Economy

Analyzing the UN Trade & Development Annual Report 2024

Global headwinds are impacting FDI flows to would-be recipients most in need.

Image credit: Shutterstock / Kamira

The esteemed American writer Mark Twain, father to many memorable sayings, also gave us the whimsical, “Lies, damned lies and statistics.” Regardless, let’s give a little faith to a recently published and telling UN report, The World Investment Report 2024. After all, the statistics are the story.

The report notes, first off, that global foreign direct investment (FDI) declined 2% to USD1.3 trillion in 2023. Worse yet, respective investment figures for developed and developing economies contrast at +9% and -7%.

Notably, FDI flows to developing markets fell to USD867 billion—FDI to Africa fell by 3% to USD53 billion, where international project finance fell by a quarter in deal number, while halved in value. Flows to developing markets in Asia fell by 8% to USD621 billion. It emerges that China, the world’s second-largest FDI recipient, saw a decline, as did India and West and Central Asia, while South-East Asia saw steady FDI.

FDI flows to Latin America and the Caribbean fell 1% to USD193 billion, where despite fewer Greenfield investments, their value rose, being centered on commodity sectors, critical minerals, and renewable energy.

A classic case of chicken and egg

Several key factors have hampered FDI, broadly identified as sluggish economic performance amid mounting geopolitical tension. To that, the report adds intertwined crisis points, protectionist policies and regional economic realignments, fragmenting trade networks, and global supply chains.

The net effect is a lack of predictability—the prerequisite for investor confidence—that applies the brakes and results in asymmetrical FDI flows that benefit one recipient at the cost of many others. Predictably, then, the Report concludes that ‘…many developing countries remain marginalized, struggling to attract foreign investment and participate in global production networks.’

Deal or No Deal?

Squeezed financing saw a 26% decline in international project finance deals, with a concomitant impact on infrastructure investment essential to socio-economic advancement among the most disadvantaged nations.

This deficit of investment severely starves sectors linked to the Sustainable Development Goals (SDGs), which saw a drop of over 10%.

The Report points to agri-food systems and water and sanitation that received fewer internationally financed projects last year than in 2015, when those goals were adopted. Sustainable bonds did see slender growth in 2023, although inflows in sustainable investment funds plunged 60%.

The wider repercussions of the FDI drought are felt by the vulnerable economic players who most need to mature, the small and medium-sized enterprises in developing countries. Forming such a major share of EMs’ economies, they struggle to meet increasing disclosure requirements, which in turn limit market access and participation in global supply chains, trapping them in a vicious cycle.

A call to arms

As this year’s Report stresses, capital flows are the lifeblood of essential projects that impact countries’ overall socio-economic development. It is, after all, ‘…about human potential, environmental stewardship and the enduring pursuit of a more equitable and sustainable world.’ Therefore, the UN Trade and Development Report makes key recommendations for government and international organizations to mitigate and potentially reverse the investment status quo among EMs.

Digital developments

The Report highlights the significance of digital routes to investment. Digital platforms simplify procedures for investors by increasing access to information, enhancing transparency, and streamlining administrative processes. Governments should, therefore implement digital platforms, seeking assistance from international institutions.

The Report recommends a “bottom-up” approach to digital government tools, starting from basic services for business and gradually broadening coverage across more institutions to capture economies of scale and scope and extend benefits to all businesses. The UN Trade and Development launched its global action menu for investment facilitation in 2016.

Since then, online single windows in developing countries have risen from 13 to 67, and in developed economies from 12 to 28. Ongoing digitalization worldwide has led to a rise in information portals for business and investor registration from 82 to 124 in developing countries and from 43 to 48 in developed economies.

International organizations to boost international project finance to structurally weak and vulnerable economies to mitigate their disproportionate vulnerability to global downturns.
Regarding small and medium-sized enterprises, developing countries promoting and facilitating regional and South-South FDI. The latter refers to investment by companies from developing countries in other developing countries.

Governments promoting investment in sustainable development projects through provisions in international agreements. The report stresses the need for well-defined product standards, robust sustainability disclosures, external auditing, and third-party ratings to avoid greenwashing.

Global woes are denting FDI flows to developing markets, with asymmetrical flows going to the exploitation of strategic commodities. Remedial actions are recommended to secure the maturity of their SMEs and sustain the rise in overall economic transparency essential to tapping FDI and foreign markets.