 188 2 927 6 798 9 879 2 329 12 220
Colombia 13 858 13 701 11 299 13 989 7 459 9 402 4 517 3 690 5 126 3 153 1 656 3 362
Ecuador 764 630 1 389 975 1 104 621 .. .. .. .. .. ..
Guyana 58 212 1 231 1 695 1 834 1 162c 26 - - 17 14 -c
Paraguay 505 336 156 225 120 122 .. .. .. .. .. ..
Peru 6 459 6 530 6 761 6 179 -871 5 908 1 180 538 98 983 29 188
Suriname 300 98 119 -8 0.3 -164 - - - - - -
/...

212 World Investment Report 2022 International tax reforms and sustainable investment
 Annex table 1. FDI flows, by region and economy, 2016–2021 (Concluded)
FDI inflows FDI outflows
Region/economy 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021

Uruguay -1 821 -590 -67 1 965 635 1 646 2 1 447 641 568 -339 310
Venezuela, Bolivarian
1 068 -68 886 -1 278 -456 -761c 1 041 2 234 661 -159 358 781c
Republic of
Central America 41 817 45 446 45 321 43 994 32 756 42 495 597 4 654 8 598 11 337 3 031 112
Belize 44 24 118 94 76 128 2 0.3 1 2 4 2
Costa Rica 2 204 2 778 2 487 2 812 1 763 3 196 77 126 53 117 118 86
El Salvador 347 889 826 636 280 314 -0.4 0.2 - 0.4 -1 1
Guatemala 1 174 1 130 981 976 932 3 472 209 196 201 180 149 161
Honduras 1 139 1 176 961 498 419 700 239 141 66 3 49 358
Mexico 31 173 34 131 34 090 34 411 27 934 31 621 193 3 988 8 365 10 640 2 710 -717
Nicaragua 989 1 035 838 503 747 1 220 65 65 75 59 40 14
Panama 4 745 4 282 5 019 4 063 607 1 844 -188 138 -163 337 -39 209
Caribbeana 3 416 4 364 2 715 3 945 2 745 3 814 361 49 287 368 11 247
Anguilla 115b 97b 210b 140b 61b 81b 5b -12b 31b 19b 8b -5b
Antigua and Barbuda 97b 151b 205b 128b 74b 104b 38b 12b -1b -1b -8b -9b
Aruba 28 88 110 -136 137 134 -0.4 9 5 -1 1 -2
Bahamas 1 260 901 947 611 897 360 359 151 117 148 157 279
Barbados 269 206 242 215 262 239c -194 -28 9 28 8 18c
British Virgin Islands 49 023c 39 610c 34 390c 39 103c 39 620c 39 361c 30 168c 50 904c 41 587c 44 154c 42 280c 43 217c
Cayman Islands 58 816c 15 173c 20 681c 28 165c 23 621c 25 893c 16 604c 4 079c 8 261c 31 630c 10 835c 21 232c
Curaçao 133 173 127 56 c
158 154 c
39 -145 30 11 9 6c
Dominica 42b 23b 78b 63b 22b 44b 1b -1b 0.1b 0.1b -0.4b -b
Dominican Republic 2 407 3 571 2 535 3 021 2 560 3 102 116c 27 209 -192 -99 153
Grenada 110b 156b 184b 199b 149b 144b 17b 4b 18b 21b -0.5b -6b
Haiti 105 375 105 75 23 50 - - - - - -
Jamaica 928 889 775 665 265 321 270 34 13 446 7 56
Montserrat 4b 3b 3b 2b 3b 1b .. .. .. .. .. ..
Saint Kitts and Nevis 121b 48b 40b 48b 14b 40b -3b 6b 29b 12b 4b -3b
Saint Lucia 162b 90b 46b 73b 35b 47b 12b -6b -9b 41b -39b 26b
Saint Vincent and the
80b 163b 42b 74b 31b 65b -9b 21b 7b 5b 3b 4b
Grenadines
Sint Maarten 55 64 -197 55 27 31 c
3 2 4 1 2 6c
Trinidad and Tobago -24 -471 -700 184 -103 342c -25 -12 65 114 104 37c
Oceania -9 -138 695 116 -68 139 107 102 -265 -839 -811 -160
Cook Islands 10b 2b 12b 8c 7c 8c 0.3b 0.3b 0.3b 0.3c 0.3c 0.3c
