Geopolitical alignment, outside options, and inward FDI: An integrated framework and policy pathways

This paper examines the interplay of geopolitics, multinational enterprise (MNE) strategies, and host country policies in shaping foreign direct investment (FDI) flows. We move beyond the traditional focus on MNE decisions by incorporating insights from international relations theory to analyse how geopolitical alignment influences MNE global strategies and host country policy responses. We develop a framework that considers three main dimensions related to home and host countries: their political alignment, which affects their respective availability of outside options, and the technology gap between them and the political system in the host country. On this basis, we explore the dynamic interplay between international geopolitical agendas, MNE investment strategies, and local Investment Promotion Agency (IPA) policy choices. Our analysis shows that while home-host geopolitical alignment can facilitate FDI and simplify policy choices, particularly in democracies, the absence of alignment necessitates a more nuanced IPA response. Our research indicates that IPA policies must consider geopolitical alignment, benefits distribution across various stakeholders, and the need to foster embeddedness and long-term engagement.