James Zhan is the chair of the executive board of Waipa’s World Investment Conference, the founding chair of the UN Sustainable Stock Exchanges Initiative, and a member of fDi Intelligence’s Editorial Advisory Board. 

The future has always been inscrutable, but the disruptions of the past few years have made forecasting even more challenging. And yet I believe there are several meaningful reasons to be cautiously optimistic about the prospects of foreign direct investment (FDI) in 2025. Optimistic because I expect global headline FDI to recover from the low levels of the past three years; cautiously because the recovery will be fragile, with escalating risks.

Overall, the global FDI recovery in 2025 is likely to be modest and structure-driven rather than expansion-driven.

Opportunities

Despite everything, the global economy remains on an upward trajectory. Global growth is projected to hold steady at 3.2% in 2024 and 2025. 

Inflation, which created headwinds the world over in the wake of the fiscal and monetary expansions to contain the Covid-19 pandemic fallout, is expected to normalise. After peaking at 9.4% in 2022 and averaging 6.7% in 2023, headline inflation rates are projected to reach 3.5% by the end of 2025, below the average of 3.6% between 2000 and 2019, IMF figures show. Major central banks in advanced economies have already started to cut their policy rates, moving their stance toward neutral. This provides some relief by lowering investment costs for governments and corporates. 

Although trade wars have dominated the headlines recently, world trade in goods and services continues to grow. It expanded by 0.8% in 2023 and 3.1% in 2024, and the IMF expects it to accelerate at 3.4% in 2025. 

The new year also bodes well from a public governance perspective. More than 70 new governments, including those of major countries, will be fully functional in 2025 after the flood of elections in 2024. Inevitably, this will make national development strategies and industrial policies clearer. 

FDI policies are moving towards positive, too. Screenings and restrictions introduced on national security grounds have stabilised in almost all major investment host countries. At the same time, many countries, particularly developing countries, are accelerating the introduction of new policy measures to facilitate and promote investment. 

These improved economic conditions will be conducive to the recovery of global FDI, pulling it out of its recession in 2022–24 when FDI flows remained close to the lowest level of the decade.

Risks

Nevertheless, downside risks are rising and dominate the outlook: an escalation in regional conflicts and geoeconomic rivalry will dim the prospects for global FDI.

Furthermore, we have now entered a world dominated by supply side disruptions — from climate, health and geopolitics. The five potential choke points for global supply chains (Panama Canal, Suez Canal, Strait of Homuz, Malacca Strait and Taiwan Strait), if disrupted, can affect up to two-thirds of global maritime trade. In 2024 alone, problems at three of the five had a serious impact on global trade and supply chains.

Faced with increased external competition and structural weaknesses in manufacturing and productivity, many countries are implementing industrial and trade policy measures to protect their workers and industries. While these measures can boost investment activities, they can also hinder investment in and out of the countries, further worsening geoeconomic fragmentation.

Overall, volatility, uncertainty, complexity, and ambiguity — or Vuca — remains high due to regional conflicts and geopolitical tensions. This makes long-term investment challenging.

Mixed impact

Trade wars can be a double-edged sword for investment. Trade wars can make efficiency-seeking FDI much more mobile, and impact FDI in opposite directions. They can hinder export-oriented FDI in the most affected countries, while boosting barrier-hopping FDI into the countries that impose tariffs, as well as those countries and subregions less affected by the tariff escalations. 

The massive divestment of export-oriented FDI from China and increased barrier-hopping investment in Mexico and south-east Asia are a case in point. Such a trend is likely to continue in 2025, as the trade wars are expected to escalate further and spread wider to other parts of the world.

The forthcoming tightening of immigration policy measures in the US and Europe will worsen their domestic labour supply, reducing FDI in labour-intensive manufacturing and services. In the meantime, this may lead to more capital-intensive investment through the massive deployment of industrial robots in the economic powerhouses. 

The deployment of industrial robots in global manufacturing has seen significant growth in recent years. According to the latest World Robotics report, the annual installation of industrial robots has exceeded half a million units annually for the past three years. The total number of operational industrial robots worldwide reached 4.3 million units in 2023. This reflects the increasing reliance on automation in manufacturing industries globally, and particularly in FDI in advanced manufacturing and services.

Drivers of a global recovery

Against this backdrop, the following factors will be driving the fragile FDI recovery I expect in 2025. 

Global value chain restructuring

Resilience-driven diversification is fragmenting the traditional integrated international production system, converting the global value chains into multiple industrial clusters and sub-regional value chains. This results in more redundant investments through industrial concentration and much shorter value chains.

