Muhammad Hammad

International Investment Trends

Global foreign direct investment (FDI) in 2023 decreased marginally, by 2 percent, to $1.3 trillion. This figure was affected by wild swings in financial flows through a small number of European conduit economies; excluding the effect of these conduits, global FDI flows were more than 10 percent lower than in 2022.

The global environment for international investment will remain challenging in 2024. Weakening growth prospects, economic fracturing trends, trade, geopolitical tensions, industrial policies, and supply chain diversification are reshaping FDI patterns, causing some multinational enterprises (MNEs) to adopt a cautious approach to overseas expansion. However, MNE profit levels remain high, financing conditions are easing, and increased Greenfield project announcements will positively affect FDI.

International project finance and cross-border mergers and acquisitions (M&As) were fragile in 2023. M&As, which mostly affect FDI in developed countries, fell by 46 percent in value. Project finance, important for infrastructure investment, was down 26 percent. Tighter financing conditions, investor uncertainty, volatility in financial markets, and – for M&As – tighter regulatory scrutiny were the principal causes of the decline.

Greenfield investment project announcements provided a bright spot. Project numbers increased by 2 percent, with the growth concentrated in manufacturing, interrupting a decade-long trend of gradual decline in the sector. Furthermore, growth was concentrated in developing countries, where the number of projects was up by 15 percent. In developed countries, new project announcements were down 6 percent.

In developed countries, the 2023 trend was strongly affected by MNE financial transactions, partly caused by moves to implement a minimum tax on the largest MNEs. FDI flows in Europe jumped from negative $106 billion in 2022 to positive $16 billion because of volatility in conduit economies. Inflows to the rest of Europe were down 14 percent. Inflows in other developed countries also stagnated, with a 5 percent decline in North America and sizeable falls elsewhere.

Investment Policy Trends

The number of investment policy measures adopted in 2023 was 25 percent lower than in 2022 but still in line with the five-year average. Most measures, 72 percent, were favourable to investors.

The overall balance between favourable measures (liberalization, promotion, facilitation) and less favourable ones (restrictions on entry and operation) was unchanged.

Developing countries mostly aim to promote and facilitate investment, whereas developed countries lean towards more restrictive measures. In developing countries, 86 percent of measures were favourable to investors. In developed countries, 57 percent of measures were less favourable to investors. Most of these concerned restrictions to address national security concerns.

Investment facilitation and incentives were the main types of measures favourable to investors in both developed and developing countries. Facilitation measures reached almost 40 percent of favourable measures and 30 percent of all measures – a record. For incentives, the services sector and renewable energy were the primary focus in 2023.

In 2023, countries and regions concluded 29 new international investment agreements (IIAs). Traditional bilateral investment treaties accounted for fewer than half of the new treaties; most were broad economic agreements with investment provisions.

Efforts to reform the IIA regime are continuing. New treaties tend to include features aimed at safeguarding the right to regulate and they increasingly cover a broader range of issues, including investment facilitation. The recent finalization of the Investment Facilitation for Development Agreement by participating members of the World Trade Organization may provide further impetus for this trend.

Sustainable Finance Trends

The sustainable finance market continues to grow, but there are clear signs of a slowdown. In 2023, the value of sustainable investment products, encompassing bonds and funds, increased by 20 percent to more than $7 trillion. However, much of the increase was driven by cumulative issuance and rising valuations and some segments of the market struggled.

Sustainable bonds showed marginal growth. Issuance climbed 3 percent to $872 billion, bringing the outstanding value of the market to more than $4 trillion. Green bonds were the main driver of growth, while issuance in other segments, especially social bonds, fell.

Sustainable funds experienced strong headwinds. Despite continued growth in the number of funds and asset values, net inflows dropped from $161 billion in 2022 to $63 billion in 2023. In the principal markets, funds in Europe lost growth momentum and those in the United States saw significant net outflows, exceeding those of the broader fund market.

Green washing poses the most significant challenge to the sustainable fund market. The average net exposure of green funds to climate-positive assets (low-carbon assets minus fossil fuels) is only about 20 percent, and fewer than 5 percent of these funds are free from oil and gas assets.

Further systemic efforts are needed to tackle green washing, including well-defined product standards, robust sustainability disclosures, external auditing, and third-party ratings.

Institutional investors made progress on sustainability reporting, but significant gaps remain. In 2023, 58 of the top 100 sovereign wealth and public pension funds monitored by UNCTAD reported on their sustainability performance, up from 55 in 2022. Only a quarter of reporting funds used third-party verification.

Institutional investors are not moving fast enough to reorient portfolios. Most reporting funds have set out strategies to address climate change. However, only one in three have set a target for fossil fuel divestment and investment in renewables.

Governments in both developed and developing economies are accelerating sustainable finance policymaking. In 2023, 35 economies tracked by UNCTAD, covering the world’s largest financial markets, introduced 94 new measures and initiatives, up from 63 in 2022. Policy measures mostly concerned disclosure rules, new national strategies, frameworks and guidelines, and (financial) sector- and product-specific requirements.

Developing countries are becoming increasingly active in sustainable finance policymaking. They accounted for about 60 percent of new policy measures in 2023. These measures were mostly concentrated in the largest developing economies or financial centres. Developing countries as a group continue to face challenges in leveraging sustainable finance, as evidenced by the persistently low sustainable investment flows.

International standards will have significant spill over effects. The new disclosure standards issued by the International Sustainability Standards Board and the European Union will affect firms based outside the main financial markets for which they were primarily developed. Companies in developing countries that are part of the supply chains of firms in those markets will face greater pressure to meet higher sustainability standards, and compliance may become a prerequisite for market access.

Investment Facilitation and Digital Government

Investment facilitation has emerged as a top priority for investment policymakers worldwide. Since the publication of the UNCTAD Global Action Menu on Investment Facilitation in 2016, an international agreement on investment facilitation for development has been negotiated. Facilitation has become a mainstay in regional and bilateral trade and investment agreements, and national implementation efforts have proliferated.

Business and investment facilitation have become central to both private sector developments and FDI attraction in developing countries. Making it easier to establish and operate a business not only attracts foreign investors but also improves the business environment for local firms, supporting the formalization and growth of micro, small and medium-sized enterprises.

At the core of facilitation efforts are information provision, transparent rules and regulations, and streamlined administrative procedures. Because these elements revolve around information and procedures, digitalization is central to their effective implementation.

Business and investment facilitation have thus led to a wave of digital government initiatives, including information portals and online single windows. Such initiatives now make up a significant share of national investment policy measures monitored by UNCTAD; modern IIAs also increasingly encourage digitalization to implement commitments.

The number of digital facilitation tools has grown significantly in recent years, and their quality has improved. UNCTAD data shows that the number of national government information portals for business and investor registration in developing countries increased from 82 in 2016 to 124; in developed countries, it increased from 43 to 48.

In developing countries, the number of online single windows – which allow for multiple procedures to be carried out online – increased from 13 to 67 in the same period; in developed countries, it increased from 12 to 28.

The quality of portals has also improved, with some in LDCs rivalling those in developed countries, showing that leapfrogging opportunities exist.