Global crises fracturing foreign investment, impacting developing economies
Global value chains and geopolitical dynamics are affecting foreign direct Investments as well as impacting on developing economies, UN Trade and Development (UNCTAD) has said.
In a report titled “patterns” released Tuesday, the UN Agency stated that FDIs’ growth and global value chains (GVCs) no longer aligned with Gross Domestic Product and trade growth, indicating a significant shift in the global economy.
According to the report, since 2010, global GDP and trade have continued to expand at an annual average of 3.4 per cent and 4.2 per cent respectively, even amidst rising trade tensions.
The report noted, “By contrast, FDI growth has stagnated near 0%, in the midst of rising protectionism, growing geopolitical tensions and increased investor caution.
“Additionally, 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 annual 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.
“Finally, the report highlights that the geography of global FDI has been significantly re-shaped by China’s reduced role as a recipient country.
“Multinational corporations have shown diminishing enthusiasm for launching new investments in China. However, 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
UN Trade and Development (formerly known as UNCTAD) which is dedicated to promoting inclusive and sustainable development through trade and investment, notes in the report that the transition from divergence to fracturing in global investment patterns emerges as a key concern.
According to the agency, recent global conflicts and crises have disrupted usual investment patterns, leading to unstable investment relationships and limited chances to benefit from strategic diversification.
The UN body noted 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.
Smaller developing countries increasingly bypassed
Despite progress toward sustainability and the Sustainable Development Goals, the report noted 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.
“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,” it stressed.
It stated that the narrowing focus of FDIs, 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.
Call to bridge investment gaps
In response to the pressing need to bridge investment disparities across sectors and regions, the UN Agency says there is a pressing need to ensure the benefits of investment are distributed more equitably and at the same time align with overarching developmental objectives.
The UN body recommended that “developing countries should revise their economic development strategies; highlight the importance of policies that attract and make the most of FDI, promoting investment in Sustainable Development Goals; as well as urging global policymakers, business leaders, and development agencies to enhance collaboration at global and regional level and work towards a more open and fairer global investment environment.”
