The FDI angle:

• Gross fixed capital formation (GCFC) is an indicator for economic growth and development in a specific country.
• Foreign direct investment (FDI) can contribute to GCFC when foreign investors deploy capital into fixed productive assets.
• Why does this matter? Forecasts for total investment as a % of GDP can give an indication of the attractiveness of destinations to investment in the future.

The EU is expected to have marginally more average investment relative to gross domestic product (GDP) over the next five years due to improving financing conditions and policy packages helping to boost capital deployment.

This finding comes from fDi analysis of IMF data on gross fixed capital formation (GCFC), which is the total value of investment to add or maintain fixed productive assets such as buildings and equipment within a certain period. GCFC is an indicator for total investment (both public and private) and a component of expenditure in GDP alongside consumption, government spending and net exports.

Average investment in the EU is forecast to marginally increase to 23.5% of GDP between 2023 and 2027, up from 23.1% in the previous five years, according to fDi calculations of data in the IMF’s October 2023 World Economic Outlook. This is counter to forecasts that average global investment relative to GDP will decline slightly from 26.8% to 26.4% over the same period.

Richard Bolwijn, the director of investment research at the UN Conference on Trade and Development, notes that the level of investment relative to GDP in countries is reflective of the growth models pursued by different economies. 

“At the beginning of a country’s economic growth path, higher investment is desirable,” he says, adding that this still requires sufficient public spending capacity. As economies mature, it is preferable that growth becomes less dependent on investment and that other components, including consumption, become a more prominent part of GDP. 

The increase of investment in the EU is reflective of efforts to bounce back from subdued investment during the pandemic. The EU’s recovery and resiliency facility fund, a package of €723bn in grants and loans, is expected to be a major driver of reforms and investments in EU member states by the end of 2026. 

A number of EU member states are expected to have average investment relative to GDP jump over the next five years. This includes Greece (from 16% to 22%), Lithuania (19.7% to 24.6%) and Portugal (19.4% to 22.5%). By comparison, average investment in emerging and developing Europe is expected to decline from 24.1% to 21.3% of GDP.

More data trends worth exploring: 

• Countries setting new FDI records in 2023
• Countries with the highest fossil fuel subsidies
• Middle East leads global tourism recovery
• Brics expansion dilutes G7 investment influence

Over the next two years, the IMF expects investment to grow by more than the baseline for several advanced economies. This prediction reflects a “greater sensitivity to the expected recovery in some regions and sectors”, easing financial conditions. This represents a stronger-than-expected boost from policy packages. 

In fDi’s analysis, emerging market and developing economies (EMDEs) are expected to see the sharpest decline in average investment, from 32.8% to 31.8% in the next five years. This is driven in large part by China, where average investment is forecast to decline from 43.3% to 38.2% over the next five years. China has been pursuing a consumption- rather than investment-led growth model.

“In the near future, the lasting effects of the pandemic, geopolitical tensions, limited fiscal space and financial market strains will continue to weigh on investment in emerging markets and developing countries,” say World Bank economists.

Despite the overall downward trend across EMDEs, a number of regions are expected to see an increase in average investment relative to GDP over the next five years. 

This includes Latin America and the Caribbean, where average investment is expected to stand at 20.4% of GDP between 2023 and 2027. Although this is up from the previous five years, it is still below 20.6% recorded between 2013 and 2017. 

The World Bank noted in a 2023 review of the growth rate in global investment that the deterioration of “elevated debt levels and heightened uncertainty and risks” have increasingly contributed to the weakening of investment in EMDEs.

The link between FDI and GCFC “remains a long-standing area of debate, with mixed findings in the literature”, according to the World Bank.

“FDI tended to raise growth and investment more in countries with better institutions, more skilled labour forces, greater financial development and openness and when FDI was directed at manufacturing rather than the primary sector or services.”