At this year’s World Economic Forum in Davos in January, Canadian Prime Minister Mark Carney announced that the rules-based international order is experiencing a rupture. Meanwhile, US President Donald Trump’s America First Investment Policy explicitly aims to concentrate the largest bilateral FDI flows into the US and towards a narrow set of strategic allies.
Together, these forces are not just reshaping global FDI. They are pushing an enormous share of the world’s economies further from institutional capital than before. The group most affected is one that was already improperly mapped: small states.
There are roughly 160 economies with populations under 12mn, accounting for around two-thirds of all economies and 85 per cent of the world’s 20 richest by per capita GDP. This population threshold marks a potential point at which outward orientation, foreign capital and global integration become structural necessities. They also represent the most underserved collective group in global FDI, not because they lack investable opportunities, but because no institutional framework or index has ever treated them as a coherent class.
Fifty years of falling short
Singapore, Luxembourg and Norway are small states that both attract and generate FDI effortlessly. But they are the ceiling of this argument, not its foundation.
In small states, governance is concentrated, which offers investors political and regulatory visibility that large markets cannot match, stakeholder networks are compact enough for investors to assess an entire country’s direction in a single engagement, and reform cycles are compressed.
A 2026 World Bank Group working paper identified select small emerging market economies as exhibiting statistically distinct return characteristics because of their structural differentiation from larger peers. The same logic applies to direct investment. These economies that lack access to institutional capital are where returns, enterprise value creation or economic development opportunities are hiding.
Private equity was theoretically positioned to fill this gap, but it has fallen short. Most small states cannot meet minimum deal sizes nor sustain a deal pipeline needed to construct a portfolio. Exit options are constrained by thin public markets and a limited acquirer universe, while due diligence costs are prohibitive relative to deal size.
Development finance institutions face the same fragmentation problem. Fifty years of bilateral, project-by-project deployment has generated no common benchmark, no standardised comparability, and no vehicle through which institutional capital can engage at scale. This market failure is not ignorance. It is architecture. Country-by-country engagement cannot accomplish what a class-level framework can.
AI changes the economics
The idea of a small states asset class has been intellectually valid for decades. What’s new is that AI has made it operationally viable for the first time. The core barrier — that rigorous country analysis costs too much relative to the size of the individual markets — is a problem stemming from economics, not knowledge.
AI reduces the marginal cost of governance assessment, political risk modelling and macroeconomic stress-testing across 160 markets simultaneously to near zero.
Equally important, AI-powered aggregation of trade data, satellite imagery and regulatory filings can construct the standardised performance record the asset class currently lacks. This is the empirical foundation needed to build with integrity any investment index and for limited partners to benchmark performance. AI can help solve the information infrastructure problem that defeated private equity.
How the framework functions
The counter-argument to investing in small states warrants attention. Political risk can be concentrated, meaning a single leadership change can leave an investment stranded. History shows that for every small state that turned disruption into a governance upgrade, others have defaulted or become aid-dependent.
However, pooling eligible small states into an asset class using a rules-based selection methodology helps address these shortcomings. This process is designed to distinguish states on an upward policy trajectory from those in decline, backtested against historical outcomes.
This framework envisages creating funds dedicated to FDI (greenfield, project finance and M&A) and portfolio instruments that provide exposure across three tiers: established, emerging and frontier small states. Each will have tiered capital structures including blended finance for the lower tiers, and senior tiers to allow institutional capital to engage — and at scale — where previously it could not.
This investment framework does not eliminate all risks when investing in these destinations, but it does price them properly for the first time.
Capital being mandated away from investable deal pipelines in these countries is a market failure of categorisation, not of underlying merit. It’s time for a small states asset class to fix it.
