This chapter provides an overview of the economic outlook for emerging and developing countries and examines trends in foreign direct investment (FDI) between 2021‑23, a period marked by uncertainty and trade disruptions.
Business Insights on Emerging Markets 2024
Business Insights on Emerging Markets
Abstract
In 2023 emerging and developing economies exhibited robust growth rates, with Emerging Asia1 predicted to experience the highest gross domestic product (GDP) increase in the period 2023‑2025.
Investment patterns worldwide, and particularly foreign direct investment (FDI), weakened in 2023 on the back of tight global financial conditions, higher uncertainty amid intensified geopolitical tensions and the unwinding of pandemic-related fiscal support measures.
Emerging Asia exhibited contrasting trends in trade in 2023. FDI dropped by 16% for ASEAN and by 6% for the People’s Republic of China (hereafter “China”). However, the attractiveness of the region for manufacturing investment remains robust, sustained by the growth in greenfield project announcements, due to competitive wages, increasing domestic demand driven by population growth, and improvements in business regulation and infrastructure.
In Africa, the potential of FDI to foster sustainable development remains largely untapped, primarily due to the limited integration of FDI into domestic productive activities. In this context, the renewable energy and the service sectors present opportunities for growth. The tertiary sector represented nearly 50% of announced projects between 2021-23 on the continent, thanks to the emergence of new technologies and growing domestic demand.
Latin America and the Caribbean (LAC) exhibits high FDI inflows, with the region becoming the leading recipient of FDI relative to its gross domestic product (GDP) at 4% in 2021. Prioritising investment in strategic sectors, such as renewable energy and digital transformation, presents a gateway for LAC countries to further promote social and economic development.
Since 2015, international investment in renewable energy has been experiencing remarkable growth, tripling in magnitude. However, in emerging markets, the high cost of capital and inadequate quality of infrastructure stand as significant barriers to attracting more investment in this sector.
Special Economic Zones (SEZs) have emerged as pivotal instruments to promote foreign investment, seeking to mitigate costs of doing business and offering attractive incentives. However, data reveal contrasting trends. In LAC, SEZs exhibited a similar average capital influx as the overall region, albeit with slightly lower job intensity. Africa, however, presented a distinct trend, with FDI into SEZs yielding around three times more jobs on average than in the broader region and with average capital expenditure (CAPEX) being nearly four times higher.
The global economic landscape is negatively affected by the shocks stemming from persisting high geopolitical risks, coupled with the tightening of monetary policy announced by central banks to counteract rising inflationary pressures (OECD, 2023[1]). Despite a context of uncertainty, OECD analysis shows that global growth has been surprisingly resilient (see Table 1.1). Notably, commodity-producing emerging and developing economies have collectively maintained strong growth rates close to those observed prior to the COVID‑19 pandemic (OECD, 2023[1]). GDP growth in Emerging Asia is estimated to have risen to 5.4% in 2023, but is predicted to slow to 5.2% in 2024 and 4.8% in 2025, mainly due to a lower forecast for the People’s Republic of China (hereafter “China”). LAC is expected to see its GDP growth rate decline from 2.5% in 2023 to 1.9% in 2024, followed by a rise in 2025 to 2.5%. This forecast reflects the negative growth in Argentina as part of significant policy adjustments to restore macroeconomic stability (IMF, 2024[2]), as well as a normalisation of growth, together with the effects of tighter policies, a weaker external environment and lower commodity prices (IMF, 2023[3]). GDP growth in Sub-Saharan Africa is estimated to have decreased to 3.3% in 2023, but the economy is projected to rebound again to 3.8% and 4.1%, respectively, in the following two years (IMF, 2024[2]). The slowdown reflects adverse weather conditions, global economic uncertainty and domestic supply issues, including electricity (IMF, 2023[3]). Finally, GDP growth in the Middle East and Northern Africa (MENA) is projected to rise from 1.9% in 2023 to 2.7% in 2024 and 4.2% in 2025. In 2024, factors such as the evolving conflicts in the Middle East and Russia’s war of aggression against Ukraine, oil production cuts and tight monetary policies have contributed to a return to the low growth of the decade before the global COVID‑19 pandemic (OECD, 2024[4]) (IMF, 2024[5]).
