Foreign Direct Investment (FDI) has already been negatively impacted by growing protectionism and the Washington-Beijing tensions. Even though China’s declining FDI is helping some nations, cross-border investment is declining overall.
According to the World Bank, long-term cross-border investment decreased to 1.7% of world production in 2022. It was 5.3% in 2007. In addition, it decreased by a further 18% in 2023, according to the United Nations Conference on Trade and Development (UNCTAD).
FDI inflows in China for the first nine months of 2022 totalled only $16 billion, compared to $344 billion during 2021. Foreign enterprises’ disinvestment has been almost equal to the amount of capital coming in as new investments.
Global conflicts have contributed to weak economic development and higher interest rates, which have significantly slowed FDI in recent years.
Numerous investment opportunities have been priced out due to the greater cost of capital after factoring in a risk premium. Uncomfortably, UNCTAD reports that the quantity of new renewable energy projects in developing nations decreased by 25% in 2023.
According to Jacob Kirkegaard, a fellow at the Peterson Institute for International Economics (PIIE), one factor contributing to the dramatic decline in investment in China is the country’s abrupt transition from a rapidly rising to a slower-growing economy.
However, the decline in capital flows is also due to restrictions on high-tech investment in China by the Western Bloc, as well as growing worries among global corporations about becoming entangled in geopolitical conflicts.
Remember your friends
According to the International Monetary Fund, over half of the FDIs went to nations that cast comparable votes at the United Nations General Assembly in 2021, up from about 40% in the first ten years of this century.
Since then, there has been increased tension in the world due to China’s growing influence and the Ukraine conflict. The West has launched programmes like “friendshoring” and “de-risking,” which seek to reduce reliance on China by establishing supply chains in friendly nations.
They are also less receptive to Chinese investments in their vital industries. Chinese businesses have invested in nations with positive ties to Washington in an attempt to gain access to the American market through a back door. For instance, the $5 billion industrial park that China’s Lingong Machinery Group is building along the Mexican border with the United States is anticipated to attract investment.
China’s $1.3 trillion Belt and Road Initiative (BRI) now faces competition from the Group of Seven (G7) major industrialised nations. By 2027, they hope to channel up to $600 billion to developing nations to assist them in building infrastructure, such as expediting green transitions in countries like Vietnam.
In the meantime, the US is using the Inflation Reduction Act to pump $369 billion into decarbonising its economy. This law penalises Chinese industry and encourages domestic production, which is a kind of protectionism.
Following FDI flows sans condemning Russia
In January 2024, the World Trade Organisation (WTO) issued a warning, stating that early indications of fragmentation are emerging and that geopolitical conflicts are starting to influence trade flows, even though it is premature to declare the era of globalisation to be over.
According to the WTO, since the invasion of Ukraine, commerce in goods has expanded between two hypothetical geopolitical blocs at a rate between 4% and 6% slower than trade inside these blocs, based on UN voting trends.
An IMF analysis of two decades’ worth of data revealed that, in contrast to the past, the prospect of profitable new markets had a significant influence on the flow of capital in recent years.
“You still find that geopolitics matters even if you control for features like country risk and geographic distance, which is generally a key driver of bilateral trade and financial flows,” explains Andrea Presbitero, deputy head of the IMF’s research division.
Since China is the largest trade nation in the world, a large portion of the shift centres on the world’s manufacturing powerhouse.
According to an updated IMF analysis released by Bloomberg, greenfield investments in China by US companies fell by 57.9% between the second quarter of 2020 and the first quarter of 2023-24, while those by European firms fell by 36.7% compared to the five years before the COVID pandemic. Over two-thirds, less money was invested in China by people from other Asian countries.
Success and failures
According to Hung Tran of the Atlantic Council, emerging economies that can draw investment from both China and Western nations stand to gain the most from these developments. Prime examples include Mexico and Vietnam, where FDI has defied the declining global trend over the previous ten years, at 2.9% and 4.6% of GDP, respectively.
However, global investors have been turned off by the governance issues and overwhelming debt that plague African nations. According to UNCTAD, FDI flows to Africa as a whole were barely $48 billion in 2018.
According to Tim Figures of the Boston Consulting Group, African states have an opportunity to play China and the West off against one another and secure investment. This money may be used for both resource extraction and domestic raw material processing.
India is a mixed bag thus far. It has drawn some interesting investments, most notably from Taiwanese manufacturer Foxconn, which assembles the majority of Apple’s iPhones and is diversifying production away from China. FDI, however, only made about 1.5% of GDP in 2022. Furthermore, according to UNCTAD, it decreased by 47% last year.
High tariffs are one of India’s disadvantages; they force businesses to pay more for their components, discouraging international investors from using the country as an export base.
Another is that it has become hostile to Chinese businesses due to the border standoff between New Delhi and Beijing.
A second Trump era!
As governments and corporations continue to adapt to the ever-changing geopolitical situation, investment flows will continue to change. However, if Trump prevails in this year’s US presidential election, the transformation process may accelerate.
Ultimately, the ex-real estate developer is pledging to apply 10% tariffs to all shipments into the US. He has promised to take a particularly severe stance against Chinese goods by removing China’s trading status as a most favourable nation.
What Trump would do as president is still quite unclear. However, there will be an equally significant impact on global investment if he uses a wrecking ball on global commerce.
Regardless of the outcome of the US elections, political factors are becoming more and more important when making investments globally. That is another reason to be sceptical about global growth, insofar as it warps commercial logic.