“Geopolitical footprint” begins to have an impact on FDI flows: IMF

The “geopolitical footprint” is beginning to have an impact on the flows of Foreign Direct Investment (FDI) of the countries, according to the analysis of the International Monetary Fund (FMI).

“Over the past decade, the share of FDI flows between geopolitically aligned economies has continued to increase, more than the share of countries that are closer geographically, suggesting that geopolitical preferences are increasingly driving the geographic footprint of FDI.” , highlighted chapter 4 of the World Economic Outlookwhich will be fully released next week.

These trends also indicate that if geopolitical tensions continue to escalate and countries diverge further along geopolitical fault lines, FDI may become even more concentrated within aligned blocs of countries.

In addition to changes in FDI flows, the IMF also commented that geopolitical fragmentation can also lead to the relocation of existing direct investments.

In this regard, the international organization indicated that emerging market and developing economies are more vulnerable to FDI relocation than advanced economies, partly because they depend more on flows from countries that are geopolitically more distant.

“Several large emerging economies are vulnerable to FDI relocation, indicating that fragmentation risk is not concentrated in just a few countries. Advanced economies are not immune either, particularly those with significant stocks of FDI in strategic sectors,” the IMF noted.

An increase in geopolitical tensionslike the one that is still being experienced in Eastern Europe, could trigger a great reallocation of capital flows worldwide.

“While reconfigured supply chains could potentially strengthen national security and help maintain a technological advantage over geopolitical rivals, relocating existing partners will often reduce diversification and make countries more vulnerable to macroeconomic shocks.”

ana.martinez@eleconomista.mx