Geoeconomic Fragmentation and FDI Reallocation in Emerging Economies: The Role of Political Alignment

Abstract

This study investigates whether the relationship between foreign direct investment (FDI) inflows and political alignment between countries has changed due to geoeconomic fragmentation in emerging market and developing economies. A source-host-year panel combines United Nations General Assembly ideal-point distances with the International Monetary Fund Direct Investment Positions by Counterpart Economy dataset. The main sample spans 2010-2024 and includes 125,239 annual observations, 86 emerging/developing host economies, 192 investor economies, and 12,787 bilateral dyads. The preferred specification transforms officially reported inward FDI positions using an inverse hyperbolic sine transformation and includes dyad, host-year, and investor-year fixed effects. The post-2022 marginal effect is estimated imprecisely but is statistically significant and negative (beta = -0.0536; clustered p = 0.037), and it captures the incremental interaction between political distance and the post-2022 period. In 2024, FDI inflows and announced greenfield capital expenditure (capEX) followed a similar trajectory of selective reallocation, though not deglobalization, with India reporting a 13% increase in FDI, China a 29% decrease, and ASEAN a record US$235 billion. Digital-economy investment reached US$360 billion globally during 2020-2024, with India, Malaysia, Indonesia, Viet Nam, Mexico, Brazil and Thailand among the top developing-country destinations. A connector screen highlights economies where weak bilateral FDI exposure converged with high geopolitical distance after 2022 among emerging economies. The evidence is descriptive, not causal. Overall, findings support a qualified fragmentation interpretation: productive investment remained driven by market fundamentals, sectoral opportunities and connection roles, while political alignment grew in significance after 2022.