Global Foreign Direct Investment (FDI) downshifted in 2022 after a 2021 upswing as economies recovered from the Covid-19 slump. Worsening investor sentiment in 2022 reflected fear of a coming recession, rising inflation and interest rates, and uncertainty from the war in Ukraine. High profitability in the fossil fuel sector put at risk recent momentum in climate change investment.
FDI of many types is sorely needed to address the world’s multiple crises. Investment is critical in health systems to recover from Covid-19 and prepare for future pandemics, as well as in both climate change mitigation and adaptation at unprecedented scale.
The recent COP27 closing text noted that a global transformation to a low-carbon economy requires investments of $4-6 trillion per year. As governments look to strengthen supply chain resilience for essential goods, more regional diversity is needed both in innovation and production capacity, which can only be provided by investment.
At the same time, the uncertainty created by these crises gives investors pause. Geopolitical complexity and swings in attitudes to industrial policy can rapidly remake the profitability of an intended investment. Witness the recent commercial conflict over green tech subsidies. Uncertainty about the exact implementation of a new international tax regime affects investor calculations.
Individual investments are getting smaller but more numerous. Due to automation and the atomisation of the value chain, an investment might be several fold smaller than a decade or so ago. The smaller it is, the less an investor can afford to spend on the process.
This is magnified in the case of early-stage companies, which are now born-global, making their first international investments much earlier than their historical counterparts.
Further, the flavour of investment is changing. Growth in global flows of services and intangibles grew at nearly twice the rate of goods flows over the past two decades, underpinned by data movement, telecommunication advances, and new tech business models.
In situations of uncertainty, the edge comes from structured intelligence — the ability to know more, communicate better and react faster than before. Technology is increasingly providing this.
The first step is to sniff out an opportunity and matchmake.
Increasingly sophisticated databases of business activity and economic vitality can create heatmaps for potential investment. Overlaid with models of supplier networks and simulations of logistics and other input costs, they provide initial assessments of project viability.
These prototypes combined with customer relationship management software can generate leads and spark serious investment conversations.
At this stage, investment promotion agencies are beginning to look beyond the now standard use of LinkedIn and similar networks, to offer virtual reality tours of potential sites. Estonia has been highlighted for its use of AI chatbots to engage prospective investors.
Understanding and communicating the regulatory environment, to ensure full compliance and take advantage of R&D credits or other incentives, is a complex task for investment actors.
All the more so when screening large numbers of possible opportunities and setups, in a fast-changing regulatory environment. For instance, since 2020, European and G20 governments have introduced over 1,700 legal and regulatory requirements in digital sectors.
Again, technology solutions can reduce the burden of assessing local laws as well as international frameworks, from bilateral investment treaties to free trade agreements. The extent to which different jurisdictions are digitally transparent can be a factor in how seriously investors look at them.
Once an investment decision is made, investor single windows can significantly streamline and accelerate the process of setting up the investment, overcoming red tape on the way.
Despite strong growth in sustainable finance, only a small fraction of it makes its way into sustainable investments in developing economies. Although in their infancy, there is scope for new technology-enabled forms of project finance and trade finance to follow in the footsteps of the digital payment revolution, with more closely targeted matchmaking between needs and sources of finance.
Recognition that the success of FDI depends on more than the economic case and extends to the knowledge, process and connections surrounding it, was a driver of the Investment Facilitation for Development negotiations at the WTO since 2017, as well as a related Services Domestic Regulation agreement. The former is coming to conclusion while the latter was agreed in 2021.
As both move to implementation, technology will be a crucial enabler.
This article is part of the World Economic Forum’s Annual Meeting 2023.