Civil war termination and foreign direct investment,1989

Abstract

Data on global foreign direct investment (FDI) inflows shows that civil war significantly deters investment, while post-civil war settings attract investment. Civil wars, however, can end in different ways (government victories, rebel victories, and various types of settlements) and firms should be attracted to terminations that reveal more information about the future political and economic stability of the nation. We argue that comprehensive peace agreements and their subsequent implementation convey the most relevant information to investors regarding the credibility of the conflict actors’ commitment to future peace and stability and should thus attract the most FDI. Analysis of FDI inflows to 73 post-civil war countries lends support to our argument. The policy implications of the study are straightforward: governments that wish to attract the maximum amount of FDI for economic reconstruction following a civil war should negotiate and implement a comprehensive peace agreement.

Keywords

Civil war credible commitment foreign direct investment peace agreement implementation signaling

Introduction

Global foreign direct investment (FDI) inflows have increased from US$202 billion in 1990 to US$1.8 trillion in 2016, an increase of 500% over two and a half decades (UNCTAD, 2013a).¹ A large academic literature has responded to the puzzle of how firms choose locations for FDI. Within this large body of work, a consistent finding is that political violence significantly reduces FDI inflows (Berden et al., 2013; Büthe and Milner, 2008; Hayakawa et al., 2013; Jensen, 2008; Nigh, 1986; Schneider and Frey, 1985). Civil wars in particular, as identified in several recent studies, have strong negative and significant effects on FDI inflows (Busse and Hefeker, 2007; Hayakawa et al., 2013; Jakobsen and De Soysa, 2006; Li, 2006; Mihalache-O’Keef and Vaschilko, 2010). Civil wars, however, can end in several different ways (government victories, rebel victories, and various types of settlements) that have been shown to have significant downstream differential political, social, and economic effects (Joshi, 2010, 2015).

The motivation for this study on post-termination FDI is two-fold. Firstly, existing studies have found that post-civil war economic improvements significantly lower the chances that a country with a recent history of civil war will experience another civil war in the future (Collier et al., 2003; Quinn et al., 2007; Walter, 2004). In addition, prior FDI studies have found positive correlations between FDI and lower levels of income inequality which have been shown to be a significant driver of civil war (Gohou and Soumaré, 2012; Jensen and Rosas, 2007; Reiter and Steensma, 2010). Similarly, proponents of liberal peacebuilding or “marketization” approaches (Pugh et al., 2011; Selby, 2011: 19) emphasize the importance of international investment to post-civil war economic recovery (Castillo, 2008; Collier, 2009) and to the replenishment of the low capital and investment stock left by civil war (Collier, 1999; Collier et al., 2004).² Yet studies on post-termination FDI are sparse. Further, as shown in Figure 1, significant variation exists in FDI across post-conflict countries, and we know little about how investors distinguish between these locations.

Figure 1.

FDI inflows across post-conflict countries (values taken five years after termination).

Secondly, the share of FDI that we are examining is far from trivial. While it is widely known that civil war significantly deters FDI, it is less well known that post-civil war economies receive a sizable share of global FDI. In 2011, for instance, post-civil war economies received roughly 28.03% of all global FDI.³ Yet we lack any theory of political risk and FDI that is fine-tuned to the peculiar risks in civil war termination settings. Such a share of global FDI, in the absence of any general theory about how firms recognize and differentiate between the various ways contemporary civil wars end, represents a major gap in understanding of global FDI flows.

As such, the main contribution of this study is a framework and analysis on the general determinants of post-civil war FDI that evaluates the effects of different modes of termination (low activity, government victory, rebel victory, non-comprehensive peace agreement, comprehensive peace agreement, and degree of comprehensive peace agreement implementation) on FDI inflows. Whereas prior studies on conflict and FDI have focused on how firms avoid high-risk locations, we focus on how investors choose from among a population of high-risk investment sites. Our goal is to understand rather than obscure the large degree of ambiguity that exists in how contemporary civil wars end. We discuss the practical difficulties of recognizing when a civil war is ending, and the related problem of the suitability of the post-conflict political and economic environment for FDI. Our theoretical framework focuses on the type and amount of politically relevant information revealed by the particular way that a civil war ends.

Following this introduction, we survey the literature on FDI and political risk highlighting the importance of civil war. In the theory section, we put forth criteria for differentiating between varieties of civil war outcomes. The research design section describes the data and methods. After examining all manner of terminations in the analysis, we find that investors seem to be most attracted to outcomes where the main conflict actors participated in negotiations that culminated in the signing of a comprehensive settlement. Further, the evidence suggests that investors follow the implementation of the comprehensive agreement and that greater FDI inflows are directed at agreements where the conflict actors actually complied with the terms they negotiated. We conclude the paper with some final remarks on the findings, limitations, future lines of research, and policy implications.

