FDI to developing nations hits lowest level since 2005

Foreign Direct Investment (FDI) has long been recognized as a powerful engine for economic growth, job creation, and technological advancement in developing economies. However, new research from the World Bank paints a concerning picture: FDI flows to low- and middle-income countries have plummeted to their lowest levels since 2005. This alarming decline reflects a troubling global trend marked by a palpable rise in barriers to cross-border trade and investment, raising serious questions about the ability of these nations to finance crucial development initiatives and foster sustainable economic progress.

The Alarming Decline: A Closer Look at the Numbers

The stark figures presented by the World Bank reveal a significant setback. In 2023, developing economies collectively attracted a mere US $ 435 billion in FDI. This performance marks the weakest showing in nearly two decades, signaling a profound shift in global investment patterns. The downturn is not isolated to developing nations; it is part of a broader global slowdown affecting all economies. High-income economies also witnessed a substantial drop, with inflows falling to US$336 billion, a level not seen since 1996.

When viewed as a share of Gross Domestic Product (GDP), the decline becomes even more striking. FDI inflows to developing countries stood at a meager 2.3% of their GDP last year, roughly half the peak level recorded in 2008, a period often characterized by robust global capital flows. This metric is particularly significant as it indicates how much foreign investment is contributing relative to the size of a country’s economy. A lower percentage suggests less integration into global value chains and reduced access to external capital for domestic development.

Further analysis of global investment trends underscores the depth of this retreat. While global FDI ostensibly rose by 1% in 2024 compared to 2023 (reaching an estimated US$1.4 trillion), this figure is misleading. When excluding the large, often temporary, financial flows routed through European conduit economies (such as Ireland, Luxembourg, and the Netherlands, which often serve as transfer points before investments reach their final destinations), global FDI actually fell by 9%. This adjusted figure provides a more accurate reflection of the underlying weakness in cross-border investment activity. The phenomenon of “conduit economies” can inflate headline FDI figures, masking real declines in productive investments.

The impact of this slowdown is particularly acute for sectors crucial to achieving the Sustainable Development Goals (SDGs). Investments in SDG-related sectors globally dropped by 11% in 2024, with fewer projects in vital areas such as agri-food systems, infrastructure, and water and sanitation compared to 2015, when the goals were officially adopted. This suggests that the decline in FDI is not merely a financial statistic but a direct impediment to global efforts aimed at poverty reduction, improving health, providing clean energy, and building resilient infrastructure.

Moreover, the World Bank’s data highlights a troubling concentration of FDI. Between 2012 and 2023, nearly two-thirds of all FDI flows to developing economies were directed to just 10 countries. China alone accounted for almost one-third of these inflows, with Brazil and India receiving approximately 10% and 6% respectively. In stark contrast, the 26 poorest countries received a paltry 2% of the total FDI, underscoring a widening investment gap that exacerbates existing inequalities and development challenges. This concentration means that the benefits of FDI are not evenly distributed, leaving many nations struggling to attract the capital needed for their progress.

The Soaring Debt Burden and the Investment Paradox

Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President, issued a stern warning about this slump, particularly as it coincides with a global surge in public debt. “It’s not a coincidence that FDI is plumbing new lows at the same time that public debt is reaching record highs,” he stated. This observation points to a critical paradox: as governments find themselves with increasingly stretched public finances and record debt levels, their capacity to fund essential public services, infrastructure, and social programs diminishes. In such an environment, private investment, especially FDI, becomes even more indispensable as a source of capital, technology, and expertise to power economic growth.

However, Gill lamented that “governments have been busy erecting barriers to investment and trade when they should be deliberately taking them down. They will have to ditch that bad habit.” This sentiment encapsulates a core tension in global economic policy. In an era marked by heightened geopolitical tensions, supply chain disruptions, and a renewed focus on domestic industrial policies, many countries have resorted to protectionist measures. While ostensibly aimed at safeguarding national interests or promoting local industries, these policies often inadvertently deter foreign investment, creating a self-defeating cycle where the very capital needed for growth is pushed away. The rising global economic policy uncertainty and geopolitical risk have indeed soared to their highest levels since the turn of the century, exacerbating investor hesitability.

