Geopolitical fragmentation in global and euro area greenfield foreign direct investment

Lukas Boeckelmann, Lorenz Emter, Isabella Moder, Giacomo Pongetti and Tajda Spital

Economic Bulletin Boxes, 2024, vol. 7

Abstract: This box illustrates how aggregate greenfield foreign direct investment (FDI) flows are showing increasing signs of fragmentation along geopolitical fault lines. Euro area outward flows are following this trend, with greenfield investments increasingly tilted towards the United States and away from China. However, firms have also stepped up investment between geopolitical blocs to boost local production content in anticipation of protectionist measures or retaliatory tariffs. Econometric evidence from gravity models shows that the overall effect of increasing geopolitical divides on FDI is negative, with FDI flows within geopolitical blocs being almost three times higher than FDI flows between geopolitical blocs in recent quarters. Moreover, the estimates suggest that global FDI flows were dampened by 3% following the increases in average geopolitical distance owing to Russia’s invasion of Ukraine. Since then, geopolitical divides have become a particularly strong deterrent to greenfield FDI both into and out of the euro area. JEL Classification: F13, F14, F21

Keywords: Greenfield foreign direct investment; geopolitical fragmentation (search for similar items in EconPapers)
Date: 2024-10
Note: 2769592
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