Subdued FDI is another sign of ‘slowbalisation’: Research
The recent slowdown in global foreign direct investment (FDI) is another manifestation of the rapid globalisation of recent decades giving way to ‘slowbalisation’, according to a report from Oxford Economics.
FDI has declined significantly in recent years, reversing the steady growth observed from 1990 to 2016, when FDI rose by an average of 13% annually. The downturn has brought FDI to around 1% of global GDP, just half of the 2% share it held between 2005 and 2016, the report highlights based on data from UN Trade & Development analysed by Oxford Economics.
The declining figures reflect broader trends in so-called slowbalisation, a shift away from the rapid globalisation that defined previous decades. The factors contributing to this decline include rising barriers to trade and investment, a slump in mergers and acquisitions, and shifting industrial policies, particularly as countries reorient their strategies to promote self-reliance.
“Weaker FDI is part of a story that involves weaker trade, higher barriers to both trade and investment linked to geopolitics, and changes in policymakers’ attitudes to open trade as an engine of growth,” the report states. “Not all the factors behind the recent weakening of FDI are necessarily negatives for growth, but the general process of slowbalisation, of which weaker FDI is part, is. And the evidence suggests middle-income emerging economies might be the biggest losers.”
One of the most significant shifts is in greenfield FDI, which has seen a recent uptick, particularly in the US and parts of Asia outside of China. This movement suggests that US.industrial policies aimed at reshoring production may be having an effect, although data on US manufacturing investments shows only modest growth. Meanwhile, FDI inflows to China have dropped drastically, from over $100 billion per quarter in early 2022 to virtually zero by mid-2024. While most existing investors are maintaining operations in China, the country is becoming less attractive for new FDI, likely due to geopolitical tensions and regulatory barriers.
The decline in FDI is not solely due to political factors; higher interest rates have also made cross-border acquisitions more costly, contributing to the second-lowest M&A activity levels since 1996. Additionally, global production appears to be less fragmented, as companies prioritize resilience over complex international supply chains. These shifts are impacting growth potential, especially in middle-income emerging markets, which typically benefit most from FDI inflows.
While greenfield projects provide a glimmer of optimism, the broader picture of FDI reflects slowbalisation, with implications for world growth, particularly for economies reliant on international investment. The UN and OECD have adjusted FDI data to remove flows into tax havens and special purpose entities, but even these refined metrics underscore the overall decline. According to analysts, this downward trend in FDI indicates a global pivot towards more regionalised investment strategies and a cautious approach to cross-border partnerships.