Fiji 390 386 471 321 241 401 -16 -2 -4 -36 14 35
French Polynesia -37 -75 32 14 17 21c 24 15 -28 4c -2c 1c
Kiribati 2 1 -1 -1 3 1c 0.1 0.1 0.1 0.1 0.1 0.1c
Marshall Islands -3 6 10 4 7 5c .. .. .. .. .. ..
New Caledonia -462 -410 -249 -655 -520 -494c 80 79 96 83 86 84c
Palau 36 27 22 22 24 23c - - 1 - - -
Papua New Guinea -40b -180b 306b 335b 112b 87c -b -b -341b -901b -916b -272c
Samoa 3 9 17 -2 4 9 15 0.1 - 4 2 1
Solomon Islands 39 43 25 33 9 50c 1 7 9 4 3 -11c
Tonga 9 14 15 2 4 2c 1 1 1 1 1 0.2c
Tuvalu 0.3 0.3 0.3 0.3 0.1c 0.2c .. .. .. .. .. ..
Vanuatu 44 38 37 35 25 26c 1 1 1 0.2 2 2c
Memorandum
Least developed countries
25 880 20 873 22 539 22 839 22 975 25 978 1 976 2 211 900 -1 004 1 508 -142
(LDCs)e
Landlocked developing
24 335 25 070 22 951 22 070 14 139 18 486 -1 738 3 911 1 072 753 -1 291 1 699
countries (LLDCs)f
Small island developing States
4 721 3 962 3 798 4 425 2 854 3 342 513 300 342 836 964 504
(SIDS)g
Source: UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics).
a
Excluding the financial centers in the Caribbean (Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Barbados, the British Virgin Islands, the Cayman Islands, Curaçao, Dominica,
Grenada, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Sint Maarten and the Turks and Caicos Islands).
b
Asset/liability basis.
c
Estimates.
d
Directional basis calculated from asset/liability basis.
e
Least developed countries include Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, the Central African Republic, Chad, the Comoros, the
Democratic Republic of the Congo, Djibouti, Eritrea, Ethiopia, the Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, the Lao People’s Democratic Republic, Lesotho, Liberia, Madagascar,
Malawi, Mali, Mauritania, Mozambique, Myanmar, Nepal, the Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, South Sudan, the Sudan,
Timor-Leste, Togo, Tuvalu, Uganda, the United Republic of Tanzania, Yemen and Zambia.
f
Landlocked developing countries include Afghanistan, Armenia, Azerbaijan, Bhutan, the Plurinational State of Bolivia, Botswana, Burkina Faso, Burundi, the Central African
Republic, Chad, Eswatini, Ethiopia, Kazakhstan, Kyrgyzstan, the Lao People’s Democratic Republic, Lesotho, North Macedonia, Malawi, Mali, the Republic of Moldova, Mongolia,
Nepal, the Niger, Paraguay, Rwanda, South Sudan, Tajikistan, Turkmenistan, Uganda, Uzbekistan, Zambia and Zimbabwe.
g
Small island developing States include Antigua and Barbuda, the Bahamas, Barbados, Cabo Verde, the Comoros, Dominica, Fiji, Grenada, Jamaica, Kiribati, Maldives, the Marshall
Islands, Mauritius, the Federated States of Micronesia, Nauru, Palau, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Samoa, Sao Tome and Príncipe,
Seychelles, Solomon Islands, Timor-Leste, Tonga, Trinidad and Tobago, Tuvalu and Vanuatu.

