Friendshoring started way before the re-election of Donald Trump
- Prof Emanuele Bracco
- Jul 9
- 4 min read
ABSTRACT: Geopolitical uncertainty has been rising, since the Arab Spring in 2010, to the re-election of Donald Trump, passing through Brexit and the more recent wars in Ukraine and the Middle East. For this reason, firms are increasingly factoring political alignment into their decisions. A recent paper (Grover and Vézina, 2025) used detailed global data on greenfield projects, mergers and acquisitions, and affiliate stocks, and various political measures and looked into how foreign direct investment (FDI) has become more sensitive to geopolitical instances. Friendshoring trends have picked up since 2011, and now they highlight the deepening geoeconomic fragmentation.
Over the past few years, geopolitical divides between groups of countries have widened, first sparked by Brexit and trade tensions, and further deepened by Russia’s invasion of Ukraine. These events have driven geopolitical risks sharply higher since 2019. Some argue that after years of polarization, the world is now split into different governance blocs. Other observers note the erosion of liberal democracies in the West, with many anti-establishment parties gaining ground.
These geopolitical upheavals have brought to the fore “decoupling” strategies that affect foreign investments, with each countries trying to become economically more independent of its “enemies.” Many developed economies have recently strengthened their foreign investment screening processes, granting domestic authorities the power to limit foreign acquisitions in key industries. These developments brought back discussions the need for protectionism, near-shoring, or friendshoring, i.e. offshoring of production to geopolitically aligned or ‘friendlier’ countries. A survey by the ECB suggests that more than 70% of 65 European multinationals surveyed are either shifting production to nearby or politically friendly countries or diversifying. Policymakers are increasingly offering stronger incentives for firms to consider friendshoring and reshoring to move production to countries with aligned political preferences.
Geopolitics and FDI
In this new paper, Grover and Vézina (2025) use detailed project-level data on FDI covering greenfield projects, information on mergers and acquisitions (M&A) and other economic data together with a host of measures of geopolitical alignment. They measure geopolitical alignment or friendship across countries are (1) a measure of bloc alignment from Capital Economics; (2) a variable singling out bilateral FDI between high liberal democracy countries and low liberal democracy ones; (3) public favourability from opinion surveys; and (4) a commonly used measure that leverages on voting patterns at the UN General Assembly.
Geopolitical forces have always shaped FDIs. Now even more.
Their analysis confirms that FDI are affected by geopolitical forces in the years of analysis (2003-2022). It also confirms that the effect of geopolitical distance has been steadily increasing since 2011, when its significance was minimal, and is now at its peak. For example, the impact of geopolitical distance on greenfield FDI has doubled over the past decade, with a one standard deviation drop in UN voting similarity reducing greenfield FDI by 8% in 2011 compared to 16% in 2022.
Notes: The y-axes measure the effect of geopolitical alignment on FDI, both greenfield (left) and M&A (centre), as well as the stock of affiliates (right), over time.
Friendshoring is driven by the West
To discern broader patterns in friendshoring forces, they consider the differential effect of FDI patterns by country. All their estimations rely on “Gravity model”, a sort of industry standard in International Economics, which posits trade is expected to behave analogously to Newton’s Gravitation Law with trade flows (gravitational forces) being directly related to country’s GDP (mass) and indirectly related to distance (just as in Newton’s Law).
Their result reveal that friendshoring activities in recent years (2020-2022) are largely observed among companies from Western economies. For example, the top destinations for US FDI over the last ten years have changed remarkably. China dropped from second to 15th position in for US greenfield FDI from 2012 to 2022. Moreover, both Brazil and Russia dropped out of the top 15, while Costa Rica and Poland climbed into the top 15. On the other hand, outward FDI from companies in China shows no sign of shifting away from the US. At the same time China, Japan, the Republic of Korea, and Singapore are now increasingly investing in geographically distant countries. Chinese companies as well invest more in geopolitically distant countries and (possibly more worryingly) in countries which are closer to the US. This result highlights the challenges associated with decoupling value chains in an interconnected globalised world, and the fact that FDI are indeed used to pursue geopolitical goals.
US FDI
Chinese FDI
Notes: The y axes measure the effect of geopolitical alignment on FDI fomr the US and from China separately. We look at greenfield projects (left) and M&As (center), as well as the stock of affiliates (right), over time.
Not only national security
Their findings indicate that friendshoring is not happening only in stratetic sectors, such as defence, energy or high-tech or to those characterised by high participation in global value chains. Their paper observes effects in all sectors, highlighting how these effects extend beyond national security or strategic considerations.
Conclusion
Grover and Vézina (2025) find an increasing role for political alignment or differences in shaping companies’ location decisions. Geopolitical differences, measured by UN voting, bloc alignment, the liberal democracy index, and unfavourable public opinion, have a larger negative impact on foreign investments today than they did ten years ago.
This extension of fragmentation is bound to reduce economic integration. Moreover, economic fragmentation may reduce efficiency and increase the call for protectionism further decreasing economic growth. In this sense, geopolitical considerations and their trade-off in terms of economic growth should be carefully considered.
References:
Grover, A and P-L Vézina (2025), “Geopolitical Fragmentation and Friendshoring: Evidence from Project-Level Foreign Investment Data”, World Bank Policy Research Working Paper.