Political risk and FDI

A vast literature focuses on the economic and political determinants of FDI and how foreign firms choose among numerous competing sites based on advantages of localization in the host country (Dunning, 1988; Rugman, 1981; Rugman et al., 2011). The most salient economic factors for attracting FDI are greater market size (Bevan and Estrin, 2004; Büthe and Milner, 2008; Neumayer and Spess, 2005), greater economic development (Büthe and Milner, 2008; Li and Resnick, 2003), greater economic growth (Jensen, 2003; Li and Liu, 2005), greater trade openness (Jensen, 2003), greater human capital (Alsan et al., 2006; Cleeve et al., 2015; Lewin et al., 2009; Noorbakhsh and Youssef, 2001; Suliman and Mollick, 2009), greater resource endowments (Asiedu 2002), and infrastructure investment (Globerman and Shapiro, 2002, 2003).

As for political factors, research has shown that countries with greater levels of democratization (Asiedu and Lien, 2011) and secured property rights (Li and Resnick, 2003) received greater amounts of FDI as these countries are best able to enforce contracts (Biglaiser and Staats, 2010; Jensen, 2003, 2008; Lee et al., 2014; Li and Resnick, 2003; North and Weingast, 1989; Olson, 1993; Oneal, 1994; Staats and Biglaiser, 2012). Conversely, the presence of political risk significantly deters FDI (Miller, 1992). Political risk assessment is an estimation of the likelihood that the FDI recipient nation will take political actions or experience political problems that will adversely impact FDI assets. Eun and Resnick (2014) argue that the most frequently assessed characteristics used by political risk analysts to rate potential FDI sites are the presence of political violence and war, political and policy continuity and predictability, and global political and economic integration. While many studies confirm that investors avoid civil war locations, firms do invest in high-risk sites under certain conditions (García-Canal and Guillén, 2008; Holburn and Zelner, 2010; Jiménez, 2010, 2011; Jiménez et al., 2014). According to Jiménez (2010), firms with a broader international expansion tend to invest in more politically risky places, presumably because they have more political capabilities to offer in these environments and are better able to adapt to the risk level given their experience. Especially in so-called factor-driven economies, which characterize most countries in civil war, firms may seek high-risk locations that have undervalued assets if they have the political capabilities to obtain competitive advantages—even if only at local levels (Wan, 2005).

To date, only a handful of studies have examined post-conflict FDI. In their study, Appel and Loyle (2012) examine post-conflict justice (PCJ) reforms taken after civil war and they find evidence that investors seem to prefer these reform-minded countries. Their study raises several pertinent questions on this topic that need to be probed further. We know from our own examination of Uppsala Conflict Data Program (UCDP) cases that most instances of PCJ reforms are negotiated as part of a comprehensive peace agreement (CPA) and Appel and Loyle do not distinguish between different types of peace agreements. Peace agreements differ in their purpose in a larger negotiation process and thus confer different types and amounts of information. Partial accords are usually not followed by large implementation processes while CPAs are. We suspect that the presence of PCJ reforms is likely to be a proxy for negotiating a CPA which, by its nature, will include the implementation of numerous other policy reforms besides justice. This begs the question: is it justice reforms in particular or the aggregate implementation of all the negotiated reforms in the agreement that matters most? In a similar way our study also builds upon Garriga and Phillips (2015), who argue that international aid flows could function as an information provider to investors but do not consider whether international aid co-varies according to how the civil war ended. Like justice reforms, we suspect that international aid is a good proxy for a CPA. Most CPAs have extensive international involvement and call for third-party financial support.

In sum, we cannot imagine a more important factor in attracting FDI than how a civil war ends given the number of studies finding strong connections between termination type and post-civil war developments along a spectrum of political, social, and economic outcomes (Andersen-Rodgers, 2015: 39; Hartzell and Hoddie, 2007; Jarstad and Nilson, 2008; Joshi and Mason, 2011; Joshi et al., 2015; Licklider, 1995; Mason et al., 2011; Quinn et al., 2007; Walter, 2002). We take this issue up further in the next section and consider the ways in which modern civil wars end and how global firms seeking FDI investment sites might differentiate among different modes of termination.

Contemporary civil war termination and FDI inflows

We present a general framework on the determinants of post-civil war FDI that attempts to produce testable predictions about the likelihood of FDI inflows across a population of countries emerging from civil war based primarily on the manner in which the civil war ended. Our approach is grounded in existing theory on the influence of location uncertainty on entry choice by firms which emphasizes (a) early mover advantages, (b) irreversibility of entry and risk, and (c) growth opportunities (Folta and O’Brien, 2003). Several straightforward assumptions are made regarding the nature of post-conflict settings, the nature of FDI, and the preferences of firms. We assume that post-civil war locales offer extraordinary potential for both gains and losses, and the entry and high exit costs of FDI make it a unique kind of investment that is undertaken after careful consideration of the internal dynamics of the host country. Drawing from the political risk literature, we assume that firms are likely to perceive renewed civil war within the host country as the greatest risk to investment. To obtain early mover advantages, investors need to be able to identify that a civil war is ending in real time, and investors are likely to perceive some modes of termination as more definitive than others. Because of the irreversibility of entry, investors need to avoid renewed war. Lastly, long-term growth opportunities require a stable political and policy environment hospitable to FDI.

