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

A Correction to this article was published on 10 December 2018

This article has been updated

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 using a dynamic fixed effects model for a panel of 90 developing countries shows that nationwide political conflict is negatively associated with total and nonresource-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 nonresource 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.

Résumé

La relation entre la violence politique et l’investissement direct étranger (IDE) ex-nihilo dépend du type de violence, des caractéristiques du secteur concerné par l’investissement et de la portée internationale de la firme qui investit. L’analyse avec un modèle dynamique à effets fixes pour un panel de 90 pays en développement montre qu’un conflit politique à portée nationale est négativement associé à l’IDE ex-nihilo complet et non lié aux ressources, mais pas à l’IDE ex-nihilo lié aux ressources. L’insensibilité de l’IDE lié aux ressources au conflit politique est expliquée par la forte rentabilité de l’extraction de ressources naturelles et les contraintes géographiques en matière de choix de localisation. Dans le secteur non lié aux ressources, les firmes les moins diversifiées géographiquement sont les plus sensibles au conflit. D’autres types de violence politique, intégrant la violence occasionnelle sous forme d’actes terroristes et d’assassinats, ou des événements persistants ayant un faible impact comme la terreur politique, n’ont aucun effet sur les décisions en matière de choix de localisation des entreprises multinationales. Ces résultats informent sur les stratégies des multinationales avec une compréhension nuancée et très utile des effets de la violence politique et des risques qu’elle pose pour leurs activités.

Resumen

La relación entre la violencia política y la inversión extranjera directa en proyectos totalmente nuevos (greenfield) es contingente al tipo de violencia, las características del sector receptor de inversión, y el alcance internacional de la firma inversora. Un análisis con un modelo dinámico de efectos fijos para un panel de 90 países en vía de desarrollo muestra que el conflicto político nacional se asocia negativamente con la IED total y los proyectos nuevos no relacionados con recursos, pero no con la IED en proyectos nuevos. La falta de sensibilidad de la IED en recursos al conflicto político es explicada por la alta rentabilidad de la extracción de recursos naturales y las limitaciones geográficas en la elección de localización. En el sector no relacionado con recursos, las empresas menos diversificadas geográficamente son más sensibles al conflicto. Otros tipos de violencia política, incluyendo la violencia intermitente en la forma de ataques terroristas y asesinatos, o acontecimientos persistentes, pero de bajo impacto, como el terror político, no tienen efecto en las decisiones de ubicación de las empresas multinacionales. Estos hallazgos informan las estrategias de las multinacionales con un entendimiento matizado y necesitado de los efectos de la violencia política y los riesgos que posee en sus negocios.

Resumo

A relação entre a violência política e o investimento estrangeiro direto (FDI) está condicionada ao tipo de violência, às características do setor receptor de investimentos e ao escopo internacional da empresa investidora. A análise com um modelo dinâmico de efeitos fixos para um painel de 90 países em desenvolvimento mostra que o conflito político de âmbito nacional está negativamente associado com o FDI total e o do tipo greenfield associado a recursos, mas não com o FDI do tipo greenfield associado a recursos. A insensibilidade do FDI de recursos ao conflito político é explicada pela alta rentabilidade da extração de recursos naturais e restrições geográficas na escolha de locais. No setor de não-recursos, as empresas menos diversificadas geograficamente são mais sensíveis ao conflito. Outros tipos de violência política, incluindo a violência intermitente sob a forma de atos terroristas e assassinatos, ou eventos persistentes, mas de baixo impacto, como o terror político, não têm efeito nas decisões de escolha de localização de empresas multinacionais. Esses resultados informam as estratégias das multinacionais com uma compreensão sutil e muito necessária dos efeitos da violência política e dos riscos que ela representa para seus negócios.

概要

政治暴力和新建外国直接投资之间的关系取决于暴力类型、投资接收行业特征以及投资公司国际范围。用动态固定效应模型对一组90个发展中国家的分析显示,全国范围内的政治冲突与总的及非资源相关的新建FDI是负相关的,而与资源相关的新建FDI则不是。资源FDI对政治冲突的不敏感可由自然资源开采的高利润率和区位选择的地理限制来解释。在非资源领域,在地理上最少分散的公司对冲突最为敏感。其它类型的政治暴力,包括以恐怖和刺杀,或持续的但低影响力的事件,如政治恐怖形式出现的间歇型暴力,对跨国企业的区位选择决定没有任何影响。这些研究结果对跨国公司战略提供了对政治暴力的影响以及它对公司业务所构成风险的细微和急需的认识。

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Change history

  • 10 December 2018

    Owing to a production error, the coefficients of the BRD (ln) * localized and Greenfield FDI variables were not correctly displayed in the even columns of Table 2 in the original article.

  • 10 December 2018

    Owing to a production error, the coefficients of the BRD (ln) * localized and Greenfield FDI variables were not correctly displayed in the even columns of Table��2 in the original article.

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Acknowledgements

We are grateful for the helpful comments from the editor, Mona Makhija, and three anonymous referees. Early versions of this article 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.

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Correspondence to Caroline T Witte.

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Accepted by Mona Makhija, Area Editor, 14 March 2017. This article has been with the authors for three revisions.

Appendices

Appendix 1

See Table 8.

Table 8 Descriptive Statistics and Correlation Matrix

Appendix 2

See Table 9.

Table 9 List of Countries in the Sample

Appendix 3

See Tables 10, 11, and 12.

Table 10 Results of Fixed Effects (LSDV)
Table 11 Results of Random Effects
Table 12 Results of Pooled OLS Models

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Witte, C.T., Burger, M.J., Ianchovichina, E.I. et al. Dodging bullets: The heterogeneous effect of political violence on greenfield FDI. J Int Bus Stud 48, 862–892 (2017). https://doi.org/10.1057/s41267-017-0079-7

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Keywords

  • political violence
  • foreign direct investment (FDI)
  • political risk
  • heterogeneity
  • political conflict
  • economic geography