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The Attraction of FDI to Conflicted States: The Counter-Intuitive Case of US Oil and Gas

Author

Listed:
  • Rodion Skovoroda

    (Nottingham University Business School)

  • Shaun Goldfinch

    (Victoria University of Wellington, School of History, Philosophy, Political Science and International Relations)

  • Karl DeRouen

    (The University of Alabama)

  • Trevor Buck

    (University of Glasgow)

Abstract

States burdened with conflict have been considered to be undesirable destinations for foreign direct investment (FDI) due to, inter alia, political instability, regulatory unpredictability, and expropriation risk. However, we develop an alternative view based on corporate governance and real option theories. We analyze a dataset of FDI location decisions made in the Oil and Gas sector by 250 US firms across 44 countries between 2007 and 2013. After controlling for energy reserves, the results show counter-intuitively, that civil war and terrorism risks, and terrorist events are positively associated with US investment in Oil and Gas. US subsidiaries also show high levels of ownership commitment. It is tempting to conclude that US Oil and Gas is a wholly unique, resource-bound case, but we argue that this disconnect may have occurred for two reasons. First, a threat of conflict and violence can make MNEs exercise their growth options and expand resource extraction sooner rather than later. Second, political instability does not necessarily lead to higher levels of FDI expropriation risk. On the contrary, instability can reduce the incentives for the state to seize assets from technologically superior MNEs, i.e. it may reduce expropriation risk. Just as the rule of law and ‘good’ governance can constrain a state from expropriation, there are theoretical reasons why ‘bad’ governance resulting from instability and incapacity may do so, too.

Suggested Citation

  • Rodion Skovoroda & Shaun Goldfinch & Karl DeRouen & Trevor Buck, 2019. "The Attraction of FDI to Conflicted States: The Counter-Intuitive Case of US Oil and Gas," Management International Review, Springer, vol. 59(2), pages 229-251, April.
    • Handle: RePEc:spr:manint:v:59:y:2019:i:2:d:10.1007_s11575-018-0374-y
    DOI: 10.1007/s11575-018-0374-y
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