S&P 500 Companies Sidestep China, Invest In Politically Aligned Nations

The geopolitical landscape is increasingly becoming a key variable in the decision-making process of the largest publicly traded companies when directing investments abroad, new data points out.

The world is once again becoming fragmented in two blocs, but the playing field is by far more complicated than that of the cold war, when the Soviet Union and the U.S. became the leaders of a world divided by economic and political views.

A new analysis by Bloomberg Economics reveals that cost-effectiveness is beginning to cease being the main factor companies look at when investing abroad.

A new trend is emerging by which companies are becoming more prone to making major investments — like outsourcing manufacturing — in like-minded countries.

The analysts looked at a 2023 vote amongst UN nations calling on Russia to withdraw from Ukraine. As an exercise, they divided the world into two major blocks: those who condemned the invasion as those who did not.

The bloc condemning the invasion includes all North, Central and South America (with the exception of a few small countries like Bolivia and Cuba); all of Western Europe, Australia, Japan, as well as half of Africa and half of South-east Asia.

The bloc not denouncing the invasion includes most of continental Asia including China, India, Russia, Pakistan, Iran, Kazakhstan and the remaining countries in Africa and the Asia/Pacific region, which include South Africa and Vietnam.

The analysts then looked at shifts in major foreign investments between the blocs, specifically checking for greenfield foreign direct investments (FDI), which occur when a multinational company decides to build a subsidiary in a foreign country from the ground up, often building new production facilities, company offices and distribution hubs.

In 2022, $1.2 trillion were made in greenfield FDI. $180 billion of that (or 15%) has shifted from countries not condemning Russia, to those who did.

Countries that didn't condemn the invasion have lost half of their large foreign investments in just a few years, according to the Bloomberg analysis.

"The global share of greenfield foreign direct investment going to countries that didn’t condemn the invasion averaged only 15% in the last two years, down from 30% in the decade to 2019," reads the report.

This shows that big companies are looking to make their investments in countries where they feel politically aligned, in an effort to reduce the risk that comes with potential disruptions coming from military tensions, economic sanctions and more unknown conflicts to come.

In 2023, S&P 500 companies including BlackRock Inc BLK, Coca-Cola Co KO, Tesla Inc TSLA. and 3M MMM mentioned the word "geopolitics" 12,000 times in earnings calls, surpassing mentions of the same word by almost three times when compared to two years prior.

Other companies that mentioned geopolitics at earnings calls or at conferences in the last month include:

• Paypal Holdings Inc PYPL
• JP Morgan Chase & Co JPM
• Citigroup Inc C
• Lockheed Martin Corp LMT
• Broadcom AVGO
• Cisco Systems Inc CSCO
• Intel Corporation INTC
• Mastercard Inc MA
• Ford Motor Co F
• UBS Group AG UBS
• Autodesk Inc ADSK

The dream of a globalized world where capital and ideas move freely is being replaced with an emerging world order where regionalism and political kinship weigh as much as balance sheets.

While the decision on whether to denounce Russia’s actions is not definitive of a fixed two-bloc system, it serves as a measure of how much companies are looking at politically similar nations when directing investments abroad.

Today, the countries contained in the block that denounced Russia account for about two thirds of global GDP, as they include the U.S. and the Euro Area. But the Russia-friendly bloc is expected to continue its growth in the coming decades to reach almost half of GDP in 2050, as it includes giant economies such as China.

The losers of this new scheme are developing countries, where foreign investment riding on cheap labor has, for decades, been an engine for growth. Companies in powerful economies such as the U.S. and the E.U. are choosing to again localize production facilities domestically, in neighboring or politically aligned countries. 

The richest countries in the world, including the U.S., the U.K., Germany and Italy, have all improved their share of global greenfield FDI. China, on the other hand, has been losing share, and quickly.

"Between the second quarter of 2020 and the first quarter of this year, U.S. companies' greenfield investments in China plunged 57.9% and those by European firms dropped 36.7% versus the five years leading up to the pandemic," said the report.

Mounting tensions between the U.S. and China over the control of key industries such as semiconductors, electric vehicles and artificial intelligence are also pushing many countries to decide with whom they want to align.

Photo by NASA on Unsplash.