Geopolitical tensions are increasingly influencing where companies choose to invest, according to new research co-authored by a King's academic that suggests firms are becoming more likely to favour politically-aligned countries when making foreign investments.
The study, published in the Journal of Comparative Economics, analysed two decades of global investment data, including greenfield projects, mergers and acquisitions, and multinational affiliate activity.
Pierre-Louis Vézina, of King's College London, and Arti Grover, from the World Bank Group, examined how investment patterns have changed as geopolitical relations between countries have become more strained.
Their findings indicate that political alignment now plays a significantly larger role in foreign direct investment (FDI) decisions than it did 10 years ago. Countries that are geopolitically distant from one another - measured through factors such as United Nations voting patterns, public opinion, democratic governance and geopolitical bloc membership - tend to attract less investment from each other.
The effect has strengthened markedly since the late 2010s and particularly after the COVID-19 pandemic. The authors say the trend is consistent with "friendshoring", whereby firms shift investment towards countries viewed as political partners or allies.
However, the pattern is not universal. The study found that friendshoring is driven largely by companies based in advanced Western economies, including the United States, Canada and the United Kingdom. By contrast, firms from several East Asian economies, including China, Japan, Singapore and South Korea, showed little evidence of avoiding geopolitically distant destinations. Chinese firms, in particular, were found to be investing increasingly in countries that are politically distant from China itself.
The research also challenges the idea that geopolitical investment shifts are confined to strategically sensitive industries such as semiconductors or defence. Similar patterns were observed across a wide range of sectors, including those heavily integrated into global supply chains.
The researchers said: "Our results highlight the negative impact that such geopolitical divergence could have on developing countries aiming to attract foreign direct investment from advanced Western countries, which has been crucial for job creation, technology transfers, and firm upgrading."
