Foreign direct investment and interstate military conflict.
On 8 December 1996, Thomas L. Friedman published his Golden Arches Theory of Conflict Prevention, which states that, "No two countries that both have a McDonald's have ever fought a war against each other." The rationale, according to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. Friedman, is that when a country reaches the level of economic development required to support a McDonald's, people in that country will stop fighting wars for fear of the resultant economic and personal losses. McDonald's, as a global foodservice retailer, represents not just a quality standard of living, but also, in the words of James Cantalupo, president and chief executive officer of McDonald's International, "a symbol of something--an economic maturity and [openness] to foreign investments." (1)
Since then, Friedman's claim, along with the publication of his popular book, The Lexus and the Olive Tree: Understanding Globalization globalization
Process by which the experience of everyday life, marked by the diffusion of commodities and ideas, is becoming standardized around the world. Factors that have contributed to globalization include increasingly sophisticated communications and transportation , has generated enormous interest and attracted scrutiny. (2) For the purpose of this essay, if McDonald's is viewed as a symbol of foreign investment, interesting questions arise regarding the relationship between foreign direct investment (FDI FDI
See: Foreign direct investment ) and interstate military conflict. Is it the presence of McDonald's that induces interstate peace? Or is it the absence of interstate military violence that leads to McDonald's investment? For Friedman's claim to be valid, the presence of McDonald's should induce peace rather than the other way around. But in reality, capital typically evades violence. (3) Scholars in international relations international relations, study of the relations among states and other political and economic units in the international system. Particular areas of study within the field of international relations include diplomacy and diplomatic history, international law, , business and economics have concerned themselves with these difficult questions before, but not to a sufficiently detailed level of analysis.
This essay will examine some key positions, arguments and evidence in recent academic scholarship on whether foreign investment mitigates interstate violence, as well as whether interstate conflict deters investment. Evidence will be offered using new data on bilateral foreign investment flows and militarized interstate disputes Militarized Interstate Disputes (or MIDs) are conflicts between states that do not involve a full scale war. A conflict is described as an MID if it causes fewer than 1000 deaths, and some military force is used. . At a time when international production--widely viewed as one of the most salient aspects of globalization--has been increasing in volume and expanding in scope, many developing countries compete to attract foreign capital, the relationship between FDI and interstate peace is a timely and significant topic. (4)
DEFINITION, ATTRIBUTES AND GROWTH OF FOREIGN DIRECT INVESTMENT
A multinational corporation (MNC MNC
See: Multinational corporation ) organizes production of goods and services In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility (unless the "good" is a "bad"). It is often used when referring to a Goods and Services Tax. in more than one country, involving the transfer of assets or intermediate products within the investing enterprise and without any change in ownership. (5) Foreign direct investment is the purchase of physical assets or a significant amount of the ownership of a company in another country to gain a measure of management control. (6) About three-quarters of International Monetary Fund (IMF IMF
See: International Monetary Fund
See International Monetary Fund (IMF). ) member countries use the 10 percent rule to define foreign direct investment in data collection--that is, 10 percent or more of the ordinary shares, voting power or the equivalent establishes a direct investment relationship. (7)
Scholarship in international business suggests a widely cited ownership, localization Customizing software and documentation for a particular country. It includes the translation of menus and messages into the native spoken language as well as changes in the user interface to accommodate different alphabets and culture. See internationalization and l10n. and internalization Internalization
A decision by a brokerage to fill an order with the firm's own inventory of stock.
When a brokerage receives an order they have numerous choices as to how it should be filled. (OLI OLI Open Learning Initiative (RSA)
OLI Operation Lifesaver, Inc.
OLI Open Learning Institute (Britain)
OLI Originating Line Information (qualifies Automatic Number Identification) ) paradigm to explain why national firms become transnational. It is said that they do so to exploit three types of advantages: (1) a firm's ownership advantages derived from its control over tangible assets such as land or factory equipment and intangible assets such as product innovations, management practices, marketing techniques and brand names; (2) the firm's internalization advantages resulting from its hierarchical control of cross-border production; and (3) the firm-perceived location-specific advantages based on the characteristics of host countries in terms of their economic environment or government policies. (8)
The nature and logic of FDI define two important, relevant attributes: the ex post illiquid Illiquid
An asset or security that cannot be converted into cash very quickly (or near prevailing market prices).
A house is a good example of an illiquid asset.
See also: Cash, Liquidity
In the context of finance. nature of investment and cross border jurisdiction. The former refers to the fact that FDI does not move easily--certainly much less than financial capital such as stocks and bonds--because foreign direct investors tend to adopt a long time horizon and build factories and facilities that do not translate into liquid assets Cash, or property immediately convertible to cash, such as Securities, notes, life insurance policies with cash surrender values, U.S. savings bonds, or an account receivable. easily. The latter attribute is almost self-evident, for direct investment flows out of the home economy to enter the foreign host economy, thus involving the laws and regulations of both countries. These two attributes determine that foreign investors have an inherent interest in the relationship between the home and host countries.
