FDI in Small Islands Developing States: Its limitations and potential

01 September 2014

On the occasion of the third United Nations Conference on SIDS taking place in Samoa, the current issue of the UNCTAD Global Investment Trends Monitor reviews a decade of foreign direct investment (FDI) to Small Islands Developing States (SIDS) and foresees its potential.

The structural characteristics of the Small Islands Developing States (SIDS) limit FDI options. Their smallness impedes the minimum efficient scale of production and limits foreign direct investment (FDI). The remoteness of some of them implies high transport costs which limits exports and, in particular, inhibits the establishment of global production networks.

Nevertheless, FDI to SIDS as a group is high compared to the size of their economies due to fiscal advantages in some SIDS and to large investments in natural resources in others.

The ratio of inflows to GDP during the period 2004-2013 was almost three times the world average and more than twice the average of developing and transition economies.

The ratio of stocks to GDP, during the same period, reached 72 per cent, more than twice the world average (30 per cent). FDI flows and stocks per capita are also higher than the world and developing and transition economies averages, but lower than developed economies.

FDI to SIDS is concentrated in a few host countries, it comes from a small number of home countries, and it targets a limited number of activities. It is concentrated in countries rich in mineral resources, countries offering fiscal advantages, and a few that have a relatively larger market size. A limited number of developed countries, e.g. the United States and Australia, are the main direct investors, although new investor countries are growing. Mineral extraction and related downstream activities, as well as tourism, business and financial services are the main FDI targets.

Recent developments have the potential to open new avenues for FDI into SIDS. China is emerging as a new source of external financing for SIDS. The planned Panama Canal expansion may open new opportunities in transport-related activities in the Caribbean SIDS. The shale gas revolution may encourage investments in small-scale LNG plants, regasification terminals, and power generation.