Advancing Sustainable Development With FDI: Why Policy Must Be Reset



Simon J. Evenett, Johannes Fritz | Global Trade Alert

Properly guided, foreign direct investment has transformed the prospects of firms, sectors, regions, and even economies. In particular, developing countries havebenefited from greenfield investments, opportunities have been created for millions of employees and their families, and living standards have risen.

As multinational corporations are perceived as having ever- growing reach, and now that sophisticated international value chains criss-cross the planet, governments and civil society are demanding that international business does more to advance sustainable development and to tackle climate change. Governments are on record stating that they cannot finance and deliver on the Sustainable Development Goals without private sector engagement.

The reality on the ground is different, however. Companies are resorting less and less to foreign direct investment. Once a hallmark of globalisation, FDI has been in trouble for some time—a fact compounded by the ongoing pandemic:

  • Even before last year’s 42% drop, sensibly benchmarked annual inflows of FDI have been in decline since the Global Financial Crisis.

  • The economic fallout from COVID-19 has witnessed new FDI flows retreating to levels not seen for 25 years.

  • New greenfield investments into developing countries have been particularly hit last year, falling 57% year- on-year in the fourth quarter of 2020.

  • Globally, the average return on FDI fell during the past decade. Mean FDI returns fell more in developing countries than in higher income countries.

Discussions on the contribution of international business to pressing global challenges need a reset. FDI cannot make a meaningful contribution to sustainable development and to tackling climate change unless sufficient FDI happens in the first place. Deliberations on the quality of FDI and on business conduct are important, but the quantity of FDI matters too

With over $11 trillion invested in developing countries, both international business and governments have a huge stake in reviving the commercial fortunes of FDI. To date, too much of the onus has been on international business. For example, the private sector has been told by advocates of sustainable development to “align” with the global and societal transformations needed to accomplish the Sustainable Development Goals.

Those advocates and policymakers must reflect and act on why the returns to FDI in key sectors are so low and why only a trickle of FDI inflows has occurred in them. Enhanced corporate contributions to sustainable development should be balanced by policy reforms to restore the commercial viability of FDI in developing countries—a proven mechanism to transfer management expertise, people, capital, and technology. Urgently needed is a reset in deliberations on what international business can realistically deliver, especially if there is no reversal in the worsening policy treatment of FDI that is documented in this report.


To read the full report from Global Trade Alert, please click here.