Annex tables 213

 Annex table 2. FDI stock, by region and economy, 2000, 2010 and 2021 (Millions of dollars)
FDI inward stock FDI outward stock
Region/economy 2000 2010 2021 2000 2010 2021

Worlda 7 377 201 19 907 143 45 448 812 7 408 902 20 471 257 41 798 485
Developed economies 5 860 038 13 846 108 33 119 269 6 740 421 17 568 316 33 008 670
Europe 2 491 244 8 439 157 16 441 775 3 193 644 10 264 456 17 619 059
European Union 1 882 785 5 960 396 11 590 104 1 967 112 6 988 784 13 263 759
Austria 31 165 160 615 198 359 24 821 181 638 244 472
Belgium .. 473 358 604 647 .. 431 613 691 297
Bulgaria 2 704 44 970 57 651 67 2 583 3 277
Croatia 2 785 32 215 38 898 952 4 914 6 052
Cyprus 2 846 260 132 406 435 557 242 556 413 294
Czechia 21 644 128 504 200 587 738 14 923 53 607
Denmark 73 574 96 136 154 189c 73 100 163 133 270 811c
Estonia 2 645 15 551 34 865 259 5 545 12 883
Finland 24 273 86 698 98 527 52 109 137 663 139 933
France 184 215 630 710 977 990c 365 871 1 172 994 1 544 964c
Germany 470 938 955 881 1 139 106c 483 946 1 364 565 2 141 269c
Greece 14 113 35 026 45 803 6 094 42 623 14 045
Hungary 22 870 91 015 101 698 1 280 23 612 38 705
Ireland 127 089 285 575 1 362 510c 27 925 340 114 1 273 778c
Italy 122 533 328 058 454 910 169 957 491 208 553 321
Latvia 1 691 10 869 23 744 19 931 5 928
Lithuania 2 334 15 455 29 396 29 2 647 10 828
Luxembourg .. 172 257 1 013 915 .. 187 027 1 272 822
Malta 2 263 129 770 231 446 193 60 596 66 219
Netherlands 243 733 588 077 2 576 225 305 461 968 105 3 356 858
Poland 33 477 187 602 269 225 268 16 407 27 562
Portugal 34 224 121 239 175 531 19 417 71 676 57 051
Romania 6 953 68 699 108 743 136 2 327 2 666
Slovakia 6 970 50 328 59 367 555 3 457 5 418
Slovenia 2 389 10 667 20 043 772 8 147 8 390
Spain 156 348 628 341 819 725 129 194 653 236 600 808
Sweden 93 791 352 646 386 569 123 618 394 547 447 500
Other Europe 608 459 2 478 760 4 851 671 1 226 532 3 275 672 4 355 300
Albania 247 3 255 10 074 - 154 830
Belarus 1 306 9 904 15 165 24 205 1 358
Bosnia and Herzegovina 450 6 709 9 474 - 211 679
Iceland 497 11 784 7 714 663 11 466 5 139
Moldova 449 2 897 4 780 23 90 322
Montenegro - 4 231 6 361c - - 106c
North Macedonia 540 4 351 7 248 16 100 202
Norway 30 265 177 318 150 246 34 026 188 996 198 181
Russian Federation 29 738 464 228 521 876 19 211 336 355 399 313
Serbia - 22 299 52 775 - 1 960 4 537
Switzerland 101 635 648 092 1 369 626 232 202 1 043 199 1 578 515
Ukraine 3 875 52 872 62 131 170 6 548 -295
United Kingdom 439 458 1 068 187 2 634 202 940 197 1 686 260 2 166 414
North America 3 108 255 4 406 182 15 056 860 3 136 637 5 793 476 12 098 870
Canada 325 020 983 889 1 437 837 442 623 983 889 2 285 325
United States 2 783 235 3 422 293 13 619 023 2 694 014 4 809 587 9 813 545
Other developed economies 260 539 1 000 769 1 620 634 410 140 1 510 383 3 290 741
Australia 121 686 527 728 770 258 92 508 449 740 618 855
Bermuda 265c 2 837 2 678 108c 925 114
Israel 20 426 60 086 235 593 9 091 67 893 117 645
Japan 50 323 214 880 256 966c 278 445 831 076 1 983 858c
Korea, Republic of 43 738 135 500 263 253 21 497 144 032 551 549
New Zealand 24 101 59 738 91 887 8 491 16 717 18 720
Developing economiesa 1 517 163 6 061 035 12 329 543 668 481 2 902 941 8 789 815
Africa 153 062 623 756 1 026 320 39 815 137 363 301 252
North Africa 45 590 201 109 326 091 3 199 25 770 40 050
Algeria 3 379c 19 545 33 977 205c 1 505 2 699
Egypt 19 955 73 095 137 543 655 5 448 8 848
Libya 471c 16 334 18 462c 1 903c 16 615 20 400c
/...

