Tariffs, tensions and FDI: How investment promotion agencies are navigating a shifting global landscape

Global economic integration, which flourished for decades, is facing serious headwinds. Since the mid-20th century, the world economy has thrived on open borders, falling trade barriers and global value chains (GVCs) that spread production across countries. But today, this model is under pressure. Rising geopolitical tensions and tariffs are challenging the assumptions that once underpinned globalisation and rewriting the playbook for international investment.

Investment Promotion Agencies (IPAs), the frontline institutions that attract and facilitate foreign direct investment (FDI), must adapt to this new reality. Growth in global FDI has slowed dramatically – declining since 2021 and rising by only 1% in 2024, according to OECD FDI in Figures – while geopolitical uncertainty continues to intensify. For IPAs, the goal is not just attracting capital anymore; it’s about supporting economic resilience, sustainability and aligning with national priorities in a fragmented and volatile world.

Tariffs, traditionally tools of trade policy, now play a complex and sometimes contradictory role in shaping FDI. On one hand, tariffs can spur “tariff-jumping” investments, where companies establish or expand operations inside tariff-imposing countries to avoid import costs. This can increase inward FDI as firms seek to bypass trade barriers. On the other hand, tariffs raise costs and risks for efficiency-driven investments that rely on integrated GVCs – discouraging investment that depends on cross-border trade for cost optimisation. 

GVCs, which underpin around 70% of international trade, are particularly exposed. They rely on the seamless cross-border movement of goods, services, raw materials, and components – often multiple times across multiple borders. In such an interconnected system, tariff volatility, combined with broader geopolitical uncertainty, significantly undermines the predictability and cost-efficiency that global investors seek.

Recent research, including from the European Central Bank, highlights that tariffs increasingly interact with broader structural shifts in the global investment environment. As geopolitical tensions rise, investors are adjusting their strategies to mitigate exposure to economic and political risk. Cross-border investments are showing signs of fragmentation, with firms consolidating operations in jurisdictions perceived as more stable or strategically aligned. This suggests that tariffs, especially when coupled with geopolitical uncertainty, may not only disrupt trade but also accelerate deeper, long-term shifts in global FDI patterns.

In today’s unpredictable environment, investors prioritise economic stability and regulatory predictability above all. The 2025 Kearney FDI Confidence Index highlights that developed markets dominate the top investment destinations, reflecting investors’ preference for safe, stable environments with clear rules and strong economic fundamentals.

Tariffs alone do not drive investment decisions. Instead, factors such as domestic economic performance, technological capabilities, and a transparent, consistent regulatory environment weigh heavily. Businesses invest where they can access skilled talent and innovation ecosystems, often irrespective of trade barriers.

However, investors are growing wary of increasing regulatory complexity, particularly in developed economies. This complexity – including the proliferation of tariff and non-tariff measures – has the potential to hinder international investment activity.

Faced with these challenges, IPAs are evolving their strategies in several critical ways:

1. Strengthening domestic supply chains:

Many IPAs are deepening their understanding of local supply networks, recognising the risks of distant, complex supply chains. By identifying vulnerabilities and gaps, they can target FDI that fills strategic needs and supports domestic resilience. This aligns with global trends like near-shoring and friend-shoring, where companies relocate production closer to home or to politically aligned partners to reduce risk and tariff exposure.

2. Closer co-operation with governments:

IPAs are increasingly collaborating with national policymakers to align investment promotion with strategic industrial policies. Tariffs and geopolitical risks have led agencies to focus on priority sectors such as semiconductors, green technologies, healthcare, digital innovation and artificial intelligence. This reflects a reinforcement of an ongoing trend, with investment promotion gradually moving from a purely market-driven approach toward more selective, policy-aligned strategies that support national economic and security objectives.

3. Building on predictability and strategic advantages:

In a world of tariff volatility, IPAs emphasise regulatory clarity and a stable investment environment. Agencies highlight their countries’ comparative advantages – such as skilled labour, technological capacity and innovation ecosystems – while steering promotion toward sectors less sensitive to trade disruptions, including green economy and knowledge-intensive industries. Some are also diversifying their investor base by targeting more stable or geographically closer economies.

4. Enhancing facilitation and aftercare:

Beyond attracting new projects, IPAs are putting greater emphasis on supporting existing investors. In an environment where new FDI may be harder to come by, retaining and expanding current investments becomes critical. Enhanced facilitation and aftercare services help investors navigate complex regulations, reduce operational costs, and adapt to changing trade policies. This service-oriented approach fosters investor loyalty and helps mitigate the impacts of tariffs and geopolitical risk.

5. Acting as early warning systems:

Thanks to their close ties with the private sector, IPAs are uniquely positioned to monitor investor sentiment and market developments. Many agencies now serve as “early warning systems” for governments, relaying feedback that can prompt targeted policy reforms to improve the investment climate. This ongoing dialogue ensures that policymakers stay attuned to emerging risks and opportunities.

Despite the turbulence, what attracts FDI hasn’t really changed: countries that offer stable economic conditions, transparent regulations, strong institutions and dynamic innovation ecosystems still top the list.

IPAs play a crucial role in communicating these strengths, positioning their countries as safe, reliable destinations even as the global picture shifts. Clear messaging about competitive advantages and policy stability builds investor confidence and helps counterbalance the volatility of trade barriers.

Today’s investment environment is more complex, more political, and more unpredictable. But IPAs that adapt – by being strategic, service-oriented and aligned with national goals – can still drive sustainable investment.

By reassessing supply chains, aligning with national industrial goals, enhancing facilitation and aftercare, and focusing on transparency and predictability, IPAs are proving their strategic agility. This approach is key to navigating uncertainty and positioning their economies for sustainable investment growth in a fragmented global economy.

This blog is based on a webinar held by the OECD IPA Network on 28 May 2025, which gathered full member agency representatives and invited experts to discuss how IPAs are adapting their strategies in response to rising tariffs and geopolitical uncertainty.