Over the past five years, foreign direct investment has gradually declined overall.
The global economy collapsed with the pandemic. Foreign direct investment, i.e. purchases of foreign companies and significant company shares or of production facilities abroad, fell to the lowest level since the early 2000s. However, investments have recovered in the past year. Inflows to Europe have more than doubled.
History shows that the conditions for international investment can change quickly. After the end of the Cold War, there was a consensus on the need for open markets and an attractive business climate. The financial sector was deregulated and expanded, leading to a rapid increase in global trade in goods and services.
A first peak in foreign direct investment was reached in 2000. The trend was interrupted by the dot-com crash, which caused the market value of many companies to fall and hit the economy in Europe and the US.
Over the next decade, low cost was the driving force behind the establishment of manufacturing facilities and supply networks. Geographical fragmentation of production and a wave of acquisitions contributed to a new high in FDI in 2007.
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Shortly thereafter, the global financial crisis forced companies to reconsider their expansion plans. A new peak in foreign direct investment was only reached in 2015.
Why foreign direct investment will increase again
Over the past five years, foreign direct investment has gradually declined overall, although the subset of corporate takeovers has steadily increased. The downturn is partly due to an increased focus on near-market production. Economic nationalism and aggressive industrial policies also play a role, as do rising geopolitical tensions, not least between the US and China.
Lena Sellgren is Chief Economist at Business Sweden.
(Photo: Business Sweden)
Asia had the largest global direct investment inflows in 2021, according to the United Nations Conference on Trade and Development (UNCTAD). However, Europe still accounts for the largest share of existing FDI – 36 percent – closely followed by North America with 34 percent and Asia with 22 percent.
The war in Ukraine has caused prices for energy, raw materials and food to skyrocket. Inflation is skyrocketing and interest rates are rising. The deteriorating geopolitical situation is having serious consequences for companies with a presence overseas.
Nevertheless, investors are optimistic. Takeover activity is high and public investment in climate protection and infrastructure is providing an additional boost. This suggests that FDI will continue to grow this year, albeit at a slower pace.
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