Statistics indicate the growing importance of FDI and the economic power of MNCs in host economies. According to the 2000 World Investment Report, the number of transnational corporation Any corporation that is registered and operates in more than one country at a time; also called a multinational corporation.
A transnational, or multinational, corporation has its headquarters in one country and operates wholly or partially owned subsidiaries in one or more parent firms has reached 63,000, associated with 690,000 foreign affiliates. (9) International production has increased faster than global GDP GDP (guanosine diphosphate): see guanine. and global exports as the sales of foreign affiliates worldwide rose from US$3 trillion in 1980 to US$14 trillion in 1999 and are now twice as high as global exports. Gross product from international production is one-tenth of global GDP. World FDI inflows amounted to US$865 billion in 1999--about 14 percent of global gross domestic capital formation--relative to 2 percent 20 years ago. (10)
The current strong increase in FDI remains a steady trend, with investments dispersed among all developed and most developing economies. The number of foreign affiliates located in developing economies has reached nearly 130,000. (11) According to the 2006 World Investment Report, FDI inflows to developed countries in 2005 increased by 37 percent, or US$542 billion, relative to the 2004 level, while developing countries received US$334 billion--the highest level of FDI ever recorded. (12) The inward FDI stock FDI stock is the value of the share of capital and reserves (including retained profits) attributable to the parent enterprise, plus the net indebtedness of affiliates to the parent enterprise. flows of developing countries ($2.3 trillion) rose from about 13 percent of their GDP in 1980 to about a third of their GDP in 2002, almost twice the 19 percent for developed countries. (13)
DOES INTERSTATE MILITARY CONFLICT INFLUENCE FOREIGN DIRECT INVESTMENT?
One may think about this question from two alternate perspectives: the perspective of the state that controls the financial regulatory environment and makes decisions about the use of force; and from the perspective of the investor who makes investment decisions. Foreign investors operating in an unfamiliar host environment will be concerned about the issue of cross border jurisdiction. They inevitably care about the expected return Expected Return
The average of a probability distribution of possible returns, calculated by using the following formula: to their investments and the ease of exit if the security of their property is threatened. Government policies toward FDI are thus important for foreign investors. Of particular importance are host policies on expropriation The taking of private property for public use or in the public interest. The taking of U.S. industry situated in a foreign country, by a foreign government.
Expropriation is the act of a government taking private property; Eminent Domain is the legal term describing the , exchange control, breach of contract, repatriation Repatriation
The process of converting a foreign currency into the currency of one's own country.
If you are American, converting British Pounds back to U.S. dollars is an example of repatriation. of profits, voluntary divestment, performance requirement, taxation and other relevant regulations. (14) To the extent that political violence influences these government policies, foreign investors will take political violence into account when they make decisions on the investment location and amount. (15)
From the perspective of the state, it seems intuitive that when two states fight with each other, both have an incentive to increase their own chance of winning. As FDI becomes more valuable to many host economies, so have the security externalities. Foreign Direct Investment brings to the host economy needed capital and managerial know-how and creates technology spillovers, helping to promote host economic growth. Outward investment to a belligerent host country may be subject to both home and host government restrictions. Home governments are more likely to encourage FDI to go to their military allies. Politicians engaged in financially and politically costly military warfare often have an incentive to impose capital controls and prevent capital flight. The need to finance expensive wars often requires higher tax rates.
In addition, market-seeking FDI often produce goods aimed for sale within the host market. In the event of interstate conflict, nationalist sentiments are likely to run high. Consumers in the host country may be reluctant to purchase goods and services that are produced by the foreign affiliates of an MNC headquartered in a belligerent country. Finally, interstate conflict often interferes with transportation, communication and the smooth functioning of the market, resulting in delays in the delivery of goods or unexpected damages. This has an impact on the trade-dependent vertically integrated FDI, where the affiliate operating in the host country is just one link within an MNC's global value chain. Conflict is likely to disrupt the smooth operation of vertically integrated FDI.
International business scholars have paid much attention to aggregate indicators of political risk or stability in which interstate conflict is sometimes one component. (16) For example, Friedrich Schneider Johann Christian Friedrich Schneider (born Alt-Waltersdorf, January 3, 1786 - Dessau, November 23, 1853) was a German composer and conductor.
