Follow the money: How FDI is redrawing the global economy

Foreign Direct Investment (FDI) is becoming an increasingly critical indicator for understanding global trade patterns and their shifts, driven by geopolitics and macroeconomics. Historically, FDI was viewed as one of many variables, but recent research from McKinsey highlights its new priority as a strategic signal rather than just a finance or government relations topic. This shift is due to several factors observed over the past three to five years. Firstly, cross-border greenfield FDI, which targets new or expanded production capacity, has significantly shifted towards "future-shaping industries." These include artificial intelligence (AI), advanced manufacturing (like electric vehicles and batteries), and the energy and resources supporting them. The financial scale of these investments has grown, with more and larger "mega deals" reaching billions or even hundreds of billions of dollars. These investments are also more geopolitically tied, offering insights into future trade and competition dynamics. The capital invested today indicates where production will occur and who will be competitive in the future. This pattern is an "upstream indicator" of trade. For example, 15 years ago, significant FDI into China built its manufacturing base, leading to subsequent trade. Today, the focus isn't solely on geographies but on these future-shaping industries. Three-quarters of recent FDI announcements are directed into these sectors. This has broad implications, even for companies not directly involved in these top-tier industries. Many investments are "place-based," such as large energy projects, mines for data centers, or manufacturing facilities that various players can integrate into. For instance, building a factory creates demand for suppliers, and even local services like hotels and food will shift. Competitors' investments in new markets can signal strategic moves, requiring businesses to consider their response and how the entire ecosystem might change. The analysis compares the pre-COVID period (2015-2019) with the current period (2022-2025). The "old world" was characterized by a "world is flat" paradigm, where the location of production mattered less, focusing on economic convenience, lowest costs, and highest efficiency. This paradigm often overlooked the strategic implications of where things were made. The last few years have brought a greater understanding of the geoeconomic implications, including jobs and strategic advantages. For instance, there's a growing desire to locate battery manufacturing closer to demand or to diversify semiconductor production globally. Technology has historically facilitated trade by enabling the decoupling of manufacturing from design and software activities, allowing companies to choose locations based on capability, cost, and productivity. While advanced technology might make it easier to establish production in new places, practical and process know-how remains crucial. Replicating the immense expertise found in established manufacturing hubs, like China's factories, presents a significant challenge. Technology is arguably the most important word in this debate, alongside "where." The "new world" is being built around green tech, AI data centers, and semiconductors, attracting massive new capital investment. FDI reveals where and how this world is being constructed. Green tech, for example, involves capital-intensive projects like battery production and solar plants. In China, inbound FDI has significantly declined due to economic difficulties, while China is now exporting capital to build green tech infrastructure elsewhere, responding to global demand. Similarly, massive semiconductor investments, particularly in the US, aim to create resilient ecosystems. AI data centers also represent huge investments, strategically located based on demand. These massive global capital commitments are shaping the future. Europe's position is equivocal. While it has attracted more FDI overall, it has received significantly less investment in future-shaping industries compared to North America, signaling a perceived deficit in competitiveness. Much of Europe's inbound investment has been in green energy. To revitalize growth and productivity, Europe needs investment in these technologies and overall. This highlights a need for focused reforms and business-friendly policies. Several sectors—AI, data centers, semiconductors, batteries, and energy—are dramatically reshaping global trade, and they are highly intertwined. Green energy is needed to power AI, which relies on semiconductors, illustrating their interconnectedness. The scale of these investments is immense. FDI projects since 2022 could more than quadruple battery manufacturing capability outside of China, nearly double data center capacity outside the US and China, and significantly shift the balance of leading-edge semiconductor production towards the US. These are not marginal increases but represent 200% to 400% growth. The US appears to be a major beneficiary of recent FDI shifts, while China has become a significant outbound investor. This rebalancing reflects several factors. The US has seen a substantial increase in promised investment, particularly in semiconductor manufacturing and advanced manufacturing. Major US tech companies are investing in AI data centers within the US. The US government is actively working to attract manufacturing capabilities, and these projects are largely moving forward. This necessitates companies reconsidering their role in the US market and their manufacturing strategies there. While challenges exist, such as developing human capital and skills, the US offers a large and rich market. Economically, the US market has historically delivered better long-term returns, creating a bifurcation in GDP growth compared to regions like Japan or Europe. This recognition of returns, coupled with policy considerations, justifies investments in the US. Conversely, returns in China have been less apparent in recent years, leading to a recalibration of investment attractiveness. Both policy and economics are converging to drive this shift. For countries and companies seeking successful FDI, key capabilities are essential. Research indicates that outsized FDI often leads to industry growth about 60% of the time. Successful cases shared common factors: a robust human capital ecosystem with trained individuals for technology development and factory work; significant domestic investment; and integration into global supply chains, allowing industries to sell into broad global markets rather than just domestic or narrow regional ones. Decision-makers face increased uncertainty today due to factors like tariff changes and geopolitical realignments. The massive shift towards future-shaping industries is driven by the urgency that "you can't wait." Delaying investment in areas like data centers or semiconductors risks being left behind as the landscape rapidly changes. The key takeaways for CEOs are: 1. Significant events are unfolding that will reshape the competitive and geoeconomic future, and businesses cannot afford to wait and see. 2. Action in future-shaping industries needs to be at a large scale, influencing the entry barriers for play in different markets. 3. Conventional FDI drivers like energy resources remain crucial. The fundamental challenge for decision-makers is that the very assumptions underlying their decisions have shifted. It's not just what they're looking at, but the lens through which they view the world must adapt. CEOs need to question which assumptions from the past decade are no longer valid in this evolving environment.