214 World Investment Report 2022 International tax reforms and sustainable investment
Annex table 2. FDI stock, by region and economy, 2000, 2010 and 2021 (continued)
FDI inward stock FDI outward stock
Region/economy 2000 2010 2021 2000 2010 2021

Morocco 8 842c 45 082 72 941 402c 1 914 7 438

Sudan 1 398 15 690 29 728 - - 54
Tunisia 11 545 31 364 33 440c 33 287 611c
Other Africa 107 472 422 646 700 229 36 616 111 594 261 202
West Africa 33 010 109 968 208 446 6 381 18 090 27 117
Benin 213 604 2 845 11 21 335
Burkina Faso 28 354 2 670 0.4 8 442
Cabo Verde 192c 4 745 2 453 - 2 94
Côte d'Ivoire 2 483 6 978 12 821 9 94 1 506
Gambia 216 323 915c .. .. ..
Ghana 1 554 c
10 080 41 021 - 83 1 840
Guinea 263c 486 5 088c 12c 144 96c
Guinea-Bissau 38 63 316 - 5 11
Liberia 3 247c 10 206 8 929c 2 188 4 714 4 919c
Mali 132 1 964 6 407 1 18 275
Mauritania 146c 2 372c 9 995c 4c 28c 104c
Niger 45 2 251 8 275 1 9 423
Nigeria 23 786 66 797 91 857c 4 144 12 576 13 508c
Senegal 295 1 699 10 505 22 263 1 135
Sierra Leone 284c 482 2 438c .. .. ..
Togo 87 565 1 912 -10 126 2 430
Central Africa 5 053 39 227 118 702 1 651 2 217 4 661
Burundi 47c 13 242c 2c 2 6c
Cameroon 917c 3 099c 9 781c 1 252c 971c 1 128c
Central African Republic 104 511 749c 43 - -
Chad 576c 3 594c 7 615c - - -
Congo 1 893c 9 261c 36 653c 40c 34c 132c
Congo, Democratic Republic of the 617 9 368 29 149 34 229 3 241
Equatorial Guinea 1 060c 9 413c 15 585c .. .. ..
Gabon -227 c
3 287 c
15 592c 280c 946c 79c
Rwanda 55 422 2 912 - 13 74
Sao Tome and Principe 11c 260c 426c - 21c 2c
East Africa 7 202 38 085 96 547 387 1 474 2 255
Comoros 21c 60c 142c .. .. ..
Djibouti 40b 332 -2 073 .. .. ..
Eritrea 337c 666c 1 267c .. .. ..
Ethiopia 941 4 206 31 596 .. .. ..
Kenya 932c 4 967 10 458c 115c 62 50c
Madagascar 141 4 383 8 638c 9c 193 1 020c
Mauritius 683 4 658 5 355c 132 864 711c
Seychelles 515 2 960 3 335 130 290 300
Somalia 4c 566c 4 071c .. .. ..
Uganda 807 5 575 16 605 - 66 174
United Republic of Tanzania 2 781 9 712 17 153c .. .. ..
Southern Africa 62 208 235 365 276 534 28 198 89 813 227 169
Angola 7 977 32 458 13 166 -8 1 870 2 153
Botswana 1 827 3 351 5 100 517 1 007 970
Eswatini 536 927 1 103b 87 91 172b
Lesotho 330 929 1 114 .. .. ..
Malawi 358 963 1 595c -5 45 329c
Mozambique 1 249 4 331 50 068 1 3 7
Namibia 1 276 3 595 6 348 45 722 849
South Africa 43 451 179 565b 173 056b 27 328 83 249b 220 103b
Zambia 3 966c 7 433 18 912c - 2 531 1 850c
Zimbabwe 1 238 1 814 6 073 234 297 737
Asia 1 023 690 3 872 409 9 130 113 575 247 2 348 151 7 745 454
East and South-East Asia 908 302 2 888 852 7 413 547 557 764 2 059 344 6 923 187
East Asia 650 700 1 738 193 4 275 933 473 708 1 455 117 5 089 251
China 193 348 586 882c 2 064 018c 27 768c 317 211 2 581 800
/...