Schneider studied piano first with his father Johann Gottlob Schneider, and then at the Zittau Gymnasium with Schönfelder and Unger. and Bruno S. Frey find that political instability has a negative effect on FDI flows. (17) In a cross sectional analysis of FDI flows to thirty-six countries for 1977 and 1982, David Loree and Stephen Guisinger find that political stability significantly promoted FDI inflows in 1982, but not in 1977. (18) Using data for all reported manufacturing plant openings from 1984 to 1987, Douglas Woodward and Robert Rolfe find that political stability increases the probability of a country being selected as an investment location. (19) However, Kamal Fatehi-Sedeh and Hossein Safizadeh fail to find statistical association between political stability and FDI. (20) Kingsley Olibe and D. Larry Crumbley do not find consistent evidence that political risk indexes influence U.S. FDI flows to ten out of thirteen Organization of Petroleum Exporting Countries Organization of Petroleum Exporting Countries (OPEC), multinational organization (est. 1960, formally constituted 1961) that coordinates petroleum policies and economic aid among oil-producing nations. (OPEC OPEC: see Organization of Petroleum Exporting Countries.
in full Organization of the Petroleum Exporting Countries
Multinational organization established in 1960 to coordinate the petroleum production and export policies of its ) countries. (21) Deepak Sethi, S.E. Guisinger, S.E. Phelan and D.H. Berg find that political instability, measured by a composite variable on a hundred-point scale, did not influence U.S. FDI flows to twenty-eight countries from 1981 to 2000. (22) Stephen Globerman and Daniel Shapiro conduct a two stage analysis of U.S. FDI flows to 143 countries from 1994 to 1997, in which the first stage investigates the causal factors of the probability that a country is an FDI recipient, while the second stage examines the determinants of the amount of FDI received. Using an index of political instability and violence, including armed conflict, social unrest, terrorist threats, etc., they find that these indicators do not influence the probability of whether a country receives any FDI inflow, but reduces the amount of FDI inflow a country receives. (23) That is, the average size of an FDI transaction may change independently of the probability of a country receiving the FDI. The econometric evidence is obviously mixed and inconsistent across studies.
In an exceptional analysis, Douglas Nigh nigh
adv. nigh·er, nigh·est
1. Near in time, place, or relationship: Evening draws nigh.
2. Nearly; almost: talked for nigh onto two hours. emphasizes the need to separate conflict and cooperation and to distinguish interstate and intrastate factors. (24) Nigh argues that the political aspect of an investment environment is driven by the subjective perception of investors from the home country. (25) Host countries could have the same democratic level of development, but investors could subjectively choose one country over another because of a historical relationship or contemporaneous events within the host nation. Moreover, since "U.S. investors realize that many host country officials and citizens do not distinguish between the interests of the U.S. government and those of U.S. direct foreign investors, even if the two are usually carefully differentiated by the U.S. political process," investors have to take into account politico-economic relations between two nations. (26) Therefore, investors watch closely for the possible international and intranational in·tra·na·tion·al
Occurring or existing within a single nation: an intranational conflict; intranational regions.
in cooperation or conflict that provide invaluable information about the business environment in a particular host country for an investor from a particular home country In his statistical analysis of manufacturing FDI by U.S. firms to twenty-four countries over twenty-one years, Nigh finds that international and intranational conflicts reduce U.S. investment while international and intranational cooperation increases it. (27)
In a recent study, I addressed the puzzling contradictory findings on political risk, offering a new analysis with several innovations. My theory considered how rational expectations and uncertainty on the part of foreign investors investors influence the ways in which political violence, including interstate and intrastate conflicts and transnational terrorism, changes investment behaviors. (28) According to this theory, foreign investors are forward-looking, constantly anticipating how political violence affects both the expected returns of their investments and the political barrier to exit. They frequently assess the probability of political violence and the likelihood that such occurrences might induce hostile policy changes. When firms internalize internalize
To send a customer order from a brokerage firm to the firm's own specialist or market maker. Internalizing an order allows a broker to share in the profit (spread between the bid and ask) of executing the order. these risk assessments into their investment decisions, a high risk of political violence will deter future investment flows and may lead to divestment from existing projects. These changes in investment decisions are based on expected risks and, therefore, often occur before the events of political violence materialize. One implication is that ex post, many actual events of political violence do not produce behavioral changes in investment.
But this is not the whole story. Because investors do not have perfect foresight, they cannot fully anticipate all the occurrences of political violence or accurately assess the level of the risk involved. This forces investors to adjust their investment decisions ex post when they experience unanticipated political violence. The reason is simple. Unanticipated occurrences of political violence often lead to unanticipated hostile policy changes (e.g. expropriations), causing the expected returns of an investment project to decline. In the absence of perfect foresight, the ex ante and ex post risk-adjusted returns will not be identical. Hence, unanticipated incidents of political violence carry new information and compel investors to moderate their ex ante optimism. Consequently, it is conceivable that even without an actual unfavorable policy change, investors may expect such a policy change to be forthcoming, thus choosing to divest, reduce or stop future investments altogether.
