Foreign Direct Investment and Post-Conflict Settings
P13-3
Presented by: Yujing Fan
Existing literature contends foreign direct investment (FDI) is averse to high-risk, high-conflict locations. Evidence, however, reveals increasing FDI inflows in post-conflict countries. A question remains as to why foreign firms systematically invest in post-conflict settings despite greater risk. This paper contends comprehensive peace agreements (CPAs) serve as credible signals to attract FDI in post-conflict countries. Namely, CPAs include specific provisions alleviating two credible commitment problems salient in low-information, post-conflict settings. First, CPAs bolster the host country's credible commitment to peace through ‘cost-increasing provisions’ that escalate the costs of re-arming and re-mobilizing for government and rebel forces alike. Second, CPAs resolve the commitment problem of expropriation through judicial provisions safeguarding property rights and contract enforcement. Employing Arellano and Bond's (1991) generalized method of moments estimation, I examine the effect of CPA provisional variation on FDI inflows using UNCTAD FDI data for 206 countries from 1990-2015. Findings reveal post-conflict countries adopting CPAs with cost-increasing provisions attract significantly greater FDI inflows. A key implication suggests CPAs may help facilitate economic development through FDI in the initial post-conflict years, when states may be most vulnerable to conflict relapse.