Geopolitical Tensions and the Allocation of Creative Destruction

Fredrik Sjöholm ()
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Fredrik Sjöholm: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden, https://www.ifn.se/en/researchers/ifn-researcher/fredrik-sjoholm/

No 1571, Working Paper Series from Research Institute of Industrial Economics

Abstract: This article examines how geopolitical tensions reshape the allocation of creative destruction by reconfiguring the cross-border movement of capital, control, knowledge, and network access. While creative destruction is commonly understood as a process of market based reallocation involving entry, exit, and the expansion of more productive firms, geopolitical rivalry increasingly inserts a public filter into ownership change through foreign direct investment (FDI) screening and related restrictions. Using Sweden’s 2023 investment screening regime as an illustrative case, the article develops a framework in which screening affects structural change through transaction-cost and uncertainty effects, composition effects that shift who can buy and scale firms, local linkage effects that shape supplier upgrading and entry, and location effects that divert investment across jurisdictions. It argues that the economic significance of screening cannot be assessed only by counting blocked transactions. Screening also influences whether foreign acquisitions generate target-firm upgrading, competitive selection among domestic incumbents, and spillovers to local suppliers and complementary firms. The article argues that screening can be welfare-enhancing in narrowly defined high-risk cases, but that broad or opaque regimes risk persistent misallocation, weaker restructuring, and slower structural transformation.

Keywords: Geopolitics; Creative destruction; Reallocation; Foreign direct investment; Investment screening; Cross-border M&A; Misallocation; Value chains; Sweden; EU (search for similar items in EconPapers)
JEL-codes: F21 F23 F52 O33 O47 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2026-11-02
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