The Seville Summit: A Crucial Dialogue for Global Development Finance

Against this backdrop, global leaders, policymakers, development experts, and private sector representatives are set to convene in Seville, Spain, from June 30 to July 3. This gathering, the Fourth International Conference on Financing for Development (FfD4), holds immense significance. Its primary objective is to chart a clear path towards mobilizing the financing needed to achieve critical global and national development goals, particularly the SDGs, which are already off track.

The World Bank’s latest analysis, with its sobering insights into the FDI drought, will serve as a foundational document for these discussions. The emphasis will be squarely on unlocking private capital, especially FDI, as official development assistance (foreign aid) is in retreat, and public finances worldwide are under severe strain. In 2024, official development assistance (ODA) reportedly fell by 7.1%, the first decline in years, a trend expected to accelerate as donor countries grapple with their own economic challenges and competing priorities. This makes the mobilization of private finance, particularly FDI, an absolute imperative for filling widening financing gaps in the poorest and least-developed countries, estimated at 15% to 30% of their GDP.

The Seville conference is expected to explore strategies that shift from simply “financing for development” to “financing from development.” This latter concept emphasizes economic growth as a means to mobilize additional domestic resources, whether through promoting capital markets, expanding the tax base, or increasing and diversifying export earnings. It also means creating a policy environment where private capital is not just attracted but effectively deployed to generate broad-based development outcomes.

Erecting Barriers: A Deeper Look at the Obstacles

The World Bank report unequivocally points to “rising barriers to trade and investment” as a primary driver of the FDI decline. Understanding these obstacles is crucial for formulating effective countermeasures.

Investment Restrictions: A Growing Impediment

The report reveals that investment restrictions in developing economies have reached their highest levels since 2010. Alarmingly, in the first half of 2025 alone, half of all announced FDI-related policy measures globally were restrictive. These restrictions come in various forms, often implemented under the guise of protecting national interests or strategic industries:

• Limits on Foreign Ownership: Many countries impose caps or outright prohibitions on foreign equity participation in certain sectors (e.g., telecommunications, finance, defense, media), limiting the scope and scale of foreign investment.
• Complex Licensing and Approval Processes: Onerous bureaucratic procedures, opaque regulatory frameworks, and lengthy approval times can significantly deter potential investors, increasing the cost and uncertainty of doing business.
• Performance Requirements: Some host countries mandate foreign investors to meet certain conditions, such as local content requirements (e.g., using a specified percentage of domestically produced goods or services), technology transfer obligations, or export quotas. While intended to foster local development, these can be burdensome and reduce the attractiveness of the investment.
• Restrictions on Profit Repatriation: Limitations on the ability of foreign companies to freely convert and repatriate profits to their home countries can be a major disincentive, as investors seek fluidity in their returns.
• National Security Reviews: An increasing trend, particularly in advanced economies, involves scrutinizing foreign investments for potential national security risks. While legitimate in principle, these reviews can become broad and unpredictable, leading to delays or outright rejections based on vague criteria.

These types of restrictions increase the cost, complexity, and risk of foreign investment, making domestic markets less attractive compared to more open economies.

The Dwindling Promise of Bilateral Investment Treaties (BITs)

The study highlights that bilateral investment treaties (BITs) have historically been effective in boosting FDI flows between signatory countries, potentially by more than 40%. BITs are international agreements between two countries that establish the terms and conditions for private investment by nationals and companies of one state in the other. Their primary purpose is to protect foreign investments from certain risks (e.g., expropriation without compensation, discriminatory treatment) and provide mechanisms for investor-state dispute settlement (ISDS) through international arbitration.

However, the number of new BITs coming into force has drastically dwindled, with just 380 signed between 2010 and 2024 – a mere third of the total signed in the 1990s. This decline is attributed to several factors:

• Concerns over State Sovereignty and ISDS: Many countries, particularly developing ones, have grown wary of the ISDS mechanism within BITs. They argue that ISDS allows foreign investors to challenge domestic public policies (e.g., environmental regulations, health measures) through international arbitration, potentially infringing on national sovereignty and incurring significant legal costs. Some studies even suggest that terminating BITs has not negatively affected investment inflows, casting doubt on their effectiveness.
• Shift Towards Regionalism: There’s a growing trend towards larger, regional investment agreements and trade blocs that include investment provisions, rather than purely bilateral treaties. Organizations like UNCTAD predict that international investment agreements will be increasingly driven by regionalism, encompassing more countries together.
• Focus on Domestic Legal Systems: Some countries, especially those with maturing legal systems, argue that well-functioning domestic courts and legal frameworks can provide sufficient protection for investors, reducing the perceived need for international treaties.