Given these factors, foreign firms should seek investment sites where the mode of termination is definitive, reveals the greatest amount of information concerning the prospects for a durable peace, and produces a more favorable political and policy climate for FDI. We can examine three broad types of terminations: (1) peace agreements, (2) military victories, and (3) low-activity cases. We also examine sub-types within these categories. Peace agreements can include ceasefire agreements, process agreements, partial agreements, and comprehensive agreements. Military victories can include government victories and rebel victories. A low-activity termination refers to a conflict that has simply “sputtered out” over a period of several years without any clear winner or settlement. In the next section, we discuss the ways in which contemporary civil wars end and the possible signals sent to investors by each termination type.

Low-activity terminations

While military victories and peace agreements draw the most attention from academics and the media, most civil wars actually have ambiguous endings. In the most widely used dataset on civil war terminations, the most frequent termination type is civil conflicts that failed to meet the annual battle-death threshold for a span of several years (Kreutz, 2010). In other words, adversaries in a civil war often just stop fighting. Conceptually and empirically, low-activity cases are defined precisely by their lack of any definitive ending. Low-activity terminations leave both conflict actors poised in an indefinite ambiguous space. The government has not demonstrated that it has the capability to defeat the insurgency, or the desire to reform itself in ways that may pacify armed groups. At the same time, the insurgents have not officially abandoned the fight. With respect to our information signaling criteria, we do not see anything intrinsic about low-activity terminations that could serve as a sign of favorable policies to come. From an investor’s purview, we argue, these “low-activity cases” should not be a preferred site for FDI as they do not reveal large amounts of information concerning the status of the civil war ending, the odds of a durable peace developing, and the future political climate for FDI.

A counter argument is that the policy status quo ante could be used by investors to predict the future political climate of the country following low activity; however, we see this argument as logically self-defeating. It presupposes that investors can distinguish between periods of low activity that lead to a durable peace and temporary lulls in the fighting that are followed by more war. In other words, low-activity conflicts may be seen as having definitively ended only after years have passed without major violence; such a judgment is retrospective and could not have been made with any confidence at the time of declining violence. Comparing all forms of civil war termination, we position low-activity terminations as revealing the lowest amount of credible information to investors regarding peace and policy. Following this reasoning, we use low-activity cases as the reference category in our analysis.

Non-comprehensive and comprehensive peace agreements

While low-activity terminations reveal low amounts of information, peace agreements reveal large amounts of investor-relevant information. Peace agreements vary in purpose, and this is reflected in their content and the amount of information they can reveal about the probability of a stable peace developing and the character of the post-accord political environment. Peace agreements can be categorized into two broad categories: non-comprehensive peace agreements and comprehensive peace agreements. Non-comprehensive agreements include ceasefire accords, process agreements, and partial agreements. Ceasefire agreements regulate the end of direct hostilities between the warring parties and are usually followed by negotiations toward more substantive agreements.

Process agreements are usually early efforts to chart a process for moving forward toward a partial or comprehensive agreement (Högbladh, 2012). Partial agreements, as a rule, record progress on a limited number of issues and are not typically implemented right away. Comprehensive peace agreements on the other hand, tend to be associated with the conclusion of the peace talks and are generally more inclusive and more substantive than lesser accords. Most importantly, CPAs are followed by a large-scale implementation process in which the negotiated reforms contained therein are put into practice to varying degrees of completion.

The seven year Guatemalan negotiation process provides an illustrative overview of how different types of peace agreements relate to each other over time and the type of information that is revealed to investors. In 1990, the parties reached a process accord (Oslo). Over the next four years, the negotiations produced numerous partial agreements, each covering a number of different issues, most notably, indigenous minority rights, human rights violations, justice, population displacement, agrarian reform, civil–military relations, and constitutional reforms. The final CPA, reached in 1996, Agreement for a Firm and Lasting Peace, subsumed all prior partial agreements and initiated a large-scale implementation process that would last nearly a decade. Therefore, partial or non-comprehensive peace agreements can lead to comprehensive peace agreements, although most do not owing to negotiation failures.

To give a concrete illustration of the type of information revealed by CPA implementation processes, and explore the inferences that investors are likely to make, we can briefly survey some of the major events as they were publically reported in the first 24 months of Guatemala’s CPA implementation process. The signing of the December 1996 comprehensive agreement took place “amid jubilant demonstrations in the Guatemalan capital” and was covered extensively by the international press (Rother, 1996). In the same month, the Government submitted a National Reconciliation Act to Congress that included legislation and justice reforms such as an amnesty law for URNG members. Congress passed the bill the same day, and it was widely reported in domestic and international sources as a sign of high commitment (UNGA, 1997a). Ninety days into the process, the verification mechanism reported “that the parties fully implemented the Agreement on the Definitive Ceasefire” (UNSC, 1997). It was also announced that the Guatemalan Armed Forces and the Unidad Revolucionaria Nacional Guatemalteca (URNG) were “demobilizing on schedule—even ahead of schedule in some cases (UNSC, 1997).” By mid-1997, the URNG had established itself as a legal political party that would run candidates in the next election. All of these public reports constitute observable and credible signs of a definitive ending to the conflict as well as proof of the resolve of the conflict actors to keep the peace.

