Economic diplomacy amid geoeconomic fragmentation: FDI flows, sanctions and adaptation models for middle powers

Abstract

The paper investigates how global geoeconomic fragmentation reshapes the toolkit of economic diplomacy for middle powers, evaluates the joint impact of trade wars and sanctions regimes of 2020–2025 on foreign direct investment (FDI) flows, and substantiates a typology of adaptation models relevant to Ukraine's post-war reconstruction. The study combines structural analysis of UNCTAD, IMF, WTO and OECD data for 2020–2025, a comparative examination of country cases (Switzerland, Turkey, Ireland, Poland, Singapore and Ukraine), and a quantitative application of an original composite indicator – the Diplomatic Resilience Index (DRI) and institutional analysis within the economic statecraft framework. The nominal 14% recovery of global FDI in 2025 is largely a statistical artefact of conduit flows: real growth does not exceed 5%, while greenfield investment into geopolitically distant jurisdictions hit a 20-year low. A four-model typology of middle-power adaptation is proposed – the Swiss-neutrality model, the Turkish-balancer model, the Irish-club model and the Singapore-hub model – enabling behavioural forecasts of economic diplomacies under fragmentation. The paper formalises the concept of sanctions arbitrage as a specific channel through which middle states re-route trade between sanctioned blocs and evaluates the associated reputational risk through a «net diplomatic revenue» frame. An expert-calibrated DRI with five normalised components is applied to Singapore, Switzerland, Turkey, Poland and Ukraine. Conclusions. Contemporary middle-power economic diplomacy must operate within a paradoxical field: maximum integration combined with deliberate build-up of resilience. Within the DRI framework, Ukraine's optimal positioning is a hybrid between the Irish-club and the Singapore-hub models, achieved through deep EU integration, a managed strengthening of regional hub functions in agri-food, IT and defence industries, and a principled rejection of sanctions-arbitrage practices in order to accumulate partner trust.