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IMF: Fragmenting Foreign Direct Investment Hits Emerging Economies Hardest

Long-term losses of 2 percent of global output due to shifting foreign direct investments underscore why global integration needs robust defense

As geopolitical tensions rise, companies and policymakers are increasingly looking at strategies to make supply chains more resilient by moving production home or to trusted countries.

The US Treasury Secretary argued in April 2022 that firms should move towards the friend-shoring of supply chains. More recently, the European Commission proposed the Net Zero Industry Act to counter the subsidies in the US Inflation Reduction Act. And China aims to replace imported technology with local alternatives to depend less on geopolitical rivals.

These examples highlight the rising trend of geoeconomic fragmentation, as we show in an analytical chapter of the latest World Economic Outlook.

Our analysis of the impact on foreign direct investment shows that such flows have been characterized by divergent patterns across host countries, particularly in strategic sectors, like semiconductors. The flow of strategic FDI to Asian countries started to decline in 2019 and has recovered only mildly in recent quarters, except for flows to China that have not yet recovered.

Over the last decade, the share of FDI flows among geopolitically aligned economies has kept rising, more than the share for countries that are closer geographically, suggesting that geopolitical preferences increasingly drive the geographic footprint of FDI.


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