Alongside these definitive security-centric developments, the implementation of political reforms pertaining to the functioning of the legal system and to economic reconstruction was underway. In April 1997, it was reported that the World Bank had approved for Guatemala a Private Participation in Infrastructure Technical Assistance Loan “to prepare selected infrastructure sectors—ports, power, telecommunications, highways, and the postal service—for concession and privatization, within a sound legal and regulatory framework (World Bank, 2003).” Stemming from the CPA, the Government of Guatemala initiated broad policy reforms aimed at achieving a modern independent judiciary and passed Legislative Decree 14-96, which did away with military privilege, setting a new precedent for civilian control over military affairs (UNGA, 1997b). Fifty constitutional reforms stipulated by the CPA soon followed and all were approved by Congress (UNGA, 1999).

What is evident in the Guatemalan case is that CPA implementation processes reveal large amounts of credible information about country developments that should matter to investment-seeking firms, namely, the prospects of achieving a durable peace and, second, the implementation of favorable political reforms. When rebel groups give up control of their territory and begin to demobilize their combatants, this is observable behavior that is routinely reported by international organizations and media sources. CPAs also provide a metric for evaluating the behavior of the conflict actors and the progress of implementation, as the text of the agreement provides a standard for evaluation.

To summarize our expectations concerning CPAs, we predict that international investors are likely to take notice of the attention given to ongoing negotiations in the press, at which point they can begin to follow the information revealed by the unfolding of the process. As for non-comprehensive peace agreements, we expect investors to take a wait-and-see approach, paying attention to whether further negotiations will lead to a CPA. If a CPA is reached, however, we expect investors to be drawn to such processes, particularly to those exhibiting high levels of commitment to implementation. The first 24 months of the Guatemalan case shows how contemporary CPA implementation processes reveal large amounts of information about the progress of institutional, political, and legal reforms in the country that should matter to investors. Hence, we expect investors to be drawn to CPA processes and higher levels of implementation.

Military victories

In contrast to CPA implementation processes, we expect government victories to reveal lower amounts of information with respect to the definitiveness of the war ending, the likelihood of renewed war, and the future policy climate (but higher amounts of information than low-activity conflicts). It may sound surprising that we would position military victories as a low information-revealing outcome. However, the short answer is that it is difficult to know that a military victory in a civil war is occurring in real time; such a judgment is typically made after the fact. There is a time component built into the definition of what a military victory is that is not often discussed and which precludes observing victories as they happen. Every battlefield win by the government could be the last battle of the civil war, but this is a retrospective judgment. The bottom line for the investor seeking to time FDI inflows to coincide with a government victory is that military victories, in real time, are difficult to identify; hence, early entry advantage is lost.

We should also consider what a government victory might convey to other opposition movements—active or latent—in the country and how this might impact the amount of future civil war. The defeat of one armed rebellion by the incumbent regime often represents little more than a lull in the conflict, not a decisive end to a larger movement. Even when one group is defeated, the broader opposition movement that spawned it will likely produce more groups. Rebels on the verge of defeat can avoid annihilation by blending into the civilian population to fight another day. While a CPA implementation gives existing groups a process to observe, evaluate, and possibly join, a military victory leaves existing groups with no options other than surrendering or increasing their capabilities in anticipation of being targeted next. As for the political or policy trajectory of the nation, government victories leave the current regime intact. The termination is not explicitly linked to any future policy changes and should resemble the status quo ante. While a government victory, on one hand, may be seen as producing policy predictability, these are the same policies that led to the civil war in the first place. If the conflict was motivated by grievances over natural resources, it is unlikely that a victorious government would then take it upon itself to implement reforms in this area. In addition, achieving a military victory is costly to both human capital and infrastructure and other factors of production, which may reduce a state’s attractiveness to foreign investors.

Lastly, we see rebel victories—in regard to the information criterion—as revealing low amounts of information about the prospects of peace and the political and policy climate. In many ways a rebel victory preserves the polarization and contested rivalry that characterized the civil war; the two sides may have swapped places for the time being but the larger incompatibility endures. In general, we expect that investors will be extremely cautious about investing in a new opposition-controlled regime and will treat rebel victories as particularly foreboding outcomes.

These discussions can be formalized as the following hypothesis:

H1: Civil wars ending in CPAs which are implemented at higher levels should attract higher rates of FDI inflows relative to other termination types.

