Spillover Effects of Armed Conflict onForeign Direct Investment

This paper seeks to investigate the impact of armed conflict on the inflows of foreign direct investment to neighbouring countries. For a dataset of 69 developing countries covering 1990 to 2014, it develops two measurements of surrounding conflict: the share of borders in conflict and the severity of surrounding conflict, additionally controlling for a large set of macroeconomic and institutional variables. Using fixed effects estimation, the results indicate that the severity of conflict as measured by the intensity variable, is an important determinant of FDI inflows to neighbouring (developing) countries. Among other variables, market size, openness to trade, macroeconomic stability and corruption are important determinants of FDI inflows. Additionally, the paper addresses potential endogeneity of explanatory variables, by employing Arellano and Bond’s (1991) GMM estimator. These results show that FDI inflows are not significantly affected by outbreaks of conflict in neighbouring states. The ambiguousness of results suggests potential areas for further research, such as disaggregating the FDI inflows into primary, secondary and tertiary sector. Nevertheless, this paper fills the gap in literature regarding the relationship of conflict in a country and its economic effects on the neighbouring states, being the first one to look specifically into the impact on FDI inflows.