Global Foreign Direct Investment Trends in 2024

In 2024, global foreign direct investment (FDI) experienced an eight per cent decrease. This decline poses a serious threat to the progress of the Sustainable Development Goals (SDGs), which depend heavily on international project finance. The United Nations Conference on Trade and Development (UNCTAD) reported this trend in its Global Investment Trends Monitor, published on January 20, 2025.

Decline in International Project Finance

International project finance, essential for infrastructure and energy investments, saw downturn. The number of deals fell by 26 per cent, while their total value decreased by nearly a third. This decline was evident in both developed and developing economies. In developed countries, project finance deals dropped by 29 per cent, continuing a downward trend from 2023. Developing economies also faced challenges, with a 23 per cent decrease in the number of deals and a 33 per cent decline in value.

Impact on Major Emerging Markets

Major emerging markets such as Brazil, China, Indonesia, and Mexico experienced declines in project numbers that were larger than the global average. This trend indicates a broader issue affecting investment climates in these regions, which are crucial for global economic stability.

Infrastructure and Renewable Energy Trends

The infrastructure sector continued to suffer, with international project finance deals falling by 31 per cent in number and 26 per cent in value. Renewable energy projects, which had previously driven growth in this area, also slowed down. There was a 16 per cent drop in both the number and value of renewable energy projects. Regions such as North America, developing Asia, and Latin America and the Caribbean saw declines in renewable energy investments, while Africa was the only region to experience an increase of eight per cent.

SDG-related Investments

The investment environment for sectors critical to achieving the SDGs remains challenging. In 2024, SDG-related investments fell by 11 per cent. While there was some growth in renewable energy, health, and education sectors, key areas such as infrastructure, agrifood systems, and water and sanitation saw fewer internationally financed projects than in 2015, when the SDGs were adopted.

Prospects for 2025

Looking ahead to 2025, moderate growth in FDI is anticipated, supported by improved financing conditions. However, geopolitical tensions and global economic instability present risks. The ongoing decline in international project finance marks the urgent need for robust strategies to attract and sustain investment. This is particularly important for sectors vital for sustainable development.

Questions for UPSC:

1. Critically analyse the implications of declining foreign direct investment on global economic stability.
2. What are the key factors contributing to the decline in international project finance? Discuss their impact.
3. Estimate the role of renewable energy projects in achieving Sustainable Development Goals in developing economies.
4. Point out the challenges faced by emerging markets in attracting international project finance. What strategies could be employed to overcome these challenges?

Answer Hints:

1. Critically analyse the implications of declining foreign direct investment on global economic stability.

1. Declining FDI threatens job creation and economic growth, leading to increased unemployment rates.
2. Reduced investment hampers infrastructure development, affecting essential services and overall quality of life.
3. Lower FDI can lead to currency depreciation and inflation, destabilizing economies.
4. Countries may face difficulties in financing sustainable development initiatives, hindering progress towards SDGs.
5. Increased uncertainty in investment climates can deter future investments, creating a vicious cycle of decline.

2. What are the key factors contributing to the decline in international project finance? Discuss their impact.

1. High interest rates raise borrowing costs, making it less attractive for investors to finance projects.
2. Geopolitical tensions create uncertainty, discouraging investment in vulnerable regions.
3. Economic instability globally affects investor confidence, leading to a reduction in project announcements.
4. Declining demand for commodities and energy can reduce the viability of related projects.
5. The COVID-19 pandemic’s lingering effects have disrupted supply chains, complicating project execution.

3. Estimate the role of renewable energy projects in achieving Sustainable Development Goals in developing economies.

1. Renewable energy projects contribute to energy access, a critical component of Goal 7 (Affordable and Clean Energy).
2. They promote environmental sustainability, aligning with Goal 13 (Climate Action) by reducing carbon emissions.
3. Investment in renewables can create jobs, supporting Goal 8 (Decent Work and Economic Growth).
4. Renewable projects enhance energy security, which supports economic stability and growth.
5. Despite recent declines, they remain vital for achieving SDGs, particularly in energy-dependent developing economies.

4. Point out the challenges faced by emerging markets in attracting international project finance. What strategies could be employed to overcome these challenges?

1. Emerging markets face political instability, which deters foreign investors due to perceived risks.
2. Lack of infrastructure and regulatory frameworks can hinder project implementation and investor confidence.
3. Economic volatility and currency fluctuations make investments riskier for foreign entities.
4. Limited access to financial markets restricts the ability to fund large-scale projects.
5. Strategies to overcome these challenges include improving governance, enhancing regulatory frameworks, and creating incentives for foreign investors.