Bridge over troubled water? German foreign direct investment in times of geopolitical tensions

• We analyze German outward foreign direct investment (FDI) from 2002 to 2022. • The period is marked by a substantial rise in geopolitical risk. • We find that geopolitical alignment does not significantly affect the geographic distribution of German FDI. • We conclude that there is no empirical evidence of geopolitical fragmentation in German FDI. Evidence of geoeconomic fragmentation does not necessarily apply to all types of cross-border business activities alike. For foreign direct investment, for instance, an increase in trade costs due to heightened geopolitical risk may actually make production abroad relatively more attractive. This paper examines the geographic pattern of German foreign direct investment over the period from 2002 to 2022. Using a variety of models and specifications, we find no consistent evidence that a host country’s geopolitical position has a measurable impact on German investment once traditional gravity factors are accounted for.