Source: (OECD, 2024[6]), OECD Economic Outlook, Interim Report February 2024: Strengthening the Foundations for Growth, OECD Publishing, Paris, https://doi.org/10.1787/0fd73462-en, (IMF, 2023[3]), World Economic Outlook: Navigating Global Divergences, International Monetary Fund, Washington DC, www.imf.org/en/Publications/WEO/Issues/2023/10/10/world-economic-outlook-october-2023, (World Bank, 2024[7]), Middle East and North Africa Economic Update: Conflict and Debt in the Middle East and North Africa, International Bank for Reconstruction and Development/The World Bank, Washington DC, https://www.worldbank.org/en/region/mena/publication/middle-east-and-north-africa-economic-update.
FDI can be a key driver in advancing progress towards the Sustainable Development Goals (SDGs). For host countries, FDI offers opportunities to boost economic growth and innovation, create quality jobs and build human capital, and improve living standards and environmental sustainability. However, while FDI has the potential to contribute significantly to sustainable development, achieving these outcomes depends on aligning the objectives of the private sector with supportive policies from both home and host countries. It is also crucial to continuously monitor and assess the impact of FDI on sustainable development (OECD, 2019[8]).
Restrictions linked to the COVID‑19 pandemic negatively affected international trade and cross-border investments due to supply chain disruptions, reduced demand and low business confidence (OECD, 2020[9]). In 2020-21, high-income countries attracted 61% of global greenfield FDI, the highest share ever recorded, compared to 17% for developing Asia, 10% for Latin America and the Caribbean and only 6% for Africa, at the lowest share since 2004 (AUC/OECD, 2023[10]). In 2022, FDI towards emerging economies peaked, with 5 991 projects and USD 632.8 billion invested. However, the momentum slowed in the first six months of 2023, with announced greenfield investment overall showing a stall compared to the second half of 2022 (OECD, 2023[11]). Total announcements of greenfield investment experienced a slight decrease from 4 705 in 2022 to 4 644 in 2023, although the overall CAPEX slightly increased over the same period (see Figure 1.1). Companies investing in emerging markets are predominantly headquartered in advanced economies, primarily in the United States, followed by Germany and the United Kingdom. Between 2020 and 2023, multinational enterprises headquartered in OECD countries initiated around 75% of the new projects announced in emerging and developing economies and created over 3 million new jobs (fDi Markets, 2023[12]).
Source: Authors’ calculations based on (fDi Markets, 2023[12]), fDi Markets database, www.fdimarkets.com (accessed on 17 January 2024).
The LAC region experienced a moderate growth in FDI inflows between 2020‑22. Notably, in 2022, Brazil received 41% of the regional total FDI inflows and was ranked as the fifth-largest destination for global FDI (NU.CEPAL, 2023[13]). Mexico attracted 17% of total regional FDI, followed by Chile (9%), Colombia (8%), Argentina (7%), and Peru (5%). Additionally, the region witnessed a significant surge in FDI project announcements, soaring by 93% in 2022 (NU.CEPAL, 2023[13]). However, announced FDI in LAC overall decreased in 2023, with some significant exceptions. Brazil, the largest economy in the region, maintained stable numbers, while Mexico, the second largest economy, saw a 21% increase in greenfield FDI and strengthened its position as the third-top destination for global foreign investments, after India and China (UNCTAD, 2024[14]). In terms of strategic sectors for greenfield FDI, renewable energy has surpassed fossil fuels almost without fail since 2011, particularly in countries such as Chile, the Dominican Republic, Honduras, Paraguay and Uruguay, which emerged as key destinations for FDI in renewable energy over the period 2003‑22 (OECD et al., 2023[15]).
Africa’s FDI inflows remained nearly unchanged in 2023 compared to the previous year. South Africa, Egypt and Morocco emerged as the top three foreign investment destinations between 2020 and 2023. Moreover, the region experienced a rise in greenfield FDI project announcements, notably in Kenya, Morocco and Nigeria. However, a one-third reduction in project finance deals has raised concerns for the future of infrastructure financing on the continent (UNCTAD, 2024[14]). In this context, the implementation of the African Continental Free Trade Agreement has the potential to boost FDI in Africa by liberalising trade and harmonising investment regulations (AUC/OECD, 2023[10]).
