Changing role of the diplomatic and government system similarity in light of re-globalization – from push to pull factor as a response to heightened geopolitical tensions

Research focuses on geopolitical distance factors influencing bilateral cross-border investment flow and whether this effect has changed in the recent context of re-globalization. Using bilateral cross-border financial investment flows and a gravity dataset of 234 countries and territories during the period 2009–2021, we find that aggregate investment flows decrease to recipient countries that are less democratic, and increase when countries have alliances, after controlling for conventional gravity-type variables, bilateral trade flows, and time-varying recipient and source country characteristics. Nevertheless, countries with the same government system have lower investment flows. Moreover, a bigger diplomatic distance results in higher cross-border investment flow, but this effect has decreased significantly in 2015–2021, considering recent geopolitical challenges and crises, such as Brexit, U.S.-China trade disputes, and the COVID-19 pandemic. The results suggest that higher investment returns in geopolitically distant countries have been prioritized by investors, but recent geopolitical tensions may be making them too risky.