The retreat from BITs removes a layer of legal certainty and investor protection that many foreign investors value, contributing to hesitancy in committing capital to unfamiliar markets.

The Slowdown in Trade Openness: A Double Whammy

Trade openness is strongly linked to FDI inflows. The World Bank report finds that each percentage-point increase in a country’s trade-to-GDP ratio leads to a 0.6% rise in FDI. This is because trade openness facilitates access to larger markets, enables integration into global supply chains, and can signal a more business-friendly environment. Foreign investors are often looking for access to new markets for their goods and services, and trade agreements provide the necessary framework for this.

Yet, here too, momentum has slowed significantly. The average number of new trade agreements per year fell from 11 in the 2010s to just six in the current decade. This deceleration can be attributed to:

• Rising Protectionism and Nationalism: A global resurgence of protectionist sentiments has led many countries to prioritize domestic industries, impose tariffs, and erect non-tariff barriers, hindering the free flow of goods and services.
• Geopolitical Fracturing and Supply Chain Reconfiguration: Geopolitical tensions have prompted companies and governments to “de-risk” or “friend-shore” supply chains, often leading to a focus on domestic or politically aligned production, rather than the most economically efficient locations. This can divert FDI away from previously attractive developing economies.
• Difficulties in Multilateral Negotiations: The complexity and political sensitivities involved in negotiating comprehensive trade agreements have made new deals harder to achieve at both bilateral and multilateral levels.

This slowdown in trade openness creates a “double whammy” for FDI: it directly reduces the attractiveness of certain markets by limiting trade opportunities, and it reflects a broader policy environment that is less welcoming to global economic integration.

The Transformative Power of FDI: Beyond Capital

Despite the challenges, FDI remains a crucial source of external finance for developing economies, accounting for around half of all such inflows in 2023. Its growth impact is significant and extends far beyond a mere capital injection. The World Bank’s analysis of 74 developing countries from 1995 to 2019 suggests that a 10% increase in FDI can raise real GDP by 0.3% within three years. This effect is even more pronounced—up to 0.8%—in countries that possess certain enabling conditions.

FDI contributes to economic growth through several key channels:

• Technology Transfer and Knowledge Spillovers: Foreign firms often bring advanced technologies, production processes, management techniques, and organizational know-how. This can lead to spillovers that benefit local industries, improving their productivity and competitiveness.
• Job Creation and Human Capital Development: FDI directly creates jobs within the foreign-owned enterprise. Moreover, it often leads to indirect job creation in local supplier industries and through increased demand for goods and services. Crucially, foreign companies frequently invest in training and upskilling their local workforce, thereby enhancing the overall human capital of the host country. This transfer of skills and knowledge can have a lasting positive impact on labor productivity and innovation.
• Access to Global Markets and Supply Chains: Foreign investors can provide local firms with access to international markets and integrate them into global value chains, boosting exports and diversifying the local economy.
• Increased Competition and Productivity: The entry of foreign firms can stimulate competition within domestic markets, pushing local companies to become more efficient, innovative, and customer-focused, ultimately benefiting consumers and driving overall economic growth.
• Improved Infrastructure: Large FDI projects, particularly in sectors like manufacturing or services, often necessitate improvements in local infrastructure (e.g., roads, power, telecommunications), which can yield broader benefits for the economy.

The World Bank report emphasizes that the positive growth impact of FDI is significantly amplified in countries with:

• Strong Institutions: A robust legal framework, effective enforcement of contracts, protection of property rights, transparent governance, and a commitment to combating corruption are paramount. These factors reduce political and regulatory risks for investors, fostering a predictable and fair business environment.
• Robust Human Capital: An educated and skilled workforce is essential for foreign firms to operate efficiently, absorb new technologies, and engage in higher-value-added activities. Investment in education and skills training is thus crucial to maximize the benefits of FDI.
• Higher Trade Openness: Countries that are more integrated into the global trading system tend to attract more FDI, as investors seek access to markets and efficient supply chains.
• Lower Levels of Informality: A larger formal economy means better regulatory oversight, clearer property rights, and a broader tax base, which can create a more stable and attractive environment for foreign investment.

By contrast, the growth impact of FDI is considerably smaller in countries lacking these foundational features, indicating that complementary domestic policies are vital to fully harness its potential.