I further separate different types of political violence into civil war, interstate war and transnational terrorism and conducted a country level statistical analysis of 129 countries from 1976 to 1996. (29) With respect to interstate war, anticipated conflict does not affect the chance that a country is selected as an investment destination or the amount of FDI inflows a country receives. However, unanticipated interstate war reduces a country's chance to be chosen as an investment location, though it has little effect on the amount of FDI a country receives. These results suggest that interstate war largely deters new equity investment flows into a country. (30)
In a recent study, Glen Biglaiser and Karl DeRouen argue that U.S. troops stationed in host countries signal positive relations and possible alliances between the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. and host countries, indicating investment stability that is only available to U.S. firms. Through statistical analysis of 126 developing countries between 1966 and 2002, they find that the presence of U.S. troops encourages U.S. capital inflows. (31)
DOES FDI INFLUENCE MILITARY CONFLICT?
If one follows the convention of treating FDI as one of the most salient aspects of integration into the global economy, then answers to this question are more contentious, involving such familiar schools of thought as realism, Marxism/dependency theory and liberalism. The realist position considers economic forces as operating in the realm of low politics--not supposedly higher realms like diplomacy or war. To realists, "the most important events in international politics are explained by differences in the capabilities of states, not by economic forces operating across states or transcending them." (32) If globalization matters at all, it serves to threaten political stability in international politics because the loss of economic policy autonomy spills over into the foreign policy area. (33)
Dependency theory Dependency theory is a body of social science theories, both from developed and developing nations, that are predicated on the notion that there is a center of wealthy states and a periphery of poor, underdeveloped states. emphasizes international trade and investment as the mechanisms through which the international capitalist order distorts the economies of developing countries. (34) Reliance on foreign capital perpetuates the low status of developing countries in the hierarchy of the world system, which will cause conflicts between the core and the periphery. As evidence of this phenomenon, theorists often point to many instances of the nationalization nationalization, acquisition and operation by a country of business enterprises formerly owned and operated by private individuals or corporations. State or local authorities have traditionally taken private property for such public purposes as the construction of of foreign investment in various countries in early stages of their development. (35) More recent expropriations also appear to confirm FDI to be a source of interstate conflict. For example, Namibia initiated land reform in 2004 to redistribute land from white farmers of German origin to black landless land·less
Owning or having no land.
Adj. 1. people. By November 2005, the government had issued expropriation orders to eighteen white commercial farmers and had said the land would be given to almost 250,000 landless people. (36) In April 2006, Venezuelan president Hugo Chavez seized two oil fields This list of oil fields includes major fields of the past and present. The list is incomplete; there are more than 40,000 oil and gas fields of all sizes in the world. from two foreign oil firms--France's Total and Italy's Eni--because both firms failed to reach an agreement with the Venezuela government on new joint-venture contracts that would give a majority stake to the state-owned company, Petroleos de Venezuela. (37) On 1 May 2006, Bolivian president Evo Morales Juan Evo Morales Ayma (born October 26, 1959 in Orinoca, Oruro), popularly known as Evo (IPA: [ˈeβ̞o] decreed the nationalization of the country's natural gas industry and ordered the military to occupy the natural gas fields This list of natural gas fields includes major fields of the past and present.
N.B. Some of the items listed are basins or projects that comprise many fields (e.g. Sakhalin has three fields: Chayvo, Odoptu, and Arkutun-Dagi). and all companies to turn their production over to the state's Yacimientos Petroliferos Fiscales Bolivianos. (38)
Adherents of liberalism argue that economic linkages created through free international markets make war more costly, thus reducing the incentive for war. (39) Cumulative statistical evidence appears to favor the liberal notion that trade interdependence is associated with peace. (40) In the context of FDI, Richard Rosecrance and Peter Thompson suggest that FDI represents a link that is costly and time-consuming to break due to its illiquid nature. Thus, FDI is more likely to reduce conflict than trade. (41) Looking at data on U.S. FDI and conflict with other countries between 1950 and 1992, they find that FDI reduces conflict and that two-way FDI has a stronger impact than one-way FDI.
Criticizing both the narrow focus on trade and the underlying theory of liberalism, Erik Gartzke, Quan Li and Charles Boehmer study why and how FDI--among other things--affects interstate military conflict. (42) They argue that the liberal opportunity cost argument is logically inconsistent with the bargaining theory of war. The game theory literature of international conflict posits that the decision to go to war results from the failure of bargaining between states because states are uncertain about their opponent's payoff structure and resolve over a contested issue. States sometimes fight to demonstrate capability or resolve. Economic integration, measured in terms of trade Terms of trade
The weighted average of a nation's export prices relative to its import prices. , FDI and financial openness, reduces the probability of war by serving as a means of costly signaling, rather than by changing the cost-benefit calculus. On one hand, when both parties already know the value of their economic exchange before engaging in military action, the size of the economic stake per se provides no information about the resolve of the contestant. On the other hand, when a military threat over the contested issue drives away international production capital, the economic price the state is willing to pay gives the state's threat additional credibility. Such costly signaling informs the other state of its opponent's resolve, often resulting in bargaining success and avoidance of violence. Statistical analyses confirm that globalization indicators including FDI reduce interstate militarized disputes between countries.
