Friend-Shoring and Near-Shoring Are Reshaping Global Investments

WASHINGTON, November 21, 2024 – Foreign direct investment (FDI) has powered prosperity in developing countries for decades, but flows have been declining for years and are being further disrupted by the rise of near-shoring and friend-shoring, according to a new report from the Multilateral Investment Guarantee Agency (MIGA), home to the World Bank Group’s new Guarantee Platform. 

Shifting Shores: FDI Relocations and Political Risk highlights that FDI into developing countries fell from just under 3 percent of GDP in the early 2010s to 1.6 percent in the 2020s, a blow to the many low- and middle-income countries that rely on FDI to support economic growth, introduce new technologies, and provide stronger links to international market. Geopolitical stress has added to the uncertainty as some companies shift FDI closer to home — near-shoring — or to countries with similar geopolitical views — friend-shoring. A survey of investment promotion agencies (IPAs) conducted for the report revealed that more than 80 percent of respondents expect near-shoring and friend-shoring to be important factors as these agencies work to attract investors. 

Multinational companies are driving these trends to strengthen supply chains after the COVID shock, improve strategic connections with source countries, and reduce long transport times. These shifts come against a background of rising political instability, fragility, violence, and conflict, yet a very small—and declining—portion of FDI to developing countries is covered by political risk guarantees.  

“This report will serve as a valuable resource for policymakers, international investors, and industry stakeholders by offering insights to inform decision-making,” said Hiroshi Matano, MIGA Executive Vice President. “Political risk insurance can help boost developmentally impactful FDI flows to low- and middle-income countries, addressing critical development needs including climate change.”  

Although most IPAs expect to benefit from friend-shoring and near-shoring, the shifting of FDI flows could produce winners and losers. Middle-income countries with strong infrastructure and geopolitical and geographical proximity to investors’ home countries will be the biggest beneficiaries, while many low-income economies are likely to struggle. Countries at risk of losing FDI should consider how political risk insurance (PRI) can complement existing tools for attracting FDI, such as investment-positive business climate, availability of skilled labor, and a reliable legal system.   

"As near-shoring and friend-shoring reshape global investments, some countries stand to gain while others risk being left behind. Political risk insurance can level the playing field, attracting and sustaining FDI in uncertain times. The World Bank Group Guarantee Platform is uniquely positioned to help build investor confidence and foster development in a rapidly evolving global landscape," said Ethiopis Tafara, MIGA Vice President and Chief Finance, Risk, Legal, and Sustainability Officer.   

Although currently PRI cover is higher in lower-income countries than elsewhere in the developing world, much more can be done to make investors aware of how political risks can be mitigated and insured. Multilateral development agencies like MIGA are uniquely positioned to address political risks and support FDI flows in riskier environments because of their perceived neutrality and the ability to leverage their convening power to de-escalate disputes before they escalate into claims.  

About the World Bank Group Guarantee Platform   

Initiated in 2024, the World Bank Group Guarantee Platform consolidates guarantee products and experts from across the World Bank Group institutions at MIGA. It provides a simplified and comprehensive menu of guarantee solutions, enabling clients to select the instrument that best suits their needs. The platform streamlines processes, removes redundancies, and provides greater accessibility by de-risking investments in developing countries. Its goal is to boost the WBG’s annual guarantee issuance to $20 billion by 2030.      

For more information about the guarantee platform, please visit: https://www.worldbank.org/wbgguarantees  

Stay updated and follow us at https://twitter.com/MIGA and https://www.linkedin.com/company/wb-miga      

Contact:    

In Washington: Elizabeth Howton, (202) 458-5922 or ehowton@worldbankgroup.org