Changing Foreign Direct Investment Dynamics and Policy Responses

December 20, 2023

White Paper for Japan’s G7 Presidency

A new report from the World Bank Group focuses on the trends in foreign di­rect investment (FDI), which encompasses foreign investment in new or existing firms and production facilities. FDI is a subset of overall capital flows, but it is perhaps the most critical because of its potential development impact and stability relative to other cross-border capital flows.

Foreign capital flows to developing countries fell to an estimated $662 billion in 2022 from an aver­age of over $1 trillion in the decade preceding the COVID-19 pandemic. Declining investment flows to developing markets largely reflect weaker macroeconomic prospects, geopo­litical tensions, as well as the lasting impact of the COVID-19 pandemic.

The trend is also linked to the ongoing process of shifting global value chains and the trans­formation of investment in terms of modes of en­try, sources, and sectors, among other dimensions. Growing climate change impacts, rising interest rates, and policy changes in advanced countries—such as incentives for green investments and local­ization of supply chains for key technologies—have also had far-reaching implications for the allocation of investment across the globe.

The study seeks to provide a granular analysis of shifts in foreign direct investment flows and policy trends and suggests responses that develop­ing countries may consider in order to reverse recent declines and to enable more private capital to support their development needs.