Is violence bad for business? The consequences of political violence for foreign direct investment

Abstract

What are the consequences of political violence for foreign direct investment (FDI)? The conventional wisdom suggests that political violence, a type of political risk, inhibits foreign investment in the developing world. I argue that this explanation is incomplete: the effect of political violence on investment varies with market structure. While current knowledge holds for investment in competitive markets—these firms are indeed deterred by violence—conflict has the opposite effect on investment in prospective monopolies (such as utilities, telecommunications, and logistics). Specifically, violence creates opportunities for firms to profit as these are markets with inelastic demand regardless of conflict. I test the theory using novel sector-level FDI data and a conservative estimation strategy. Building on work in business, political science and economics, this project forces us to rethink the relationship between conflict and capital. This has important consequences for the determinants of FDI and post-conflict reconstruction literatures.