Foreign Direct Investment (FDI) is the engine behind global economic growth and development, acting as a financial lifeline for countries across the globe. Imagine a company in one corner of the globe setting up or acquiring a business in another; this is FDI in action. Looking ahead to 2024, the FDI landscape will be interesting as traditional economic powerhouses will continue to dominate, while emerging markets will emerge and reshape the global economic map.
The United States: A leading destination for foreign direct investment
According to the Kearney Global Business Policy Council’s 2024 Foreign Direct Investment Confidence Index, the United States has been the largest recipient of foreign direct investment for the 12th consecutive year.
Let’s look at what makes the US a leading destination for FDI.
Strong economy: The United States is one of the world’s largest and most dynamic economies, providing a stable and robust environment in which businesses can grow and thrive.
Innovation: The United States is a global leader in technological advancement and innovation, home to Silicon Valley and numerous high-tech industries, attracting foreign companies looking to invest in cutting-edge technologies.
Excellent infrastructure: The United States boasts an advanced infrastructure, including transportation, communications, and public services, facilitating efficient business operations.
Highly skilled workforce: The country has a well-educated and highly skilled workforce, giving a competitive advantage to businesses that require specialized knowledge and technology.
Strong legal and regulatory framework: The United States offers a transparent and predictable legal and regulatory environment, giving foreign investors confidence that their investments will be protected.
Access to global markets: Investing in the United States gives your company a strategic advantage by providing access to markets around the world thanks to our extensive trade agreements and our position as a global trade hub.
Government support: A variety of federal and state programs support foreign investment through incentives, grants, and partnerships, making the United States an even more attractive destination for FDI.
The US economy is the fastest growing among the G7. Recovery in consumer confidence and the factors mentioned above add weight to the US ranking and explain why the US remains a top destination for FDI.
Asia: China declines, India endures
Foreign direct investment (FDI) into mainland China will be $33 billion in 2023, down 90% from 2021 and the lowest level since 1993, according to the State Administration of Foreign Exchange (SAFE).
Why the sudden suddenness?
Geopolitical tensions: Rising geopolitical tensions, especially between major economies such as China and the United States, have created an uncertain environment for foreign investors. Trade wars, tariffs and diplomatic disputes have increased risk for foreign companies and made them more hesitant to invest.
Regulatory and policy uncertainty: Changes in China’s regulatory environment and policies can be unpredictable – for example, stringent data privacy laws, cybersecurity regulations and recent crackdowns on certain industries (such as technology and education) have made the investment environment more volatile.
Economic slowdown: China’s economic growth has slowed compared to the rapid expansion of past decades. The slowdown, which is partly due to domestic issues such as the real estate crisis and debt levels, has made investors more cautious. COVID-19 has also disrupted global supply chains and business operations.
Rising labor costs: As China’s labor costs continue to rise, its competitiveness as a low-cost manufacturing base is declining, and many companies are considering relocating their production bases to Asian countries with lower labor costs, such as Vietnam, India and Bangladesh.
Capital flow restrictions: China maintains strict controls on capital flows, including limits on profit repatriation and foreign exchange controls. These controls can scare off foreign investors who prefer a freer and more predictable financial environment. However, China has recently relaxed some of its controls.
Intellectual Property Concerns: Despite improvements, concerns about intellectual property protection remain: foreign companies often fear the risks of intellectual property theft and enforcement in China, which can deter investment in technology and innovation-focused industries.
Shifting investment focus: There is a global shift towards investment in other emerging markets that are perceived to have higher growth potential and fewer regulatory hurdles. Countries such as India, Southeast Asian countries and parts of Africa are becoming more attractive for FDI.
While China is experiencing a steep decline in foreign direct investment, down 80% year-on-year, many investors are being attracted to India. The government has relaxed foreign direct investment norms in several sectors, including defense, retail, and insurance, making it easier for foreign companies to enter and invest in these markets. India’s economy is diverse, with opportunities in various sectors, including agriculture, manufacturing, services, and technology. This diversity allows investors to tap into multiple growth areas. In addition, the Indian government offers various incentives for foreign investors, including tax benefits, regulatory simplification, and investment subsidies. For example, some states offer capital subsidies to companies setting up research and development facilities. Some regions also offer R&D expenditure-related subsidies.
Europe: some hurdles, but encouraging results
FDI in Europe fell for the first time since 2020. A variety of factors contributed to this, including slowing economic growth, soaring inflation, high energy prices and an unstable geopolitical environment. Reduced demand for new offices due to an increase in remote working also affected investments. Despite a 5% annual decline in the number of projects, France secured the most investments, with the UK in second and Germany in third place. The 23rd EY Europe Attractiveness Survey revealed that Europe remains an attractive investment destination in the long term, with 72% of companies planning to expand or set up operations in the next year increasing from 67% last year, and three-quarters expecting its attractiveness to increase over the next three years.
Additionally, investors are turning to existing assets rather than pursuing new developments in greenfield developments such as electric vehicles and renewable energy projects.
African and Latin American Markets
Africa is an attractive destination for foreign direct investment (FDI) due to its abundant natural resources, growing consumer markets and economic reforms aimed at improving the business environment. Heavy investment in infrastructure combined with a young population creates a dynamic workforce and supports long-term economic growth. Diverse sector opportunities and government incentives in agriculture, manufacturing, technology, renewable energy and services further attract foreign investors.
Despite these opportunities, investors must be aware of challenges such as political instability, regulatory complexities and infrastructure gaps in certain regions. However, ongoing reforms and efforts aimed at improving the business environment are making Africa an increasingly attractive destination for FDI investment.
The future of Latin America and the Caribbean’s economies is full of risks. On the one hand, low productivity, low participation in global value chains, low investment in science and technology, regulatory and institutional deficiencies, limited access to finance, savings and investment, crime, the list goes on. But the workforce is relatively young and many of Latin America’s countries are well endowed with natural resources. Latin America has great potential for competitive green hydrogen (H2V) production and is rich in many of the key minerals needed for emerging economies, including lithium, copper, nickel, graphite, silicon, rare earths and high-grade iron ore.
Conclusion
In conclusion, FDI will continue to flow into traditional large economies, with emerging markets playing an increasingly important role. FDI trends in 2024 will be shaped by the opportunities presented by global economic conditions, government policies, innovative technologies, sustainability, and market size. For international trade stakeholders, understanding these FDI trends is essential to make informed investment decisions and capitalize on the opportunities presented by the global economic conditions.