Research design

Data

To test these claims, we assembled a time series cross-sectional dataset that includes 271 civil war termination events in 73 post-conflict countries between 1989 and 2012. Table A1 in the Online Appendix provides a full list of these countries. Our post-conflict cases are taken from the UCDP Conflict Termination Dataset (Kreutz, 2010).⁴ We define the start of a post-conflict setting when at least one conflict dyad in a country is terminated. Once a country enters the sample with a dyadic termination, the country remains in the sample until 2012; most countries experienced several terminations over the time period of the study.

The dependent variable

Our dependent variable is the natural log of annual FDI inflows into post-conflict countries (Allee and Peinhardt, 2011; Li and Resnick, 2003). Data on FDI inflows come from the United Nations Conference on Trade and Development (UNCTAD, 2013b). The UNCTAD data are the most comprehensive FDI data and are regarded as being the least affected by intentional non-reporting bias (see Büthe and Milner, 2008).

Main explanatory variables

Our main independent variables are taken from the Peace Accords Matrix Implementation Dataset (PAM_ID) and UCDP Civil War Termination dataset. PAM_ID identifies a population of CPAs negotiated since 1989 and tracks the annual implementation of those CPAs across 51 policy categories over a period of 10 years per agreement (Joshi et al., 2015). Agreements are considered “comprehensive” if the negotiations that produced the agreement included the main conflict actors and the substantive issues underlying the dispute.⁵ CPA Implementation Rate ranges from 0 to 95; cases that do not have a CPA, or that achieved no implementation, are coded 0 (see, Joshi et al., 2015). This variable is used to test H1. A binary measure for CPA termination is also used.

To test hypotheses related to civil war outcomes other than CPAs, we relied on the UCDP Civil War Termination dataset transformed to a country-year format to match the FDI data (Kreutz, 2010).⁶ The dataset provides information on the following types of terminations: (1) peace agreement; (2) ceasefire agreement with conflict regulation; (3) ceasefire agreement without regulation; (4) military victory; and (5) low activity. We generated a binary variable for conflicts terminated in non-comprehensive peace accord (category 1, 2, or 3 above). We also use two different binary variables for conflicts terminated in government victory and rebel victory. Low-activity termination is used as the reference category.

Control variables

We control for war duration (in days) with data from UCDP (2013). We also control for the number of battle-deaths incurred annually in the country (Lacina and Gleditsch, 2005; UCDP, 2013). Both variables are logged. We also control for whether the civil war was fought over territory or control of the government (Themnér and Wallensteen, 2013). We include the number of annual peacekeeping troops deployed in the country as peacekeeping troops enhance security and enforcement (Doyle and Sambanis, 2006; Hartzell and Hoddie, 2007; Joshi and Mason, 2011; Kathman, 2013; Quinn et al., 2007). To deal with issues of dispersion in this measure, we take the natural log of this variable. We also control for time elapsed since the last termination.

We control for many standard variables found to influence FDI inflows in prior studies. Because democracy has been found to increase FDI inflows (Jensen, 2003; Li and Resnick, 2003; also see Asiedu and Lien, 2011; Büthe and Milner, 2008), we control for democracy using the Executive constraint measure from the Polity IV Project (Marshall et al., 2013). This variable is coded “1” if the XCONST is “5” or above in the Polity IV data. Using the same data source, we use the durable variable for regime durability. We use total population as a measure of market size (see Büthe and Milner, 2008; Neumayer and Spess, 2005). We control also for GDP growth rate (see Büthe and Milner, 2008; Garriga and Phillips, 2014; Jensen, 2003; Li and Resnick, 2003), and trade openness (see Büthe and Milner, 2008; Garriga and Phillips, 2014; Jensen, 2003). We also control for labor force participation rate and official exchange rate. Data for all these economic variables come from the World Bank’s World Development Indicators (World Bank, 2013). All of these variables are logged and lagged by one year. Descriptive statistics are presented in Online Appendix A3.

Empirical analysis

As static models can overestimate effects given the dynamic nature of FDI, and time series data on FDI inflow are likely to be affected by serial correlation, we address these issues using Arellano and Bond’s (1991) generalized method of moments (GMM) estimator, which includes a lagged dependent variable as a regressor. As discussed in great detail in Egger and Merlo (2007: 1538), Arellano and Bond’s proposed GMM estimator of first-differenced models produces significant efficiency gains over standard econometric models with a lagged dependent variable or fixed effects estimator in FDI analyses. Nickell bias, another problem associated with the use of lagged dependent variable and country fixed effects, is also commonly addressed with the use of Arellano and Bond’s GMM estimator (Nickell, 1981).

Among the models presented in Table 1, the first model includes only termination outcome variables and no controls. Model 2 adds controls for annual GDP growth, trade as a percentage of the economy, the deadliness and duration of the civil war, and whether the conflict was fought over territory or control of the government. Model 3 includes an additional control for constraints on the executive branch of government. Model 4 includes a control for population size and a control for regime durability (how long the current regime has been in power), and a time variable that counts the number of years since the last termination. Model 5 includes the previous controls with the addition of UN peacekeeping troops in the country. Model 6 replicates Model 5 with a binary measure for conflicts terminated with a CPA.

