KAMPALA— In a year already defined by fiscal strain, political anxiety, and rising protectionism, the global economy is facing another mounting crisis: the collapse of foreign direct investment (FDI) into developing countries. According to the World Bank’s newly released June 2025 report, Foreign Direct Investment in Retreat: Policies to Turn the Tide, FDI has plunged to its lowest levels in two decades, with potentially devastating consequences for global development, economic resilience, and poverty reduction.
For developing economies—where FDI often represents a lifeline for infrastructure, industrial growth, and job creation, this sharp contraction could not come at a worse time. In 2023, FDI inflows to these nations fell to just $435 billion, their lowest level since 2005. That’s less than half of what these countries received during the 2008 boom and represents just 2.3 percent of their combined GDP. The report makes one thing clear: this isn’t just a dip in the numbers. It’s a warning siren.
“What we’re seeing is a result of public policy,” said Indermit Gill, Chief Economist and Senior Vice President of the World Bank Group. “It’s not a coincidence that FDI is plumbing new lows at the same time that public debt is reaching record highs. Private investment will now have to power economic growth—and FDI happens to be one of the most productive forms of private investment. Yet, in recent years, governments have been busy erecting barriers to investment and trade when they should be deliberately taking them down.”
Why It Matters: Beyond the Balance Sheet
Foreign direct investment is more than just a capital injection—it’s an accelerant for development. It brings jobs, innovation, supply chain integration, and access to international markets. It also tends to target long-term projects, such as infrastructure or manufacturing, that are critical to sustained growth.
The World Bank’s data shows that a 10 percent increase in FDI typically lifts a country’s real GDP by 0.3 percent over three years. In nations with strong institutions and transparent governance, the gain can be as high as 0.8 percent. But the benefits are not equally distributed. Between 2012 and 2023, over two-thirds of FDI inflows to developing economies were funneled into just 10 countries—China alone received nearly a third, while Brazil and India accounted for about 10 percent and 6 percent, respectively. The world’s 26 poorest nations received a meager 2 percent.
Such disparity is not just economic—it’s political and moral. With public debt levels surging and foreign aid budgets shrinking, FDI remains one of the few remaining engines of external finance for the Global South. In 2023, it accounted for roughly half of all external financing for developing countries. The report warns that if this trend continues unchecked, development goals—like eradicating poverty, improving infrastructure, and achieving net-zero emissions—will be out of reach.
“Reversing this slowdown is not just an economic imperative—it’s essential for job creation, sustained growth, and achieving broader development goals,” said M. Ayhan Kose, the World Bank’s Deputy Chief Economist. “It will require bold domestic reforms and decisive global cooperation to revive cross-border investment.”
So why is FDI drying up?
The report points to a mix of rising geopolitical tension, economic fragmentation, and policy inertia. Since 2020, the number of investment treaties signed has fallen dramatically. In the 1990s, countries enacted more than 1,000 investment treaties. In the past decade? Just 380. Trade agreements, often paired with FDI incentives, have also halved in frequency—from 11 per year in the 2010s to only six per year since 2020.
Meanwhile, many governments in developing economies have turned inward, imposing new restrictions on foreign ownership or erecting bureaucratic hurdles. In 2025 alone, half of all announced FDI-related measures were restrictive—the highest share in 15 years.
Such protectionism might score short-term political points, but the long-term economic cost is severe. Countries that maintain open trade regimes see higher FDI inflows—an additional 0.6 percent for every percentage-point increase in trade-to-GDP ratio, according to the World Bank. Likewise, a 1 percent increase in labor productivity correlates with a 0.7 percent rise in FDI.
Turning the Tide: A Three-Part Rescue Strategy
The World Bank’s report outlines a clear and urgent strategy to revive foreign investment.
First, governments must improve the investment climate. That means reversing recent restrictions, fast-tracking approvals, and ensuring legal protections for foreign investors. More broadly, countries must foster macroeconomic stability and upgrade their infrastructure to attract long-term commitments.
Second, countries should amplify the benefits of FDI by directing it toward sectors with the highest growth potential and ensuring it benefits broader segments of the population. Countries with better schools, more formal employment, and robust institutions extract far greater value from each dollar of investment.
Third—and perhaps most critically—the world needs more international cooperation. With geopolitical rifts widening, the World Bank urges nations to reinforce a rules-based global order and recommit to multilateral initiatives. Upcoming conferences, such as the Conference on Financing for Development in Seville, Spain, offer a rare opportunity to align political will with economic necessity.
The World Bank, for its part, is scaling up its own involvement. It is designing new tools to de-risk private capital, improving market conditions in developing nations, and supporting the creation of legal frameworks that attract and retain investors.
Beyond China, Brazil, and India
One of the report’s most sobering revelations is how skewed global FDI patterns have become. Despite being home to some of the world’s most promising labor markets and raw material reserves, the poorest nations—especially in sub-Saharan Africa—continue to be shut out of the global investment cycle.
Take East Asia and the Pacific: over two-fifths of all FDI into developing economies went there between 2012 and 2023. Latin America and the Caribbean and Europe and Central Asia received a quarter and a sixth, respectively. Sub-Saharan Africa and South Asia, in contrast, remain peripheral.
In Eastern Europe, the 2000s brought an FDI boom as countries liberalized and integrated into the EU. But since Russia’s invasion of Ukraine and the collapse of commodity prices in the mid-2010s, FDI has dropped dramatically—down from 5% to 3% of GDP in many countries. That same fragility is now showing in Latin America, where political instability and trade fragmentation have deterred new investment.
The Clock Is Ticking
The retreat of FDI isn’t just a symptom of a turbulent global economy—it’s a key driver of inequality, underdevelopment, and lost opportunity. As global leaders prepare to meet in Seville to debate the future of financing for development, the stakes couldn’t be higher.
For developing economies, the path forward is clear but not easy. The hard work of reform, cooperation, and institution-building lies ahead. But the rewards—a reinvigorated investment pipeline, new jobs, stronger infrastructure, and a chance at sustainable growth—are well worth the effort.
“FDI is not a silver bullet,” the report concludes, “but it is one of the few scalable, sustainable levers we have left. If we want to reverse the tide, we must act now—and act together.”
