Global Investment Downturn Deepens: FDI Falls 3% in First Half of 2025 Amid Persistent Economic Headwinds

Global foreign direct investment experienced a troubling 3 percent decline in the first half of 2025, marking the continuation of a protracted two-year slump that has gripped the international economy. According to the latest Global Investment Trends Monitor released by the United Nations Conference on Trade and Development (UNCTAD), the sustained downturn reflects a complex web of challenges including escalating trade tensions, persistently high interest rates, and deepening geopolitical uncertainty that continues to suppress investor confidence across global markets.

The decline represents more than just a statistical dip—it signals a fundamental shift in how multinational corporations are approaching investment decisions in an increasingly fragmented global economy. As economic forecasters had predicted throughout 2024, the investment climate has remained stubbornly resistant to recovery, with capital flows continuing their downward trajectory despite hopes for stabilization.

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Developed Economies Bear the Brunt of Investment Retreat

The steepest declines were concentrated in developed economies, where cross-border mergers and acquisitions—traditionally the primary vehicle for FDI in wealthy nations—plummeted by 18 percent to reach just $173 billion. This dramatic contraction in M&A activity reflects growing corporate caution in an environment characterized by regulatory uncertainty, elevated financing costs, and concerns about economic stability in major markets.

The M&A slowdown has been particularly pronounced in sectors that typically drive large-scale consolidation, including technology, pharmaceuticals, and financial services. Companies that might have pursued aggressive acquisition strategies in previous years are now adopting a more conservative approach, preferring to preserve cash and focus on organic growth rather than risk capital on uncertain deals.

Financial analysts attribute this hesitancy to multiple factors. The elevated interest rate environment has made debt-financed acquisitions significantly more expensive, while geopolitical tensions have introduced new layers of regulatory scrutiny, particularly for cross-border deals involving strategic industries or technology transfers. Additionally, the ongoing restructuring of global supply chains has created uncertainty about the long-term viability of certain international business combinations.

Regional Disparities Reveal Uneven Economic Landscape

While developing economies demonstrated greater resilience overall, with investment flows remaining relatively flat, the regional picture reveals stark disparities that underscore the uneven nature of global economic recovery. Latin America and the Caribbean emerged as a relative bright spot, recording a 12 percent increase in FDI inflows during the first half of 2025. This growth was driven primarily by strong commodity demand, strategic infrastructure investments in countries like Panama, and continued interest in the region’s renewable energy potential.

Asian developing countries also demonstrated resilience, posting a 7 percent increase in investment flows. This growth reflects the region’s ongoing role as a manufacturing hub and its attractiveness for companies seeking to diversify supply chains away from geopolitically sensitive locations. Countries within the Association of Southeast Asian Nations (ASEAN) continued to benefit from investment diversion, as multinational corporations increasingly view the region as a stable alternative to more contentious markets.

However, Africa experienced a devastating 42 percent decline in FDI, representing one of the most severe contractions among all regions. This dramatic fall reflects a confluence of challenges including political instability in several key markets, currency volatility, infrastructure deficits, and reduced appetite for risk among international investors. The decline is particularly concerning given Africa’s need for substantial investment to support economic development and achieve the Sustainable Development Goals.

The African investment drought has been especially acute in extractive industries, where commodity price volatility and concerns about long-term demand have dampened enthusiasm. Meanwhile, sectors critical for the continent’s development—including infrastructure, manufacturing, and services—have struggled to attract the capital needed for expansion and modernization.

Manufacturing Investment Plummets Amid Tariff Uncertainty

High borrowing costs and pervasive economic uncertainty continued to squeeze investment in industry and infrastructure throughout the first half of 2025. Announcements of greenfield projects—whereby companies build entirely new operations in foreign countries—fell 17 percent in number, reflecting growing corporate reluctance to commit capital to long-term projects in an uncertain environment.

The decline was particularly steep in supply-chain-intensive manufacturing sectors such as textiles, electronics, and automotive production, which saw a combined 29 percent drop in greenfield project announcements. This contraction reflects the chilling effect of ongoing tariff disputes and trade policy uncertainty, which have made it increasingly difficult for companies to confidently plan long-term manufacturing investments.