Annex tables 215

 Annex table 2. FDI stock, by region and economy, 2000, 2010 and 2021 (continued)
FDI inward stock FDI outward stock
Region/economy 2000 2010 2021 2000 2010 2021

Hong Kong, China 435 417 1 067 520 2 022 195d 379 285 943 938 2 082 323d
Korea, Democratic People's Republic of 77c 236c 939c .. .. ..
Macao, China 2 801c 13 603 46 524c - 550 13 670c
Mongolia 182 8 445 26 346c - 2 616 810c
Taiwan Province of China 18 875 61 508b 115 911c 66 655 190 803b 410 648c
South-East Asia 257 603 1 150 659 3 137 614 84 056 604 228 1 833 936
Brunei Darussalam 3 868c 4 140 7 302 .. .. ..
Cambodia 1 580 9 026 41 025 193 345 1 171
Indonesia 25 060 160 735 259 268 6 940 6 672 95 636
Lao People's Democratic Republic 588c 1 888c 12 208c 26c 68c 95c
Malaysia 52 747 101 620 187 375c 15 878 96 964 134 613c
Myanmar 3 752c 14 507 37 189 .. .. ..
Philippines 13 762c 25 896 113 711c 1 032c 6 710 66 367c
Singapore 110 570 633 354b 2 007 270b 56 755 466 723b 1 346 395b
Thailand 30 944 142 334 279 140 3 232 24 418 177 044
Timor-Leste - 155 554c - 94 802c
Viet Nam 14 730c 57 004c 192 571c - 2 234c 11 813c
South Asia 30 743 269 143 656 698 2 761 100 441 214 572
Afghanistan 17c 963 1 613c - 16 165
Bangladesh 2 162 6 072 21 582 68 98 390
Bhutan 4c 204 409 .. .. ..
India 16 339 205 580 514 292 1 733 96 901 206 378
Iran, Islamic Republic of 2 597c 28 953 60 136c 411c 1 713c 4 139c
Maldives 128c 1 114c 5 996c .. .. ..
Nepal 72c 239 1 850 .. .. ..
Pakistan 6 919 19 828 32 931 489 1 362 1 979
Sri Lanka 2 505 6 190 17 891 60 351 1 522
West Asia 72 352 612 837 848 430 14 672 172 001 590 951
Armenia 513 4 405 5 631 - 150 519
Azerbaijan 1 791 7 648 31 607 1 5 790 26 692
Bahrain 5 906 15 154 33 471 1 752 7 883 19 007
Georgia 762 8 518 19 380 118 848 3 121
Iraq -48 7 965 - - 632 3 151
Jordan 3 135 21 899 37 305 44 473 697
Kuwait 608 11 884 14 799c 1 428 28 189 36 372c
Lebanon 14 233 44 285 68 905c 352 6 831 16 042c
Oman 2 577 c
14 987 40 814 c
- 2 796 12 769c
Qatar 1 912 30 549 27 534c 74 12 995 47 670c
Saudi Arabia 17 577 176 378 261 061 5 285c 26 528 151 499
State of Palestine 1 418c 2 176 2 976 - 241 332
Syrian Arab Republic 1 244 9 939 10 743c - 5 5c
Turkey 18 812 188 324 120 700 3 668 22 509 57 356
United Arab Emirates 1 069c 63 869 171 563c 1 938c 55 560 215 047c
Yemen 843 c
4 858 c
1 942 c
13 c
571 c
672c
Central Asia 12 293 101 577 211 438 49 16 365 16 745
Kazakhstan 10 078 82 648 151 953 16 16 212 15 666
Kyrgyzstan 432 1 698 4 233 33 2 610
Tajikistan 136 1 226 3 198c - - 271c
Turkmenistan 949 c
13 442 c
40 775 c
.. .. ..
Uzbekistan 698c 2 564b 11 278b - 152b 198b
Latin America and the Caribbeana 338 557 1 550 176 2 142 727 53 170 416 598 741 119
South America 186 425 1 085 366 1 310 976 43 634 288 295 532 846
Argentina 67 601 85 591 98 928 21 141 30 328 42 452
Bolivia, Plurinational State of 5 188 6 890 10 734 29 8 893
Brazil - 640 330 592 761 - 149 333 296 185
Chile 45 753 160 904 180 489 11 154 61 126 83 737
Colombia 11 157 82 991 218 928 2 989 23 717 68 804
Ecuador 6 337 11 858 21 388 .. .. ..
Guyana 756 1 784 9 107c 1 2 57c
Paraguay 1 003 3 457 6 302 .. .. ..
Peru 11 062 42 976 117 816 505 4 265 9 888
/...

