The chart 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). While total net flows to developing countries initially rebounded following the 2008 crisis, peaking in 2010 at USD 615 billion, they turned negative in 2014. As shown in the chart, 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.
Despite relatively stable financial markets for the most part in 2016, for the full year, developing countries experienced net financial outflows of USD 456 billion. Portfolio flows, which have been particularly volatile, contracted sharply in 2015, falling by USD 424 billion, and remained negative in 2016. Cross-border bank loans to developing countries (measured largely by other investment in the chart), have been the most volatile type of financial flow, falling by USD 550 billion and USD 455 billion in 2015 and 2016 respectively. This large decline has in large part reflected deleveraging by international banks since the financial crisis. While net FDI flows remain positive, they are estimated to have declined sharply in 2016, to USD216 billion from USD431 billion the previous year. Such a multi-year reversal in flows on a global scale has not been seen since 1990, the first year for which the United Nations compiled data on net financial flows. Contributing factors include a slowdown in growth prospects in key developing economies, expectations of monetary tightening in some developed economies, after several years of near-zero or negative interest rates and quantitative easing, and weak commodity prices. Although in 2016 there has been some recovery in capital inflows to many developing countries amid slower-than-expected tightening of monetary policy in developed countries and increases in commodity prices, this has not been sufficient to change the overall dynamic. There are 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.
The volatility of total flows to developing countries has been almost entirely due to shifts in short-term lending. The lack of growth in long-term commercial bank flows to developing and transition economies is of particular concern for sustainable development since they have historically played an important role in financing longer-term infrastructure projects in these countries. In terms of FDI, Greenfield investment tends to have a greater impact on jobs and development than other forms of FDI, but the increase in global FDI in 2016 has been principally driven by cross-border mergers and acquisitions. The large majority of FDI to developing countries continues to be invested in Asia and Latin America while flows to Africa, though higher than a decade ago, remain limited. In addition, FDI flows to LDCs and small island developing states (SIDS) remain concentrated in extractives industries, where their development impact is limited.
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 chart on the top right hand corner, investment growth has been weak in developed countries since the global financial crisis of 2008-2009, and turned negative in developing countries in recent years. Gross capital formation is higher in LDC and middle income countries then developed countries. 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.