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The Great Reallocation Revisited: How Foreign Direct Investment Is (and Is Not) Shifting amid Heightened Geopolitical Tensions

Author

Listed:
  • Rolando Avendano

    (Asian Development Bank)

  • Emily Blanchard

    (Dartmouth College)

  • William Olney

    (Williams College)

  • Amelia Santos Paulino

    (United Nations Conference on Trade and Development)

  • Claudia Trentini

    (United Nations Conference on Trade and Development)

Abstract

This paper examines how global greenfield foreign direct investment (FDI) flows are evolving amid rising geoeconomic fragmentation. We use difference-in-differences and event study approaches to analyze changes in FDI around key bilateral inflection points. We find a decline in FDI from the US and broader Group of Seven Plus (G7+) into the PRC, concentrated in trade-exposed, efficiency-seeking sectors. Investment diversion—particularly from the PRC to Association of Southeast Asian Nations (ASEAN) members and Latin America—is evident, but this growth was concentrated in less global value chain (GVC)-integrated activities, suggesting that GVC links may act as a constraint on investment relocation. These findings suggest that while tensions may be reshaping global investment, GVC dependencies are likely limiting firms’ ability to reallocate production at scale, making the “great reallocation” least evident where it was most expected.

Suggested Citation

  • Rolando Avendano & Emily Blanchard & William Olney & Amelia Santos Paulino & Claudia Trentini, 2026. "The Great Reallocation Revisited: How Foreign Direct Investment Is (and Is Not) Shifting amid Heightened Geopolitical Tensions," ADB Economics Working Paper Series 851, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:022699
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    Keywords

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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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