Foreign Direct Investment Meets Tariffs and Geopolitics

executive summary: This essay examines how foreign direct investment changed from propelling world economic growth between 1980 and 2010 to being altered in character and held back in expansion since the 2008–10 global financial crisis. main argument FDI became a truly significant part of the world economy after World War II. Driving the expansion of multinational corporations (MNCs) was the economic logic of applying proprietary technology, created at substantial cost, to production in foreign countries. The decades between 1980 and 2010 became the golden era of globalization as large U.S., European, and Japanese firms established profitable operations abroad. Their investments made an outsized contribution to world economic growth. Later, MNCs with home offices in emerging economies such as China, Brazil, and South Korea put down their own footprint. Since 2010, however, new FDI worldwide (inbound and outbound) has significantly slowed, although Asia remains a relatively dynamic region. The slowdown cannot be explained by a change in economic logic but rather by an escalation of policy barriers designed to impede globalization. Moreover, rising tensions between the U.S. and China have enabled national security concerns to supplant market forces in shaping investment decisions. policy implications • MNC expansion depends on reliable access to world markets, but further trade liberalization is now disfavored by advanced economies. • Unlike in the golden era, the global expansion of MNCs will not make an outsized contribution to world economic growth in the near future. • In some industries, tariffs and subsidies might carry U.S. firms closer to the technological frontier, but the economic distortion implied by Donald Trump's broad policy agenda is immense. • As a result of national security restrictions, many countries will need to reverse-engineer technology in high-tech sectors such as electric vehicles, artificial intelligence, and novel materials rather than lure the proprietary know-how of foreign MNCs. • Emerging countries will benefit if they avoid taking sides in geopolitical rivalry and instead offer an open door to FDI from all sources.