# **1 Introduction**

Market concentration has garnered considerable attention in both media and academic discourse since the onset of the global financial crisis. Although the focus of the debate has centered on the United States, where fewer, larger, more productive firms account for increasing shares of economic activity over time (Philippon & Gutierrez 2018, OECD 2018, Grullon et al. 2019, Autor et al. 2020, De Loecker et al. 2020, Bessen 2022), there is evidence that concentration has been rising also in other advanced economies (OECD 2018, Affeldt et al. 2021) and, to a smaller extent, in selected emerging economies (Akcigit et al. 2021). Theory and a modest body of evidence suggest that market concentration tends to reduce capital investment (Guti ́errez & Philippon 2017); however, expectations and trends are unclear when it comes to foreign direct investment (FDI) - an activity typically undertaken by the few leading firms with a capacity to expand their operations across borders. Whether FDI is indeed becoming more concentrated across multinational enterprises (MNEs), in which countries and under what conditions, remains an open question, and a gap in our understanding of foreign investment dynamics.

This paper aims to bridge this gap by bringing new evidence to the question. Using granular data on FDI projects across the globe spanning two decades, we show that the share of the largest enterprises in total cross-border investment has steadily increased in the aftermath of the global financial crisis. This pattern is robust across various measures of concentration, modes of investment, source countries and targeted industries, regardless of the overall trajectory of aggregate FDI flows, which have grown in several regions during the same period. The surge in foreign investment concentration has been particularly pronounced in developing economies, reaching new highs in the last two years, with destination economies in Asia leading the way. This trend seems to be driven more by a declining number of investing firms in developing countries rather than rising project capital expenditures. The opposite is true for high-income economies where the rising FDI concentration appears to be more the result of a higher over time average capital expenditure per project. Importantly, structural shifts into services do not primarily drive variations in investment concentration across countries and over time; instead, concentration has significantly increased in destinations dealing with high economic uncertainty.

These stylized facts contribute to an emerging body of literature that explores the effects of uncertainty on trade and FDI (Juvenal & Monteiro 2021, Jardet et al. 2023), emphasizing forward-looking drivers of these activities over economic fundamentals. Ultimately, the fact that cross-border investment is increasingly dominated by fewer multinational firms underscores the granularity of FDI flows. Mirroring the concept of the granularity of growth (Gabaix 2011), our stylized facts highlight the often overlooked importance of idiosyncratic firm-level shocks as a driver of variation in aggregate investment flows, challenging the prevailing analytical frameworks used for their analysis, as well as the horizontal policy toolbox typically used for their attraction and retention.

The implications of these facts for development may be significant in the longer term.

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