The impact of geoeconomic fragmentation on Foreign Direct Investment

Supply-chain disruptions and rising geopolitical tensions have brought the risks and potential benefits and costs of geoeconomic fragmentation (GEF) to the center of the policy debate. This event will be kicked off by a presentation of a chapter of the IMF World Economic Outlook, which studies how GEF can reshape the geography of foreign direct investment (FDI) and, in turn, how FDI fragmentation can affect the global economy. The recent slowdown of FDI has been characterized by divergent patterns across host countries, with flows increasingly concentrated among geopolitically aligned countries, particularly in strategic sectors. Looking forward, several emerging and developing economies are highly vulnerable to FDI relocation, given their reliance on FDI from countries which often are geopolitically distant. In the long-run, FDI fragmentation due to the emergence of geopolitical blocs can generate large output losses. These may be especially severe for emerging and developing economies facing heightened restrictions from advanced economies, which are the major sources of FDI.