Tech-driven transformation of industries

Investment in artificial intelligence-enabled industrial and services activities is set to take off. The servitisation of manufacturing will continue to grow with the digitalisation and smart manufacturing.

Sovereign investors

Public pension funds and sovereign wealth funds now manage a staggering combined $34tn. They will continue targeting direct FDI in infrastructure, energy and property, and increasingly in manufacturing.

Non-equity modes of investment

Contract manufacturing, franchising and leasing are becoming more important in cross-border production, allowing for asset-light and risk-averse investment strategies for international production. 

Circular economy

Investment in the circular economy, as well as in green and blue initiatives, will accelerate investment, although investment in climate transition may slow down.

Service investment

Investment into services now accounts for a whopping 72% of the total FDI stock in the world. The growth of cross-border investment into services is a long-term trend. In each decade, FDI into services has grown significantly, five-fold in 2000, four-fold in 2010 and again by more than 50% in 2020. The growth of FDI in services will continue to outpace FDI into manufacturing and natural resource sectors.

The Global South

The persistent trade and investment protectionism in the north will push FDI further to the emerging markets. Intensified economic cooperation among the developing countries will also likely boost cross-border investment in the Global South.

Regional prospects and top recipients

US

The potential escalation of tariffs for most major trading partners, combined with the reduction of corporate income tax to the global minimum level of 15% will boost FDI into the US, particularly market-seeking, barrier-hopping FDI. This may also accelerate the reshoring process. However, such FDI from other continents or reshored investments are likely to be capital-intensive, increasing automated production rather than creating massive job opportunities, partly due to the forthcoming immigration policy measure and the already high level of labour costs.

EU

FDI inflows have been too low for too long. A bottom-out is likely, and modest recovery is not impossible. Notably, greenfield investment has been relatively high, with its capex the second highest among the sub-regions in the world. However, this has been offset, and masked, by significant negative flows in terms of conduit FDI in the Netherlands, Ireland and Luxembourg. Discounting such conduit FDI, the inflows into the EU would be much higher. 

China

China has already suffered from a drastic decline in new FDI inflows in 2023 and 2024. The momentum of divestments of export-oriented FDI since the trade war started in 2018 may continue, particularly if trade wars and geopolitical tensions escalate further. Meanwhile, the new massive economic stimulus package and intensified efforts to attract FDI are expected to draw significant market-seeking FDI in new industrial activities and high value-added services. Nevertheless, a recovery to its peak level is unlikely in 2025.

South-east Asia

This region will continue to be the most dynamic for attracting FDI. However, it will continue to struggle with its FDI absorptive capacity and the integration of its regional production system, which started in 2023–24 after the 2018–22 boom. Should the US increase tariffs on exports from the Association of Southeast Asian Nations, it would dent efficiency-seeking FDI into the bloc. Nevertheless, intra-Asia market-seeking FDI is expected to increase, somewhat offsetting the decline in export-oriented FDI for the US market.

Latin America and the Caribbean

There remains potential for continued FDI growth for the next two to four years for this region, before reaching their absorptive capacity constraints in infrastructure, geographic fragmentation, and skills availability. These challenge the building of an integrated sub-regional production system. Should the new US administration implement immigration policy measures, labour costs in the sub-region might decline. Latin America may gradually receive part of “friend-shoring” and “strategic-shoring” FDI due to further geopolitical tensions and trade wars elsewhere.

Africa

FDI in Africa will remain low. However, there is significant potential for FDI along the Mediterranean region, as it gradually integrates into the European regional production network in the context of regionalisation of global supply chains.

Gulf Cooperation Council

Long-term investment will continue to be negatively impacted by the conflicts in the region. Nevertheless, countries like the UAE and Saudi Arabia will continue to be the bright spot for attracting high value-added investment. Their investment plans are ambitious and promotion strategies viable. 

Sectoral prospects

Renewable energy, communications and semiconductors are likely to be the top three recipients of FDI in 2025, even though FDI in renewable energy is expected to slow down. Investment in the automotive industry will slow down overall, but the sector remains highly dynamic in terms of structural and technological transformation.

Industries such as real estate, transportation and warehousing, and software and IT services are likely to experience stagnated growth in FDI. Meanwhile, the electronic components and metals industries may suffer from a decline in FDI.

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This article first appeared in the December 2024/January 2025 print edition of fDi Intelligence