The gap between FDI and productive investment in low-income countries
Foreign direct investment (FDI) can support economic transformation through fixed capital formation, and the recipient country’s access to export markets and technology transfers, while providing a relatively stable source of external finance. However, global FDI remains below its pre-2008 global financial crisis peak and in a declining trend: standing at around US$1.6 trillion in 2025, compared with US$3 trillion in 2007, with least developed countries receiving less than 3% of the total. Crucially, these already low headline numbers can overestimate and underestimate both the funding directed toward real investment and that the provision of foreign exchange.
FDI effects on production can be significant but vary across countries and sectors. A 10% increase in FDI in emerging and developing economies is associated with GDP being approximately 0.3% higher after three years, though these effects are substantially weaker in low-income countries (LICs). Research that spillovers are not automatic and depend on the type of FDI and domestic institutions and policies. FDI can also complement or displace domestic investment: recent evidence finds crowding-in effects in Vietnam, particularly through production linkages, but long-run crowding-out effects across Sub-Saharan Africa. Historically, FDI has proven considerably more stable than portfolio debt and bank lending during sudden stops, when portfolio debt inflows tend to reverse and bank lending falls sharply, while FDI remains relatively stable.
All said, and most notably, the decline in FDI has been substantial for low-income economies, which can be bad news for growth prospects. IMF estimates show net FDI inflows to LICs falling from nearly 4% of GDP in 2012 to around 2.3% in 2024, with wide disparities across countries. In 2025, Liberia received around US$500 million (equivalent to about 9.5% of GDP), whereas Burkina Faso received around US$312 million (just 1.1% of GDP).
However, these aggregate figures overstate or understate what capital is actually achieving on the ground. Balance-of-payments FDI records financing between a foreign investor and its affiliate, rather than how the funds are used. Equity, intercompany loans and retained earnings may finance new capacity, but they can just as easily fund debt repayment, financial-asset accumulation or pass through affiliates and special-purpose entities, including structures used for tax minimisation. An ECLAC study examining transnational affiliate balance sheets found that in around one-thirds of cases, firms’ fixed investment exceeded FDI inflows. This indicates that part of the financing was associated with other balance-sheet uses rather than building new fixed capital. In nearly half of the firms analysed, retained earnings alone exceeded real investment, with financial assets becoming increasingly important relative to fixed assets. Cross-border mergers and acquisitions (M&A) introduce another gap, as they bring external financing while primarily transferring the ownership of existing assets. In LICs, however, cross-border M&A accounts for only around 10% of total FDI. Along similar lines, the OECD’s updated FDI standards seek to separate investment in new capacity from other FDI transactions, proposing a “capital approach” based on fixed capital formation by foreign-controlled firms.
When it comes to foreign exchange, headline FDI figures can similarly overstate fresh currency inflows because they include retained earnings. In balance-of-payments accounting, a foreign investor’s share of retained earnings is recorded simultaneously as a primary income outflow in the current account and an equal inflow of reinvested earnings in the financial account. Bangladesh illustrates this dynamic clearly: while the country received US$1.77 billion in 2025 (around 0.4% of GDP), this rebound was predominantly driven by reinvested earnings and intracompany loans rather than fresh external capital inflows.
To illustrate the low and stagnant level of FDI in LICs, figure 1 compares gross fixed capital formation as a share of GDP with FDI less FDI-related primary-income payments, and with FDI net of M&A in selected low-income countries with available data. The first focuses on foreign exchange; the second proxies FDI associated with new gross fixed capital formation.
Figure 1: Gross fixed capital formation and Foreign Direct Investment for selected LICs