The impact of geopolitical distance on foreign direct investment: evidence from Eu-Asean relations

Abstract

This study provides a comprehensive empirical assessment of the evolving determinants of Foreign Direct Investment (FDI) inflows from the European Union (EU) to the ASEAN region between 2013 and 2025. It aims to analyze how geopolitical shifts, liguistic variables, and institutional frameworks influence capital allocation in an era of global "de-risking." Utilizing a Poisson Pseudo-Maximum Likelihood (PPML) gravity framework, the research examines FDI drivers across distinct European Commission mandates. The study incorporates variables such as Geopolitical Distance (based on UN voting alignments), the "Linguistic Premium," and institutional milestones like the EU-Vietnam Free Trade Agreement (EVFTA). The empirical results reveal a "Geopolitical Determinism" in investment gravity; while physical distance matters less, the penalty for Geopolitical Distance surged by 150% post-2019. Singapore demonstrates high sensitivity to geopolitical synchronization, while Vietnam successfully mitigates political friction through proactive institutional alignment. Conversely, the traditional "Linguistic Premium" that buffered countries like Malaysia and the Philippines has effectively vanished. Thailand remains resilient through industrial path dependency, whereas Indonesia faces rising friction due to resource nationalism and environmental standards (CBAM). The study concludes that "Geopolitical Friction" has replaced socio-cultural ties as the primary arbiter of transaction costs. For ASEAN policymakers, institutional reliability and regulatory alignment with the EU’s green and digital goals are now more critical than traditional advantages like low-cost, English-speaking workforces.