Risky Business: Foreign Direct Investment and the Economic Consequences of Electoral Violence

Abstract

AbstractWhile the social and political consequences of electoral violence are widely discussed in the literature, less is known about the economic repercussions of electoral violence. Our study investigates this dynamic, asking how episodes of electoral violence affect existing levels of foreign direct investment. We argue that, when managing their investments in foreign markets, multinational firms weigh the expected gains of the investment with the probability that the host country experiences significant lapses in political stability. Electoral violence signals a greater risk of this undesirable outcome and, thus, increases the probability that firms divest in favor of more favorable investment environments. Using firm-level data, we investigate the investment behavior of seventy-seven multinational firms in twenty-five Sub-Saharan African countries from 1995 to 2008 with a series of logistic regression models. Directly modeling the choices that firms make with respect to yearly changes in investment, we demonstrate that firms are more likely to divest following events of electoral violence in a host country. This study carries important implications for our understanding of how electoral violence may undermine the economic stability of emerging economies.