Focusing on how international production affects international security, Stephen Brooks Stephen Brooks is an Assistant Professor of Government at Dartmouth College. Selected works
Second, competition for global production capital deepens regional economic integration among long-standing security rivals, producing better political relations with some qualifications. That is, members of regional trade agreements have to be few in number and have large economies; forcing them to cooperate to attract foreign capital. Brooks cites how the development of the Southern Cone Common Market (MERCOSUR), motivated partly by the pursuit of foreign capital, helped Argentina and Brazil to resolve their 150-year-long security rivalry. (45)
Third, states pursuing cutting-edge military technology can no longer resort to autarkic au·tar·ky or au·tar·chy
n. pl. au·tar·kies or au·tar·chies
1. A policy of national self-sufficiency and nonreliance on imports or economic aid.
2. A self-sufficient region or country. defense production. The involvement of MNCs in the defense industry leads to the internationalization The support for monetary values, time and date for countries around the world. It also embraces the use of native characters and symbols in the different alphabets. See localization, i18n, Unicode and IDN.
internationalization - internationalisation of weapons production and the rising cost, complexity and scale of developing new military technologies. The internationalization of U.S. defense production and military technology stood in sharp contrast with the autarkic production of the Soviet Union, which contributed to a technological gap. (46)
Brooks attributes the postwar peaceful relations among great powers to the dispersion of international production, but argues that the dispersion of international production capital has not produced such pacifying effects on security relations among developing countries and has had only a mixed effect on security relations between great powers and developing countries. (47) This is mainly because the noted economic and institutional conditions under which international production reduces the economic benefits of military conquest and deepens regional integration among security rivals are not present in developing countries. Furthermore, since developing countries most often employ their militaries in regional actions and focus on less complicated, smaller weapons systems, it is unlikely that the globalization of defense-related production would be relevant to their security relations.
NEW EVIDENCE ON BILATERAL FDI AND INTERSTATE MILITARY CONFLICT
There is little direct evidence that links bilateral FDI with interstate military conflict. Almost all studies focus on FDI inflows at the country level or bilateral outflows to others from only the United States. It seems imperative that empirical inquiry be expanded. Here, two factors are examined: bilateral FDI flows and dyadic Two. Refers to two components being used.
(programming) dyadic - binary (describing an operator).
Compare monadic. military conflict (conflict between two nations), using relatively more comprehensive data. The data used for this study tracks FDI flows among twenty-nine OECD OECD: see Organization for Economic Cooperation and Development. countries, as well as between those countries and twenty-nine non-OECD countries, from 1980 to 2003. (48) There is no coverage of FDI flows among non-OECD countries. Still, this is by far the most comprehensive bilateral FDI data currently available. For dyadic conflict, we use the widely used and recently updated Militarized Interstate Dispute (MID) data. An MID is a conflict in which one or more states engages in a threat of military force, display of force, use of force or war against one or more other states between the years 1816 and 2001. (49)
[FIGURE 1 OMITTED]
Average FDI flows from one country to the other can be computed and compared between the dyad dyad /dy·ad/ (di´ad) a double chromosome resulting from the halving of a tetrad.
1. Two individuals or units regarded as a pair, such as a mother and a daughter.
2. in peace and the dyad in MID or military conflict. Such a comparison allows us to observe whether the two types of dyads differ systematically in terms of foreign investment. Figure 1 illustrates this comparison. The dyad in peace witnesses an average of 410 million constant U.S. dollars worth of FDI flowing from the source to the recipient country. In contrast, the dyad in conflict observes an average of 250 million constant U.S. dollars worth of FDI flowing from the source to the recipient, which is nearly 40 percent less than the level for the dyad in peace. While this evidence does not indicate whether it is peace that induces more FDI or that it is more FDI that curtails conflict, it is rather obvious that peace and conflict go hand in hand with differing amounts of investment.
