Brewing Violence: Foreign Investment and Civil Conflict
56 Pages Posted: 13 Jul 2017 Last revised: 14 Nov 2017
Date Written: November 13, 2017
We explore the link between inward foreign direct investment (FDI) and intrastate armed conflict in developing countries. We argue that the activity of multinational corporations affects market structure, contributing to rent creation; concerns about the control and distribution of those rents in turn increase rebel groups' and governments' incentive to fight. State capacity, on the other hand, alleviates the conflict-promoting effect of inward FDI. Strong states are capable of deterring rebellions, addressing citizens' demands through institutionalized channels, and credibly committing to a negotiated agreement. Using data from a sample of non-OECD countries from 1970 to 2013 and an instrumental variable strategy to address potential endogeneity bias, we find strong support for our hypotheses. We further examine the underlying mechanism, showing that inward FDI increases the probability of conflict onset through contributing to market concentration. Our findings have important implications for understanding the link between economic interdependence and security.
Keywords: Foreign Direct Investment, Multinational Corporations, Economic Rents, State Capacity, Civil Conflict, Instrumental Variable
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