UN trade body hints at better 2024 for FDI

The outlook for foreign direct investment in the latest UN Trade & Development report is bleak, but there are reasons for optimism, finds Courtney Fingar.

The hoped-for post-pandemic foreign direct investment (FDI) recovery remains elusive, it would appear.

In 2023, global FDI flows declined by 2%, to $1.3 trillion, primarily driven by trade and geopolitical tensions amid a slowing global economy. This insight from the World Investment Report 2024 by UN Trade & Development (UNCTAD) sheds a somewhat depressing light on the fragile state of global investment.

In fact, the situation is worse than this modest decline suggests. If a handful of key conduit economies in Europe are stripped out, the global drop would be more than 10% – a dire state for FDI indeed. This further highlights the volatility of the current investment landscape and the disproportionate influence of specific regions.

Economic crises, protectionist policies and regional realignments are fragmenting trade networks, regulatory environments, and supply chains. Such disruptions create a complex mix of challenges and isolated opportunities for investors.

Geoeconomic fragmentation is also accentuating divides between the haves and have-nots of FDI destinations, creating obstacles for some nations while presenting opportunities for others, especially in value chain-intensive manufacturing sectors like automotive and electronics.

To add to these concerns, developing countries experienced a 7% decline in FDI to $867 billion in 2023. FDI inflows to Africa in particular decreased by 3%, highlighting ongoing challenges in attracting sustained investment, despite the continent’s massive potential.

There are some bright spots, however. FDI inflows to structurally weak and vulnerable economies increased, reaching $31 billion. This rise, though concentrated in a few countries, signals potential areas for growth and development.

FDI growth in 2024?

And despite the report’s bleak outlook for 2023, it also hints at the possibility of FDI growth for 2024, driven by easing financial conditions and efforts to facilitate investment through national policies and international agreements. Increased greenfield project announcements in 2023, coupled with high multinational enterprise profit levels, could positively impact FDI flows going forward.

There is no denying the international investment environment remains fraught with challenges. Yet, for countries that can find their place in the shifting global value chains (GVCs) and adapt their investment promotion strategies to suit the changed times, new strategic investments and international collaborations may emerge.

As trade networks and supply chains undergo reconfiguration due to geopolitical shifts and technological advances, countries and companies can capitalise on new investment flows and partnerships. For instance, regions with easy access to major markets and strong manufacturing capabilities are poised to attract increased FDI in sectors such as automotive and electronics.

Indeed, greenfield investment project announcements in developing countries, rose by 15% 2023. This suggests a potential pivot towards manufacturing sectors in developing regions, a necessary shift for these economies to integrate into global production networks.

Technological innovation is also driving change, enabling businesses to enhance efficiency and reduce costs through digitalisation and automation. Countries investing in advanced manufacturing technologies, like robotics and artificial intelligence, can become pivotal players in the new global value chains, attracting investment and lifting economic growth.

Green investment opportunities

Moreover, the shift towards sustainable and resilient supply chains offers opportunities for green investments. Nations focusing on renewable energy, circular economies, and sustainable practices can draw significant investment as companies seek to meet global sustainability standards and reduce their carbon footprints.

These changes also encourage diversification, allowing smaller and developing economies to integrate into global production networks. By improving infrastructure, enhancing regulatory frameworks, and investing in human capital, these countries can attract foreign investors looking to diversify their supply bases and mitigate risks associated with geopolitical tensions.

As GVCs continue to evolve, countries that can adapt and innovate stand to benefit from new investment opportunities and sustaining foreign investments and in doing so fostering a more inclusive and resilient global economy.

Courtney Fingar is the founding partner of Fingar Direct Investment and editor of RealFDI.