Flows of foreign direct investment (FDI) into developing economies—a key propellant of economic growth and higher living standards—have dwindled to the lowest level since 2005 amid rising trade and investment barriers, new research from the World Bank showed. These barriers pose a significant threat to global efforts to mobilize financing for development, the research said.
In 2023, developing economies received just $435 billion in FDI, the lowest level since 2005. That coincides with a global trend in which FDI flows into advanced economies have also slowed. High-income economies received just $336 billion in 2023, the lowest level since 1996. As a share of their GDP, FDI inflows to developing economies in 2023 were just 2.3 percent, about half the number during the peak year of 2008.
New trade agreements signed over the past decade dropped in half
The World Bank added that investment treaties tend to boost FDI flows between signatory states by more than 40 percent. Between 2010 and 2024, only 380 new investment treaties came into force, barely a third of the 1990s number.
Similarly, the report finds that countries that are more open to trade tend to receive more FDI—an extra 0.6 percent in FDI for each percentage-point increase in the trade-to-GDP ratio. However, the number of new trade agreements signed over the past decade dropped in half, from an average of 11 per year in the 2010s to just six in the 2020s.
In 2023, FDI accounted for roughly half of the external financing flows received by developing economies. Under the right conditions, it is a strong spur to economic growth. Analysis of data from 74 developing economies between 1995 and 2019 suggests that a 10 percent increase in FDI inflows generates a 0.3 percent increase in real GDP after three years. The impact is nearly three times larger in countries with stronger institutions, better human capital, greater openness to trade and lower informality. By the same token, the effect of FDI increases is much smaller in countries that lack such features.
China receives third of FDI flows to developing economies
FDI tends to be concentrated in the largest economies. Between 2012 and 2023, about two-thirds of FDI flows to developing economies went to just 10 countries, with China receiving nearly a third of the total and Brazil and India receiving roughly 10 percent and 6 percent, respectively.
The 26 poorest countries received barely 2 percent of the total. Meanwhile, advanced economies accounted for nearly 90 percent of the total FDI in developing economies over the past decade. About half of that came from just two sources: the European Union and the United States.
“What we’re seeing is a result of public policy. It’s not a coincidence that FDI is plumbing new lows at the same time that public debt is reaching record highs. Private investment will now have to power economic growth, and FDI happens to be one of the most productive forms of private investment. Yet, in recent years, 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,” said Indermit Gill, the World Bank Group’s chief economist and senior vice president.
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Policy changes needed to recover FDI flows
The World Bank identified three policy priorities for developing economies. First, these countries must redouble efforts to attract FDI. Easing FDI restrictions that have accumulated over the last decade would be a good start. So would speeding up improvements in the investment climate, which have stalled in many countries over the past decade.
Strong macroeconomic outcomes—healthy growth and rising labor productivity—also help accelerate FDI flows, the analysis shows. An increase of 1 percent in a country’s labor productivity, for example, is associated with an increase of 0.7 percent in FDI inflows.
Second, developing economies must amplify the economic benefits of FDI. Promoting trade integration, improving the quality of institutions, fostering human capital development, and encouraging more people to participate in the formal economy increase the benefits of FDI.
Finally, these countries need to focus on advancing global cooperation. All countries should work together to accelerate policy initiatives that can help direct FDI flows to developing economies with the largest investment gaps.