Table 1.

Determinants of FDI inflow in post-conflict states

	(1)	(2)	(3)	(4)	(5)	(6)
Ln FDI inflow_t–1	0.909^****	0.888^****	0.887^****	0.871^****	0.871^****	0.869^****
	(0.011)	(0.011)	(0.011)	(0.012)	(0.012)	(0.012)
CPA implementation rate	0.002^***	0.002^***	0.002^***	0.002^**	0.002^**
	(0.001)	(0.001)	(0.001)	(0.001)	(0.001)
CPA termination (1, 0)						0.160^***
						(0.057)
Non-CPA termination (1, 0)	0.062	0.078^**	0.076^*	0.078^*	0.077^*	0.090^**
	(0.040)	(0.040)	(0.040)	(0.040)	(0.040)	(0.041)
Rebel victory termination	0.044	–0.102	–0.108	–0.093	–0.092	–0.102
	(0.069)	(0.080)	(0.080)	(0.081)	(0.081)	(0.081)
Government victory termination	0.197^****	0.113^**	0.102^*	0.093^*	0.094^*	0.100^*
	(0.053)	(0.055)	(0.056)	(0.056)	(0.056)	(0.056)
GDP growth (annual %)		–0.001	–0.001	–0.001	–0.001	–0.001
		(0.001)	(0.001)	(0.001)	(0.001)	(0.001)
Trade (% GDP)		0.001^*	0.001^*	0.001^**	0.001^**	0.001^**
		(0.000)	(0.000)	(0.000)	(0.000)	(0.000)
Ln total killed		0.010^**	0.010^*	0.010^*	0.010^*	0.008
		(0.005)	(0.005)	(0.005)	(0.005)	(0.005)
Ln war duration		0.001	0.001	–0.004	–0.003	–0.005
		(0.006)	(0.006)	(0.007)	(0.008)	(0.007)
Government only conflict (1, 0)		0.100^**	0.100^**	0.099^**	0.099^**	0.088^*
		(0.048)	(0.048)	(0.048)	(0.049)	(0.049)
Executive constraints (1, 0)			0.066	0.058	0.058	0.060
			(0.046)	(0.045)	(0.045)	(0.045)
Population (Total)				0.000^**	0.000^**	0.000^*
				(0.000)	(0.000)	(0.000)
Regime durability				0.005^**	0.005^**	0.005^**
				(0.002)	(0.002)	(0.002)
Years since last termination				–0.000	–0.000	–0.000
				(0.000)	(0.000)	(0.000)
Ln average UN deployments					–0.001	–0.003
					(0.007)	(0.007)
Constant	0.768^****	0.795^****	0.780^****	0.718^****	0.719^****	0.748^****
	(0.075)	(0.084)	(0.085)	(0.106)	(0.106)	(0.107)
Observations	1343	1188	1188	1188	1188	1188
Groups	73	68	68	68	68	68
Wald χ²	10,512.31	9919.24	9930.57	10,775.39	10,768.33	10,789.49
Probability> Wald χ²	0.000	0.000	0.000	0.000	0.000	0.000
Mean VIF	1.43	3.40	3.50	3.33	3.22	3.46

Note: FDI, foreign direct investment; CPA, comprehensive peace agreement; GDP, gross domestic product. Arellano and Bond generalized method of moments (GMM) estimation for dynamic panel data is used. All variables are lagged one year except conflict type, conflict deaths, and war duration. ^*p < 0.10, ^**p < 0.05, ^***p < 0.01, ^****p < 0.001.

Across all of these models, CPA implementation rate is positive and consistently significant. This lends support to our hypothesis (H1) that investors generally seem to prefer CPA implementation processes over other terminations, although investors appear to be drawn to several termination types. Significant results were also found for the signing of a CPA termination (binary measure) without considering the level of achieved implementation (Model 6). Among other termination types, we see less robust but significant results for conflicts terminated in peace agreements that are non-comprehensive (non-CPA termination) as well as conflicts terminated in government victories. No significant results were found for rebel victories. Thus, we find evidence that investors do indeed prefer several different types of terminations over conflicts terminated via low activity. With respect to the robustness of these findings, as shown in Tables 2 and 3, CPA implementation rate produces the most consistently strong results followed by government victory, followed by non-CPA. Comparing the three positive and significant outcomes, we find the strongest effects for CPA implementation, followed by government victory, followed by non-CPA. Based on the size of the coefficients in the full model (Model 5), we could expect that a one standard deviation increase in CPA implementation leads to roughly a 7% increase in FDI inflow annually; a highly implemented CPA produces roughly a 19% increase in FDI. Therefore, comparing civil wars that differ in whether they ended in a government victory or a highly implemented CPA, but similar in other respects, you would predict CPA countries to attract roughly double the FDI of cases ending in government victory, on average. Comparing civil wars that differ in whether they ended in a government victory or a non-CPA, but likewise similar in other respects, you would predict government victory cases to attract roughly 22% higher levels of FDI.