216 World Investment Report 2022 International tax reforms and sustainable investment
 Annex table 2. FDI stock, by region and economy, 2000, 2010 and 2021 (concluded)
FDI inward stock FDI outward stock
Region/economy 2000 2010 2021 2000 2010 2021

Suriname - - 1 888 - - 215

Uruguay 2 088 12 479 31 448 138 345 5 707
Venezuela, Bolivarian Republic of 35 480 36 107 21 187c 7 676 19 171 24 908c
Central America 139 768 417 113 755 450 8 534 126 008 204 732
Belize 294 1 454 2 535 42 49 75
Costa Rica 2 809 15 936 53 692 22 1 135 8 039
El Salvador 1 973 7 284 10 378 104 1 5
Guatemala 3 420 4 554 21 423 93 452 1 944
Honduras 1 392 6 951 17 598 - 850 2 830
Mexico 121 691 355 512 578 792 8 273 119 967 185 268
Nicaragua 1 414 4 681 11 206 - 181 811
Panama 6 775 20 742 59 825c - 3 374 5 760c
Caribbeana 12 365 47 697 76 301 1 002 2 295 3 541
Anguilla - - 1 214b - - 124b
Antigua and Barbuda - - 1 516b - - 178b
Aruba 1 161 4 567 4 412c 675 682 658c
Bahamas 3 865 c
13 160 26 352 c
547 c
2 538 59c
Barbados 308 4 970 8 344c 41 4 058 3 843c
British Virgin Islands 30 289c 265 783c 990 238c 69 041c 376 866c 85 497c
Cayman Islands 27 316 c
161 916 c
548 337 c
21 643 c
89 316 c
344 445c
Curaçao - 527 2 045c - 32 721c
Dominica - - 526b - - 1b
Dominican Republic 1 673 18 793b 47 792b - 743b 963b
Grenada - - 1 841b - - 109b
Haiti 95 625 2 001 - - -
Jamaica 3 317 10 855 17 814 709 176 1 076
Montserrat - - 38b .. .. ..
Saint Kitts and Nevis - - 1 636b - - 101b
Saint Lucia - - 1 685b - - 629b
Saint Vincent and the Grenadines - - 1 412b - - 99b
Sint Maarten - 256 173c - 10 106c
Trinidad and Tobago 7 280c 17 424c 8 694c 293c 2 119c 1 502c
Oceania 1 854 14 694 30 384 249 828 1 989
Cook Islands - - 131c - - 14c
Fiji 356 2 963 5 908 39 47 103
French Polynesia 146c 442c 1 120c - 144c 348c
Kiribati - 5 13c - 2 1c
Marshall Islands 20 120 218c .. .. ..
Micronesia, Federated States of - 7 235c - - 5c
New Caledonia -41c 5 726c 16 211c 2c 304c 1 130c
Palau 173 232 511c .. .. ..
Papua New Guinea 935 3 748 3 887c 194c 209c 135c
Samoa 77 220 327 - 14 53
Solomon Islands 106c 552 651c - 27 60c
Tonga 19c 220c 471c 14c 58c 111c
Tuvalu - 5 9c .. .. ..
Vanuatu 61c 454 692c - 23 30c
Memorandum
Least developed countries (LDCs)e 35 974 161 938 414 411 2 604 11 528 22 434
Landlocked developing countries (LLDCs)f 33 630 177 269 431 130 1 025 29 288 51 892
Small island developing States (SIDS)g 17 133 65 139 97 115 1 906 10 332 9 873

Source: UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics).

