The figure shows the breakdown of recent trends in net international (or cross-border) financial flows to developing countries by type of flow: including foreign direct investment, portfolio investment and other investment (mostly bank lending). International financial flows to developing countries, particularly portfolio flows and other cross-border bank loans (represented by other investment) have been highly volatile. While FDI has been more stable, it has also declined in recent years. There are also significant differences in the quantity and quality of capital inflows accruing to different regions and countries, as well as concerns regarding the concentration and development impact of such inflows.
Global investment growth hit a low in 2016, having contracted significantly since the global economic and financial crisis, with weak investment in part reflecting the fact that companies were channelling profits to shareholders in the form of dividend distribution or share buybacks, rather than to productive investment. Investment weakness shifted from advanced economies to developing countries over this period. In developed countries, investment increased in 2017, although from a low base. In developing countries, investment dynamics differed across countries, in large part reflecting commodity-sector developments.
Following broader trends, total FDI to developing countries, which tends to be a more stable form of capital flow, amounted to approximately $653 billion in gross terms in 2017, with FDI to LDCs estimated to be around $32.6 billion (or around 2 per cent of total global FDI flows). However, it remains heavily concentrated in a few countries and in the extractive industries, often providing few forward and backward productive linkages within the economy.
Portfolio flows, primarily from institutional investors, remain volatile. Net inflows to most regions were positive in 2017. Overall, however, there was a net outflow from developing countries of $124 billion in 2017, mainly driven by large outflows from East and South Asia. Risks of monetary tightening in some developed economies, after several years of near-zero or negative interest rates, could lead to further volatility and outflows of portfolio capital, which could derail SDG investment. Indeed, an analysis of high-frequency data of capital flows in select developing countries has shown that cross-border portfolio and bank flows, in particular, are subject to periodic episodes of high volatility.
Gross fixed capital formation is a proxy for domestic investment. Gross fixed capital formation includes domestic public and private investments and, though in the case of developing countries private investment by non-financial corporations represents a large share of the total. As shown in the figure, investment growth has been weak in developed countries since the global financial crisis of 2008-2009. Gross fixed capital formation is higher in LDCs and middle-income countries than in developed countries after the crisis. Weak investment has been at the core of recent slow global economic growth. The contribution of investment to global growth declined from an average of 1.4 per cent per annum during 2003-2007, to 0.7 per cent per annum since 2012. Policies to stimulate long-term sustainable investment would thus serve to promote sustainable development and social and environmental progress, while also supporting global growth.