As per chapter three of the Global Economic Prospects report published on Monday, the WB noted that while FDI surged in the 2000s, increasing fivefold and peaking at nearly five percent of GDP in 2008 for the typical EMDE, inflows have since fallen to around two percent of GDP in recent years, the lowest level since 2005.
In 2023, EMDEs collectively received $435 billion in FDI, marking a significant decline.
The downtrend has been widespread: about 60 percent of EMDEs and four out of six EMDE regions recorded lower FDI-to-GDP ratios between 2012 and 2023 compared to 2000 and 2011.
Forward-looking indicators are also pessimistic, with early 2024 project announcements pointing to a 25 percent year-on-year decline in greenfield FDI, the primary mode of FDI into EMDEs.
During the first half of the current FY2024/2025 (July-December 2024), Egypt witnessed a notable development in FDI inflows, which recorded a net inflow of $6 billion, according to the latest data published by the Central Bank of Egypt (CBE).
This came despite an overall balance of payments (BoP) deficit of $502.6 million, driven by a widening current account deficit of $11.1 billion, primarily due to a 47.4 percent surge in the trade deficit and a 21.2 percent drop in the services surplus.
Sectoral, geographical composition shift
The report also indicated that the nature and destination of FDI in EMDEs have changed.
Since the early 2000s, the share of FDI going into services has significantly increased, while manufacturing has declined.
From 2019 to 2023, nearly 65 percent of FDI inflows into EMDEs went into the services sector, up from 45 percent in the early 2000s, mirroring patterns in advanced economies.
Meanwhile, the manufacturing share dropped to below 30 percent.
Additionally, FDI has become more concentrated in a few large economies. Between 2012 and 2023, China, India, and Brazil accounted for nearly half of all FDI inflows into EMDEs.
China alone received about one-third, while Brazil and India attracted 10 percent and six percent, respectively, together about 10 percentage points more than during 2000-2011.
Growth impact varies widely
FDI positively impacts economic output in EMDEs, though the magnitude of this effect varies by country.
On average, a 10 percent increase in FDI inflows boosts GDP by around 0.3 percent after three years.
However, countries with stronger trade openness, better institutional quality, greater human capital, and lower levels of informality see significantly larger gains, up to 0.8 percent.
In contrast, low-income countries (LICs), which often lag in these areas, experience more muted effects.
The decline in FDI is tied to broader macroeconomic and geopolitical challenges. FDI inflows are highly correlated with real GDP growth and international trade volumes.
Notably, the two major global recessions in 2009 and 2020 triggered significant drops in FDI to EMDEs.
Economies with higher trade integration benefit more: each percentage point increase in trade-to-GDP ratio leads to a 0.6 percent increase in FDI inflows, while participation in global value chains adds another 0.3 percent.
Furthermore, countries entering bilateral investment treaties see FDI flows rise by more than 40 percent.
However, the pace of such agreements has slowed drastically. From 2010 to 2024, only 380 new investment treaties were enacted, less than half the 870 treaties formed between 2000 and 2009.
Adding to the concerns, FDI policy measures in EMDEs have become more restrictive since the 2020s.
After a phase of liberalization in the 2010s, several EMDEs have introduced policies that limit foreign investment, coinciding with a rise in trade-distorting measures.
Simultaneously, progress on institutional reforms to improve investment climates has largely stalled.
The path forward: Three-pronged strategy
To revive FDI inflows, the WB outlined a strategy through which the EMDEs are urged to adopt a comprehensive three-pronged approach:
1. Attracting FDI: Through reforms that enhance macroeconomic stability, ease regulatory burdens, improve infrastructure and human capital, and reduce trade and investment barriers;
2. Amplifying FDI benefits: Maximizing linkages with local firms, promoting technology transfer, and supporting sustainable development;
3. Strengthening global cooperation: Maintaining a stable rules-based international investment and trade system.
The global FDI landscape for EMDEs is facing structural headwinds, from geopolitical fragmentation to weakened reform momentum.
While the economic benefits of FDI are well-documented, realizing them fully will require decisive domestic reforms and renewed international collaboration, especially as the world grapples with heightened uncertainty and slower global growth.
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