Global sanctions, foreign direct investment, and global linkages: evidence from global data

Abstract

Using a rich and updated dataset on the Global Sanction Data Base (Felbermayr et al. “The Global Sanctions Data Base,” European Economic Review 2020; 129: 1–23), this study examines the effect of sanctions on FDI flows across 1,717 pairs of 66 countries during the 2000–2012 period and the role played by international linkages such as global value chains and global bank linkages in the sanction-FDI nexus. Results from the gravity model show that sanctions indeed have heterogenous effects on FDI flows when separate types of sanctions are put into consideration. They significantly reduce FDI flows in the pre- and during the crisis period. Both global value chains (GVCs) and global bank linkages (GBLs) play a moderating role in the sanction-FDI nexus, where the consequences of sanctions on FDI flows become more severe in the presence of these two types of international linkages. It is also found that GVCs signify the negative impacts of trade sanctions, while the GBLs can be regarded as a channel through which financial sanctions affect FDI flows more significantly. These findings bridge two strands of literature on sanctions and international linkages, where the latter is on the rise due to the worldwide presence of multinational corporations’ activities and the globalization of the financial markets.