Declining Foreign Direct Investment: A Call for Urgent Reforms
The World Bank has issued a stark warning regarding the detrimental impact of restrictive trade and investment policies adopted by various governments worldwide. These policies are poised to suffocate foreign direct investment (FDI), a crucial driver of economic growth in Nigeria and other developing nations.
A Concerning Decline in FDI
In a recent report released in anticipation of the upcoming Conference on Financing for Development, scheduled to occur in Seville, Spain, the World Bank highlighted a concerning trend: FDI in developing economies plummeted to $435 billion in 2023, marking its lowest level since 2005. Advanced economies, too, reported disappointing figures, with only $336 billion in FDI inflows—the weakest since 1996.
Indermit Gill, the Chief Economist and Senior Vice President at the World Bank, linked this significant drop in investment to intentional policy decisions made by governments. He stated, “It’s not a coincidence that FDI is plummeting to new lows at the same time that public debt is reaching record highs.” Gill emphasized the urgent need for private investment to foster economic growth, pointing out that FDI is one of the most efficient forms of such investment. Yet, in recent years, governments have focused on imposing barriers rather than dismantling them.
Economic Implications of Reduced FDI
As a percentage of GDP, FDI inflows to developing economies accounted for a mere 2.3% in 2023, a stark contrast to nearly double that figure during the peak year of 2008. Ayhan Kose, the Deputy Chief Economist and Director of the Prospects Group at the World Bank, described the current trend as alarming, stressing that reversing this decline should be a top priority for both governments and development partners. He remarked, “With the global community gearing up for the Conference on Financing for Development, the sharp drop in FDI to developing economies should sound alarm bells. Reversing this slowdown is not just an economic imperative; it’s essential for job creation, sustained growth, and achieving broader development goals.”
The Restrictive Policy Landscape
The report further indicated that in 2025, half of all FDI-related policy changes in developing countries have been restrictive, marking the highest share since 2010. Investment treaties, which have the potential to boost FDI by over 40%, have seen a significant decline in their implementation. Between 2010 and 2024, only 380 new treaties came into force, a stark comparison to over 1,000 established in the 1990s. Similarly, new trade agreements have dwindled, with an average of just six initiated annually in the 2020s compared to eleven in the preceding decade.
Recommendations for Attracting FDI
In light of these findings, the World Bank advocates for governments to prioritize reforms aimed at attracting FDI. Recommendations include:
- Enhancing the Business Climate: Governments should create more favorable conditions for investment.
- Reducing Informality: Addressing informal economic activities can boost investor confidence.
- Strengthening Institutions: Robust institutions can foster a more stable investment environment.
- Investing in Human Capital: A skilled workforce is essential for maximizing the benefits of foreign investment.
The bank noted that countries making strides in these areas tend to experience significantly higher economic returns from foreign investment. For instance, a 10% increase in FDI inflows could potentially elevate real GDP by 0.3% within three years and up to 0.8% in nations with stronger institutions and higher productivity.
Addressing Unequal FDI Distribution
The report also brought attention to the unequal distribution of FDI, indicating that two-thirds of inflows to developing economies from 2012 to 2023 went to just ten countries. Alarmingly, China received nearly one-third of the total FDI, while the 26 poorest countries collectively garnered a mere 2%.
The Need for Global Cooperation
The World Bank has called for enhanced global cooperation to direct FDI towards countries that require it the most, emphasizing the necessity of maintaining a rules-based order. Additionally, it stressed the importance of supporting structural reforms through both technical and financial assistance.
In its ongoing efforts, the World Bank aims to play a pivotal role in mobilizing private capital by reducing investor risk, enhancing market conditions, and amplifying private sector engagement. The time for decisive action and reform is now, as the future of economic growth in developing nations hangs in the balance.