The automotive industry, traditionally one of the largest sources of cross-border manufacturing investment, has been especially hard hit. Companies that might have committed billions to new production facilities are now adopting a wait-and-see approach, concerned that tariff structures could change dramatically and render their investments economically unviable. Similarly, electronics manufacturers have become increasingly cautious about establishing new production capacity, particularly in markets where trade relationships remain volatile.

Textile and apparel manufacturers, meanwhile, are grappling with a rapidly changing competitive landscape characterized by rising labor costs in traditional manufacturing hubs, shifting consumer preferences, and the growing importance of nearshoring strategies. These dynamics have created paralysis among investors who struggle to identify the optimal locations for new manufacturing capacity.

Infrastructure Finance Shows Mixed Regional Performance

International project finance—which serves as the lifeblood for infrastructure development in emerging markets—also experienced contraction, with deal numbers declining 11 percent and total values falling 8 percent during the first six months of 2025. This pullback in infrastructure financing represents a significant concern for countries that depend on external capital to build the roads, ports, power plants, and telecommunications networks essential for economic growth.

The infrastructure financing landscape revealed sharp regional divergences. Developing economies demonstrated relative resilience, with project finance deals declining by only 2 percent after experiencing two consecutive years of sharp contractions. Despite the reduced number of deals, the total value of infrastructure projects in developing countries surged 21 percent, buoyed by several large-scale megaprojects in Panama, the United Arab Emirates, and Uzbekistan.

These outsized projects—including major port expansions, urban development initiatives, and industrial zone developments—temporarily masked underlying weakness in infrastructure investment. Remove these handful of megaprojects from the equation, and the developing world’s infrastructure financing picture appears far more precarious, with most countries experiencing continued difficulties in attracting capital for critical projects.

The concentration of infrastructure investment in a small number of large projects also raises concerns about the sustainability and equity of infrastructure development. While megaprojects can deliver transformational economic benefits to host countries, they often come with significant risks including cost overruns, environmental impacts, and displacement of local communities. Moreover, the focus on these high-profile developments may divert attention and resources from smaller-scale infrastructure projects that could deliver more immediate benefits to broader populations.

Artificial Intelligence Emerges as Lone Manufacturing Bright Spot

Despite the broader manufacturing downturn, the global value of greenfield investment actually increased by 7 percent—a seemingly paradoxical result that reflects a dramatic surge in projects related to artificial intelligence and the digital economy. This AI-driven investment boom represents a fundamental reorientation of global capital flows, as companies and governments alike recognize artificial intelligence as a strategic imperative for economic competitiveness.

The United States emerged as the epicenter of this AI investment surge, recording an extraordinary $237 billion in new greenfield project announcements during the first half of 2025—nearly matching the country’s entire 2024 total and representing approximately four times the average for any half-year period over the past decade. This massive influx of capital commitments underscores the country’s determination to maintain technological leadership in AI and related fields.

More than half of the United States’ greenfield investment value came from AI-related sectors, with semiconductor manufacturing accounting for approximately $103 billion and data center construction representing another $27 billion. These figures reflect the enormous capital requirements of modern AI infrastructure, where a single advanced semiconductor fabrication facility can cost $20 billion or more, and cutting-edge data centers designed for AI workloads can require investments exceeding $10 billion.

The semiconductor investment wave includes major commitments from both domestic and international companies seeking to establish or expand advanced chip manufacturing capacity in the United States. These projects are supported by substantial government incentives, including provisions of the CHIPS and Science Act, which offers billions in subsidies and tax credits to encourage domestic semiconductor production.

Similarly, the data center boom reflects the voracious appetite for computing power required by modern AI applications, particularly large language models and generative AI systems. Major technology companies are racing to build massive facilities capable of housing hundreds of thousands of advanced processors, with some individual data center complexes spanning thousands of acres and consuming as much electricity as medium-sized cities.