FDI trends in Emerging Asia are expected to be resilient. India and China, the region’s two largest economies, accounted for the highest number of announced FDI projects between 2020 and 2023, capturing 20% and 33%, respectively. Nevertheless, greenfield investment has decreased over the last decade in China, signalling a divergence in investment trends between the country and the rest of the world (FDI Intelligence, 2022[16]). FDI flows to members of the Association of Southeast Asian Nations (ASEAN) declined by 16% in 2023 compared to 2022. However, the region continued to attract manufacturing investments, with a noteworthy increase in greenfield project announcements in countries such as Cambodia, Indonesia, Malaysia, the Philippines, Thailand and Viet Nam, thanks to the increasing liberalisation of the economy and the introduction of effective policies to promote investment (UNCTAD, 2024[14]). Overall, the outlook for FDI is expected to remain resilient in Emerging Asia, as the region attracts investments from a diversified group of countries due to competitive wages, increasing domestic demand driven by population growth, and improvements in business regulations and infrastructure (OECD, 2023[17]).
Special economic zones (SEZs) have emerged as pivotal instruments in industrial policy, seeking to mitigate the costs of doing business and to offer pockets of stability and efficiency. Their rise in popularity over recent decades is due to their significant role in the broader strategy to attract private investment, particularly FDI (OECD, 2023[18]). However, their effectiveness varies across regions, indicating that successful implementation relies on more than just tax incentives or regulatory simplification. On the other hand, reduced corporate income tax provisions, import duty exemptions and indirect tax abatements may contribute to reducing government revenues, without necessarily providing a benefit to the country concerned (OECD/EUIPO, 2018[19]). In order to be effective, SEZs need to be embedded in a holistic enabling environment, encompassing infrastructure development to integrate SEZs with global and local markets, co-ordinated institutional frameworks, international partnerships, and enhanced environmental, social and governance (ESG) standards (UNCTAD, 2023[20]). Data reveals contrasting trends in job creation and capital investment within SEZs in emerging markets. In Emerging Asia over the period 2021‑23, SEZs attracted, on average, lower capital and generated fewer jobs from FDI than the overall region. In LAC, SEZs exhibited a similar average capital influx as the overall region, albeit with slightly lower job intensity. Africa, however, presented a distinct trend, with FDI into SEZs yielding around three times more jobs on average than in the broader region and with average capital expenditure (CAPEX) being nearly four times higher (see Figure 1.2).
Source: Authors’ calculations based on (fDi Markets, 2023[12]), fDi Markets database, www.fdimarkets.com (accessed on 17 January 2024).
Since 2015, international investment in renewable energy has experienced remarkable growth, tripling in magnitude (UNCTAD, 2023[21]). By 2017, FDI in renewables was close to 80% of FDI in the primary energy sector for BRICs and over 60% for the OECD. Other regions are quickly gaining ground, notably Southeast Asia and LAC, where FDI flows in renewables grew to over a third and a quarter of FDI in primary energy, respectively (compared to 0% and 5% in 2003) (OECD, 2019[8]) (OECD, 2024[22]). However, despite this upward trajectory, there was a noticeable slowdown in growth in 2022. Furthermore, a significant portion of investment in renewable energy is concentrated in only a few countries, including Brazil, Chile, and India. The solar and wind power sectors stand out, accounting for 95% of these investments (IRENA, 2023[23]). In terms of greenfield investment, renewable energy exhibited a remarkable surge, with both announced capital investment and the number of greenfield projects steadily increasing since 2012 (Knutsson and Ibarlucea Flores, 2022[24]) and surpassing greenfield activity in fossil fuels (see Figure 1.3).
However, despite the promising growth in greenfield investment announcements, international project finance deals, typically larger in scale, have experienced a decline (UNCTAD, 2023[21]). In this context, multinationals can play a critical role in the deployment and innovation of renewable energy technologies across borders. FDI in renewable energy can bolster the economies of emerging markets, but it also represents a considerable chance to progress towards SDGs, which can be assessed through various FDI quality indicators. More investment in renewables can allow emerging economies to turn away from fossil fuels and to reduce their carbon emissions. It is also conducive to creating new jobs, which stimulates employment growth, as well as promotes green, skilled, quality jobs (OECD, 2019[8]). In Africa, developing renewable energy and sustainable infrastructure could generate over 9 million new jobs by 2030 and a further 3 million jobs by 2050 (AUC/OECD, 2024[25]).
