Sectoral Complementarity and Political Alignment: Drivers of Greenfield FDI to Latin America

We examine how sectoral complementarity and geopolitical alignment jointly shape greenfield foreign direct investment (FDI) to Latin America. Using a novel project-level database of greenfield investment from 2003–2024, combined with a bilateral geopolitical distance index and sector-level revealed comparative advantage measures, we show how geopolitical distance affects the volume and sectoral allocation of FDI, and how this effect interacts with underlying competitiveness. We find that greater geopolitical distance significantly reduces greenfield FDI to Latin America, with the impact becoming more pronounced since the mid-2010s across major FDI source countries. While sectoral complementarity between source and destination countries remains an important positive determinant of FDI, its effect weakens as geopolitical tension rises. The impact of geopolitical distance is particularly strong in high-tech manufacturing, transportation, and ICT sectors. We also show that bilateral investment treaties and free trade agreements can help moderate the effects of geopolitical distance on FDI. The findings highlight the importance of diversifying investment sources in an increasingly complex global environment and underscore the critical role of robust investment and trade agreements in mitigating policy uncertainty.