Amid the complex landscape of global foreign direct investment (FDI), the United Nations Conference on Trade and Development (Unctad) has called for innovative investment strategies to foster inclusive and sustainable economic growth.

In its report titled ‘Global Economic Fracturing and Shifting Investment Patterns’, the agency points to key FDI trends that have evolved over the past two decades.

Firstly, it argues that the growth of FDI and global value chains is no longer aligned with gross domestic product (GDP) and trade growth, indicating a significant shift in the global economy.

Since 2010, global GDP and trade have continued to expand at a yearly average of 3.4% and 4.2% respectively, even amid rising trade tensions.

By contrast, FDI growth has stagnated near 0% in the midst of rising protectionism, growing geopolitical tensions and increased investor caution.

Additionally, Unctad points out that there is a growing gap between the manufacturing and services sectors, with investments increasingly leaning towards services.

From 2004 to 2023, the share of cross-border greenfield projects in the services sector grew from 66% to 81%.

Simultaneously, FDI in manufacturing was stagnating for two decades before going down significantly, with a negative compound yearly growth rate of -12% in the three years after the outbreak of the Covid-19 pandemic.

“The decline in manufacturing has severely impacted smaller economies, hindering their ability to participate in global production, upgrade production methods and adopt new technologies,” it says.

Finally, the report highlights that the geography of global FDI has been significantly reshaped by China’s reduced role as a recipient country, noting that multinational corporations have shown diminishing enthusiasm for launching new investments in China.

However, it posits that the country still holds a dominant position in global manufacturing and trade, which signifies a transformation in its international production model.

FROM DIVERGENCE TO FRACTURING

The transition from divergence to fracturing in global investment patterns emerges as a key concern, says Unctad.

It notes that recent global conflicts and crises have disrupted usual investment patterns, leading to unstable investment relationships and limited chances to benefit from strategic diversification.

The report cautions that investment decisions are now more frequently influenced by geopolitical factors, at times overriding economic determinants, complicating standard approaches to investment promotion and hindering FDI-based development.

Despite progress toward sustainability and the Sustainable Development Goals, Unctad argues that the impacts on developing nations are mixed.

“The growing trend of FDI to environmental technologies offers new opportunities but fails to fully address the slowdown in other industries, specially affecting developing and least developed countries, increasing the vulnerability of their economies.”

It adds that the expansion of the services sector mainly benefits larger developing economies that can effectively compete, creating an imbalance that leaves smaller ones at a disadvantage, accentuating disparities and underscoring the need for policies that provide all developing countries equal opportunities.

“The narrowing focus of FDI, both geographically and sectorally, sidelines smaller and less developed nations, heightening their economic fragility. Furthermore, traditional reliance on manufacturing investments no longer guarantees sustained growth and economic development.”

In response to the need to bridge investment disparities across sectors and regions, Unctad is calling for immediate action to ensure that the benefits of investment are distributed more equitably and aligned with overarching developmental objectives.

Policy recommendations from Unctad include urging developing countries to revise their economic development strategies; highlighting the importance of policies that attract and make the most of FDI, promoting investment in sustainable development goals; and calling on global policymakers, business leaders, and development agencies to enhance collaboration at the global and regional levels and to work towards a more open and fairer global investment environment.