Industry Level of Foreign Direct Investment and Militarized Interstate Conflict
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While many researches measure economic interdependence as trade, we argue that foreign direct investment (FDI) is just as good a proxy for measuring economic interdependence as the level of trade ties. It is because interstate economic relations are characterized just as much by foreign investments as by trade between countries. Similarly to trade, FDI is understood as a means to promote peace. Yet, although research on the relationship of FDI and conflict has been gradually increasing in recent years, studies have not yet focused on examining the effect of foreign direct investment on conflict across industrial sectors. It is the reason why this research is initiated. We expect to examine not only the fact that higher level interdependence – understood as the ratio of inward FDI stock and GDP – makes conflict less likely, but also the fact that there are differences across the primary, secondary and tertiary industrial sectors. More specifically, on the base of the FDI volumes and military strategic considerations, we expect the secondary sector to have the largest negative impact on the likelihood of military interstate disputes. We use the Correlates of War project’s Militarized Interstate Dispute database and we merge it with our own dataset on inward FDI stock inflow. We also control for several factors: trade, economic growth (GDP per capita), relative capabilities, major power status, alliance structure, dyadic democracy, and contiguity. We use a time-series cross-section logit analysis that covers the period between 1970 and 1992. We found that the tertiary sector has a negative impact on conflict initiation. A more apt conclusion is that inward FDI stock has no impact on militarized interstate disputes since no significant relationship could be uncovered between FDI and conflict. This result suggests that we need to extend our research to the more common FDI flow measure.
Abstract
While many researches measure economic interdependence as trade, we argue that foreign direct investment (FDI) is just as good a proxy for measuring economic interdependence as the level of trade ties. It is because interstate economic relations are characterized just as much by foreign investments as by trade between countries. Similarly to trade, FDI is understood as a means to promote peace. Yet, although research on the relationship of FDI and conflict has been gradually increasing in recent years, studies have not yet focused on examining the effect of foreign direct investment on conflict across industrial sectors. It is the reason why this research is initiated. We expect to examine not only the fact that higher level interdependence – understood as the ratio of inward FDI stock and GDP – makes conflict less likely, but also the fact that there are differences across the primary, secondary and tertiary industrial sectors. More specifically, on the base of the FDI volumes and military strategic considerations, we expect the secondary sector to have the largest negative impact on the likelihood of military interstate disputes. We use the Correlates of War project’s Militarized Interstate Dispute database and we merge it with our own dataset on inward FDI stock inflow. We also control for several factors: trade, economic growth (GDP per capita), relative capabilities, major power status, alliance structure, dyadic democracy, and contiguity. We use a time-series cross-section logit analysis that covers the period between 1970 and 1992. We found that the tertiary sector has a negative impact on conflict initiation. A more apt conclusion is that inward FDI stock has no impact on militarized interstate disputes since no significant relationship could be uncovered between FDI and conflict. This result suggests that we need to extend our research to the more common FDI flow measure.
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