International Finance Corporation Projects and Increased Armed Conflict

Abstract

Does private sector-oriented development finance have negative consequences for conflict? Whereas aid has broadly been shown to have developmental effects and to not exacerbate conflict, the empirical evidence for foreign direct investment (FDI) is more mixed. To investigate the conflict impact of foreign direct investment supported within a development finance framework—arguably a hybrid of aid and FDI—we created a novel geospatial dataset of International Finance Corporation (IFC) projects in the period 1994-2022. Employing propensity score panel matching and an instrumental variables approach in a subnational research design, we show that IFC projects cause an increase in deaths from conflict in the year following the project start in their local project area. The effect is more pronounced for investments in capital-intensive sectors. These results call for renewed discussion of the negative externalities of private sector-oriented development finance and the need for heightened attention to conflict risk assessment and mitigation.

Keywords: International Finance Corporation, international development, multilateral institutions, aid, foreign direct investment, conflict

JEL Classification: F23, F230, F350, O190