Despite a testing environment, FDI growth for the year remains possible.

Prospects for global foreign direct investment (FDI) are “challenging” this year, as the world economy faces weakening growth prospects and a continuation of tensions over trade and geopolitics, according to the UN Trade and Development (Unctad) World Investment Report 2024.

Global FDI flows in 2023 decreased marginally by 2% to $1.3tn, but were affected by “wild swings in financial flows” through a few European economies. When removing the effects of these conduit countries, Unctad estimates that global FDI fell by 10% between 2022 and 2023.

Unctad’s report, which was released on June 20, argued that some multinational enterprises (MNEs) are now taking a cautious approach to their overseas expansion due to factors like lower expectations for growth, geopolitical tensions, industrial policies and supply chain diversification.

A notable weak spot in 2023 was cross-border mergers and acquisitions, which fell by 46% in value compared to the previous year, due to tighter financial conditions, regulatory scrutiny and volatility in financial markets. International project finance, which is critical for infrastructure investment, was also down by 26%, impacting investment in sectors related to the sustainable development goals, according to Unctad.

Meanwhile, greenfield FDI projects increased up by 2% driven by growth in manufacturing projects in a reversal of a decade-long gradual decline in the sector. Developing countries recorded 15% more greenfield projects in 2023 than a year earlier, according to Unctad.

Preliminary fDi Markets data for January to April 2024 suggests that the global greenfield FDI projects have fallen by 15%, compared to the same four months of 2023, while capital expenditure is up by 3%. “Although early indicators for the first quarter of 2024 are still weak, modest growth for the full year appears possible,” read the Unctad report.

The higher levels of capital expenditure are reflective of a long-term trend of FDI becoming more capital intensive as companies pledge more on average to announced projects, particularly in strategic sectors related to the energy transition and digitisation.

Pressure on companies to restructure their global supply chains was reflected in 2023. Compared to 2022, greenfield FDI projects jumped by 24% in value chain-intensive sectors, such as automotive, electronics and machinery, according to Unctad. The number of critical minerals extraction and processing project announcements also nearly doubled from 61 to 114.

A fracturing of the global economy was shown in FDI decision making of major multinationals in 2023. The world’s top 100 non-financial MNEs marginally increased their level of internationalisation — based on their overseas assets, sales and employees, according to Unctad. But since 2019, manufacturing projects by these large firms have shifted closer to major MNE home markets such as Europe and the US.

FDI flows to developing countries meanwhile fell by 7% to $867bn, largely thanks to a 8% decrease in developing Asia. While greenfield project announcements jumped by more than 1000 in developing countries, these were highly concentrated with south-east Asia accounting for almost half.