a
Excluding the financial centers in the Caribbean (Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Barbados, the British Virgin Islands, the Cayman Islands, Curaçao, Dominica,
Grenada, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Sint Maarten and the Turks and Caicos Islands).
b
Asset/liability basis.
c
Estimates.
d
Directional basis calculated from asset/liability basis.
e
Least developed countries include Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, the Central African Republic, Chad, the Comoros, the
Democratic Republic of the Congo, Djibouti, Eritrea, Ethiopia, the Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, the Lao People’s Democratic Republic, Lesotho, Liberia, Madagascar,
Malawi, Mali, Mauritania, Mozambique, Myanmar, Nepal, the Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, South Sudan, the Sudan,
Timor-Leste, Togo, Tuvalu, Uganda, the United Republic of Tanzania, Yemen and Zambia.
f
Landlocked developing countries include Afghanistan, Armenia, Azerbaijan, Bhutan, the Plurinational State of Bolivia, Botswana, Burkina Faso, Burundi, the Central African
Republic, Chad, Eswatini, Ethiopia, Kazakhstan, Kyrgyzstan, the Lao People’s Democratic Republic, Lesotho, North Macedonia, Malawi, Mali, the Republic of Moldova, Mongolia,
Nepal, the Niger, Paraguay, Rwanda, South Sudan, Tajikistan, Turkmenistan, Uganda, Uzbekistan, Zambia and Zimbabwe.
g
Small island developing States include Antigua and Barbuda, the Bahamas, Barbados, Cabo Verde, the Comoros, Dominica, Fiji, Grenada, Jamaica, Kiribati, Maldives, the Marshall
Islands, Mauritius, the Federated States of Micronesia, Nauru, Palau, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Samoa, Sao Tome and Príncipe,
Seychelles, Solomon Islands, Timor-Leste, Tonga, Trinidad and Tobago, Tuvalu and Vanuatu.

Annex tables 217

 EXPLANATORY
NOTES

The terms country and economy as used in this report also refer, as appropriate, to territories
or areas; the designations employed and the presentation of the material do not imply the
expression of any opinion whatsoever on the part of the Secretariat of the United Nations
concerning the legal status of any country, territory, city or area or of its authorities, or
concerning the delimitation of its frontiers or boundaries. In addition, the designations
of country groups are intended solely for statistical or analytical convenience and do not
necessarily express a judgment about the stage of development reached by a particular
country or area in the development process. The major country groupings used in this report
follow the classification of the United Nations Statistical Office:
• Developed economies: the member countries of the OECD (other than Chile, Colombia,
Costa Rica, Mexico and Turkey), plus the new European Union member countries that are
not OECD members (Bulgaria, Croatia, Cyprus, Malta and Romania), plus Albania, Andorra,
Belarus, Bermuda, Bosnia and Herzegovina, Liechtenstein, the Republic of Moldova,
Monaco, Montenegro, North Macedonia, the Russian Federation, San Marino, Serbia and
Ukraine plus the territories of Faeroe Islands, Gibraltar, Greenland, Guernsey and Jersey.
• Developing economies: in general, all economies not specified above. For statistical
purposes, the data for China do not include those for Hong Kong Special Administrative
Region (Hong Kong SAR), Macao Special Administrative Region (Macao SAR) or Taiwan
Province of China.
Methodological details on FDI and MNE statistics can be found on the report website
(unctad/diae/wir).
Reference to companies and their activities should not be construed as an endorsement by
UNCTAD of those companies or their activities.
The following symbols have been used in the tables:
• Two dots (..) indicate that data are not available or are not separately reported. Rows
in tables have been omitted in those cases where no data are available for any of the
elements in the row.
• A dash (–) indicates that the item is equal to zero or its value is negligible.
• A blank in a table indicates that the item is not applicable, unless otherwise indicated.
• A slash (/) between dates representing years, e.g., 2020/21, indicates a financial year.
• Use of a dash (–) between dates representing years, e.g., 2020–2021, signifies the full
period involved, including the beginning and end years.
• Reference to “dollars” ($) means United States dollars, unless otherwise indicated.
Annual rates of growth or change, unless otherwise stated, refer to annual compound rates.
Details and percentages in tables do not necessarily add to totals because of rounding.

218 World Investment Report 2022 International tax reforms and sustainable investment
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