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Sustainable Development Investment Continues Alarming Decline

While AI-related sectors attracted unprecedented capital, investment in sectors critical to achieving the Sustainable Development Goals experienced continued deterioration in early 2025, raising serious concerns about the global community’s ability to meet its 2030 development targets. SDG-related investment projects in developing countries fell 10 percent in number and 7 percent in value during the first half of the year, following steep declines throughout 2024.

This persistent underinvestment in sustainable development sectors represents a widening gap between the world’s most pressing needs and actual capital allocation. Projects in least developed countries (LDCs) are on track to decline another 5 percent in 2025, potentially reaching their lowest levels since the SDGs were adopted in 2015—a particularly troubling trajectory for countries that require substantial external investment to build basic infrastructure and services.

The investment shortfall has been especially acute in infrastructure sectors that form the backbone of economic development. Internationally financed projects in transport and utilities remained approximately 25 percent below the decade average, despite the critical importance of these sectors for economic growth, poverty reduction, and climate resilience. The underinvestment leaves millions without access to reliable transportation networks and modern utility services, constraining economic opportunities and quality of life.

In least developed countries, the infrastructure financing crisis has reached critical proportions. Project finance for infrastructure collapsed by an astonishing 85 percent in value during the first half of 2025, effectively cutting off one of the primary channels through which these countries access capital for large-scale development projects. Greenfield infrastructure activity declined 31 percent in value and 25 percent in number, with particularly sharp contractions in Latin America and the Caribbean, where infrastructure investment fell 78 percent in value and 43 percent in number of projects.

Renewable Energy Investment Falters Despite Climate Urgency

Renewable energy investment—the largest SDG-relevant sector and critical to global climate objectives—also weakened considerably during the first half of 2025. Global international project finance in renewable energy, which has historically accounted for nearly two-thirds of total project finance volumes, fell another 9 percent in number and 10 percent in value.

This decline in renewable energy financing represents a troubling reversal at a moment when climate science demands dramatic acceleration of clean energy deployment. The investment pullback reflects multiple factors including rising capital costs, policy uncertainty in key markets, grid integration challenges, and growing competition from other sectors—particularly artificial intelligence infrastructure—for available capital.

Global greenfield projects in renewable energy declined even more precipitously, falling 55 percent in number and 21 percent in value. In developing economies, renewable energy projects dropped 23 percent, while in least developed countries, they declined 31 percent in number and 18 percent in value. These figures suggest that the countries most vulnerable to climate change and most in need of clean energy infrastructure are experiencing the sharpest reductions in renewable energy investment.

The renewable energy investment drought has been particularly severe in certain subsectors and regions. Solar and wind projects, which represented the majority of renewable energy investment in recent years, both experienced significant contractions as developers grappled with supply chain challenges, permitting delays, and uncertain returns in an environment of higher financing costs. Hydropower projects, meanwhile, faced growing scrutiny over environmental and social impacts, leading to cancellations or delays of several major developments.

Water and Sanitation Investment Reaches Crisis Levels

Investment in water and sanitation—essential services for human health and dignity—experienced a catastrophic 40 percent decline in the first half of 2025. Most alarmingly, no new projects were announced in Africa or least developed countries during this period, while Latin America and the Caribbean saw a 97 percent decrease in water and sanitation investment.

This near-total collapse of investment in water infrastructure represents a humanitarian and development crisis. Billions of people worldwide lack access to safe drinking water and adequate sanitation facilities, contributing to disease, lost productivity, and stunted development. The investment drought threatens to reverse progress made in recent decades and makes achievement of SDG 6 (clean water and sanitation for all) increasingly unlikely by 2030.

The water and sanitation investment crisis reflects multiple challenges. These projects typically offer lower financial returns than alternatives, making them less attractive to private investors focused on profit maximization. Additionally, water infrastructure often requires complex institutional arrangements involving multiple government levels and stakeholders, creating execution risks that deter investment. Currency volatility in many developing countries further complicates project finance by introducing exchange rate risks that can undermine project economics.

Health and Agriculture Provide Rare Bright Spots

Amid the broader investment malaise, only agrifood systems and health sectors showed positive trends in developing economies. Investment in agrifood systems held steady, maintaining previous levels despite broader economic headwinds. Health sector investment surged 37 percent, driven primarily by new projects in Asia responding to lessons learned from the COVID-19 pandemic and growing recognition of health infrastructure’s importance for economic resilience.

