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Guest Article: Buckle up, investors: the FDI market is in for a rough ride

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8 November 2023

Written by
Courtney Fingar

Courtney Fingar is principal of Fingar Direct Investment, which advises governments globally on the attraction of inward investment and private-sector clients on strategic communications. She formerly ran the Financial Times’ specialist publication on FDI as part of her 20-plus year career in journalism.

The global environment for foreign direct investment (FDI) has been volatile for some time now with jagged-looking graphs of investment flows to show for it and the recent flare-up of violence in the Middle East will not help calm jittery investor nerves.

Geopolitical tensions, rising inflation, fears of a recession and turbulence in financial markets has been damaging investor confidence and slowing down or delaying corporate expansion plans for the past year or more. FDI volumes fell -12% in 2022, according to the World Investment Report 2023 released in June by the United Nations Conference on Trade and Development (UNCTAD) although it was a smaller decline than had previously been feared.

The decline was mainly a result of lower volumes of financial flows and transactions in developed countries. Real investment trends were more positive, with growth in new investment project announcements in most regions and sectors. FDI in developing countries increased marginally. Major disparities in global investment patterns remains, with a reported growth of investment in developing countries being concentrated in a small number of large emerging economies. FDI flows to many smaller developing countries are stagnant, while flows to the least developed countries fell by 16% from an already low base, according to the report.

Industry trends showed increasing project numbers in infrastructure and industries that face supply chain restructuring pressures, including electronics, automotive and machinery. Three of the five largest investment projects were announced in semiconductors, in response to global chip shortages. Investment in digital economy sectors slowed after the boom in 2020 and 2021. Investment project
numbers in energy remained stable.

Unfortunately, UNCTAD expects the tough times to continue for FDI. Its 2023 forecast reads: “Negative or slow growth in many economies, further deteriorating finance conditions, investor uncertainty in the face of multiple crises and, especially in developing countries, increasing risks associated with debt levels will put downward pressure on FDI.”

Meanwhile, geo-economic fragmentation (caused by supply chain disruptions and geopolitical dramas) is reshaping the geography of FDI. Investment flows are increasingly concentrated among geopolitically aligned countries. For example, trade and investment flows between China and the US, and between China and Europe, have declined while US investment has increased in allied countries such as Colombia and India.

As the world becomes increasingly divided, so too is the world of FDI, and investment promoters will have to be aware of and be able to navigate these complex geopolitical waters. Developing economies are particularly vulnerable to

FDI relocation, given their reliance on FDI from geopolitically distant countries and heighten restrictions from advanced economies. Unhelpfully, trade and investment protectionism is still on the rise. Restrictions on investment experienced the greatest increase in 2022, reaching 239 last year — more than four times that imposed in 2021, according to the International Monetary Fund (IMF). The number of unilateral restrictions imposed by countries on cross-border trade and investment has grown massively over the past decade, reversing the general trend of liberalisation seen during most of the 20th century.

However, as to how to cope with FDI geo-fragmentation, the IMF recommends the opposite approach: more open doors than closed ones, and greater cooperation instead of alienation. It also calls for locations to bolster their competitiveness as a bulwark against the negative global dynamics. “Multilateral efforts to preserve global integration are the best way to reduce the large and widespread economic costs of FDI fragmentation,” reads the IMF’s World Economic Outlook.

So which investment locations will be able to succeed in today’s fast-changing and not entirely favourable FDI landscape? In short, it will be the ones that can stay out in front of the macro trends that are shaping the investment world and leverage them to their benefit, and that have competitive advantage in industries of the future such as artificial intelligence, electric vehicles, Industry 4.0 and renewables.

Successful locations of the future will keep a firm eye on quality, have clear metrics as to what that means, and target potential investors accordingly. They will also work to strengthen their international trade and investment ties, remove barriers that stifle them, and think carefully about their positions in the new global value chains. They will burnish their competitiveness and credentials in the industries that will drive future FDI flows, and most importantly be ready and able to adapt their strategies and organisational structures to meet the needs of the FDI market as it is and as it will become.