Working Paper: CEPR ID: DP18434
Authors: Shekhar Aiyar; Davide Malacrino; Andrea Presbitero
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 almost 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; fragmentation; political alignment
JEL Codes: F14; F60; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Geopolitical distance (R12) | FDI flows (F21) |
| Geopolitical alignment (F55) | Geographical footprint of bilateral investments (F23) |
| Geopolitical distance (R12) | FDI flows (in strategic sectors) (F23) |
| Geopolitical distance (R12) | FDI flows (in low and middle-income countries) (F21) |
| Increase in IPD from 25th to 75th percentile (C43) | FDI flows (F21) |
| Increase in geopolitical distance (F69) | More pronounced negative relationship with FDI (F64) |