Geopolitical Shift in Capital Preference: The Differential Impact of Geopolitical Risk and Political Fragmentation on Cross-Border Capital Allocation

Abstract

Since the Russia-Ukraine War in 2022, geopolitical risks have become a structural force reshaping the pattern of global capital allocation. This paper constructs a framework for analyzing the structure of capital preference and decomposes the influence of geopolitics on cross-border capital allocation into risk-hedging preference (aggregate effect) and camp-allocation preference (structural effect), aiming to reveal the independent effects of the two mechanisms and their interaction. Based on panel data of 22 major economies from 2006 to 2024, this paper uses the proportion of net FDI inflows to GDP as the dependent variable and the GPR index and the United Nations voting ideal point as the core independent variables, employing two-way fixed effects regression for empirical testing. The results show that for every one-unit increase in GPR, the net FDI inflow decreases by 1.55 percentage points (p < 0.01). The independent effect of the ideal point is not significant, but the interaction term is significantly positive (coefficient 0.78, p < 0.01), indicating that pro-Western countries experience smaller FDI shocks under high geopolitical risk. The two mechanisms exhibit a substitution relationship rather than an additive relationship. This study provides new empirical evidence for understanding the logic of capital allocation in the geopolitical era.