United States Benefitting from Decline in China’s FDI Share

In a significant shift observed in global investment trends, the United States, along with a select group of developed and emerging markets, has emerged as a beneficiary of the sharp decline in the share of foreign direct investment (FDI) inflows into China, as reported by Kotak Institutional Equities.

Over the period spanning CY2019-23, China experienced a notable loss of 9.30 percentage points (pps) in its share of global FDI, while the United States witnessed a remarkable gain of 14.3 pps during the same period.

Other major countries experiencing an increasing share of FDI inflows are Brazil, Canada, Japan, Korea, Mexico, and Poland.

The surge in FDI inflows into the United States, particularly in the manufacturing sector, can be attributed to several factors. These include diversification efforts in supply chains such as near-shoring and on-shoring, geopolitical tensions between the US and China, substantial incentives for investment under the Inflation Reduction Act and CHIPS Act, as well as significant investments in artificial intelligence (AI), according to Kotak Institutional Equities.

Furthermore, the recent decline in gross FDI inflows to India reflects a broader slowdown in global capital flows since CY2021, as noted by the brokerage.

Increasing geopolitical tensions between a US-led ‘economic’ bloc and China, along with government-funded industrial policies for strategic sectors and tightening global central bank liquidity, have been identified as key contributors to the recent weakness in capital flows. Despite robust investment interest globally in sectors such as electricity, electronics, and IT & communication, actual investments appear to be lagging behind announcements in recent years.

India, while having implemented significant positive reforms and incentive measures over the past five years, has yet to witness a substantial increase in investments during this period. Nevertheless, there remains optimism that investments in certain sunrise sectors will gain momentum in the coming years. Kotak Institutional Equities emphasises the importance for India to focus on leveraging its domestic market while expanding its presence in higher value-added goods for exports.