As the world grapples with economic fracturing and significant shifts in global trade and investment, the impacts are being felt across borders, leading to a reshaping of international production patterns and industrial strategies. In the past two decades, several transformative trends in foreign direct investment (FDI) have emerged, shaping the course of economic globalisation and challenging traditional paradigms of development.

Understanding the landscape

The intersection of technological advancements, policy shifts, and sustainability imperatives, compounded by trade tensions and the COVID-19 pandemic, has ignited a discourse on the risks of economic deglobalisation. This dialogue, primarily centred on trade perspectives, now expands to encompass the investment angle, offering policymakers and analysts a comprehensive view of the evolving FDI landscape amidst global economic fracturing.

The transformative trends

Outlined in a recent study by UNCTAD, 10 empirical FDI trends unfold, clustered into three overarching themes:

1. Triple divergence

•       Divergence between FDI and Global Value Chains (GVCs): While global GDP and trade continue to grow, FDI and GVCs face stagnation, indicating a disconnect between investment flows and production networks.
•       Divergence in FDI between Services and Manufacturing: Investment in services grows while manufacturing activities decline, reshaping the global value creation landscape.
•       Divergence in FDI trends between China and the rest of the world: China’s declining share in cross-border projects signals a shift in its operational model despite maintaining leadership in global trade.

2. From divergence to fracturing

•       Escalating Fracturing: Trade tensions and geopolitical crises accelerate the transformation of divergence into economic fracturing, disrupting historical investment patterns and increasing uncertainty.
•       Geopolitical Motivations: Investment decisions are increasingly driven by geopolitical factors, overshadowing traditional FDI determinants.

3. Sustainability push and marginalisation

•       Rise of Green FDI: Investments in renewable energy and environmental technologies surge, driven by sustainability imperatives and the pursuit of Sustainable Development Goals (SDGs).
•       Marginalisation of Developing Countries: Decline in FDI in critical sectors exacerbates the marginalisation of smaller and least developed countries, as investment concentrates in developed and emerging economies.

 Implications and way forward

1. Rethinking development paradigms:

Long-term stagnation in GVC investment challenges traditional models of export-led growth, particularly for developing countries.

2. Navigating complexity:

Changes in investment patterns introduce new complexities and uncertainties, requiring adaptive strategies from investors and policymakers.

3. Diversifying investment promotion:

Marginalised countries must explore opportunities beyond traditional GVC-intensive industries, focusing on sectors driven by policy factors such as environmental technologies.

Kenya’s strategy to support FDI

Kenya is proposing a streamlined approach to attracting investors by establishing a one-stop centre under the Kenya Investment Authority. This centre aims to simplify the bureaucratic processes investors face when entering the country by consolidating services such as tax administration, immigration permits, licensing, and land ownership clearance.

The move is part of the Investment Promotion and Facilitation Bill 2024 and seeks to eliminate the tedious and lengthy procedures that currently deter potential investors. Kenya views easing investor entry as crucial for job creation and industrial growth, especially given the challenges exacerbated by the COVID-19 pandemic.

Currently, investors must navigate various offices in Nairobi to complete the necessary paperwork, a process that has been criticised for hindering investment. With millions of Kenyans unemployed, particularly recent graduates, and the high cost of doing business, simplifying entry for investors is seen as vital for economic recovery. The proposed one-stop centre also aims to provide business permits, licensing services, and approvals from county governments, aiming to boost investor confidence and enhance Kenya’s competitiveness against neighbouring countries like Tanzania, Rwanda, and Ethiopia.

The evolving landscape of FDI reflects broader shifts in global economics, urging stakeholders to adapt strategies to navigate uncertainty and capitalise on emerging opportunities in a fractured yet interconnected world.