Investing in Friends: The Role of Geopolitical Alignment in FDI Flows

Shekhar Aiyar, Davide Malacrino and Andrea F. Presbitero
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Shekhar Aiyar: Johns Hopkins SAIS, Bruegel and NCAER
Davide Malacrino: International Monetary Fund
Andrea F. Presbitero: International Monetary Fund and CEPR

No 158, NCAER Working Papers from National Council of Applied Economic Research

Abstract: Firms and policy makers are increasingly looking at friend-shoring to make supply chains less vulnerable to geopolitical tensions. We test whether these considerations are shaping FDI flows, using investment-level data on over 300,000 instances of greenfield FDI between 2003 and 2022. Estimates from a gravity model, which controls for standard push and pull factors, show an economically significant role for geopolitical alignment in driving the geographical footprint of bilateral investments. This result is robust to the inclusion of standard bilateral drivers of FDI—such as geographic distance and trade flows—and the strength of the effect has increased since 2018, with the resurgence of trade tensions between the U.S. and China. Moreover, our results are not limited to greenfield FDI, but hold also for M&As.

Keywords: Foreign direct investment; Geoeconomics; Fragmentation; Political alignment (search for similar items in EconPapers)
JEL-codes: F14 F60 I18 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2024-01-01
New Economics Papers: this item is included in nep-fdg
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