Tracing three decades of foreign direct investment booms and busts and their recent decline

The trade war waged by the US Administration is also an investment war: In 2018, global foreign direct investment (FDI) declined again – the third year in row. For the world economy, this is a disadvantageous development and has negatively impacted global economic growth in 2018. Even though annual FDI flows tend to be unstable and frequently experience ups and downs, their recent decline can be regarded as yet another indicator for the current unhealthy condition of the global economic order. A quick recovery is not in sight.

Foreign direct investment (FDI) is an essential part of economic globalization. It promotes the international division of labor and help companies to build global value chains (GVCs). In this way, FDI contributes to the increasing economic interconnectedness between countries and people. The definition, motives and effects of FDI are laid out in detail in our GED Explains blogpost by Thieß Petersen.

Development of global FDI flows in the last three decades

Following the fall of the iron curtain at the beginning of the 1990s, global FDI experienced a decade of slow but steady increase. The 1990s were a phase of accelerating globalization and outsourcing activities by western multinationals, in which FDI in developing countries with low labor cost (e.g. China) played an important role. The developed economies dominated global FDI flows, while FDI from developing countries played a negligible role in terms of outflows, but due to outsourcing a clearly more important role in terms of inflows (figure 1 and 2).

After reaching a preliminary peek in 2000, both FDI outflows and inflows were sent on a downward spiral by the burst of the dotcom bubble in the early 2000s. In the following years, they recovered and reached unprecedented heights in 2007 shortly before the outbreak of the Global Financial Crisis. From 2003 onwards, developing countries, especially China, started to play a more important role as outward investors, as their firms sought opportunities on global markets through pushing their own internationalization process.

After the Global Financial crisis in 2008/2009 and the Euro crisis closely following in 2010, developed countries FDI outflows and inflows experienced more ups and downs than in the two decades before. FDI from developing countries, however, continued to grow. The gap between inflows to developing and to developed countries clearly decreased. In 2014 and 2018, developing economies for the first time even received more FDI than developed countries did.

Developing countries have also been catching up in terms of FDI outflows: While these constituted only 20 percent of global FDI outflows in 2009, their share reached more than 40 percent in 2018, getting close to the level of those from developed countries in 2018. One has to keep in mind, though, that especially the “China factor” has been the key driver of foreign direct investment outflows from developing countries: More than 30 percent of these came from China in 2018. This share was even higher in the years before, while China’s share in global FDI inflows has been at a constant level of about 20 percent for several years in a row now.

On developed countries’ FDI, the “Trump factor” appears to have had a similar effect as the “China factor” had on FDI from developing countries, albeit in the opposite direction: Since Donald Trump took office in 2016, both developed countries’ foreign direct investment outflows and inflows have halved. This development is to a large part driven by the United States themselves as the largest home and host country of global FDI: In 2018, US FDI outflows were negative, i.e. driven by disinvestments, and inflows had dropped by 55 percent compared to 2016.

While one reason for disinvestments abroad could be that some American companies relocated parts of their economic activities back home, the development of FDI inflows to the US clearly shows that President Trump has not reached his widely propagated goal: bringing back jobs to America. To the contrary, it appears that foreign companies have invested less in the United States in recent years than ever before and thus hardly created that many jobs. Just like the trade war, the investment war hurts the country that started it most: the United States of America.

No end of global insecurities ahead: Poor prospects for global FDI:

FDI constitute an integral part of the global economy. However, companies need a stable and foreseeable economic environment in order to increase their investment activities. If this condition is not given, companies may hold back and postpone investment decisions or even disinvest.

In recent years, global insecurities have been rising, as the United States has been breaking away as the backbone of a rules-based international economic order, Brexit is looming ahead and countries worldwide are increasingly reverting to protectionist measures – not only in terms of trade but also in regards to foreign direct investment. These developments have had a negative impact on global FDI. Since the next presidential election in the United States is upcoming in 2020 and important issues surrounding Brexit are far from being solved, it is rather likely that current insecurities and antics in regard to trade and investment policies will linger on. It is questionable if global FDI flows will recover any time soon.