Challenging current global macroeconomic conditions will cause some turbulence in foreign direct investment (FDI) inflows in 2023, with higher inflows expected post-2023. While the model of globalization has come into question following recent shocks to international trade and supply chains, globalization will remain firmly in place while firms simultaneously pursue nearshoring and supply chain diversification strategies. With the growing clean energy push and national energy security concerns, renewable energy FDI projects are set for growth, especially supported by conducive policy initiatives.
Evolving Global Economic Conditions and Implications for Foreign Investments
Following the pandemic-induced downturn in global FDI inflows in 2020, strong recovery was seen in 2021, driven by low-interest rate conditions and supportive infrastructure packages. Global FDI inflows rose from $963.1 billion in 2020 to $1.6 trillion by 2021, well-surpassing pre- pandemic levels, with developed economies registering an increase from $319.2 billion to $745.7 billion between 2020 and 2021 and developing economies witnessing a rise in FDI inflows from $643.9 billion to $836.6 billion during this period1.
The outbreak of the Russo-Ukrainian war in Q1 2022 and the resultant global consequences exerted negative pressure on FDI in 20222. Project numbers of greenfield announcements and mergers and acquisitions (M&As) witnessed a reversal following war outbreak.
Q1 2023 saw the extension of fragility in global economic conditions, with fears of recession growing. While some recessionary fears were alleviated mid-Q1 2023 because of the avoidance of a severe European winter energy crisis and China’s reopening, the recent string of banking sector failures have again brought recessionary risks to the forefront. Frost & Sullivan expects the world economy to avoid a 2023 recession, although there will be marked global growth slowdown. FDI flows are consequently expected to be subdued in 2023 especially in the context of factors such as rising interest rates and uncertain investment conditions. The latest April 2023 global growth forecasts from the International Monetary Fund (IMF) peg global growth at around 3% for the next five years3—which will be slightly less compared to the average 3.4% growth seen pre-pandemic between 2015 and 20194. However, expected growth and recovery and dissipation of shock effects, compared to current economic conditions, will provide a medium-term boost to foreign investment. Over the next five years, global FDI inflows are expected to trend closer to the $1.7 trillion average seen between 2015-2019, as compared to $1.6 trillion in flows seen in 2021.
Supply Chain Reorientation in an Era of Resilience-building
The global economy has had to withstand several shock events in the recent past, exposing the vulnerabilities of globalized trade and supply chains. The outbreak of US-China trade wars in 2018 led to hefty punitive tariffs on US-China trade, with some companies working to circumvent these tariffs through relocation or rerouting to Mexico or Vietnam. The pandemic further highlighted globalization risks, with supply chain susceptibilities thereafter tested with the fallout from the Russo-Ukrainian war. Considering these events, strategies such as nearshoring and China Plus One (C+1)5 have come to the fore as businesses seek to limit shock exposure, improve agility, and fortify supply chain resilience.
Take the case of China for example—China’s attractiveness as a manufacturing powerhouse has been tested in recent times considering rising labor costs, trade wars, and strict, enduring COVID-19 control policy measures. A March 2023 survey released by AmCham China (American Chamber of Commerce in China) indicated that 74% of respondents were looking to maintain China operations, although there was an increase in the share of firms that had started or were looking to move production/sourcing abroad. These mixed results point to some deterioration in investment confidence in China, although China nonetheless remains high on the investment radar. Especially in 2023, the case for investing in China is stronger, in the context of global slowdown and recessionary risks in advanced economies and China’s higher economic growth potential. Adding to this is established production base and the large consumer market that China represents. In this context, as opposed to complete relocation away from China, C+1 strategies are likely to be at the forefront as companies maintain some China presence while simultaneously pursuing strategic diversification.
Despite nearshoring and diversification gaining prominence, the benefits attached to global supply chains cannot be overlooked. Some of the advantages are multinationals benefitting from more competitive labor costs in international destinations, policy benefits compared to home countries, and improved access to larger consumer markets. So, while globalization continues to remain the order of the day, we can also expect companies to pursue strategic supply chain decisions to mitigate excess dependency on certain markets, curtail risk exposure, and build more agile supply chains. In this regard, artificial intelligence (AI)-driven, digitally enabled supply chains will also prove to be crucial.
