Brewing Violence: Foreign Investment and Civil Conflict
61 Pages Posted: 13 Jul 2017 Last revised: 23 Jul 2018
Date Written: July 13, 2018
Two prominent features in current world affairs are the unprecedented levels of global economic integration and the growing incidence of intrastate violence. We develop and test a novel argument linking foreign direct investment (FDI) to intrastate armed violence in developing countries. We argue that the entry and presence of multinational corporations causes market concentration in host countries, resulting in high rents. This in turn increases the return to appropriation or create opportunities for rebel groups to enhance their fighting capabilities, thereby increasing the likelihood of conflict. We further posit that state capacity mitigates the positive association between FDI and conflict. Strong states have the capacity to deter rebellions and address citizens' demands through institutionalized mechanisms. Using a sample of developing countries from 1970 to 2013 and addressing endogeneity bias, we find strong support for our hypotheses. Our findings have important implications for understanding the link between economic interdependence and conflict.
Keywords: Foreign Direct Investment, Multinational Corporations, Economic Rents, State Capacity, Civil Conflict, Instrumental Variable
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