A sobering new report by the World Bank reveals that foreign capital investment to emerging market and developing economies (EMDEs) have dropped to levels unseen in nearly two decades, posing a serious challenge to economic development, poverty reduction, and green infrastructure goals.
As outlined in Chapter 3 of the Global Economic Prospects – June 2025, net investment to EMDEs now stand at just over 2% of GDP, less than half the 2008 peak of 5%. This is the lowest in nominal terms since 2005. Particularly alarming is the nearly 25% decline in greenfield projects—a category that often delivers new jobs, infrastructure, and technological capacity.
Beyond the Numbers: Structural Economic Shifts
The current downturn is not merely a reflection of cyclical volatility. It points to systemic changes in how and where global capital is being deployed.
Key contributors to this decline include:
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Increased geopolitical tensions
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Fragmented global trade networks
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The rise of economic nationalism
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A slowdown in domestic reforms across EMDEs
Traditionally, these economies have relied on external funding and know-how to support industrial growth and capacity building. That support is now dwindling.
A Tale of Concentration and Exclusion
A striking shift highlighted in the report is the concentration of capital in a few major destinations. Countries like China, India, and Brazil account for more than two-thirds of EMDE investment.
On the other end of the spectrum, low-income nations, despite their vast development needs, attract just 2% of EMDE capital investment and under 1% of global totals. This imbalance reflects how smaller economies are often left out of the global financial ecosystem.
Shift in Focus: From Manufacturing to Services
Another notable transformation is the changing sectoral focus. Nearly 65% of current inflows now target the services sector, a shift away from traditional manufacturing and resource-intensive industries.
While this trend can open up digital and knowledge-based opportunities, it also risks sidelining countries with insufficient digital infrastructure or fragile institutions. Without robust governance and open trade environments, many countries could struggle to benefit.
Unlocking Economic Gains Through Global Engagement
The report outlines significant growth potential if EMDEs can reverse current trends. A 10% increase in external capital investment could lead to a 0.3% boost in GDP for the average EMDE. For those with effective policy frameworks and institutional strength, gains could rise to 0.8%.
However, most countries remain limited by:
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High debt burdens
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Investor skepticism
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Outdated policy tools
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Governance and transparency challenges
This means that even modest progress toward attracting external funding can have outsized benefits—if the right conditions are in place.
A Three-Pillar Strategy for Economic Revitalization
To counter declining investment flows and regain momentum, the World Bank suggests a clear, actionable roadmap:
1. Foster Predictable and Transparent Business Climates
Creating stability through reliable governance, consistent laws, and transparent regulations can restore confidence among global financiers.
2. Maximize Local Development Impact
Efforts must go beyond simply attracting funds. Governments need to ensure that capital contributes to infrastructure, education, skills training, and job creation.
3. Strengthen Global Cooperation and Fair Trade
Global institutions must work together to support rules-based systems for commerce and cross-border engagement. This includes restoring trust in trade agreements and dispute-resolution mechanisms.
Time for Action: EMDEs at a Crossroads
With global capital investment now falling below 1% of global GDP, the urgency for reform is clear. New patterns such as regional value chains and ‘friend-shoring’—where countries seek safer, aligned trade partners—make it even more important for EMDEs to position themselves as reliable, future-ready partners.
Policy inertia, if left unchecked, will only deepen existing inequalities. The window for action is narrow but critical.
Conclusion: Reimagining Global Partnerships
Beyond economic metrics, external financing plays a vital role in bridging opportunity gaps and powering national progress. Its decline must be treated not just as a financial issue, but as a development emergency.
By focusing on transparency, institutional reform, and regional integration, emerging economies can re-establish themselves as credible partners on the world stage. Doing so will not only attract the funding they need but also create a foundation for long-term, inclusive growth.
