The Impact of Conflict on Foreign Investments : Evidence from Project-Level Data

Overview & Synopsis

This paper examines how armed conflict affects the global allocation of foreign direct investment using monthly conflict fatality data matched with project-level greenfield foreign direct investment (FDI) and cross-border mergers and acquisitions (M&As) from 2010–2023. The presence of an armed conflict is associated with a decline in the number of greenfield projects (16.5%), FDI associated jobs (15.6%), the number of origin countries (12.4%), and the number of sectors (15.6%). The sensitivity of FDI to conflicts has intensified during 2020–2023, especially so for one-sided violence against civilians. Conflict fatalities that are geographically dispersed within a country are more strongly negatively correlated with FDI, while conflict in neighboring countries also deters FDI. Across sectors, we find that semiconductor and biotech investments are most sensitive to conflict, while sectors like coal, oil, & gas are less affected. A synthetic counterfactual analysis of Ukraine reveals that it lost approximately 10,000 jobs annually that were directly associated with FDI following the 2014 annexation of Crimea. These patterns quantify the role of conflict in perpetuating development traps and highlight the broader economic stakes it has for development policy.