Lower foreign investment in EMs set to persist

Lower foreign direct investment (FDI) into emerging markets (EMs) will reduce their long term growth prospects. Inflows of FDI into EMs fell to US$406b (1.6% of EM GDP) in 2016 from US$526b (2% of GDP) a year earlier. China accounted for the lion share of the decline—but excluding China, FDI into the other EMs still declined 8% in 2016. The International Institute of Finance expects FDI inflows to fall to US$386b (1.4% of GDP) in 2017. Foreign direct investment is a key source of technology and knowhow in EMs, necessary for improving long term growth prospects. But more worrying is the declining trend in FDI over much of the last 10 years—FDI was worth over 3% of EMs GDP in 2007. Weaker inflows of FDI could reflect slowing EM growth prospects and greater onshoring as rising labour costs reduces EMs cost advantage. The growing trend toward trade protectionism could further reduce FDI into EMs as companies reorientate their production facilities back to advanced economies.