Knightian uncertain violence and the challenge of FDI-assisted development: policy recommendations where civilian lives are at risk

Abstract

In this interdisciplinary paper, reviewing scholarship on both politically motivated and social violence, we use the Knightian distinction between (measurable) risk and (unknowable) uncertainty to examine how international business is affected when violence is directed at civilians, civilians are killed, and violence levels are constantly changing. Using data on 48 African countries (1997–2021), we show the uncertainty of these actions deters inward foreign direct investment (IFDI). As a high-commitment mode of internationalization, IFDI involves deepening knowledge of and exposure to foreign locations. Because uncertainty challenges the feasibility of deepening knowledge and is so hard to mitigate, investors behave differently than under risky conditions—they avoid contexts with Knightian uncertain violence. Our post hoc analysis shows that as IFDI decreases, exporting by local firms increases, suggesting another way to remain globally economically connected. Although our work raises many questions that demand further research, we can already identify useful policy insights. When violence makes a context uncertain to the point of virtual unknowability, IFDI will only assist development if policymakers and MNEs alike work to reduce violence. Multi-sectoral partnerships, increasing educational opportunities, and especially good governance are critical to ensuring IFDI is not appropriated by perpetrators of violence, but instead serves development.