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How To Attract FDI In An Era Of High Interest Rates

Interesting and timely article explores the uncertain future of interest rates and its impact on Foreign Direct Investment (FDI), focusing on the rising cost of capital for corporations.

The key concern lies in how emerging markets, lacking fiscal flexibility, will cope with the challenges posed by higher capital costs. The authors propose a shift away from traditional fiscal incentives towards non-fiscal measures, emphasizing regulatory certainty and stable business environments. As global monetary policy normalizes and fiscal constraints persist, the article anticipates a nuanced approach by states in attracting FDI, signaling a need for strategic adjustments. By Simon Evenett, Camilla Erencin, Felix Reitz FDI Intelligence

Let’s ground the discussion in pertinent facts. We’ve tracked the financial performance of some 40,000 publicly-listed firms since 2005 as part of the Crux of Capitalism initiative. These firms are located in 21 economies, which together accounted for more than 84% of global FDI flows from 2018 to 2022. We’ve calculated the median weighted average cost of capital (WACC) of the biggest 25% of firms in each of these countries measured by asset size. 

Our data shows how the median WACC of the largest firms in China, Germany, Japan and the US has varied since the start of 2019. Although the turning point from falling to rising WACC varies, by the second quarter of 2022 the median WACC was rising in all four economic behemoths. Since their nadirs, the median WACC has risen more than 300 basis points in each of these big four economies. The repricing of capital is occurring in all sectors that we’ve tracked. From industrials and healthcare to IT and consumer goods, no sector is immune, it seems.

Attracting FDI Despite High Interest Rates
How To Attract FDI In An Era Of High Interest Rates

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