Economies differ in size and level of development. Average bilateral FDI flows tend to be heavily influenced by outliers and do not accurately gauge the relative significance of bilateral FDI flows to recipient and source economies. One way to circumvent this problem is to measure the relative importance of bilateral FDI flow to an economy by looking at the percent ratio of the FDI flow over the GDP of the recipient or the source. Figure 2 compares the average FDI/GDP percent ratio between the dyad in peace and that in conflict. For the recipient, the FDI/GDP ratio is 0.014 percent in the conflict dyad and 0.084 percent in the peace dyad. There is little doubt that this 83 percent difference is enormous. One may interpret this evidence as demonstrating either that the bilateral FDI recipient suffers a huge loss in foreign capital inflow due to its involvement in military conflict, or that a low level of FDI inflow tends to increase the probability of conflict between the recipient and the source or that both channels work simultaneously.
[FIGURE 2 OMITTED]
Interestingly, for the source country, the FDI/GDP ratio is 0.47 percent versus 0.84 percent between the conflict and peace dyads. This is still a large difference, although not as dramatic as that for the recipient country case. Likewise, one may interpret this as being produced by one of the three possible causes: the source of bilateral FDI invests much less in the recipient with whom it has a military dispute; too little investment from the source to the recipient tends to increase the likelihood it will fight militarily with the recipient; or both.
Evidence from Figures 1 and 2 indicates that bilateral FDI flows and dyadic military conflict are negatively correlated. This pattern contradicts both the realist position that these two phenomena are unrelated, and the dependency position that more FDI flows tend to beget be·get
tr.v. be·got , be·got·ten or be·got, be·get·ting, be·gets
1. To father; sire.
2. To cause to exist or occur; produce: Violence begets more violence. more military conflict. This evidence also appears to support the liberal position and Friedman's Golden Arches Theory that FDI leads to peace. The difficulty with this inference favorable to the liberal position, though, is as noted above: one simply can not rule out the possibility that conflict reduces investment--not the other way around.
[FIGURE 3 OMITTED]
Is it possible to disentangle the issue of causation between bilateral FDI flow and dyadic military conflict? Without complicating this essay with technicalities, one may get a glimpse of the relationship by looking at the changes in bilateral FDI flows over time. Figure 3 illustrates the temporal changes for average bilateral FDI flows in millions of constant U.S. dollars. For dyads in peace, bilateral FDI flows tend to be stable across the current year (t), the year before (t-1) and the year after (t+1). In contrast, for dyads that are involved in conflict, the graph shows interesting temporal changes. It is worth noting that for both the FDI and source-GDP and the FDI and recipient-GDP series, the same temporal patterns emerge. In the year before conflict occurs, FDI flows are already quite low when compared with those of the same period in the peace dyad. In the year of conflict occurrence, the amount of flows only declines slightly from the year before. In the year after conflict occurrence, investment resurrects and climbs up to almost the same level as in the peace dyad. The evidence supports the rationalist explanation that investors are forward looking and--at times--anticipate conflict correctly and do not invest in conflict areas before conflict occurs. The ex ante investment decline is followed by only a small drop in the conflict year because investors guess right often enough, or because they do not always correctly anticipate conflict occurrence. In the post-conflict year, investors reevaluate the situation and, in light of the new information revealed by the dispute, anticipate less conflict for the future. This demonstrates much about how conflict or the expectation of conflict influences investment decisions, but the new evidence does not reveal much about whether investment reduces conflict--a possibility that also cannot be ruled out.
The evidence demonstrates that bilateral FDI flows and dyadic militarized disputes are negatively correlated. This contradicts the realist position and the dependency theory on how integration into the global economy influences peace. It is consistent with the liberal expectation and Friedman's Golden Arches Theory, but the underlying mechanism of liberalism is incompatible with the bargaining theory of war. The signaling argument is consistent with the bargaining theory of war, but it does not fully consider the suppressive sup·pres·sive
Tending or serving to suppress.
Adj. 1. suppressive - tending to suppress; "the government used suppressive measures to control the protest" effect of conflict on investment. A rationalist explanation of how conflict affects investment appears linked to temporal patterns of investment over time. It remains unclear how this fits with the signaling argument of how investment influences conflict.
(1) Thomas L. Friedman, "Foreign Affairs foreign affairs
Affairs concerning international relations and national interests in foreign countries. Big Mac I," New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of Times, 8 December 1996, opinion.
(2) Thomas L. Friedman, The Lexus and The Olive Tree (New York: Farrar, Straus & Giraux, 1999). See, for example, http://www.danielpipes.org/comments/8491 for reader comments.
(3) Stephen J. Kobrin, "Political Risk: A Review and Reconsideration," Journal of International Business Studies JIBS, the Journal of International Business Studies, (ISSN: 0047-2506, eISSN: 1478-6990) is the official publication of the Academy of International Business (AIB) and is published by Palgrave Macmillan. 10 (1979), 67-80.
