The Great Reallocation Revisited: How Foreign Direct Investment Is (and Is Not) Shifting amid Heightened Geopolitical Tensions

Rolando Avendano, Emily Blanchard, William Olney, Amelia Santos Paulino and Claudia Trentini
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Rolando Avendano: Asian Development Bank
Emily Blanchard: Dartmouth College
William Olney: Williams College
Amelia Santos Paulino: United Nations Conference on Trade and Development
Claudia Trentini: United Nations Conference on Trade and Development

No 851, ADB Economics Working Paper Series from Asian Development Bank

Abstract: This paper examines how global greenfield foreign direct investment (FDI) flows are evolving amid rising geoeconomic fragmentation. We use difference-in-differences and event study approaches to analyze changes in FDI around key bilateral inflection points. We find a decline in FDI from the US and broader Group of Seven Plus (G7+) into the PRC, concentrated in trade-exposed, efficiency-seeking sectors. Investment diversion—particularly from the PRC to Association of Southeast Asian Nations (ASEAN) members and Latin America—is evident, but this growth was concentrated in less global value chain (GVC)-integrated activities, suggesting that GVC links may act as a constraint on investment relocation. These findings suggest that while tensions may be reshaping global investment, GVC dependencies are likely limiting firms’ ability to reallocate production at scale, making the “great reallocation” least evident where it was most expected.

Keywords: FDI; tensions; global value chains; globalization; reallocation (search for similar items in EconPapers)
JEL-codes: C23 F21 F23 L23 (search for similar items in EconPapers)
Pages: 35
Date: 2026-06-10
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