Working Paper

Breaking Up: Fragmentation in Foreign Direct Investment

Abstract: Rising geopolitical tensions and supply chain vulnerabilities have driven recent fragmentation of foreign direct investment (FDI). This paper provides systematic evidence of FDI fragmentation along ideological and geographic lines across five dimensions: shifting away from ideologically distant countries (ideological sorting), prioritizing politically aligned countries (friendshoring), reducing exposure to specific high-risk countries (derisking), moving production closer to the home country (nearshoring), and returning investment to the home country (reshoring). Measures of FDI based on financial transactions reveal evidence of ideological sorting and nearshoring. The capital expenditures of multinational enterprises and their affiliates display ideological sorting, derisking, nearshoring, and reshoring. Cross-border M&A deals reflect patterns of derisking, while horizontal (but not vertical) M&A exhibits broader ideological realignment. At the industry level, derisking and ideological sorting appear widely distributed. By contrast, friendshoring and nearshoring of M&A remain concentrated in goods-producing sectors.

JEL Classification: F21; F23; F36; F50; F65;

https://doi.org/10.17016/IFDP.2025.1413

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2025-07-16

Number: 1413