(4) Economic globalization is most often defined as the integration of financial markets and the global dispersion of production capital. See Michael Veseth, Selling Globalization: The Myth of the Global Economy (Boulder: Lynne Rienner, 1998); Jagdish Bhagwati Jagdish Natwarlal Bhagwati (जगदीश भगवती, born 1934) is a prominent economist noted for his defense of free trade against the critics of globalization. He is a University Professor of Economics at Columbia University. , In Defense of Globalization (New York: Oxford University Press, 2004).
(5) Richard E. Caves, Multinational Enterprise and Economic Analysis (Cambridge: Cambridge University Press Cambridge University Press (known colloquially as CUP) is a publisher given a Royal Charter by Henry VIII in 1534, and one of the two privileged presses (the other being Oxford University Press). , 1996); Giorgio Barba Navaretti and Anthony J. Venables, Multinational Firms in the World Economy (Princeton, NJ: Princeton University Princeton University, at Princeton, N.J.; coeducational; chartered 1746, opened 1747, rechartered 1748, called the College of New Jersey until 1896. Schools and Research Facilities
Press, 2004); John H. Dunning, Multinational Enterprise and the Global Economy (New York: Addison-Wesley Publishers, 1993).
(7) Directorate for Financial and Enterprise Affairs, Investment Division, OECD and Service Centrale de la Statistique et des Etudes Economiques, "IMF Committee on Balance of Payments Statistics and OECD Workshop on International Investment Statistics," http://www.imf.org/External/NP/sta/bop/pdf/diteg2.pdf
(8) John H. Dunning, "The eclectic paradigm Eclectic Paradigm
A theory that provides a three-tiered framework for a company to follow when determining if it is beneficial to pursue direct foreign investment.
Notes: of international production, a restatement and some possible extensions," Journal of International Business Studies (Spring 1993), 1-31; Dunning (1993).
(9) United Nations Conference on Trade and Development United Nations Conference on Trade and Development (UNCTAD)
Organ of the United Nations General Assembly, created in 1964 to promote international trade. Its highest policy-making body, the Conference, meets every four years; when the Conference is not in session, the (UNCTAD UNCTAD United Nations Conference on Trade & Development ), "World Investment Report 2000 Cross-border Mergers and Acquisitions and Development," (United Nations, New York and Geneva Geneva, canton and city, Switzerland
Geneva (jənē`və), Fr. Genève, canton (1990 pop. 373,019), 109 sq mi (282 sq km), SW Switzerland, surrounding the southwest tip of the Lake of Geneva. : 2000), xv.
(10) Ibid., xvi.
(11) Quan Li and Adam Resnick, "Reversal of Fortunes: Democracy, Property Rights and Foreign Direct Investment Inflows in Developing Countries," International Organization 57, no. 1 (Winter 2003), 175-211.
(12) United Nations Conference on Trade and Development (UNCTAD), "World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development," (United Nations, New York and Geneva, 2006), xvii.
(13) "World Investment Report 2003. FDI Policies for Development: National and International Perspectives," UNCTAD.
(14) For a discussion of the policy types, see note 4. Thomas L. Brewer, "Government Policies, Market Imperfections, and Foreign Direct Investment," Journal of International Business Studies 24, no. 1 (1993), 101-120. One may argue that a multi-national enterprise (MNE) may not necessarily care too much about the risks for particular investment asset, since the firm can diversify away some of the risks by holding a market portfolio (Butler and Joaquin (1998), 600). For specific investment asset in a particular country, at least part of the political risks resulting from political violence-related policy changes are not diversifiable risks. This is because investors cannot fully anticipate all contingencies and because the market for the securitization Securitization
The process of creating a financial instrument by combining other financial assets and then marketing them to investors.
Mortgage backed securities are a perfect example of securitization.
May also be spelled as "securitisation. of political risks is not yet well developed; John Finnerty, "Securitizing Political Risk Insurance: Lessons From Past Securitization" in International Political Risk Management, ed. Theodore Moran, (Washington: World Bank Group, 2001). See also Kirt Butler and Domingo C. Joaquin, "A Note on Political Risk and the Required Return on Foreign Direct Investment," Journal of International Business Studies 29 (1998), 599-607.
(15) Quan Li, "Political Violence and Foreign Direct Investment," in Research in Global Strategic Management, Regional Economic Integration 12, ed. Michele Fratianni and Alan M. Rugman (Oxford: Elsevier Ltd., 2006).
(17) Friedrich Schneider and Bruno S. Frey, "Economic and Political Determinants of Foreign Direct Investment," World Development 13 (1985), 161-75.
(18) David W. Loree and Stephen Guisinger, "Policy and Non-Policy Determinants of U.S. Equity Foreign Direct Investment," Journal of Business Studies 26 (1995), 281-99.
(19) Douglas Woodward and Robert Rolfe, "The Location of Export-Oriented Foreign Direct Investment in the Caribbean Basin," Journal of International Business Studies 24 (1993), 121-144.
