Reshaping of the Global FDI Landscape: How Emerging Markets Respond to Changes in Capital Flows

Global FDI Enters a New Normal

Foreign direct investment (FDI), once regarded as the most stable source of external financing for developing countries, has experienced a significant contraction in flows over the past few years. According to a white paper prepared by the International Finance Corporation (IFC) of the World Bank Group for Japan’s G7 presidency, FDI flows to developing countries fell to approximately $662 billion in 2022, compared with an annual average of over $1 trillion in the decade before the pandemic. This decline is not a cyclical fluctuation but the result of multiple structural forces at play.

A Shift from Scale to Structure

The surface-level causes of the FDI decline include a slowing global economy, geopolitical tensions, and the ongoing impact of the COVID-19 pandemic. Yet what deserves greater attention is the profound restructuring of global value chains. Multinational corporations are no longer solely pursuing cost minimization; they are incorporating supply chain resilience and national security into their investment decisions. Green investment incentives introduced by advanced economies—such as the U.S. Inflation Reduction Act and the European Union’s Green Deal Industrial Plan—are channeling substantial capital back home or toward “friend-shoring” markets.

At the same time, the modes of FDI entry are also changing. The share of greenfield investments (new projects) is declining, while mergers and acquisitions as well as joint ventures are increasing. Capital is increasingly concentrated in the digital economy, renewable energy, and technology-intensive manufacturing, while traditional resource-based industries are losing their appeal. This shift poses challenges for developing countries that rely on low-cost labor and resource exports.

The Collective Predicament of Emerging Markets

Developing countries face pressure on two fronts in the global battle for FDI. First, rising interest rates have driven up financing costs, exacerbating sovereign debt risks. Second, developed countries are erecting “green barriers” through subsidies and localization requirements, making it harder for developing nations to attract comparable investment in emerging sectors such as solar energy and electric vehicle batteries. For instance, the European Union’s Carbon Border Adjustment Mechanism (CBAM) could further reduce the attractiveness of economies dependent on high-carbon industries.

The IFC report notes that policy uncertainty is one of investors’ biggest concerns. In emerging markets, policy reversals, contract breach risks, and weak governance are amplified when the macro environment deteriorates. Meanwhile, the demands of digital transformation and climate change adaptation require substantial upfront investment, yet many countries lack the fiscal space to do so.

How the Global South Can Respond

Despite the grim challenges, developing countries are not without room for maneuver. The IFC recommends focusing on three dimensions:

1. Improving the Investment Environment: Simplify approval processes, strengthen intellectual property protection, and enhance regulatory transparency. Countries such as Chile and India have reduced corporate compliance costs through digital reforms. 2. Focusing on Regional Cooperation: Regional integration mechanisms like the African Continental Free Trade Area (AfCFTA) and the ASEAN Economic Community can create larger markets and attract FDI tailored to regional needs. For example, cross-border infrastructure projects (such as Africa's Dar es Salaam Corridor) can simultaneously lower logistics costs and investment risks. 3. Embracing Sustainable Development: Integrate ESG standards into national development policies, issue green bonds, and establish carbon credit markets to attract capital that values long-term returns. Egypt introduced international PPP models in the renewable energy sector, successfully leveraging billions of dollars in investment.

Long-Term Perspective: Demographic and Digital Dividends

The advantages of emerging markets remain. There are over 2 billion young people aged 15–34 globally, with 90% living in developing countries. If equipped with digital skills through vocational education, these countries can unleash enormous consumption and productivity potential. Vietnam, Nigeria, and Indonesia have benefited from the relocation of manufacturing by combining young labor forces with digital infrastructure.

Furthermore, the global goal of carbon neutrality is accelerating the energy transition, providing new FDI entry points for countries rich in critical minerals such as lithium, cobalt, and rare earths. However, these countries must establish reliable mining governance and environmental standards to avoid repeating the "resource curse."

Conclusion

The reshaping of the global FDI landscape is not a zero-sum game. While developed countries "internalize" through industrial policies, developing countries need to more proactively embed themselves in new value chain nodes. The IFC white paper reminds us that capital only flows to markets with stable returns and controllable risks. For emerging markets, the real growth code lies not in waiting passively, but in structural reforms—from the rule of law to digital infrastructure, from regional integration to green transformation. Only then can they secure a favorable position in the next round of global capital flows.