UN report highlights changing FDI landscape

MONDAY, JUNE 10, 2024

Countries seeking to attract foreign investment must focus on sustainability, technology and green production chains, new report says

The Foreign Direct Investment (FDI) landscape is shifting due to geopolitical factors, with Investment trends now focusing more on environmental sustainability and incorporating technology to streamline value chains, according to a new report by UN Trade and Development (UNCTAD) titled "Global Economic Fracturing and Shifting Investment Patterns".

FDI has long served as an economic driver for many countries. According to the World Investment Report 2023 by UNCTAD, Thailand accumulated FDI valued at $306.163 billion, ranking second in ASEAN after Singapore ($2.3 trillion), followed closely by Indonesia ($262.920 billion), Vietnam ($210.471 billion), and Malaysia ($199.206 billion). It was a similar picture in 2022, though Indonesia, Vietnam and Malaysia beat Thailand’s $10.034 billion in the investment stakes with $21.968 billion, $17.900 billion and $16.940 billion respectively.

These statistics reflect the evolving global investment landscape influenced by various factors, necessitating policy adjustments for countries, especially developing ones like Thailand, to remain competitive. In short, FDI must now contribute to sustainable development in Thailand.

Promoting sustainable investment

The report highlights the need for immediate action to ensure that the benefits of investment are more equitably distributed and aligned with comprehensive development objectives.

Policy recommendations suggest that developing countries should shift from traditional investment incentives towards promoting sustainable development investments. Policymakers, businesses, and relevant stakeholders must collaborate to create an open and fair investment environment globally and regionally.

Global value chain trends and geopolitical dynamics are increasingly integrating sustainability into investment strategies. Therefore, investment policies must adapt to this trend, as global production methods are being upgraded and new technologies are being adopted.
Reduced interest in investing in China

The report also notes a significant shift in FDI, with China’s role as a major recipient of FDI declining. Multinational companies are showing less enthusiasm for new investments in China.

“Investment decisions are increasingly influenced by geopolitical factors, sometimes surpassing economic considerations, complicating traditional investment promotion approaches and hindering FDI-driven development," the authors write,

Smaller developing countries are often overlooking sustainability, reducing their chances of attracting foreign investment, despite the growing trend of FDI expansion in environmental technology sectors. Although these investments may not fully compensate for the continued slowdown in the manufacturing sector since Covid-19, they highlight the increased economic risks faced by these countries.
Technology compressing global value chains

The report indicates that for developing countries, especially those at the early stages of their development journey, integrating into global value chains (GVCs) is essential. New FDIs are designing these structures, but unprepared investment sources may be excluded.

“Challenges in climbing the GVC ladder for low-income developing countries often stem from a lack of technological capability and human capital to access FDI and high-value service sectors within GVCs, reshaping current FDI patterns."

To attract more investment, many countries are exploring new trade tools, seeking economic activities that align with FDI needs, such as robust service sectors, and collaborating with neighbouring countries to strengthen regional GVCs.

Regional connectivity as a new investment attraction

Regional value chain growth presents opportunities to adapt to changing FDI structures and stimulate local development. However, regional development faces challenges, such as the cross-border flow of capital and goods, which have been difficult for many regions over the past decade.

Policy initiatives targeting regional integration must facilitate closer cross-border connections, ease trade and investment, and implement effective regional investment provisions.

Key tools for addressing these challenges include Free Trade Agreements (FTAs), which must be modern and align with global value chains. Modern FTAs should facilitate data flow, payment systems, digital trade, and suitable investment provisions.

These factors strengthen the fundamental infrastructure necessary for attracting investment, such as special economic zones (SEZs), which may need to be established along borders to connect with neighbouring countries.

For example, despite ASEAN's efforts over the past decades to attract investment through various policies, it still accounts for only 15% of global FDI.