Investment, Opportunity, and Risk: Do US Sanctions Deter or Encourage Global Investment?1

Abstract

Complementing the effectiveness of US sanctions debate, the US government often prods US investors to disinvest from targeted countries, hoping to pressure sanctioned countries to back US foreign policy goals or face economic costs for their actions. Missing from the effectiveness of sanctions debate is the impact US sanctions have on third-party foreign direct investment (FDI). Using panel data for 171 countries from 1969 to 2000, we present the first empirical study on the effect of sanctions on global FDI. We find strong evidence that when US firms disinvest during US sanctions, global FDI significantly increases, providing the target country with a reliable source of capital replacement. The results suggest the limited effectiveness of sanctions for restricting capital flows to targeted countries and that US firms may ultimately bear the highest costs from US-imposed sanctions. A debate exists in the sanctions literature about whether multilateral cooperation produces successful policy outcomes. Some point to the ability of sanctioning states to garner multilateral cooperation as a near necessary condition for success, while others see the potential pitfalls involved with the forming and maintaining of a sanctioning coalition. 2 Much of the sanctions success research investigates commerce issues (Martin 1992; Mastanduno 1992; Drezner 2000; Miers and Morgan 2002), with spe