Foreign direct investment inflows to developing nations fall to 18-year low, threatening job growth - report

Job creation prospects in developing countries such as Kenya face a major setback, as new research highlights a concerning decline in Foreign Direct Investment, an essential driver of job creation.

The June Global Economic Prospect report by the World Bank shows that Foreign Direct Investment (FDI) inflows into these economies have plummeted to their lowest levels in almost two decades.

“FDI inflows to emerging markets and developing economies (EMDEs) have weakened steadily as a share of their GDP since the global financial crisis,” the lender says.

“During the boom years of the 2000s, FDI inflows to EMDEs grew fivefold in nominal terms, equivalent to nearly five per cent of their GDP in the typical economy at the peak in 2008.”

Since then, FDI inflows have declined, settling at around two per cent of GDP in recent years, it adds.

Fast forward, in nominal terms, the World Bank says EMDEs received $435 billion (Sh56.2 trillion) in FDI in 2023, the lowest level since 2005.

“The trend has been broad-based across economies: about 60 per cent of all EMDEs and four out of six EMDE regions had lower FDI-to-GDP ratios in 2012-23 than in 2000-11.”

The lender attributes the decline to the rising trade tensions and protectionist policies that are deterring cross-border capital movement.

FDI inflows have a positive impact on economic output in emerging economies, but the magnitude of the impact depends on country characteristics.

On average, a 10 per cent increase in FDI inflows is estimated to increase GDP by 0.3 per cent after three years.

However, the effect is much stronger, up to 0.8 per cent, in economies with greater trade openness, stronger institutions, better human capital development and lower informality.

Notably, FDI has long been a cornerstone of economic development in emerging markets, driving industrialisation, infrastructure development and employment opportunities.

In Kenya, sectors such as manufacturing, agriculture, and services have historically benefited from international investment, contributing significantly to job creation and GDP growth.

Data by the East African Community Secretariat shows Kenya's foreign direct investment (FDI) inflows have experienced a significant decline in the recent past, dropping to $374.6 million (Sh48 billion) in 2023, from $710.21 million (Sh92 billion) in 2022, marking a 47.2 per cent decrease.

This was largely driven by the depreciating currency at the time, elevated interest rates, rising inflation, a dollar shortage and poor performance on the Nairobi Securities Exchange.

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The downturn coincided with a 43 per cent reduction in the number of foreign investment projects, from 209 in 2022 to 146 in 2023.

World Bank’s latest update, therefore, points to a troubling trend that could hinder economic progress in Kenya and other developing nations.

The lender in the report further warns that the current conditions are not conducive for generating robust FDI flows to developing countries.

“Global economic policy uncertainty and geopolitical risk have soared to the highest level since the turn of the century. The formation of investment and trade agreements has slowed sharply,” the World Bank says.

“Between 2010 and 2024, just 380 new investment treaties came into force, less than half of the approximately 870 treaties between 2000 and 2009.”