Renewable energy has emerged as a significant source of FDI and has indeed been instrumental in job creation globally. In 2022, the renewable energy sector employed 13.7 million people, representing an increase of one million from the previous year. Asia hosts around 66% of these jobs, with China alone contributing 41% of the global total (IRENA and ILO, 2023[26]). In emerging economies, the high cost of initial capital investment stands as a significant barrier to attracting investment in renewable energies. Additionally, inadequate infrastructure, particularly concerning energy storage and grid integration, together with the lack of readiness of distribution infrastructures, pose a significant hindrance to the widespread adoption of renewable energy sources (IRENA, 2023[23]).
Note: Emerging markets include Africa, LAC and Emerging Asia.
Source: Authors’ calculations based on (fDi Markets, 2023[12]), fDi Markets database, www.fdimarkets.com (accessed on 17 January 2024).
The potential of FDI to contribute to sustainable growth in Africa remains largely untapped. This is primarily due to its limited integration with productive activities on the continent. Enhancing FDI in Africa holds the potential to stimulate growth, foster innovation, and enhance human capital through spillovers to local suppliers and domestically owned enterprises (AUC/OECD, 2023[10]). Notably, intra-African greenfield FDI demonstrates greater resilience to global shocks compared to FDI originating from outside the continent. In the period 2020‑21, intra-African greenfield FDI witnessed a decrease of 20% from its 2018‑19 levels, whereas FDI from outside the continent experienced a substantially steeper drop of 58% (AUC/OECD, 2023[10]). Between 2021 and 2023, South African and Nigerian companies emerged as the most dynamic players in the intra-African market, while, in the same period, the United States, the United Kingdom, France and the United Arab Emirates stood out as the main source markets for foreign companies investing in Africa.
In recent years, the emergence of new technologies and growing domestic demand led to an increase in FDI in the tertiary sector, which represented nearly 50% of announced projects between 2021‑23 on the continent (AUC/OECD, 2023[10]). This included investments in business services, as well as in sales, marketing and support. Additionally, manufacturing continued to hold significant importance, representing 17% of announced projects in the period (see Figure 1.4).
Source: Authors’ calculations based on (fDi Markets, 2023[12]), fDi Markets database, www.fdimarkets.com (accessed on 17 January 2024).
The potential of FDI to foster sustainable development remains underexploited. For example, while it has been estimated that USD 1 million in FDI creates 14 jobs in textiles, 10 in electronic equipment and 9 in automotive, these sectors attracted only 4.5% of greenfield FDI to African countries over the period 2003‑20 (AUC/OECD, 2023[10]). Therefore, the capacity of FDI to stimulate employment on the continent remains limited. Conversely, Africa received a considerable inflow of renewable energy projects, accompanied by substantial capital investment totalling over USD 200 billion, underscoring the continent’s potential to become a global green powerhouse (see Figure 1.5). At present, hydropower is the largest source of renewable electricity in Africa, particularly in Angola, the Democratic Republic of the Congo (hereafter “DRC”), Egypt, Ethiopia, Ghana, Morocco, Mozambique, Nigeria, South Africa, Sudan and Zambia (IRENA/AfDB, 2022[27]). Among the most recently announced projects is the USD 37 billion green hydrogen project planned near the north-east of Nouakchott, Mauritania. Its construction was announced by Infinity Power, a joint venture company of Egypt-based Infinity and United Arab Emirates-based Masdar, after signing a memorandum of understanding with Germany-based Conjuncta and the government of Mauritania in March 2023 (Reuters, 2023[28]).
Source: Authors’ calculations based on (fDi Markets, 2023[12]), fDi Markets database, www.fdimarkets.com (accessed on 17 January 2024).
