Divergence Beneath Surface Prosperity: Emerging Market Challenges Behind Global FDI Growth in 2025

Divergence Beneath Surface Prosperity: Emerging Market Challenges Behind 2025 Global FDI Growth

In 2025, global foreign direct investment (FDI) rebounded by 14% to $1.6 trillion, a figure that seemingly brought an end to two consecutive years of investment downturn. However, the latest Global Investment Trends Monitor report released by the United Nations Conference on Trade and Development (UNCTAD) reveals a more complex reality: this growth not only masks the fragility of actual investment activity, but also highlights the widening investment gap between developed and developing countries. For the Global South, this is not a shared recovery, but a warning of structural divergence.

The "K-Shaped" Recovery of Global Capital Flows

The impressive headline figures are mainly contributed by advanced economies. According to the report, FDI inflows to advanced economies surged by 43% to $728 billion, with the EU leading the way with a 56% increase, driven mainly by large cross-border mergers and acquisitions in countries such as Germany, France, and Italy. At the same time, FDI to developing economies fell by 2%, totaling $877 billion. More worrying, among the least developed countries, three-quarters are facing stagnant or shrinking direct investment.

This "K-shaped" recovery is no accident. Global capital is increasingly flowing to developed regions with political stability, well-established infrastructure, and mature market sizes, while emerging markets are being marginalized by risk-averse sentiment due to geopolitical tensions, debt pressures, and policy uncertainty. Even within developing countries, divergence is intensifying: some Asian economies such as India, Thailand, and Malaysia can still attract large projects, but most countries in Africa and Latin America are excluded from the capital feast.

Notably, the report points out that more than $140 billion of the global FDI growth came from conduit flows through financial centers. If this portion is excluded, the actual global FDI growth rate is only about 5%. This means that genuine productive investment is far from recovering to pre-crisis levels, while financial-engineering-driven capital flows have inflated the overall figures. For emerging markets, such inflated prosperity has no substantive meaning, and may even mask the deterioration of the investment environment.

The Data Center Boom: Winners and Losers in the New Economy

Against the backdrop of sluggish growth in total capital, industry concentration has increased significantly. In 2025, data center projects accounted for more than one-fifth of the total value of global greenfield projects, with announced investment exceeding $270 billion. This boom is driven by the rapid expansion of AI infrastructure and digital networks. France, the United States, and South Korea became the main host countries, but emerging markets such as Brazil, India, Thailand, and Malaysia also successfully attracted large projects. Meanwhile, announced investment in semiconductor projects grew by 35%.However, this highly capital-intensive and technology-driven investment may be a double-edged sword for developing economies. On the one hand, it does bring advanced technology and job opportunities; on the other hand, such projects often require enormous energy supplies and a highly specialized workforce, while having limited linkages with the local economic chain. The report explicitly points out that this type of investment “generates limited spillover effects.” If policies fail to effectively connect digital infrastructure investment with skill development, innovation systems, and local value creation, the so-called “digital dividend” may well be short-lived.

More alarming is that in industries with high tariff exposure and dense global value chains, such as textiles, electronics, and machinery, the number of new projects plummeted by 25%. This reflects that global supply chains are shifting from a traditional efficiency-oriented approach to a security-oriented one, and Global South countries in mid- to low-end manufacturing may become direct victims of this shift. They find it difficult to compete with developed countries in high-end technology, yet can no longer maintain their existing advantages in labor-intensive industries, leaving them in a dilemma.

Weak Infrastructure Investment: A Long-term Hidden Danger for the Global South

If the boom in data centers represents “future growth,” then the weakness in infrastructure and renewable energy investment means that “current development” is facing a crisis. The report shows that international infrastructure projects fell by 10%, with renewable energy projects experiencing a sharp decline. Investors are reassessing revenue risks and regulatory uncertainties, causing many large clean energy projects to stall.

Particularly noteworthy is that domestically led infrastructure projects have seen a strong rebound, but in the absence of international financing, this is equivalent to adding insult to injury for developing countries that rely heavily on external funds. Many low-income countries already have strained fiscal space, and domestic investment cannot fill the gap left by the withdrawal of international capital. UNCTAD warned that this shift could widen the investment gap among countries that depend on international financing for large-scale infrastructure construction.

For the Global South, infrastructure is not only the hardware foundation for economic development, but also a necessary condition for attracting more foreign investment. When international investors lose confidence in the profitability models of renewable energy projects, and emerging markets are unable to bear the cost of large-scale infrastructure investment on their own, a vicious cycle quietly takes shape: backward infrastructure leads to declining investment attractiveness, and insufficient investment further ages infrastructure. This predicament is particularly acute in sub-Saharan Africa and parts of South Asia.

2026 Outlook: Policy Choices Under a New Normal of Uncertainty

Looking ahead to 2026, the global investment outlook remains fragile. The report suggests that if financing conditions continue to ease and cross-border M&A activity recovers, FDI may see moderate growth. However, factors such as geopolitical tensions, policy uncertainty, and economic fragmentation will continue to dampen actual investment activity. Unless countries take coordinated action, global investment will become even more concentrated in a few regions and industries.For emerging markets and developing economies, this prospect means they must change their approach. In the short term, they need to attract more resilient capital by improving the business environment and strengthening regional cooperation; in the long term, they should focus on enhancing local innovation capacity and cultivating industrial linkages to avoid being locked into the low end of global value chains. The shift in global growth centers does not happen automatically; it requires proactive policy shaping.

The data from 2025 reminds us that the Global South is undergoing a "quiet divergence." Some countries, riding the wave of the digital economy and leveraging geographical advantages, have become investment hotspots, while more countries are being pushed to the margins. In the tides of international capital flows, only those economies that can convert external resources into endogenous growth drivers can truly benefit. Otherwise, so-called growth is merely numbers on paper, and the real divide will continue to widen.

Information source URL: https://unctad.org/news/global-foreign-investment-14-2025-growth-concentrated-developed-economies