Relative Geopolitical Positioning and Foreign Direct Investment: Evidence from Cross-Border Capital Allocation

Abstract

Rising geopolitical tensions have made international investment flows increasingly sensitive to differences in risk conditions across countries. This study examines the relationship between geopolitical risk and foreign direct investment (FDI) inflows using panel data for 36 major investing countries over the period 2002–2022. Complementing conventional country-specific measures of geopolitical risk, the study adopts a relational perspective by constructing geopolitical risk relative to Vietnam as the common host economy. Fixed-effects models are combined with moderation, geopolitical shock, robustness, and heterogeneity analyses. The results show that higher geopolitical risk in source countries relative to Vietnam is significantly associated with lower bilateral FDI inflows. Political stability significantly moderates this relationship, although the marginal effect of geopolitical risk becomes statistically insignificant at relatively high levels of political stability. The shock analysis further shows that large geopolitical disturbances are associated with lower FDI inflows, while lagged geopolitical risk remains negatively associated with subsequent investment. The main findings remain robust to an alternative ratio-based measure of relative geopolitical risk, the inclusion of exchange-rate conditions, and a dynamic System GMM specification. The negative association between geopolitical risk and FDI is also significantly stronger for developing than for developed source economies. Overall, the findings demonstrate that geopolitical risk, considered in relation to host-country conditions, is relevant to understanding patterns of international capital allocation under heightened geopolitical uncertainty.