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Foreign direct investment (FDI)—an important source of external financing for emerging market and developing economies (EMDEs)—has weakened since the global financial crisis, heightening the challenges of filling vast infrastructure gaps, reducing poverty, creating new jobs, and addressing climate change. This study provides a broad perspective on the evolution of FDI inflows to EMDEs since 2000, including patterns across regions and changes in sectoral composition.
It presents fresh empirical analysis on the macroeconomic implications of FDI and the key factors driving FDI. Based on the analysis, it develops an FDI policy strategy that can help EMDEs maximize benefits from FDI. FDI inflows as a share of GDP in the typical EMDE have fallen steadily, dropping to about 2 percent in recent years—less than half of the peak of about 5 percent in 2008. The slowdown has occurred in most economies, and it is evident in four out of six EMDE regions. Nearly 60 percent of EMDEs had lower FDI-to-GDP ratios in 2012-23 than in 2000-11.
EMDEs have also experienced setbacks in several key drivers of FDI. Trade tensions, policy uncertainty, and geopolitical risk have soared. The number of investment treaties—agreements instrumental for bolstering FDI inflows between signatory states—has dropped precipitously since the 2010s. The rising restrictiveness of new FDI policy measures in EMDEs in the 2020s puts them on track to receive lower FDI inflows.
Despite the string of setbacks, policy makers have the power to reinvigorate FDI. A three-pronged strategy geared toward attracting FDI, maximizing the benefits of FDI, and advancing global cooperation is needed. This starts with improving institutional quality, promoting macroeconomic stability, and easing trade and investment restrictions. Of equal importance is sustaining conducive conditions to ensure the lasting benefits of FDI. Global cooperation is essential to uphold a rules-based international system for cross-border investment and trade flows, and to provide technical and financial assistance to support the implementation of necessary structural reforms, especially in low-income countries (LICs).
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