Geopolitics to shape the future of FDI
In 2023, global foreign direct investment (FDI) flows reached USD 1.37 trillion. This is 3% higher than a year ago, reports UNCTAD, the United Nations agency for trade and development (UNCTAD), in its latest Global Investment Trends Monitor. The authors emphasise that the modest increase in FDI flows is partly the result of continuing uncertainty, including the geopolitical situation. At the same time, they point out that geopolitical risks will remain one of the main factors shaping the FDI market also in 2024. Despite the difficult environment, however, analysts expect that 2024 could see a moderate increase in FDI flows due to the stabilisation of financing conditions for international investment transactions.
The conclusions of the UNCTAD report are also relevant for Polish investors planning or already pursuing capital expansion into international markets. What aspects are particularly important? What factors shaped the market and how did foreign investment perform last year? What can we expect in the market over the next 12 months? In this article, I will analyse the key findings from the Global Investment Trends Monitor and compare them with the report “Destination: East. Current trends and attractive foreign expansion destinations in the face of geopolitical turbulence”, compiled by PFR TFI and PwC in cooperation with KUKE.
Geopolitics as a key factor
The impact of the tense geopolitical situation on FDI flows was already felt in 2022. After a strong rebound in 2021, they fell by 12% year-on-year in 2022. During this time, the event that had the largest impact on investors’ uncertainty was Russia's invasion of Ukraine. To make matters worse, new armed conflicts emerged in 2023, and the exacerbation of the situation in the Middle East only increased investors’ concerns. The decline in foreign direct investment is likely to affect the countries involved in these conflicts, as it did during the Arab Spring marked by civil unrest and armed conflict in 2010-2012. At this point, however, it is difficult to accurately predict the impact of these developments on global foreign investment.
Geopolitics and foreign direct investment are closely linked. This is also confirmed by the results of our research, conducted among a group of Polish entrepreneurs for the purpose of the report “Destination: East. Current trends and attractive foreign expansion destinations in the face of geopolitical turbulence”. Companies are now more cautious when it comes to planning foreign projects. 90% of them identify geopolitical risk as one of the key factors when analysing a potential foreign investment location. The same number of entrepreneurs surveyed declared that the size of the market was important to them. It can therefore be concluded that the importance of geopolitical factors is as important to them as the prospect of business development. Given the ongoing conflicts in Ukraine and the Middle East, as well as rising trade tensions between the US and China, 2024 is unlikely to be an uneventful year.
Asia still attractive in the eyes of investors
Although China recently recorded its first negative FDI balance in 25 years, according to the UNCTAD report, Asia, and especially the South East, remains an attractive investment destination, as evidenced by the increase in the number of greenfield projects announced. For the continent as a whole, the rate increased by 17%, while for ASEAN countries it rose by as much as 37%, with Vietnam, Thailand, Indonesia, Malaysia, the Philippines and Cambodia recording the largest increases. When talking about Asia, a country that cannot be overlooked is India. Although it saw a decline in the value of FDI inflows (-47%), the number of greenfield projects announced remained stable, securing India's place in the top five greenfield FDI recipients.
I have highlighted these countries because they are among those that, based on a multidimensional analysis, we identified as the most attractive expansion destinations for Polish investors in our report “Destination: East”. Malaysia (3rd place), Vietnam (5th place), Cambodia (6th place), Thailand (10th place) are among the top ten countries that have so far been less attractive to Polish entrepreneurs, but offer great potential, especially for entrepreneurs who accept a higher risk in exchange for a higher return on investment. It is worth mentioning at this point that our survey showed that Polish entrepreneurs rate the investment potential of Asia highly. A large and fast-growing market with an affluent population is seen by almost half of those surveyed as a region with potential. Interestingly, there are no significant differences here, regardless of the companies' experience in international capital expansion.
Changes in the sectors
Analysis of sectoral data shows a 16 per cent increase in the number of projects in areas heavily reliant on the global value chain, in particular the automotive, textiles, machinery and electronics industries. In my opinion, this is linked to the strong trend related to supply diversification and the desire to secure supply chains. This is a phenomenon observed since the COVID-19 pandemic. Increased transport costs and supply bottlenecks have led to numerous changes in companies' purchasing, sales and production strategies. To ensure continuity of supply, some have taken appropriate steps to relocate production and logistics to countries that are geographically or culturally closer. As a result, we are seeing an increasing number of investments in new plants, distribution and logistics centres, but also in related technologies such as artificial intelligence, the internet of things or blockchain, which can be used to streamline logistics processes and optimise resource allocation.
For the first time since the announcement of the Paris Agreement in 2015, last year saw a decline in the number of new international project financing agreements in the renewable energy sector (down 17%) and in terms of project value (down 10%). The number of greenfield projects in infrastructure sectors also fell (by 4%) due to lower project financing in RES. On the other hand, the number of greenfield projects related to the Sustainable Development Goals (SDGs) set out in Agenda 2030 increased by 12 per cent, while their value increased by 6 per cent. In this area, the main investments highlighted by UNCTAD are those related to access to water, clean energy, food security, agri-food systems, health and education. The priority for the market in this regard is to increase exposure to developing countries, where the number of international investment projects in sectors relevant to the Sustainable Development Goals has remained unchanged.
Looking ahead to the future
Cautious optimism – this is how analysts' current approach to the prospects for foreign direct investment can be summed up. In its forecasts, UNCTAD expects 2024 to bring a moderate increase in FDI flows to the global market. According to UNCTAD, the stabilisation of financing conditions for international investment transactions will drive new investment, while the persistence of significant risks, including geopolitical risks and concerns about the outlook for the global economy, will impede more dynamic growth.
Comparing the forecasts for global flows with the situation on the Polish market, I believe that in such a dynamic economic environment we can find room for the development of Polish direct investment abroad. Of course, we still face serious macroeconomic challenges that also affect our economy, but this does not mean that entrepreneurs will turn away from foreign investment. This is particularly true for those companies that have built a strong financial base and are now using surpluses to invest. The best time to buy is when prices are at their lowest, which is when the situation in the economy is more difficult. Polish companies are active in this area and we see this in the Polish International Development Fund. At the end of 2023, we signed two investment agreements with Enprom and SECO/WARWICK for projects in Germany and the United States. We are currently conducting negotiations on more than a dozen projects, which are at varying levels of progress. We expect to be able to share further information on new transactions over the coming months.