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

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.