Breaking Up: Fragmentation in Foreign Direct Investment

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 multiple types of FDI. On the intensive margin, the capital expenditures of multinationals’ subsidiaries have shifted away from geopolitically risky countries (“derisking”) and toward geographically proximate countries, with additional evidence of reshoring. On the extensive margin, greenfield FDI primarily shows derisking, while cross-border M&A exhibits broader ideological fragmentation. At the industry level, derisking is pervasive across industries, while other forms of fragmentation are concentrated in a narrower set of sectors.