As global foreign direct investments (FDIs) continue to stagnate, policymakers should look at revising their traditional strategies for economic development to focus on policies that attract FDIs and promote investment in Sustainable Development Goals (SDGs), according to a new United Nations report.
The UN Conference on Trade and Development (UNCTAD) launched on April 23, 2024 a report on global FDI trends and development, which has found that FDI growth has stagnated amidst the rise in protectionism, geopolitical risks and investor caution.
Among the key findings of the paper is how the growth of FDI and global value chains (GVCs) 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 an annual average of 3.4% and 4.2% respectively, even amidst rising trade tensions. By contrast, FDI growth has stagnated by nearly 0%.
“This lag reflects increased investor caution as a result of shifts in international production and GVCs, rising protectionism and growing geopolitical tensions. It highlights the vulnerability of developing economies that are dependent on FDI,” said the report.
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%, said the report entitled “Global Economic Fracturing and Shifting Investment Patterns.”
Moreover, services-related investment within manufacturing industries nearly doubled to about 70%, driven by technological advances.
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, said the research.
The good news is that investments in environmental technologies like wind and solar energy have surged, it added. Their share of total greenfield projects in non-services sectors jumped from 1% in the early 2000s to 20% by 2023.
FDI in the manufacturing of electric vehicles and batteries has likewise seen a 27% annual growth over the past decade.
“The sustainability imperative and the drive to stimulate investment in the Sustainable Development Goals (SDGs) have opened new opportunities for investment-driven industrial development, particularly in environmental technologies,” said the report. “However, these new opportunities can only compensate in part for the lack of FDI growth in other industrial sectors.”
This necessitates a re-evaluation of traditional strategies to harness FDI for inclusive and sustainable development, the report said.
To mitigate the effects of shifts in GVC investment patterns and the decline of FDI across most manufacturing sectors, the paper suggests that policymakers in developing economies focus on exceptions to the general trend and on industries and activities that are less vulnerable to the whims of GVC movements.
It also recommends that developing countries consolidate links with neighboring countries and cooperate at the regional level to strengthen regional value chains.
These nations are also advised to promote investments in sustainable and green technologies as well as in other sectors driven by the sustainability imperative and policy considerations.
The report noted, for example, how the local production of pharmaceuticals is gaining increased attention from policymakers in developing countries and from special economic zone authorities aiming to stimulate cluster development by involving both international producers and local small and medium enterprises to service local and regional markets.
“The drivers of growth are health policy considerations rather than international production logic, potentially making the activity relatively immune to the general trend,” said the report.
