Investment flows between regions and nations date back to ancient empires and civilisations. But it was not until the nineteenth century, during a period of rapid globalisation and industrialisation, that modern foreign direct investment (FDI) took shape, with major western companies building factories overseas to serve national and regional markets.

Technology was in the vanguard. The Singer sewing machine company of the US was Apple Corporation of the nineteenth century, the manufacturer of the world’s first mass-produced, mass-marketing consumer technology and, by 1912, the world’s seventh largest firm by market capitalisation. Singer products sold around the world and its manufacturing capacity followed, with one of its earliest overseas factories being built in Glasgow in 1867 to serve the UK market. Some 15 years later, the Bell Telephone Manufacturing Company, a US business, opened a factory in Antwerp to manufacture telephones for the European market. Ford opened its first plant outside North America in 1911 in Manchester, and rapidly became the UK’s largest carmaker.

FDI flows accelerated after the Second World War as multinational corporations (MNCs) built global networks in consumer goods, finance, autos, retail, leisure and energy. The culmination of this period of globalisation occurred between the early 1980s and the early 2000s driven by new technologies, trade liberalisation and the end of the Cold War. Investment in new factories and facilities surged and companies sought acquisitions overseas. In the 1990s global FDI grew by an average of 23 per cent a year.

The pace slowed in the 2000s, with inward investment into rich countries dampened by shocks including the dotcom crash of 2001, the financial crisis in 2008 and the euro crisis of the early 2010s. This marked the beginning of a new, more turbulent era. In recent years foreign investors have had to contend with rising geopolitical tensions, the pandemic and higher interest rates. FDI has continued to grow, but investors have become more cautious, and selective.

One of the most significant shifts has been the slowing of Chinese investment into the US in the face of new US restrictions and a more troubled bilateral relationship. Although Chinese ownership of US assets has risen since the turn of this century. In 2019, China accounted for just 1.4 per cent of the entire stock of US FDI, a third of which was in real estate. In this area at least China is a small player compared to longstanding western investors, particularly the UK, Germany, Japan and the Netherlands. Since 2019 flows of Chinese investment into the US have slowed significantly.

The US remains, by a large margin, the main destination for globally mobile direct investment. About a quarter of the total world stock of FDI, worth $10.5tn, is in the US. Subsidies offered by the Biden administration for “green” industries, infrastructure and semiconductors have made the US even more attractive to foreign investors.

China runs the second largest stock of FDI, worth $3.8tn. The UK is in third place, with foreign-owned assets worth $2.7tn, more than Germany, Japan, France and Italy combined. The UK is a global hub for FDI, particularly in digital technology, financial services, life sciences, and as a location for headquarters. The British auto industry has been revitalised by foreign investment in the last 40 years, with major marques including Jaguar, Mini and Rolls Royce passing into foreign ownership and new automakers, such as Toyota and Nissan, setting up in the UK.

To get a clearer picture of performance of countries in attracting FDI we examined the inward stock of FDI relative to national GDP. Using this approach smaller, open economies, run very high levels of foreign ownership – Singapore’s stock of foreign-owned assets stands at 542 per cent, Ireland and the Netherlands are at about 270 per cent. Among major economies, the UK tops the league with the inward FDI to GDP ratio of 88 per cent, compared to 41 per cent for the US, 25 per cent for Germany and 21 per cent for China. Despite its prowess in manufacturing and technology, and its position as the world’s third-largest economy, foreign investors have not warmed to Japan. FDI is equivalent to just 5.4 per cent of Japanese GDP.   

Foreign investment into China grew rapidly from the turn of this century. China became more attractive as a destination for FDI, and given the scale of the Chinese economy, that meant a lot of foreign-owned factories opening in China. That enthusiasm is waning, with slower Chinese growth, high US interest rates and geopolitical tensions taking a toll. Russia’s invasion of Ukraine, and the ensuing western sanctions, have highlighted the risk that future action by China against Taiwan could trigger similar measures. Last month, official Chinese data showed foreign investment in China dropped to the lowest level in 30 years in 2022.

A more difficult economic and political environment has tempered, but not blunted investors’ appetite for investing overseas. Last year investors spent $1.3bn on foreign acquisitions and greenfield developments. For all the challenges, cross-border investment remains one of the great engines of modern globalisation.

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe and/or view previous editions of the “Deloitte Monday Briefing” here.

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