Table 2.

Robustness tests

	(7)	(8)	(9)	(10)	(11)	(12)
Ln FDI inflow_t ₋₁	0.849^****	0.847^****	0.854^****	0.848^****	0.847^****	0.845^****
	(0.015)	(0.016)	(0.015)	(0.016)	(0.017)	(0.017)
CPA implementation rate	0.002^***	0.002^***	0.002^**	0.002^**	0.002^***
	(0.001)	(0.001)	(0.001)	(0.001)	(0.001)
CPA termination (1, 0)						0.195^****
						(0.059)
Non-CPA termination (1, 0)	0.061	0.054	0.065	0.083^**	0.072^*	0.091^**
	(0.040)	(0.040)	(0.041)	(0.041)	(0.043)	(0.044)
Rebel victory termination (1, 0)	–0.089	–0.084	–0.103	–0.078	–0.083	–0.096
	(0.080)	(0.081)	(0.081)	(0.085)	(0.087)	(0.087)
Government victorytermination (1, 0)	0.098^*	0.060	0.124^**	0.108^*	0.077	0.086
	(0.056)	(0.058)	(0.059)	(0.059)	(0.066)	(0.066)
BITs (cumulative)	0.005^***	0.004^**	0.004^*	0.004^*	0.003	0.002
	(0.002)	(0.002)	(0.002)	(0.002)	(0.002)	(0.002)
GDP growth (annual %)	–0.001	–0.001	–0.001	–0.001	–0.002	–0.001
	(0.001)	(0.001)	(0.001)	(0.001)	(0.002)	(0.002)
Trade (% of GDP)	0.001^**	0.001^***	0.001^*	0.001^*	0.001^**	0.001^**
	(0.000)	(0.000)	(0.000)	(0.000)	(0.001)	(0.001)
Population (million)	0.002	0.002^*	0.002^*	–0.009	–0.008	–0.009
	(0.001)	(0.001)	(0.001)	(0.006)	(0.006)	(0.006)
Executive constraints (1, 0)	0.040	0.054	0.017	0.027	0.038	0.037
	(0.046)	(0.046)	(0.045)	(0.047)	(0.048)	(0.048)
Regime durability	0.004^*	0.003	0.004^*	0.004^*	0.003	0.004^**
	(0.002)	(0.002)	(0.002)	(0.002)	(0.002)	(0.002)
Official exchange rate		–0.000			–0.000	–0.000
		(0.000)			(0.000)	(0.000)
Natural resources rents			0.004^**		0.003^*	0.003
			(0.002)		(0.002)	(0.002)
Labor force, total				0.000^**	0.000^**	0.000^**
				(0.000)	(0.000)	(0.000)
Ln war duration	–0.002	–0.001	0.002	–0.001	0.000	–0.002
	(0.007)	(0.007)	(0.008)	(0.008)	(0.008)	(0.008)
Government onlyconflict (1, 0)	0.096^**	0.109^**	0.113^**	0.111^**	0.150^***	0.131^**
	(0.048)	(0.048)	(0.049)	(0.054)	(0.055)	(0.055)
Years since last termination	–0.000	–0.000	–0.000	–0.000	–0.000	–0.000
	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)
Ln average UN deployments	0.002	0.002	0.001	0.000	–0.000	–0.002
	(0.007)	(0.007)	(0.007)	(0.007)	(0.007)	(0.007)
Constant	0.887^****	0.871^****	0.795^****	0.885^****	0.816^****	0.857^****
	(0.126)	(0.131)	(0.128)	(0.140)	(0.144)	(0.145)
Observations	1188	1159	1168	1142	1095	1095
Groups	68	68	67	68	67	67
Wald χ²	11,021.10	9420.05	10,600.29	10,271.70	8516.83	8511.59
Probability> Wald χ²	0.000	0.000	0.000	0.000	0.000	0.000
Mean VIF	3.30	3.15	3.41	6.81	6.46	6.47

Arellano and Bond GMM estimation for dynamic panel data is used. All variables are lagged one year except conflict type, conflict deaths, and war duration. ^*p < 0.10, ^**p < 0.05, ^***p < 0.01, ^****p 0.001.

Table 3.

