According to the report, this is the the third consecutive annual decline in global FDI flow.
"The contraction was largely precipitated by the United States multinational enterprises (MNEs) repatriating earnings from abroad, making use of tax reforms introduced by the country in 2017, designed for that purpose," it said.
The developed countries were the hardest hit by the earnings repatriation, where flows fell by a quarter to $557 billion, a level last seen in 2004.
"FDI continues to be trapped, confined to post-crisis lows. This does not bode well for the international community's promise to tackle urgent global challenges, such as abject poverty and the climate crisis," UNCTAD Secretary-General Mukhisa Kituyi said.
"Geopolitics and trade tensions risk continuing to weigh on FDI in 2019 and beyond," he cautioned.
The tax-driven fall in FDI, which occurred in the first two quarters, was cushioned by increased transaction activity in the second half of 2018, the report said, adding that the value of cross-border merger and acquisitions rose by 18 per cent, fuelled by American multinational enterprises using liquidity in their foreign affiliates.
However, developing country flows managed to hold steady, rising by 2 per cent, which helped push flows to the developing world to more than half (54 per cent) of global flows, from 46 per cent in 2017 and just over a third before the financial crisis, it said.
The UNCTAD report noted that despite the FDI decline, the United States remained the largest recipient of FDI, followed by China, Hong Kong and Singapore.
In terms of outward investors, Japan became the largest followed by China and France, it said.
On the outlook for 2019, it said that FDI is expected to recover in developed economies as the effect of the US tax reforms winds down.
( With inputs from IANS )