Dodging Bullets: The Heterogeneous Effect of Political Violence on Greenfield FDI

31 Pages Posted: 2 Jul 2018

See all articles by Caroline Witte

Caroline Witte

Copenhagen Business School - Department of Strategic Management and Globalization

Martijn Burger

Erasmus University Rotterdam (EUR) - Erasmus Happiness Economics Research Organization (EHERO)

Elena Ianchovichina

World Bank

Enrico Pennings

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

Date Written: June 2017

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.

Keywords: political violence, foreign direct investment (FDI), political risk, heterogeneity, political conflict, economic geography

Suggested Citation

Witte, Caroline and Burger, Martijn and Ianchovichina, Elena and Pennings, Enrico, Dodging Bullets: The Heterogeneous Effect of Political Violence on Greenfield FDI (June 2017). Journal of International Business Studies, Vol. 48, Issue 7, 2017. Available at SSRN: https://ssrn.com/abstract=3206634 or http://dx.doi.org/10.1057/s41267-017-0079-7

Caroline Witte (Contact Author)

Copenhagen Business School - Department of Strategic Management and Globalization

Porcelænshaven 24
Frederiksberg, 2000
Denmark

Martijn Burger

Erasmus University Rotterdam (EUR) - Erasmus Happiness Economics Research Organization (EHERO) ( email )

P.O. Box 1738
Rotterdam, 3000
Netherlands

Elena Ianchovichina

World Bank ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-458-8910 (Phone)
202-522-1159 (Fax)

Enrico Pennings

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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