The total investment trajectory for LAC has exhibited a general deceleration over the past three decades. While investment levels vary across countries, the overall trend has been lagging compared to other regions, with total investment averaging 20.4% of GDP by 2022 compared to 40% in Emerging Asia (OECD et al., 2023[15]). Despite low domestic investment, the region has attracted relatively high levels of FDI. In 2022 alone, LAC received USD 112 billion in FDI, signifying a substantial 60% increase from 2021 and becoming the first world region to attract FDI inflows of 4% relative to its GDP, while Asia‑Pacific held the second position at 2% (OECD et al., 2023[15]). FDI had a significant impact on job creation in the region, accounting for 898 855 new jobs in the period 2021‑23. The distribution of these jobs varies significantly depending on the country of origin and the sector receiving the investment. Notably, FDI in renewables created more jobs than in fossil fuels, demonstrating the potential of green investment to stimulate employment in the LAC region (OECD et al., 2023[15]). In 2022, the share of intra-regional greenfield project announcements remained relatively small, at 11% of all projects in the region (8% in terms of value), although showing an increase since 2017, when it was 8% of the total (6% in value) (UNCTAD, 2023[21]). Argentinian and Mexican companies emerged as the two main investors in intra-regional FDI with 97 and 90 announced projects and a CAPEX of USD 4.8 billion and USD 3.4 billion, respectively, between 2021‑23 (fDi Markets, 2023[12]). The United States, followed by Germany, Spain, the United Kingdom and China, emerged as the main source markets for FDI in LAC over the same period. Investment allocation across value-chain activities exhibits considerable diversity. Between 2021‑23, manufacturing represented nearly a quarter of greenfield FDI (23%). Business services and sales, marketing and support each accounted for 18% of total projects in the period (see Figure 1.6).
Source: Authors’ calculations based on (fDi Markets, 2023[12]), fDi Markets database, www.fdimarkets.com (accessed on 22 October 2024).
Projects in renewable energy exhibited considerably high CAPEX despite being concentrated in a lower number of projects compared to other sectors (see Figure 1.7). Recent analyses show that prioritising investment in strategic sectors, such as technology and renewable energy, presents a gateway for LAC countries to capitalise on untapped opportunities, particularly in the realms of green transition and digital transformation (OECD et al., 2023[15]). LAC already has one of the cleanest electricity sectors in the world as renewables, led by hydropower, generated 60% of the region’s electricity in 2023, twice the global average, and countries such as Argentina, Brazil, Chile and Mexico stood out as solar and wind energy powerhouses (IEA, 2023[29]). In this context, the transition towards green energy represents an opportunity for the region’s productive evolution, underscoring the need for countries to prioritise green energy projects within their productive development strategies and agendas to realise the region’s untapped potential in terms of natural resources (NU.CEPAL, 2023[13]).
The automotive industry also holds significant importance in LAC, as it boasts extensive linkages with other industries and enjoys favourable conditions for producing electric mobility components (OECD et al., 2021[30]). For example, in 2023, US-based electric vehicle manufacturer Tesla Motors announced plans to open a new electric vehicle manufacturing facility in Monterrey, Mexico. With a commitment exceeding USD 5 billion, the company aims to generate approximately 7 000 jobs (Reuters, 2023[31]).
Source: Authors’ calculations based on (fDi Markets, 2023[12]), fDi Markets database, www.fdimarkets.com (accessed on 17 January 2024).
In 2023, FDI announcements into Emerging Asia slightly increased compared to 2022, with some major economies, such as China and India, seeing a relative decline. However, total CAPEX on greenfield investment in the region has strongly increased since 2022 (see Figure 1.8).
Source: Authors’ calculations based on (fDi Markets, 2023[12]), fDi Markets database, www.fdimarkets.com (accessed on 17 January 2024).
Emerging Asia, an engine of FDI growth, experienced declines in 2023. FDI dropped by 16% for ASEAN and by 6% for China (OECD, 2024[32]). Tighter global credit conditions contributed to the temporary slowdown in FDI in 2022 and 2023, yet signs of recovery are already visible (OECD, 2023[17]). The region is predicted to remain attractive for FDI due to competitive wages, increasing domestic demand driven by population growth, and improvements in business regulations and infrastructure (OECD, 2023[17]). Nearly half of all announced FDI projects between 2021‑23 were concentrated in sales, marketing and support (26%), and business services (25%) (see Figure 1.9). Since 2010, there has been an increase in the share of FDI inflows into the service sector and a decline in the share channelled into the primary sector (industries involved in the extraction and production of raw materials) in these economies (OECD, 2023[17]). This trend is due to several factors, including heightened investor interest in e-commerce, the rise of the middle-class consumer base and the proliferation of startups in the region (ASEAN, 2023[33]).
