Foreign Direct Investment in Retreat: Policies to Turn the Tide

Foreign direct investment (FDI)—an important source of external financing for emerging market and developing economies (EMDEs)—has weakened since the global financial crisis, heightening the challenges of filling vast infrastructure gaps, reducing poverty, creating new jobs, and addressing climate change. This study provides a broad perspective on the evolution of FDI inflows to EMDEs since 2000, including patterns across regions and changes in sectoral composition.
It presents fresh empirical analysis on the macroeconomic implications of FDI and the key factors driving FDI. Based on the analysis, it develops an FDI policy strategy that can help EMDEs maximize benefits from FDI. FDI inflows as a share of GDP in the typical EMDE have fallen steadily, dropping to about 2 percent in recent years—less than half of the peak of about 5 percent in 2008. The slowdown has occurred in most economies, and it is evident in four out of six EMDE regions. Nearly 60 percent of EMDEs had lower FDI-to-GDP ratios in 2012-23 than in 2000-11.