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Foreign Direct Investment

Updated: Dec 13, 2023

According to UNCTAD, foreign direct investment (FDI) is considered the investment made by a company in a different country of origin to obtain decision-making capacity in the receiving economy and establish a long-term relationship. Generally, foreign capital reaches local economies through the integration of multinational companies, so the International Monetary Fund differentiates three types of operations: shares and other capital participations (being the 10% of the share capital that gives effective control), the reinvestment of the profits achieved, and financing loans.



Global FDI decreased by 12% in 2022 according to the World Investment Report 2023 published by UNCTAD. The decrease was mainly due to the lower volume of financial flows and transactions in developed countries.

According to UNCTAD report, industries struggling with supply chain challenges, including electronics, semiconductors, automotive and machinery, saw a surge in projects, while investment in digital economy sectors slowed.

At the same time, international investment in renewable energy generation, including solar and wind, also continued to grow – but at a slower 8% than the 50% growth recorded in 2021. Notably, projects announced in battery manufacturing tripled to more than $100 billion in 2022.

Although investments in renewables have nearly tripled since 2015 due to Sustainable Development Goals agenda most of the money has gone to developed countries.

 

When it comes to FDI is expected to have an impact on the macroeconomic indicators of recipient countries, but this is not always the case as the wealth generated by investors is usually transferred to the source countries.

Aspects like the quality of labor market, business accountability or environmental effects are subject to change under the umbrella of FDI.

Here's the matter of improve design and public policies implementation to take advantage of the contribution that FDI can make.

 

First, it is urgent that economies activities consider development and sustainability dimensions. It is important to require investors to comply with obligations related to human rights, labor, environmental and anti-corruption standards. Investment treaties should serve as tools to promote compliance with international best practices, as proposed by UNCTAD.

 

Governments must contribute to design and implementation of FDI by allowing entry into activities that add value. They must apply public policies that make territories attractive (investing in infrastructure, for example) and defining a portfolio of investment priorities based on sustainability criteria. Priority must be given to FDI that encourages and works with the existing business network to establish synergies that allow development and growth of local economies.

 

At the same time, speed ​​up licensing procedures in investment projects, remove obstacles to the participation of foreign suppliers in public procurement, incorporating environmental and social criteria in public tenders or adjusting the R&D tax incentives regime as proposed by the OECD are valuable measures to contribute to the attraction of FDI and to the protection of the environment jointly.

 

There's a direct link between FDI and human capital. Investing in education and training of the population, particularly in technology and science, stimulate innovation and productivity in the long term.

 

Beyond the interests of each territory, a multilateral system is needed so that FDI agreements are transparent and coordination between private and public interests is encouraged, favoring, among others, participatory governance.

 

Finally, it should be noted that the profiles and guidelines of investors have changed. It is often those who don't belong to the OECD who, with the governments support or influence, make investments not with exclusively commercial reasons but with the intention of exerting regional influence.

In this context, developing countries often found themselves in a disadvantage position due to the limited bargaining power they have in FDI processes, so technical assistance by a neutral actor is highly recommended.


© International Relations Consulting 2023

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