It may be good news that overall global foreign direct investment (FDI) increased modestly in the past year. The preliminary estimate of the United Nations Conference on Trade and Development (UNCTAD), released last week, showed that global FDI posted a modest 3 per cent growth in 2023 after a big fall of around 20 per cent in 2022.
Thus, global FDI stood at US$1.37 trillion last year, up from $1.33 trillion the previous year. A relevant question is, how good is the news?
The latest issue of the Global Investment Trends Monitor provided the answer in brief with a useful explanation of the annual world foreign investment trend. It showed that FDI in the developed world increased by around 23 per cent in the past year, mainly due to a big rise in FDI in a few European 'conduit' economies like Luxembourg and the Netherlands. These countries usually act as 'intermediaries for FDI destined for other nations.' If the FDI in these countries is excluded, foreign investment in the rest of the developed world witnessed a 28 per cent drop from the previous year. Similarly, global FDI flows showed an 18 per cent decline in 2023. In other words, last year, the estimated 3 per cent growth in the global economy was not a modest rebound of FDI in real terms. The different aspects of the world FDI flows support the proposition.
UNCTAD report mentioned that the number of international project finance deals declined by 21 per cent, and the value of these deals was also reduced by one-fourth of the previous year. Due to the rise in financing costs, the cross-border merger and acquisition (M&A) deals declined most in the past year. A merger is defined as the combination of two or more firms subsequently forming a new entity under the banner of a single corporate name. An acquisition is a process where one company ultimately purchases another entity.
In 2023, greenfield project announcements were also 6 per cent lower in number, though they were 6 per cent up in value, which is a positive thing. The manufacturing greenfield projects showed higher numbers, which indicates an 'initial sign of recovery following a long-term declining trend.' In a greenfield investment, usually, a parent company, the company already in commercial operation, creates a new venture in a foreign country from the ground up.
So, it is clear that the global flow of FDI is yet to gain adequate pace. Instead, to the pessimist, the latest trend indicates much-dubbed deglobalisation. It is defined as a 'movement towards a less connected world, characterised by powerful nation-states, local solutions, and border controls rather than global institutions, treaties, and free movement.'
Experts opined that recent disruptions to global value chains (GVCs) due to the Covid-19 pandemic, the Russia-Ukraine war, growing ideological differences and the green transition have prompted various governments and corporations to reconsider external dependencies. (WEF, 2023) So, they are looking closer to home and to trusted partners for more resilient growth models. Simply put, deglobalisation is a combination of less trade with more restriction, less FDI, less cross-border movement of people and more small blocs of countries. Many also observed that in recent years, the benefits of FDI have been threatened by geopolitical risks and chronic supply chain disruptions, ultimately helping
deglobalisation.
The issue of deglobalisation has been a big debate, especially in the last few years, although it is not new. Moreover, only some are convinced that the reverse course of globalisation has been getting stronger, although many have agreed that the 'slowbalisation', the slow pace of globalisation, is already there.
UNCTAD report further showed that FDI in the developing world dropped by 9 per cent in the past year after it had posted a modest 5 per cent growth in 2022. Asia faced a 12 per cent decline in the annual flow of FDI in 2023, and South Asia witnessed the biggest drop of 43 per cent.
In line with the regional trend, FDI in Bangladesh also showed a declining trend in the past year. Statistics available with Bangladesh Bank showed that net inflow of FDI in the first nine months of 2023 stood at $2.12 billion which was $2.78 billion in the same period of 2022. Even if the last quarter of 2023 witnessed a big jump in FDI, it is unlikely that the annual inflow of net FDI in 2023 would cross the previous year's level of $3.48 billion.
One of the main reasons behind the decline in FDI in the country last year was election-centric political uncertainty. Central bank statistics revealed that annual inflow of net FDI declined before the past two national elections. It dropped slightly, less than one per cent, in 2014. In 2019, net FDI declined by 20.50 per cent.
What is alarming is that the country saw a decline in FDI at a time when the balance of payments (BoP) is under serious pressure due to the rapid depletion of foreign exchange reserves. Net foreign exchange reserve came down to $21.87 billion at the end of December 2023 from $24.75 billion at the end of June 2023. In the latest annual report, Bangladesh Bank said: "A significant deficit in the financial account along with a deficit in the current account led to a sharp fall of foreign exchange reserves." In the first five months of the current fiscal year or the July-November period of 2023, the financial account posted a big deficit of $5.40 billion against a modest surplus of $1.20 billion in the same period of 2022.
The reversal of the declining trend of FDI will help to offset the depletion of forex reserves to some extent. Though there is no magic wand to do so immediately, the post-election stability is expected to attract foreign investors in the near future.
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