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The Impact Of Foreign Direct Investment On International Conflict

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  • Solomon Polachek
  • Carlos Seiglie
  • Jun Xiang

Abstract

This paper extends the analysis of the conflict-trade relationship by introducing foreign direct investment (FDI). We present a formal model that shows why FDI can improve international relations. We then proceed to test the model empirically. Our empirical results show that foreign direct investment plays a similar role to trade in affecting international interactions. More specifically, we find that the flow of FDI has reduced the degree of international conflict and encouraged co-operation between dyads during the period of the late 1980s and the decade of the 1990s. This is an especially important result since one of the main characteristics of globalization has been the reduction of barriers to international capital flows and, as a consequence, the amounts of capital flows have expanded enormously dwarfing those of trade flows. The policy implication of our finding is that further international co-operation in reducing barriers to capital flows can promote a more peaceful world.

Suggested Citation

  • Solomon Polachek & Carlos Seiglie & Jun Xiang, 2007. "The Impact Of Foreign Direct Investment On International Conflict," Defence and Peace Economics, Taylor & Francis Journals, vol. 18(5), pages 415-429.
    • Handle: RePEc:taf:defpea:v:18:y:2007:i:5:p:415-429
    DOI: 10.1080/10242690701455474
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    1. Norman S. Fieleke, 1996. "What is the balance of payments?," Special Report 1:x:1, Federal Reserve Bank of Boston.
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    Cited by:

    1. Okara, Assi, 2023. "Does foreign direct investment promote political stability? Evidence from developing economies," Economic Modelling, Elsevier, vol. 123(C).
    2. Jie Cai & Lian An, 2014. "Is Protectionism Rational Under the Financial Crisis? Analysis from the Perspective of International Political Relations," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(3), pages 278-299, March.
    3. Knill, April & Lee, Bong-Soo & Mauck, Nathan, 2012. "Bilateral political relations and sovereign wealth fund investment," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 108-123.
    4. (ed.), 0. "Research Handbook on Economic Diplomacy," Books, Edward Elgar Publishing, number 16053.
    5. Ahsan Kibria & Reza Oladi & Sherzod B. Akhundjanov, 2020. "Foreign direct investment and civil violence in Sub‐Saharan Africa," The World Economy, Wiley Blackwell, vol. 43(4), pages 948-981, April.
    6. Elena V McLean & Jeheung Ryu & Taehee Whang, 2024. "The effect of economic coercion on companies’ foreign direct investment decisions: Evidence from sanctions against Russia," Conflict Management and Peace Science, Peace Science Society (International), vol. 41(4), pages 438-462, July.
    7. Zhang, Wenjia & Mauck, Nathan, 2018. "Government-affiliation, bilateral political relations and cross-border mergers: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 220-250.
    8. Yue Lu & Wei Gu & Ka Zeng, 2021. "Does the Belt and Road Initiative Promote Bilateral Political Relations?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 29(5), pages 57-83, September.
    9. Bilin Neyapti, 2017. "Educate or Adjudicate? Socioeconomic Heterogeneity and Welfare," Defence and Peace Economics, Taylor & Francis Journals, vol. 28(5), pages 491-510, September.
    10. Lin Scott Y. & Seiglie Carlos, 2014. "Same Evidences, Different Interpretations – A Comparison of the Conflict Index between the Interstate Dyadic Events Data and Militarized Interstate Disputes Data in Peace-Conflict Models," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 20(2), pages 347-372, April.
    11. Kentor, Jeffrey & Clark, Rob & Jorgenson, Andrew, 2023. "The hidden cost of global economic integration: How foreign investment drives military expenditures," World Development, Elsevier, vol. 161(C).
    12. fofana, moustapha & Lawson, Laté & ballo, zié, 2019. "Assessing the migration and social instability nexus in sub-saharan Africa : A spatial analysis," MPRA Paper 96471, University Library of Munich, Germany.
    13. Peter A.G. van Bergeijk, 2019. "Deglobalization 2.0," Books, Edward Elgar Publishing, number 18560.
    14. de Soysa Indra, 2020. "Does Foreign Direct Investment Encourage State Militarization and Reduce Societal Security? An Empirical Test, 1980–2017," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 26(1), pages 1-15, February.
    15. Moons, S.J.V. & van Bergeijk, P.A.G., 2013. "A meta-analysis of economic diplomacy and its effect on international economic flows," ISS Working Papers - General Series 50074, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.

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