Global Foreign Direct Investment Decline

January 24, 2025

Global foreign direct investment (FDI) experienced a notable decline of eight per cent in 2024, according to the United Nations Conference on Trade and Development (UNCTAD). This reduction poses risks to achieving the Sustainable Development Goals (SDGs), which heavily depend on international project finance. The challenges in securing international project finance are critical, particularly for infrastructure and energy sectors.

Overview of Foreign Direct Investment

FDI refers to the investment made by a foreign entity in a business or assets in another country.
Unlike foreign portfolio investment, which involves purchasing equity shares without control, FDI grants the investor degree of influence over the operations of the enterprise.
It encompasses not only capital inflow but also the transfer of technology, skills, and expertise, making it vital for economic development.

Recent Trends in International Project Finance

In 2024, international project finance witnessed a substantial decline, with the number of deals falling by 26 per cent and their value decreasing by nearly a third.
Developed economies faced a 29 per cent drop in project finance deals, continuing a downward trend from 2023.
Developing economies also struggled, with a 23 per cent decrease in deal numbers and a 33 per cent decline in value, primarily due to fewer announcements in Asia.

Impact on Infrastructure Development

Infrastructure investment is crucial for economic growth. However, international project finance in this sector fell by 31 per cent in number and 26 per cent in value. Renewable energy projects, which had previously driven growth, also slowed down by 16 per cent in both metrics. Notably, North America, developing Asia, and Latin America experienced reductions in renewable energy project finance.

Sustainable Development Goals and Investment

The decline in international project finance is particularly concerning for sectors essential to the SDGs in developing countries. In 2024, SDG-related investments dropped by 11 per cent. While there was some growth in renewable energy and health sectors, critical areas like infrastructure, agrifood systems, and water and sanitation saw fewer projects financed than in 2015, when the SDGs were adopted.

Future Prospects for FDI

Looking ahead to 2025, moderate growth in FDI is anticipated, aided by improved financing conditions. However, geopolitical tensions and global economic instability present ongoing challenges. The persistent decline in international project finance marks the need for diverse strategies to attract and sustain investment, particularly in sectors vital for sustainable development.

Determinants of Foreign Direct Investment

Several factors influence FDI in host countries. A conducive policy framework, political and economic stability, and favourable treatment standards for foreign affiliates are essential. Additionally, international agreements, trade policies, and privatisation strategies play important role in determining FDI flows. The advantages of FDI are not uniformly distributed and depend on the host country’s infrastructure and regulatory environment.

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