Troy Elsner, The University of California – Santa Barbara
Abstract
This article addresses the question of whether the recent downturn in global FDI represents a cyclical dampening or a broader structural shift in capital flows. It argues that while the downturn in global FDI can be partially attributed to cyclical market forces, a narrow range of countries have shifted to digitally driven investment, spurring uneven financial growth and threatening sustainable development. It draws upon evidence from the United Nations Conference on Trade and Development and various economic research papers to underscore this structural change. This topic examines the drawbacks of highly concentrated technological investment and elucidates the detriments to sustainable development, which, along with weakened economic growth, directly affect the quality of human life across the globe.
- Introduction
Global foreign direct investment (FDI) has reached a period of immense imbalance. According to the United Nations Conference on Trade and Development, “the share of global foreign investment in the digital economy has climbed from 5.5 percent to 8.3 percent over the past decade.” This growth is largely driven by “expanding digital services, rising demand for software solutions, and emerging tech talent and start-up ecosystems.” While growth from the global tech boom is beneficial, it is not evenly distributed, especially among developing countries and the Global South. Within the Global South, just 10 countries have received 80 percent of FDI in the digital economy. This concentration prevents the robust and maximum potential of global economic growth amidst extreme uncertainty and volatility. This article questions whether the recent downturn in FDI and its uneven flows are caused by cyclical, macroeconomic factors or another force. It proposes that while cyclical factors certainly contribute to the decline of FDI, there is a structural change exacerbating the issue. The current state of FDI is a highly topical matter in global affairs as it intertwines the political and economic interests of global powers with the lives of those in developing countries. In severely underfunded countries without strong digital infrastructure, as well as other weak critical sectors, a prolonged dampening of FDI can inhibit sustainable development goals (SDGs) and exacerbate the consequences of climate change. At its most fundamental point, the uneven flow of FDI is a humanitarian issue. While investor countries pour capital into a select few countries, those excluded lose more agency in global markets. This article will first discuss the historical trends of FDI. It will explain the typical effects of cyclical volatility on FDI, then examine the current structural shift and emphasis on the digital economy. Next, it will detail the inequality of global financial development fueled by digital stress, specifically concerning the loss of investment to critical sectors outside of the digital economy. Afterward, it will reinforce the idea of this structural shift through discussion on the influence of geopolitical fragmentation on leading investor nations. This transition leads to an analysis of the political systems and institutions of FDI-receiving countries, providing potential solutions.
- Literature Review and Context
The literature used to write this article covers a wide array of recent economic works on FDI. The three most substantial sources are listed in this section. The article, “Investing in the Future: Clean Energy, Technological Advancement, and Environmental Quality as Catalysts for Foreign Direct Investment: Evidence” from SSA was published in September of 2025 in the International Journal of Energy Economics and Policy. It provides a comprehensive review of the effects of clean energy, technological innovation, and environmental quality on attracting FDI in sub-Saharan Africa. The research presented in this article is crucial to determining why FDI is so highly concentrated in the Global South. Although it outlines clean energy and environmental quality as key drivers for FDI. The article, “Foreign Direct Investment, Institutional Quality and Sustainability: Cross-Country Analysis Using Different Estimators,” published in 2022 in the Indian Economic Journal, presents evidence that the institutional quality factors, like sound rule of law and stable government, can predict FDI inflows to receiving countries. These findings support the idea that current trends are structural. Published in the UNCTAD Transnational Corporations Journal, the article, “FDI in the Digital Economy: A Shift to Asset-Light International Footprints,” highlights findings on digital multinational enterprises (MNEs) that are reshaping global FDI. It finds that digital MNEs, as opposed to traditional, or manufacturing MNEs, “concentrate in a few highly developed countries,” leaving a “lighter FDI footprint.” These findings indicate that as digital MNEs expand along with the digital economy, FDI shifts further away from tangible to intangible assets, leaving material sectors underfunded. Each of these articles points to a specific cause or attractor of FDI. However, they have not been applied cohesively to the current state of global FDI. This article examines these factors holistically and contextualizes them within the context of digitally-driven investment in the 2020s.