The health investment surge reflects multiple dynamics. Pharmaceutical companies are expanding manufacturing capacity in Asian markets to diversify supply chains and access growing consumer bases. Hospital and clinic networks are attracting private equity investment as middle classes expand and demand for quality healthcare increases. Medical technology companies are establishing production facilities and research centers to serve regional markets.

Similarly, investment in agrifood systems has remained relatively robust due to food security concerns, growing demand for agricultural products, and recognition of agriculture’s importance for rural development and employment. Projects span the full value chain from farm inputs and mechanization to processing, storage, and distribution infrastructure.

Challenging Outlook Through Year-End 2025

The global investment climate is expected to remain challenging through the remainder of 2025, according to UNCTAD’s assessment. Geopolitical tensions, regional conflicts, economic fragmentation, and ongoing efforts to de-risk supply chains will continue weighing heavily on investment flows. Trade policy uncertainty remains particularly problematic, as businesses struggle to make long-term capital allocation decisions without clarity on tariff structures and market access.

However, several factors could support a modest rebound in investment activity by year-end. Easing financial conditions—if central banks begin reducing interest rates as inflation pressures moderate—could lower the cost of capital and make investment projects more attractive. Rising merger and acquisition activity observed during the third quarter of 2025 suggests that corporate confidence may be gradually improving, potentially setting the stage for increased deal-making in subsequent quarters.

Additionally, higher overseas spending by sovereign wealth funds could provide a significant boost to global investment flows. These state-owned investment vehicles have accumulated substantial capital and are increasingly looking to deploy it internationally, particularly in infrastructure, technology, and natural resources. Their long investment horizons and greater tolerance for risk make them potentially important sources of capital for projects that struggle to attract private sector financing.

The technology sector’s continued strength, particularly in artificial intelligence and related fields, may also provide a floor under global investment levels even if other sectors remain weak. The strategic importance of AI technology is driving both private sector investment and government support, creating a virtuous cycle of capital deployment that could offset weakness elsewhere in the global economy.

Nevertheless, the path to investment recovery faces significant obstacles. Until geopolitical tensions ease, trade relationships stabilize, and monetary policy normalizes, the investment environment will likely remain characterized by caution and selective capital deployment. Companies and investors will continue prioritizing defensive strategies over aggressive expansion, preferring proven markets over frontier opportunities, and emphasizing short-term flexibility over long-term commitments.

Implications for Global Development and Economic Growth

The sustained weakness in global foreign direct investment carries profound implications for economic development, particularly in emerging markets and developing countries that depend on external capital to finance growth. The investment shortfall is not merely a temporary cyclical phenomenon but reflects deeper structural challenges in the global economic system that will require coordinated policy responses to address.

For developing countries, reduced FDI inflows mean fewer resources available for infrastructure development, technology transfer, and job creation. The concentration of investment in a handful of countries and sectors exacerbates inequality both between and within nations, potentially undermining social cohesion and political stability. The underinvestment in sustainable development sectors threatens to derail progress toward critical global goals related to poverty reduction, health, education, and environmental sustainability.

The divergence between AI-related investment and other sectors also raises questions about the future trajectory of economic development. While artificial intelligence promises transformational benefits, its highly concentrated investment patterns risk creating a two-tier global economy where a small number of technologically advanced regions race ahead while others fall further behind. Ensuring that the benefits of AI and other emerging technologies are broadly shared will require deliberate policy interventions and international cooperation.

As the world approaches the midpoint of the 2030 Agenda for Sustainable Development, the persistent underinvestment in SDG-related sectors suggests that dramatic course corrections will be necessary to achieve global development objectives. Mobilizing the estimated $4 trillion in annual investment that developing countries need to achieve the SDGs will require innovative financing mechanisms, stronger public-private partnerships, reformed international financial institutions, and renewed commitment from both developed and developing countries.

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By: Montel Kamau

Serrari Financial Analyst

4th November, 2025