Source: Authors’ calculations based on (fDi Markets, 2023[12]), fDi Markets database, www.fdimarkets.com (accessed on 17 January 2024).
Manufacturing secured 16% of greenfield projects in Emerging Asia over the period 2021‑23 and accounted for 25% of the total number of projects in China. This increasing trend in investment attraction signifies the changing patterns in FDI destination in Emerging Asia, with ASEAN countries benefiting from de-risking and diversification strategies of foreign investors (Nikkei Asia, 2024[34]). The production of semiconductors and electrical components dominated the manufacturing landscape in the region, presenting among the highest CAPEX, over USD 60 billion. Additionally, projects in communications and real estate boasted high CAPEX values, around USD 50 billion and USD 40 billion, respectively (see Figure 1.10). Countries in the region were highly competitive in electronics, the automotive industry, textiles and machinery and are expanding into electric vehicles, pharmaceutical goods and Information and Communication Technology (ICT) (OECD, 2023[35]).
Source: Authors’ calculations based on (fDi Markets, 2023[12]), fDi Markets database, www.fdimarkets.com (accessed on 17 January 2024).
In the period 2021‑23, India retained its position among the top five recipients of global greenfield projects, with a quarter of these projects dedicated to research and development (see Figure 1.11). Noteworthy projects include a USD 5 billion investment for urea production from green hydrogen in a joint venture between the Adani Group and TotalEnergies, as well as the construction of one of India’s first semiconductor chip factories by Foxconn and Vedanta Resources for USD 19 billion (UNCTAD, 2023[20]). The Indian government has included in the 2023‑24 budget a large sum to fund improvements in infrastructure and connectivity, which, coupled with strong demographic growth, is projected to increase FDI inflows into manufacturing in the long term (OECD, 2023[35]). The 2024-2025 India Union budget envisages sustained support to 9 priorities, including manufacturing and services, infrastructure, and energy security (Ministry of Finance, 2024[36]).
In China, the decline in greenfield projects can be attributed to several factors, including rising labour costs, the need for firms to diversify their supply chains, and the transition towards a more service-oriented economy. This trend was further accelerated by the COVID‑19 pandemic (FDI Intelligence, 2022[16]). However, China remains the world’s second-largest recipient of FDI in 2023, with a 5% increase from 2022, with investment concentrated in manufacturing and high-tech industries, largely driven by European Multinational Enterprises (MNEs) (UNCTAD, 2023[20]). ASEAN surpassed China as a recipient of FDI in 2021 for the first time (ASEAN, 2023[33]). Robust growth in manufacturing, energy transition investments (including renewables and electric mobility), retail trade and the digital economy were all key in the development of ASEAN countries (ASEAN, 2023[33]). Notably, Singapore accounted for 60% of the region’s total investments, while Malaysia, Singapore and Viet Nam achieved record FDI levels in 2023 (ASEAN, 2023[33]). Additionally, Cambodia has emerged as a prominent FDI recipient among lesser-developed countries (UNCTAD, 2023[20]). Despite ASEAN’s importance as an FDI destination, only 20% of these investments are intraregional, compared with 60% in the European Union (ASEAN, 2023[33]). Nonetheless, the rising middle class is expected to increase the region’s world share of demand for consumer goods (OECD, 2023[17]). Some economies in the region, such as Indonesia, Malaysia and Thailand, among others, lack export diversification and, therefore, are highly vulnerable to commodity price changes, including energy pricing and changes in global demand and supply (OECD, 2023[35]). Factors such as economic liberalisation and policies aimed at promoting FDI have played pivotal roles in attracting investments from major sources such as the United States, Europe and China, which are the largest sources of FDI inflows in these countries (ASEAN, 2023[33]).
Source: Authors’ calculations based on (fDi Markets, 2023[12]), fDi Markets database, www.fdimarkets.com (accessed on 17 January 2024).
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← 1. In this report, Emerging Asia encompasses the People’s Republic of China, India and the ten ASEAN member states: Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic (hereafter “Lao PDR”), Malaysia, Myanmar, the Philippines, Singapore, Thailand and Viet Nam. ASEAN-5 includes Indonesia, Malaysia, the Philippines, Singapore and Thailand.