The Next Go-to Investment Destinations—Unveiling the MUVICS (Malaysia, UAE, Vietnam, India, China, Saudi Arabia)
Through a data-driven, weighted indexing approach, Frost & Sullivan has identified the next cluster of go-to emerging markets which businesses should look to prioritize over the next 2-3 years. This promising investment cluster, the MUVICS, comprises of Malaysia, UAE, Vietnam, India, China, and Saudi Arabia. This grouping represents a combination of countries from Asia Pacific and the Middle East regions which are relatively insulated from the ongoing global economic slowdown and poised to drive global growth.
Looking at the case of India for example—the Indian economy has emerged as a global growth frontrunner amidst challenging global economic conditions, in part supported by its domestic demand-driven resilience. Other than competitive labor costs and demographic dividend advantages, the Indian government has also been working to stimulate manufacturing investments through conducive policies. Vietnam will also see resilient growth in 2023; adding to this is its proximity to China and labor cost advantages which position Vietnam as an important C+1 destination. Turning towards the Middle East— the Saudi Arabian economy has displayed strong levels of GDP growth amidst global slowdown, partially supported by higher trending oil prices. The prioritization of economic diversification beyond oil will especially support Saudi Arabia’s economy’s growth trajectory while also unlocking several investment opportunities across several non-oil industries.
Growing Sustainability Thrust in FDI
Post-pandemic government stimulus and recovery packages evidenced the growing support for clean energy push, with the Russo-Ukrainian war and resultant energy supply disruptions further highlighting the need for boosting energy security and accelerating renewables development. This sustainability push is also evidenced from emerging FDI patterns across the global economy. For Europe in particular, 2017-2021 data points a sharp increase in the number of international investment projects in renewables, with Q1-Q3 2022 data indicating that Europe accounted for nearly 50% of both greenfield climate change mitigation projects as well as international project finance deals related to climate change6. North American and Asia thereafter followed Europe with regards to higher numbers of Q1-Q3 2022 climate change projects and deals.
Greenfield projects in 2022 were helped by megaproject announcements as well as higher average size of renewables projects. Data on the largest greenfield project announcements from 2022 is indicative of the growing sustainability focus, amongst other global priorities. Out of the ten largest greenfield project announcements from 2022, three were related to chip factory investments considering lingering supply chain disruptions; the other six pertained to renewable energy projects, with the estimated capital expenditure for each of these projects ranging from $10- $13 billion7.
Conducive policy efforts have a key role in stimulating sustainability linked FDI inflows. 2010-2022 data for developing economies with regards to climate change-related investment policy measures reveals that the highest number of policy measures, 24, pertained to incentive and facilitation measures; this was followed by 15 liberalization policy efforts8. A 2021 circular in China, for example, emphasized preferential tax and other policies for FDI in energy-saving and other industries, while Philippines, in 2022, removed the 40% foreign ownership cap in renewables—in effect allowing for 100% ownership.
1 United Nations Conference on Trade and Development (UNCTAD), FDI Inflows by Region and Economy 1990-2021
2 Full-year UNCTAD FDI figures for 2022 are not released as yet
3 Reuters (April 2023), IMF’s Georgieva Sees Global Growth below 3% in 2023, says Robust Recovery remains ‘Elusive’
4 IMF (October 2022), World Economic Outlook Database
5 Involves expansion of operations beyond China while simultaneously maintaining presence in China; pursued to achieve diversification and supply chain resilience
6 UNCTAD (June 2022), World Investment Report 2022; UNCTAD (October 2022), Investment Trends Monitor (Special Issue 43)
7 UNCTAD (October 2022); Investment Trends Monitor (Special Issue 43)
8 UNCTAD (September 2022); Investment Policy Monitor (Special Issue 9)
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This article is authored by Neha Anna Thomas, Program Manager - Economic Analytics, Frost & Sullivan, which has six decades of experience analyzing industry transformation and identifying innovative growth opportunities. Frost & Sullivan is an Official Knowledge Partner of the Annual Investment Meeting.
