Dodging bullets: The heterogeneous effect of political violence on greenfield FDI

Abstract

The relationship between political violence and greenfield foreign direct investment is contingent on the type of violence, the characteristics of the investment-receiving sector, and the international scope of the investing firm. Analysis with a dynamic fixed effects model for a panel of 90 developing countries shows that nationwide political conflict is negatively associated with total and non-resource-related greenfield FDI, but not with resource-related greenfield FDI. The insensitivity of resource FDI to political conflict is explained by the high profitability of natural resource extraction and geographic constraints on location choice. In the non-resource sector, the least geographically diversified firms are most sensitive to conflict. Other types of political violence, including intermittent violence in the form of terrorist acts and assassinations, or persistent but low-impact events, such as political terror, have no effect on the location choice decisions of multinational enterprises. These findings inform the strategies of multinationals with a nuanced and much needed understanding of the effects of political violence and the risks it poses to their businesses. * We are grateful for the helpful comments from the editor, Mona Makhija, and three anonymous referees. Early versions of this paper were presented at the Center for the Study of African Economies (CSAE) Conference 2015 and the 2015 AIB Annual Meeting in Bangalore. We would also like to thank seminar participants at Ivey Business School, Copenhagen Business School, the University of Groningen and the Erasmus School of Economics for their useful suggestions.

Towards a Democratic New Normal? Investor Reactions to Interim‐Regime Dominance during Violent Events

“…Consequently, they are usually better positioned to shift domestic sales or production activities abroad in response to adverse domestic developments, causing their total sales to suffer less from such developments (Lee and Makhija, 2009). Overall, these arguments are consistent with the more general view that geographic diversification provides a hedge against country-specific risks such as political upheaval, especially when such risks do not correlate highly across markets (Dai et al, 2017;Witte et al, 2017). Accordingly, we hypothesize:…”

“…Defined as 'violence against and by the government' (van de Vliert et al, 1999, p. 291), government-related violence concerns physical confrontations within a country between civilians and governmental actors, whereby each of these groups can be either the perpetrator or the victim. In former autocracies with an interim regime, such confrontations may include anti-regime demonstrations that result in clashes with state security forces, street skirmishes between civilians and policemen, terrorist attacks on public properties such as army checkpoints, and military or police raids on terrorist strongholds or residences of political activists (Acemoglu et al, 2013;Oetzel and Oh, 2014;Witte et al, 2017). The frequent involvement of weaponry in such violence often leads to fatalities among civilians and governmental actors (Oetzel and Getz, 2012 For investors, the share of civilian fatalities in the total number of fatalities of government-related violence may serve as a signal of an interim regime's political intentions.…”

The Attraction of FDI to Conflicted States: The Counter-Intuitive Case of US Oil and Gas

“…The empirical evidence on conflicted states and inward resource-extractive FDI has already hinted at a positive association, arguably reflecting weaknesses in the 'good' governance institutions of host countries, but also their 'bad' governance potential (Biglaiser and DeRouen 2007;Frynas 1998;Frynas and Mellahi 2003;Witte et al 2017). We propose a real options perspective on this evidence based on the ability of MNEs to treat risks as opportunities, plus the governance constraints on predatory states contemplating expropriation but confronted by non-lootable extractive resources.…”

“…Mancuso et al (2010, p. 787) report "a general consensus in the literature that increases in terrorist activity or risk reduce the inflow of FDI". However, while Witte et al (2017) support this 'general consensus' overall, they note the insensitivity of resource-related FDI to political conflict. This they attribute to the high profitability of natural-resource extraction and to the geographic constraints on location choice.…”

“…More recent studies, however, point towards a degree of sectoral heterogeneity in the response of FDI to conflict: in particular, the relative insensitivity of resourceseeking FDI to political conflict (Witte et al 2017). Furthermore, Biglaiser and DeRouen (2007) reported findings that seem counter-intuitive, with societal conflict found to have a significantly positive influence on general FDI inflows.…”