- Approach
This article develops its fundamental argument through UNCTAD statistics in conjunction with economic research papers. The World Investment Report of 2025 by UNCTAD highlights an inequality between data and the reality of FDI. Despite data showing positive increases in FDI during 2024, unmasking several technicalities reveals an 11 percent decline in global FDI. Analysis of the World Investment Report, along with supplemental research, provides a more complete perspective of how the recent downturn is not a spontaneous occurrence. The United Nations Conference on Trade and Development produces authoritative sources for world data and reports. The selected scholarly works are from peer-reviewed journals. This article uses multiple lenses of analysis. First, it takes a sustainably-oriented perspective that stresses the risks of the current structural changes in FDI. That is, the structural changes are too concentrated to be conducive to sustainable development goals. Next, it takes a postcolonial perspective to accentuate the importance of rebalancing financial development. Many underfunded countries in the Global South are inherently ill-equipped to compete in the global market. This is largely due to their inheritance of colonial systems not designed to function efficiently in the present day. Combined with relative data, these lenses serve to create an unbiased understanding of the current trends in FDI.
- Evidence and Analysis
Before illuminating the current structural shift, it is important to understand the recent history and cyclical nature of FDI inflows and outflows. FDI is generally procyclical, meaning it co-moves with business cycles, trending upward during business peaks and downward during business troughs. Moreover, globalization is a major driver of FDI. Starting in the 1980s, many developing countries opened their economies to FDI through major policy changes, fueling competition among investing nations. In the 21st century, the changes produced by the Global Financial Crisis in 2008 and the COVID-19 pandemic in 2020 have exposed the procyclical nature of FDI. Following the GFC, FDI fell by 21 percent in 2008 largely due to tightened credit conditions and lowered business confidence due to heightened risk. Even so, FDI saw a gradual recovery with the revitalization of the global economy. The COVID-19 pandemic forced many multinational corporations (MNCs) to shut down or operate at severely reduced capacities. This directly resulted in reduced capital expenditures and sudden halts in FDI. In both of these cases, there are clear macroeconomic causes of FDI, supported by empirical evidence. Periods of uncertainty, whether on an individual or global scale, typically reduce investor confidence. While cyclical factors, like global rates and regional uncertainty, may have contributed to the 2024 decline of FDI, they do not provide a robust explanation. Unlike the GFC, the COVID-19 pandemic, and other FDI troughs, the current decline has occurred in conjunction with a marked concentration of investment in digital sectors. The recomposition of FDI flows signals shifted investment motivations of global superpowers.
Digitally-driven investment has fundamentally altered the core aspects of FDI. Instead of directing capital flows to tangible sectors like energy, agriculture, and transportation, investor nations have increasingly funded intangible areas, like software and e-commerce. This divergence from traditional flows indicates a structural shift in FDI. Returning to Casella and Formenti in Transnational Corporations, multinational enterprises (MNEs) that fuel the digital economy are much more concentrated than enterprises in physical industries. Essentially, digital MNEs operate more intensively than physical MNEs. Additionally, digital MNEs have a “lighter FDI footprint,” meaning they concentrate operations in a few countries with established digital infrastructure. This intensive, rather than extensive, mode of investment contributes to uneven development and deters capital flows from countries without preexisting infrastructure. This represents a positive feedback loop, as selective operations will grow in contained regions rather than spreading out. Despite macroeconomic factors that destabilize FDI, this pattern of investment will continue to bolster economies with necessary infrastructure rather than those without infrastructure, regardless of economic growth or decline.