(20) Kamal Fatehi-Sedeh and Hossein M. Safizadeh, "The Association between Political Instability and Flow of Foreign Direct Investment," Management International Review 29 (1989), 4-13.
(21) Kingsley O. Olibe and D. Larry Crumbley, "Determinants of U.S. Private Foreign Direct Investments in OPEC Nations: From Public and Non-Public Policy Perspectives," Journal of Public Budgeting, Accounting and Financial Management (1997), 331-55.
(22) Deepack Sethi et al., "Trends in foreign direct investment flows: a theoretical and empirical analysis," Journal of International Business Studies 34 (2003), 315-26.
(23) Steven Globerman and Daniel Shapiro, "Governance Infrastructure and US Foreign Direct Investment," Journal of International Business Studies 34 (2003), 19-40.
(24) Douglas Nigh, "The Effect of Political Events on United States Direct Foreign Investment: A Pooled Time-Series Cross-Sectional Analysis," Journal of International Business Studies 16 (1985), 1-17.
(26) Ibid., 4.
(27) Ibid., 10-11.
(28) Li (2006).
(31) Glen Biglaiser and Karl DeRouen, "Following the Flag: Troop Deployment and U.S. Foreign Direct Investment," International Studies Quarterly 51, no. 4 (December 2007), 835-854.
(32) Kenneth N. Waltz, "Globalization and American Power," National Interest 59 (Spring 2000), 52.
(33) John J. Mearsheimer, "Why We Will Soon Miss the Cold War," Atlantic Monthly 266, no. 2 (August 1990), 35-50.
(34) Nazli Choucri and Robert North, Nations in Conflict: National Growth and International Violence (New York: W. H. Freeman, 1995); Robert Gilpin, Political Economy of International Relations (Princeton, NJ: Princeton University Press, 1987); Theodore Moran, "Multinational Corporations and Dependency: A Dialogue for Dependentistas and Non-Dependentistas," International Organization 32, no. 1 (Winter 1978), 79-100.
(35) Moran, 79-100; Raymond F. Mikesell, Foreign Investment in the Petroleum and Mineral Industries: Case Studies of Investor-Host Country Relations (Baltimore: Johns Hopkins Press, 1971).
(36) "On German visit, Namibian president defends his land reform," Agence France Presse, 28 November 2005; "Namibian President defends land grab on German visit," Mail and Guardian, 28 November 2005.
(37) "Venezuela Industry: New Blows for Oil Firms," Economist Intelligence Unit The Economist Intelligence Unit (EIU) is part of The Economist Group. It is a research and advisory company providing country, industry and management analysis worldwide and incorporates the former Business International Corporation, a U.S. , 6 April 2006.
(38) Christine Hauser, "Bolivia Nationalizes Natural Gas Industry," New York Times, 1 May 2006.
(39) Immanuel Kant, "Perpetual Peace: A Philosophical Sketch," reprinted in Kant's Political Writings, ed. Hans Reiss, (Cambridge: Cambridge University Press, 1970); Baron de Montesquieu, The Spirit of Laws, (New York: P.F. Collier and Son, 1900).
(40) John R. Oneal and Bruce Russett, "The Classical Liberals Were Right: Democracy, Interdependence, and Conflict, 1950-1985," International Studies Quarterly 41, no. 2 (June 1997), 267-293.
(41) Richard Rosecrance and Peter Thompson, "Trade, Foreign Investment and Security," Annual Review of Political Science 6, No. 1 (June 2003), 377-398.
(42) Erik Gartzke, Quan Li and Charles Boehmer, "Investing in the Peace: Economic Interdependence and International Conflict," International Organization 55, no. 2 (June 2001), 391-438; Erik Gartzke and Quan Li, "The Shadow of the Invisible Hand Invisible Hand
A term coined by economist Adam Smith in his 1776 book "An Inquiry into the Nature and Causes of the Wealth of Nations". In his book he states:
"Every individual necessarily labours to render the annual revenue of the society as great as he can. : War, Peace, and Economic Globalization," International Studies Quaterly 47, no. 4 (December 2003), 561-586.
(43) Stephen G. Brooks, Producing Security: Multinational Corporations, Globalization, and the Changing Calculus of Conflict (Princeton, NJ: Princeton University Press, 2005).
(48) "International Direct Investment Statistics Yearbook, 1992/2003," Organisation for Economic Cooperation and Development (2004). The basis for this statistic is balance of payments data published by central banks or statistical offices of the corresponding countries.
(49) Faten Ghosn and Scott Bennett, Codebook codebook - data dictionary For the Dyadic Militarized Interstate Incident Data, Version 3.10 (2007), http://correlatesofwar.org; D. Scott Bennett and Allan C. Stare, "EUGene: A Conceptual Manual," International Interactions 26 (2000), 179-204.