Abstract
States burdened with conflict have been considered to be undesirable destinations for foreign direct investment (FDI) due to, inter alia, political instability, regulatory unpredictability, and expropriation risk. However, we develop an alternative view based on corporate governance and real option theories. We analyze a dataset of FDI location decisions made in the Oil and Gas sector by 250 US firms across 44 countries between 2007 and 2013. After controlling for energy reserves, the results show counter-intuitively, that civil war and terrorism risks, and terrorist events are positively associated with US investment in Oil and Gas. US subsidiaries also show high levels of ownership commitment. It is tempting to conclude that US Oil and Gas is a wholly unique, resource-bound case, but we argue that this disconnect may have occurred for two reasons. First, a threat of conflict and violence can make MNEs exercise their growth options and expand resource extraction sooner rather than later. Second, political instability does not necessarily lead to higher levels of FDI expropriation risk. On the contrary, instability can reduce the incentives for the state to seize assets from technologically superior MNEs, i.e. it may reduce expropriation risk. Just as the rule of law and ‘good’ governance can constrain a state from expropriation, there are theoretical reasons why ‘bad’ governance resulting from instability and incapacity may do so, too.
Highlights
Countries characterized by extreme forms of political risk and conflict—including political violence, intra and inter-state war, and terrorism—are generally considered to be undesirable destinations for foreign direct investment (FDI) (Busse and Hefeker 2007; Driffield et al 2013)
How does a host country’s political instability and conflict influence inward FDI and its ownership commitment? Can theory explain any sectoral heterogeneity in FDI responses to instability? Is FDI by resource-seeking firms attracted to nations with societal conflict, and if so, can this effect be fully explained by the availability of the resource? Answers to these questions would respond to a recent plea for further contextualization of the conflict/FDI relationship (Bailey 2018)
We investigate FDI location decisions in Oil and Gas made by 250 US Oil and Gas firms across 44 countries, 2007–2013
Summary
Countries characterized by extreme forms of political risk and conflict—including political violence, intra and inter-state war, and terrorism—are generally considered to be undesirable destinations for foreign direct investment (FDI) (Busse and Hefeker 2007; Driffield et al 2013). This is attributed to potential losses associated inter alia with political instability, regulatory unpredictability, and expropriation risk (e.g., Holburn and Zelner 2010; Jensen 2003). Can theory explain any sectoral heterogeneity in FDI responses to instability? How does a host country’s political instability and conflict influence inward FDI and its ownership commitment? Can theory explain any sectoral heterogeneity in FDI responses to instability? Is FDI by resource-seeking firms attracted to nations with societal conflict, and if so, can this effect be fully explained by the availability of the resource? Answers to these questions would respond to a recent plea for further contextualization of the conflict/FDI relationship (Bailey 2018)
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