How Widespread is FDI Fragmentation?

August 16, 2024

Preview Citation

Format: Chicago

Joanne Tan. How Widespread is FDI Fragmentation?, (USA: International Monetary Fund, 2024) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper examines the extent to which FDI has fragmented across countries, the ways it has done so, using a modified gravity approach. The paper finds that FDI fragmentation is, for now, not a widespread phenomenon. Instead, fragmentation is circumscribed in two ways. First, the paper finds that geo-economic fragmentation has occurred only for certain industries that likely have strategic value, including computer manufacturing, information and communications, transport, as well as professional, scientific and technical services. Secondly, fragmentation appears to be more pronounced for outward FDI from the US, notably in a shift of US FDI from China to advanced Europe and the rest of Asia. This shift appears to be driven by both the intensive and extensive margin. Fragmentation is also more pronounced for immediate rather than ultimate FDI, with evidence of ultimate parent companies aligning the geopolitical mix of their intermediaries more closely to that of their final FDI host destinations. Overall, the results suggest that fragmentation, where found, may be a response to targeted policies that have placed curbs on certain types of FDI on national security grounds, rather than an indiscriminate breakup of investment links between non-ally countries.

Subject: Balance of payments, Economic sectors, Exchange rates, Foreign direct investment, Foreign exchange, International trade, Manufacturing, Population and demographics, Trade agreements

Keywords: Asia and Pacific, Europe, Exchange rates, FDI fragmentation, FDI from China, FDI from the US, FDI host destination, Foreign Direct Investment, Fragmentation, Global, Host destination, Manufacturing, Trade agreements, Western Europe

Publication Details

Pages:

98
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/179
Stock No:

WPIEA2024179
ISBN:

9798400281211
ISSN:

1018-5941

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