Joint FDL and ITO Seminar

Rising geopolitical tensions and changing approaches to trade policy have the potential to significantly reshape global investment linkages and lead to fragmentation. However, our understanding of actual bilateral FDI exposures remains limited due to data gaps in existing public datasets and official sources, diverse methodologies and limited timeliness of existing data seeking to account for round-tripping and pass-through capital in tax havens and financial centres.

This paper builds a novel comprehensive dataset on bilateral FDI stocks globally from 2005 up to 2024 capturing both immediate and ultimate investment, significantly improving existing data for fragmentation analysis. In particular, it develops a balanced matrix model for 231 countries as well as a Markov absorbing chains procedure leveraging on latest available official data on ultimate investing countries to reallocate pass-through capital to ultimate investors.

Armed with this novel dataset, we revisit the stylized facts on recent shifts in global FDI linkages as well as the empirical evidence on the role of geopolitics in driving such changes. Using a variety of definitions to draw geopolitical blocs, we confirm the important role played by geopolitical distance in driving FDI and portfolio positions, both on an immediate and ultimate perspective. Immediate exposure statistics do not show an increase in this role post-2022, while there is some evidence of such increase with ultimate FDI positions data. These findings complement recent evidence that used partial data on announced greenfield flows.