The Investment Casualties of War: Global Impacts of Armed Conflict on Foreign Direct Investment Inflows

Abstract: Involvement in the outbreak of an armed conflict can present a variety of potential risks to an involved nation’s economy. In this paper I examine if one one of those risks, specifically that a new war could scare away foreign investment actually occurs and whether the intensity of the conflict increases or lessens the potential impact. Using ordinary least squares on panel data from 1966 to 2015, I examine the short and long term impacts of armed conflict on global foreign direct investment (FDI) inflows using two measures of conflict intensity: Large conflicts or ‘wars’, with 1000 or more battle-related deaths and small conflicts, between 25-999 battle related deaths in a given year. Throughout the sample, I find that large conflicts are associated with a strong and negative relationship with FDI inflows associated with a conflict’s onset and end. First, I find a consistent and large negative impact on FDI inflows into an involved country associated with the outbreak of a new large conflict in the year after a conflict’s start. Additionally, once a large conflict does end, it takes approximately 3 years before FDI inflow levels return to positive levels. In order to asses long term impacts on FDI inflows, I test a third model examining conflict frequency by country, using the total number of conflicts that occur in 1, 5, 10, and 25 year periods. Surprisingly, the total amount of conflicts that occur in a country over time regardless of intensity does not seem to hold a statistically significant impact on FDI inflows, reflecting what is likely a rather short term impact of armed conflict on the investment decisions of foreign firms and investors