The world of cross-border investment is undergoing a fundamental transformation. As governments across the globe enact new tax rules and tighten national security checks, businesses and policymakers alike face both challenges and opportunities. This article explores how these shifts are reshaping the landscape of foreign direct investment (FDI), and offers guidance on navigating the road ahead.

A New Tax Landscape Emerges

In 2024, global FDI flows fell by 11%, a clear signal that the previous era of unfettered capital mobility is evolving. Much of this contraction reflects the introduction of OECD’s global minimum tax, also known as BEPS Pillar Two, which sets a 15% floor on corporate tax rates worldwide.

By curbing profit-shifting and base erosion, the new regime reduces the allure of traditional financial conduits such as Ireland, Luxembourg and the Netherlands. Multinationals are now reassessing their footprints, shifting resources from jurisdictions that once offered minimal tax burdens to those promising genuine market access.

Rather than chasing the lowest headline rate, investors increasingly value stability, regulatory clarity and tangible infrastructure. Countries that adapt by offering targeted incentives—such as refundable tax credits tied to research or green energy—are emerging as winners in this new era.

Shifting Focus from Conduits to Real Economies

As conduit economies experience declining headline flows, a discernible shift is underway toward regions with substantive economic activity and digital infrastructure. This trend is propelled by two forces:

• Investors seeking sustainable, long-term returns in sectors like renewable energy, advanced manufacturing and digital services.
• Host governments offering tailored incentives aligned with strategic national priorities, from clean technology to workforce upskilling.

The United States has maintained its lead as the top destination for FDI, buoyed by technological leadership and a large consumer market. Germany and Singapore also saw significant upticks, leveraging robust digital networks and skilled workforces to attract capital.

National Security Screening and Geopolitical Tensions

Concurrently, governments are bolstering FDI screening, especially in critical technologies like artificial intelligence, quantum computing and semiconductors. The United States, under renewed bipartisan focus on national security, has intensified scrutiny of inbound investment from strategic competitors.

Europe’s largest economies are similarly recalibrating their regimes to strike a balanced approach between openness and security. The UK’s incoming Labour government has signaled greater transparency, while France contemplates stricter vetting for AI and quantum ventures. This environment demands that investors build robust compliance frameworks and engage early with regulators to secure approvals.

Implications for Developing Countries

For many developing economies, FDI has long been a catalyst for job creation, technology transfer and infrastructure development. Yet inflows to these regions are at their lowest levels since 2005, hampered by restrictive measures and uneven policy frameworks.

Without renewed capital in critical sectors—energy, transport, digital connectivity—the path toward the UN 2030 Agenda risks being delayed or derailed. To reverse this trend, policymakers must reduce unnecessary barriers, foster transparent investment treaties and align incentives with sustainable development goals.

Investor Sentiment: Beyond Low Tax Rates

According to the 2025 Kearney FDI Confidence Index, executives now rank policy stability, digital innovation and workforce quality above nominal tax advantages. Companies are drawn to environments that promise real economic opportunities and seamless regulatory processes.

• Clarity and predictability in legal frameworks
• Access to skilled talent and digital ecosystems
• Targeted incentives linked to strategic sectors
• Commitment to green and inclusive growth standards

Charting a Path Forward: Policy Recommendations

To harness the full potential of FDI in this evolving landscape, governments and businesses can take several concrete steps:

• Modernize tax incentives: Link credits to R&D, renewable energy and capacity building rather than headline rate cuts.
• Streamline screening processes: Establish clear timelines and criteria to reduce uncertainty for investors.
• Negotiate robust investment treaties: Ensure bilateral agreements protect both investor rights and public policy objectives.
• Invest in infrastructure: Prioritize digital connectivity, clean energy grids and transportation networks that serve as magnets for capital.
• Enhance skill development: Partner with private sector to upskill local workforces for high-value industries.

Foreign direct investment is at an inflection point, transitioning from a race to the bottom in tax competition to a contest for genuine value creation. While the road ahead may hold volatility, it also presents a chance to channel global capital toward sustainable, inclusive and technologically advanced sectors.

By embracing transparent frameworks, aligning incentives with long-term goals and maintaining a balanced approach between openness and security, nations can transform FDI challenges into engines of growth. Investors, too, must adapt by building compliance excellence, fostering local partnerships and seeking regions that prioritize stability and strategic innovation.

In this new era, success will favor those who view FDI not merely as a source of cheap capital, but as a catalyst for prosperity, resilience and shared progress. The journey may be complex, but with thoughtful policies and creative collaboration, the promise of global investment can be fully realized.