A Three-Pronged Approach to Reinvigorate FDI

To reverse the worrying decline in FDI and maximize its developmental benefits, the World Bank recommends a comprehensive three-pronged policy approach for governments.

First Prong: Redouble Efforts to Attract FDI

Governments must prioritize making their economies more appealing destinations for foreign capital. This involves:

• Removing Harmful Restrictions: Systematically identifying and dismantling the myriad investment restrictions that have accumulated over the last decade. This includes relaxing limits on foreign ownership, simplifying complex licensing and approval processes, and eliminating burdensome performance requirements.
• Reviving Stalled Reforms to Improve the Business Climate: Many developing countries have seen reform efforts stagnate. Governments need to reignite initiatives that improve ease of doing business, enhance legal certainty, fight corruption, protect intellectual property rights, and develop reliable infrastructure (e.g., power, transport, digital connectivity). A predictable and transparent policy environment is key to attracting long-term, productive investments.
• Fostering Sound Macroeconomic Performance: Stable economic growth, manageable inflation, and prudent fiscal policies create a conducive environment for investment. The analysis specifically highlights the importance of rising labor productivity; a one percentage-point increase in a country’s labor productivity is associated with a 0.7% rise in FDI inflows. This underscores the need for policies that promote efficiency, technological adoption, and skills development within the workforce.

Second Prong: Deepen the Developmental Impact of FDI

Attracting FDI is only half the battle; ensuring it genuinely contributes to broad-based development is equally crucial. This requires:

• Improving Institutional Quality: Strengthening the rule of law, ensuring judicial independence, enhancing regulatory transparency, and effectively combating corruption are fundamental. Strong institutions provide the governance framework necessary for FDI to thrive and for its benefits to be equitably distributed.
• Expanding Education and Skills Training: Investing in human capital development through improved education systems and targeted skills training programs is vital. This enables the local workforce to absorb and adapt new technologies brought by foreign investors, facilitating high-value job creation and fostering innovation.
• Increasing Participation in the Formal Labor Market: Policies that encourage businesses and workers to transition from the informal to the formal economy can improve regulatory compliance, enhance labor protections, and expand the tax base, all of which create a more stable and attractive investment environment.
• Fostering Greater Trade Integration: Continuing to pursue policies that promote trade openness—such as reducing tariffs, streamlining customs procedures, and participating in regional trade agreements—creates a synergistic effect with FDI, enabling foreign firms to operate more efficiently and access broader markets.

Third Prong: Critical International Cooperation

Given the global nature of the FDI challenge and the interconnectedness of economies, international cooperation is indispensable.

• Collective Action on Global Challenges: All countries, particularly those with significant financial and institutional capacity, must work together to address global challenges (e.g., climate change, pandemics, debt crises) that deter cross-border investment. This includes coordinated policy responses and the provision of global public goods.
• Directing FDI to Most Urgent Needs: There is a strong call for the international community to collectively work to direct FDI towards developing economies with the most urgent investment needs, particularly the poorest countries that currently receive a disproportionately small share of global FDI. This may involve de-risking mechanisms, targeted investment promotion, and capacity building support.
• Revitalizing Multilateralism: Supporting and strengthening multilateral frameworks for trade, investment, and development finance can help reverse the fragmentation trend and foster a more predictable and equitable global investment environment.

Conclusion: A Call to Action for Global Prosperity

The World Bank’s findings serve as both a stark warning and an urgent call to action. The decline in foreign direct investment to developing economies is not merely an economic blip; it represents a significant impediment to global efforts to achieve sustainable development and improve living standards for billions. The current environment, characterized by soaring public debt and rising trade and investment barriers, demands a fundamental shift in policy priorities.

Unless governments around the world, in concerted action, commit to dismantling the barriers they have inadvertently or deliberately erected, the world risks squandering one of the most effective tools for development and inclusive growth. The upcoming summit in Seville provides a critical opportunity for global leaders to demonstrate this commitment. By fostering open, transparent, and predictable investment environments, investing in human capital and institutions, and embracing genuine international cooperation, the global community can reignite the engine of FDI, ensuring that private capital once again becomes a powerful force for shared prosperity and sustainable development worldwide. The stakes are immense: nothing less than the future of global development hinges on the ability to reverse this troubling trend.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

17th June, 2025