THE IMPACT OF FOREIGN DIRECT INVESTMENT ON INTERNATIONAL CONFLICT

• Published in: Defence and peace economics 2007-10, Vol.18 (5), p.415-429
• Main Authors: Polachek, Solomon, Seiglie, Carlos, Xiang†, Jun
• Format: Article
• Language: English
• Subjects: Capital flow; Capital movement; Cooperation; Economic models; Empirical research; Foreign direct investment; Foreign investment; Globalization; International conflicts; International relations; Security; Studies; Trade flows
• ISSN: 1024-2694; 1476-8267
• DOI: 10.1080/10242690701455474

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. † The authors would like to acknowledge the comments of participants at the ISA meetings in Montreal, those of the Peace Science Society in Houston and the Economics and Security Conference in Thessaloniki, Greece.