Foreign Direct Investment (FDI) is increasingly shifting to friendly economies, concludes a WTO analysis.
To take into account: friend-shoring consists of deepening relationships and diversifying supply chains with a greater number of reliable trading partners to reduce risks to their economies.
According to the International Monetary Fund (IMF), FDI flows to and from emerging and developing economies are substantially lower for geographically distant partners.
This sensitivity to geopolitical distance increased in 2018-2021 compared to the 2009- 2018 period, and is especially pronounced in strategic sectors such as semiconductors, telecommunications equipment, equipment needed for ecological transition, pharmaceutical ingredients, and essential minerals.
Friendly economies
Globally, FDI flows grew 2.9% from 2022 to 2023, reaching $1.365 trillion, according to preliminary data from the United Nations Conference on Trade and Development (UNCTAD).
A Kearney survey showed that investors anticipate continued geopolitical tensions in 2024. Eighty-five percent believe that increased geopolitical tensions will affect investment decisions, and companies are making decisions to go nearshore and/or friendshore (considering friendly economies) in reaction to these persistent geopolitical pressures.
Investors also anticipate that a more restrictive business regulatory environment in both developed and emerging markets is likely to pose risks over the next year.
The proliferation of industry policies and trade restrictions, including those related to emerging technologies, suggests increased regulatory complexity that investors will need to monitor and comply with across markets.
Relocation
Since the start of the war in Ukraine, trade between hypothetical blocs composed of economies with similar political views (based on voting patterns at the United Nations General Assembly, referred to as East and West) has grown 4% slower than trade within those blocs.
However, the WTO added that to date the data do not show an increasing trend towards regionalization of trade or its relocation to neighboring economies.
Ally-shoring with U.S. neighbors offers a viable alternative to the immense logistical hurdles with China.
By 2021, the cost of shipping a forty-foot container from China to the United States soared to more than $20,000, an annual increase of 500 percent.