Gambling on Conflict: Foreign Direct Investors and Political Violence in Developing Countries
Open Access
- Author:
- Mihalache, Andreea Stefania
- Graduate Program:
- Political Science
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- August 11, 2010
- Committee Members:
- D Scott Bennett, Dissertation Advisor/Co-Advisor
D Scott Bennett, Committee Chair/Co-Chair
Quan Li, Committee Member
Douglas William Lemke, Committee Member
Subhanan Mukherjee, Committee Member
Andres Rodriguez Clare, Committee Member - Keywords:
- multinational corporations and conflict
political risk management
political risk
industry-level FDI
conflict
political violence
Foreign direct investment
civil conflict
location substitutability
intensity of non-physical assets - Abstract:
- Over the past two decades foreign direct investment (FDI) has become as important as, if not more important than, international trade in the global economy. FDI constitutes a major source of capital, particularly in developing countries, where FDI inflows as a share of GDP rose from only 10% in 1980 to approximately one third in 2005. Scholars have found FDI to be important for the quality of democracy, political stability, economic growth, and various aspects of human welfare. It is, therefore, important to understand the determinants of the global and within-country distribution of FDI flows, while continuing to study the effects of this distribution on development outcomes, individual wellbeing, and the political environment. In conflict situations, even small shifts in the balance of power can change outcomes drastically. Capital inflows through FDI likely affect this balance of power. Yet, the within-country distribution of FDI flows during conflict episodes has so far been overlooked in scholarly work. This lack of attention can be attributed to the conventional wisdom that foreign investors simply do not go to conflict countries. Why would they? The advantages they seek, ranging from inexpensive labor to friendly policies, are present in most developing countries. In my dissertation, I debunk this myth. I first establish that sizable amounts of FDI continue to flow to developing countries throughout episodes of conflict. Evidence shows that at least some investors stay on and rebuild in environments with high political violence risk, like Columbia, Haiti, Liberia, Rwanda, and Sierra Leone. Furthermore, FDI to conflict countries is not confined to the extractive sector, which, arguably, offers the fewest options when selecting foreign affiliate locations. This reality naturally raises the question: what differentiates foreign investors who withstand political violence from those who flee? In the first part of the dissertation, I offer a theory of investors’ reactions to conflict and a set of empirical models that predict firm perceptions of threat from political violence, as well as location decisions. Starting with the premise that firms are heterogeneous, I identify two investment characteristics—intensity of non-physical assets and location substitutability—that reduce firms’ sensitivity to conflict. A set of empirical models using survey responses of foreign investors support my hypotheses. I also develop an industry-level argument for FDI reactions to conflict, which I test on a new data set of industry-specific FDI flows. In the second part of the dissertation, I explore the role of FDI in conflict processes, particularly the onset of civil conflict. The argument and analyses here continue to account for differences among foreign direct investors: both the investors’ socio-economic effects and their incentives and ability to overcome the collective action problem vary across types of FDI. These effects and incentives, in turn, influence the dynamics of civil conflict. Investment characteristics thus condition the impacts of FDI penetration on the initiation of civil conflict. The accumulation of foreign production capital in the primary sector (mining and agriculture industries) tends to increase the probability of civil conflict, while services sector FDI tends to reduce it. Manufacturing investments appear to have no significant effect on conflict. This project offers the first theory and empirical test of foreign firms’ reactions to political violence contingent on the attributes of their investment. After establishing that investments do flow to conflict-affected countries, I explore the effect of industry-specific foreign capital on the onset of civil conflict. For political scientists, this project opens new avenues for research, inviting further analyses of the role of foreign investors in conflict processes and in politics more broadly. The project also offers an important lesson to political actors: the blanket approach to attracting FDI ought to be reconsidered. Some investors need stronger incentives than others when faced with the risk of political violence; at the same time, some investors can help alleviate this risk, while others exacerbate it through their presence.