Geoeconomic Fragmentation

Beyond short-term wartime dynamics, the global defence sector is undergoing a significant and far-reaching transformation. The recent increase in military spending, initially framed as a cyclical response to regional conflicts, is increasingly recognized as part of a broader structural repricing of security across global markets. This has also prompted a reassessment of defence firms’ role, shifting their perception from cyclical industrial contractors primarily tied to procurement cycles toward strategic assets embedded within the dynamics of geopolitical fragmentation and sovereign competition.   Consequently, this shift has contributed to the erosion of the post-Cold War peace dividend model, which underpinned global economic integration for more than three decades. In the aftermath of the Soviet Union’s collapse, advanced economies largely embraced the assumption that economic interdependence would mitigate conflict risk, thereby justifying sustained declines in defence expenditure. This assumption underpinned an efficiency-oriented model of globalization, optimized around lean inventories, cost minimization, and geographically dispersed supply chains, while assigning comparatively limited importance to redundancy and strategic industrial depth.   However, by 2026, this model had demonstrated its material vulnerabilities. Security considerations were no longer treated as external to economic policy, but rather embedded within it, as states sought to integrate defence production, industrial capacity, and supply-chain control into a broader framework of national resilience.

The world economy is at a turning point, with a visible tendency to reverse the integration that was seen in the last decades of the 20th century. Growing scepticism about the benefits of globalisation, particularly in developed countries, accompanied the sluggish recovery after the Global Financial Crisis (GFC). This uncertainty led to a purposeful policy change away from integration known as geoeconomic fragmentation (GEF). A variety of policies impacting capital flows, worker mobility, and trade are included in GEF. GEF policies are motivated by a variety of factors, such as correcting internal economic inequities, economic competition, and national security concerns. Foreign direct investment (FDI), which has been declining recently, particularly in emerging countries, is another indication of how this trend toward GEF has affected FDI and the need for quick action to reverse it.