The shift to digital investment naturally alters growth conditions in developing and developed countries, dampening progress toward the UN Sustainable Development Goals (SDGs). The SDGs are 17 goals that the UN set in 2015 to reach by 2030. They call for global partnership in ending poverty by “improving health and education, reducing inequality, spurring economic growth,” and “tackling climate change.” Meeting these goals requires cooperative and unified efforts by UN member states. However, the Sustainable Development Goals Report 2025 reports “fragile and unequal” progress, with millions facing “extreme poverty, hunger, inadequate housing, and a lack of basic services.” As noted earlier, investment in developing countries in the Global South is concentrated in a few countries. Without crucial capital to expand infrastructure and meet SDGs, the 5-year outlook for 2030 looks grim. Despite ostensible progress in inflows to developing countries, “capital is stagnating or bypassing entirely” critical sectors like infrastructure, energy, technology, and industries that drive job creation. In Africa, FDI rose by 75 percent, but this is a misleading statistic; the figure was driven almost entirely by a single project in Egypt. Thus, it is imperative to unearth the true threads beneath such attractive data points. Behind the reported growth is the impending unraveling of economic growth in developing countries. This precarious position is caused by weakening sectors and the potential prevention of future labor growth. However, the damage may still be reversed. Governments in developing countries can incentivize more robust FDI by pouring capital into clean energy systems and digital infrastructure, which has been found to attract sustainably conscious investors. Overall, digitally-driven investment is not absolutely detrimental, but its effect on pulling capital from other sectors should be addressed by collective and decisive action by UN member states.
Rising geopolitical fragmentation informs structural changes in FDI beyond a cyclical level. It incentivizes leading foreign direct investors, like the United States and China, to invest not only for profit, but for political gains. In the 2020s, FDI has been greatly shaped by the technological development rivalry between the U.S. and China, as well as bloc funding, exemplified by China’s Belt and Road Initiative (BRI). The concept of friend-shoring, or investing in allied nations, has played a substantial role in geopolitical fragmentation. As found in The European Journal of Political Economy, friend-shoring has resulted in restructuring capital flows through major policy decisions by investor nations, including the CHIPS and Science Act in the U.S., as well as the European Chips Act, which both seek the “reconfiguration of supply chain networks.” Friend-shoring is fundamentally political, which detracts from efficiency-oriented investment. Inefficient investment motivated by altering supply chains to benefit one’s geopolitical strategies is detrimental to sustainable development. Countries that are not vital or politically important to major power blocs are thus overlooked by FDI. Geopolitical differences have significantly affected FDI flows over the last decade. According to UNCTAD, investments between “geopolitically distant” countries, or those with differing politics, declined from 23 percent in 2013 to 13 percent in 2022. This underscores the structural shift in FDI resulting from politically motivated investment, along with a more intensive focus on the digital economy.
Historically, institutional quality has been a key driver of countries’ appeal to foreign investors. Institutional quality factors include “sound and the attractive rule of law, the absence of corruption, better governance, freedom, and a stable government.” The aforementioned article in the Indian Economic Journal uses regression analyses to compare 189 countries from 1996 to 2017. It offers an example in which two countries have similar economic makeup, but vastly differing growth and reception of FDI due to institutional quality. Thus, it is natural for scholars to assert that FDI inflows can largely be predicted by institutional quality, contrasting with the idea of a current structural shift in FDI. However, the current digital era of FDI weakens this model. There are countries with strong institutional quality, but low FDI due to deficiencies in digital infrastructure, and vice versa. India and Vietnam were among the top recipients of FDI in 2025. However, these countries do not necessarily have strong institutional quality. In India, “political interference has eroded the independence and quality of institutions ranging from the police and courts to educational and cultural institutions” over the last 25 years. In Vietnam, public institutions “do not conform to international norms” and are “fragmented, with overlapping jurisdictions and weak coordination.” In both countries, there are large FDI inflows despite weaknesses in public institutions. In 2025, India received 24 percent of the total global FDI toward data centre projects, worth almost 3.6 billion. This demonstrates how the prospects of digital infrastructure can outweigh the impact of traditional FDI drivers such as institutional quality and political stability in the current digital era.
- Conclusion
Ultimately, the current distortions of FDI are not merely cyclical but part of a broader structural change. Intensive digital investment in global markets promotes uneven financial growth, restricting progress toward meeting SDGs and undermining traditional determinants of FDI inflows. While macroeconomic factors such as market volatility and shifting financial cycles affect FDI, they do not entirely explain the current trends in FDI. Digital MNEs and investment require less physical capital, shifting flows to intangible sectors over critical, tangible sectors, like energy and transportation. Moreover, political motivations among key investor nations, particularly the U.S. and China, alter FDI that was once efficiently motivated. Investor nations and international organizations should work intensively to mitigate this structural shift. Uneven financial development not only contributes to global market volatility but also worsens life outcomes for people in increasingly underfunded nations.
The Global Affairs Journal 
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