By Paul Hannon

Overseas investment by businesses rose again last year, but is increasingly steered by governments toward a small number of strategic sectors as geopolitical rivalries intensify, the United Nations said Tuesday.

That marks a shift away from investments driven by considerations of cost and efficiency, a move that threatens to sideline many developing economies that don't have the resources to compete with the inducements offered by their richer counterparts, the body said in its annual report on foreign direct investment.

"This logic rewards deep pockets, and most developing countries cannot match the support that the largest economies now deploy," said Pedro Manuel Moreno, acting secretary-general of United Nations Conference on Trade and Development.

Overseas investments rose 6% in 2025 to $1.6 trillion, having rebounded in 2024 following two straight years of decline. However, much of that growth was accounted for by advanced economies, with FDI in developing economies increasing by just 2%.

The UN said the outlook for this year is uncertain, and investment may decline.

"Slower global growth, trade policy uncertainty, geopolitical tensions and conflicts are likely to weigh on investment decisions, leading firms to cancel, suspend or delay projects," it said.

The U.S. remained the top destination for foreign investment in 2025, although inflows fell to $277 billion from $284 billion in 2024. China attracted $105 billion in foreign investment, down from $116 billion in 2024. Europe accounted for much of the increase in total FDI, recording inflows of $285 billion, up from $204 billion in 2024.

Among developing economies, India and Brazil recorded significant pickups. But the UN said the environment for many poorer countries has grown more challenging over recent years.

During the period of rapid globalization in the final decade of the last century and the first decade of this, FDI was driven by businesses seeking to cut costs and improve efficiency. Leading sectors included electronics other than semiconductors, automobiles and textiles.

The UN said 2025 saw declines in new overseas investments in those three sectors of 40%, 25% and 30% respectively.

By contrast, investments in sectors deemed to be of strategic importance by governments increased significantly. For the UN's purposes, this broad group includes AI infrastructure and AI-related technologies, other advanced technologies, critical minerals, energy transition technologies, and semiconductors.

According to the report, the value of new investments in these sectors jumped to $576 billion in 2025 from just $109 billion in 2020. AI infrastructure and AI-related technologies accounted for 60% of that total, and U.S. businesses were the most active investors, with Europe their main destination.

However, poorer countries have largely been bypassed by that boom, attracting only 10% of the total invested in strategic sectors, and much of that focused on extracting natural resources.

Governments seeking to attract investment in those strategic sectors are increasingly offering incentives to businesses, making it difficult for economies with limited resources to compete. In 2025, the number of new government measures affecting foreign investment--mainly in the form of inducements--reached a record high of 229 worldwide.

"For decades, capital followed cost and efficiency, areas in which developing countries were able to compete," Moreno said. "Today, investment follows strategic calculation and industrial policy marked by subsidies, economic security and technological advantage."

Foreign investment has long been seen by economists as key to lifting incomes in developing economies. Alongside the jobs that come with those investments, other benefits include a transfer of technology and know-how that can spread to domestic businesses and raise productivity in the economy as a whole.

The UN worries that the new focus on strategic sectors along with the use of subsidies and other incentives by those with deep pockets will exclude many countries from an established path to higher incomes.

"As labour-intensive and cost-driven industries lose momentum, opportunities to attract FDI are becoming increasingly constrained for countries at earlier stages of development," the UN said.

Write to Paul Hannon at paul.hannon@wsj.com