New Delhi: Foreign direct investment (FDI) inflows into emerging market economies like India and China fell in 2023, Moody’s Analytics said in a report on Wednesday.
The fall happened due to the shrinking of global investment flows and supply-chain chaos, surging inflation, and tighter funding conditions after the covid-19 pandemic.
“The world’s second-largest recipient of FDI, China, saw a downturn in 2023. Inflows turned negative in the third quarter as withdrawals and downsizing outpaced new investments. More recent data showed a fresh decline in the second quarter of 2024,” the report said.
“FDI into India has also seen better days, falling in recent years despite the country’s push into manufacturing and notable investments from tech giants such as Apple Inc.,” the report added.
The report titled ‘Why FDI Is Shrinking’ said investment flows are being reshaped by economic fragmentation, trade and geopolitical tensions, industrial policies, supply-chain diversification and tighter regulations to thwart the usage of tax havens.
“While retreating inflation and easing monetary policy settings might offer some relief, economic fragmentation will hinder the smooth flow of FDI,” it said, adding that climate change will increasingly shape FDI flows in the long term.
The report was authored by Moody’s Analytics economists Jeemin Bang, Royston How, Dave Chia and Stefan Angrick.
In 2023, emerging economies saw a decline in FDI due to shrinking investments in China and India, although developed economies attracted more FDI inflows than the previous year due to new investments in European conduit economies.
According to the ministry of finance, net FDI inflows to India declined from $42 billion during FY23 to $26.5 billion in FY24. However, gross FDI inflows moderated by 0.6% from $71.4 billion in FY23 to just under $71 billion in FY24.
The FDI inflows have been weak mainly due to geopolitical conflicts, high borrowing costs, and global economic fracturing, according to the latest Economic Survey released last month.
According to data from the United Nations’ trade and development agency UNCTAD, global FDI fell 2% annually in 2023 to $1.3 trillion.
Relative to the size of the global economy, FDI fell to 1.27% of global GDP in 2023 from 1.34% in 2022, well below the average of 2.2% from 2000 to 2019.
The Moody’s report said the lukewarm FDI numbers are part of a larger trend of slowing global FDI flows.
“Annual FDI relative to world GDP has been slipping since the mid-2010s, primarily due to Europe. The continent was a major FDI destination and source, often accounting for more than 50% of global FDI—a figure that far surpassed its economic heft,” it said.
“While annual flows to and from Europe have shrunk in recent years, FDI in North America and the Asia-Pacific region has held up,” it added.