Robustness tests continued

	(13)	(14)	(15)	(16)
Ln FDI inflow_t–1	0.873^****	0.871^****	0.874^****	0.878^****
	(0.012)	(0.012)	(0.012)	(0.012)
CPA implementation rate	0.002^***	0.002^***	0.002^***
	(0.001)	(0.001)	(0.001)
Non-CPA termination (1, 0)		0.090^**	0.063	0.042
		(0.043)	(0.043)	(0.043)
Low activity termination (1, 0)	0.003	0.039	0.009	0.031
	(0.036)	(0.038)	(0.037)	(0.039)
Rebel victory termination (1, 0)	–0.104		–0.093	–0.100
	(0.081)		(0.082)	(0.085)
Govt. victory termination (1, 0)	0.079	0.112^*		0.110^*
	(0.058)	(0.058)		(0.061)
GDP growth (annual %)	–0.001	–0.001	–0.001	–0.001
	(0.001)	(0.001)	(0.001)	(0.001)
Population (Total)	0.000^**	0.000^**	0.000^**	0.000^***
	(0.000)	(0.000)	(0.000)	(0.000)
Trade (% GDP)	0.001^**	0.001^**	0.001^**	0.001^**
	(0.000)	(0.000)	(0.000)	(0.001)
Executive constraints (1, 0)	0.064	0.055	0.070	0.079^*
	(0.046)	(0.045)	(0.045)	(0.047)
Regime durability	0.003	0.004^*	0.003	0.004^*
	(0.002)	(0.002)	(0.002)	(0.002)
Government only conflict (1, 0)	0.105^**	0.103^**	0.121^**	0.107^**
	(0.049)	(0.048)	(0.048)	(0.050)
Years since last termination	–0.000	–0.000	–0.000^*	–0.000
	(0.000)	(0.000)	(0.000)	(0.000)
Ln average UN deployments	0.001	0.001	0.001	0.001
	(0.007)	(0.007)	(0.007)	(0.007)
Ln war duration	0.000	–0.001	–0.003	0.001
	(0.007)	(0.007)	(0.007)	(0.008)
Constant	0.700^****	0.696^****	0.702^****	0.621^****
	(0.104)	(0.104)	(0.104)	(0.104)
Observations	1188	1188	1188	1211
Groups	68	68	68	69
Wald χ²	10,702.41	10,819.17	10,730.13	10,420.78
Probability> Wald χ²	0.000	0.000	0.000	0.000
Mean VIF	2.90	3.04	2.92	2.89

Note: Arellano and Bond GMM estimation for dynamic panel data is used. All variables are lagged one year except conflict type, conflict deaths, and war duration. ^*p < 0.10, ^**p < 0.05, ^***p < 0.01, ^****p < 0.001.

As for our controls, lagged FDI inflow is significant across all models as expected. Population size, which is a proxy for market size, is a positive and significant predictor of FDI inflow as expected. We also find that territorial conflicts seem to attract less FDI compared with conflicts fought over control of the central government. Territorial conflicts are more difficult to resolve and could lead to future secession of the disputed territory, and hence greater future uncertainty. Regime durability, conflict deaths, and trade as a percentage of GDP were positive and significant. GDP growth was not significant. We did not find significant support for conflict duration, executive constraints, or time elapsed since the last termination, and UN troop deployments.

Robustness tests

We undertook a number of additional estimations to check the robustness of the results (Table 2). For example, firms can actively negotiate bilateral investment treaties (BITs) with governments to protect their investments. BITs give foreign investors contractual rights and rights to international arbitration in the event of a dispute related to investment or taxes, and serve as institutionalized measures of a government’s commitment to liberal economic policies as well as their record of compliance (Büthe and Milner, 2008). Hence, BITs are an effective way of controlling for the behavioral endogeneity of the government, capturing the government’s previous willingness to negotiate and accommodate investors (Elkins et al., 2006; Neumayer and Spess, 2005; Tobin and Rose-Ackerman, 2011). We control for the cumulative frequency of prior BITs at the country level using data from UNCTAD (2014). As seen in Table 2, cumulative BITs is positive and significant in several models and the results for CPA implementation rate strongly hold. This suggests that CPA implementation rate exerts effects independent of and in addition to a government’s previous record of compliance with foreign investors.

In Models 8–10, we include additional measures for official exchange rate, natural resource rents as a percentage of the economy, and the total size of the labor force, respectively, and together in Model 11. Our main findings concerning CPA implementation and other termination outcomes were not impacted by these additional controls. Natural resource rents as a share of the economy and labor force size were positive and significant. Model 12 replicates Model 11 by replacing CPA implementation rate with a binary measure for the signing of a CPA and the variable is positive and statistically significant. Government victory falls out of the range of marginal significance in Models 8, 11 and 12.

In Models 13–16 (Table 3), we systematically rotate the termination reference category using the full model (Model 5) from Table 1. In Model 13, the reference category is non-CPA; rebel victory in Model 14; government victory in Model 15; and CPA implementation rate in Model 16. As seen in Models 13–15, CPA implementation rate remains significant regardless of termination reference category. In Model 14, government victory is marginally significant and preferable to rebel victories. Taken together, these results provide robust evidence in support of the thesis that investors seem to prefer CPA implementation processes over other ways of ending civil wars.

In the Online Appendix, additional robustness tests are presented in Tables A4–A10. Tables A4–A6 replicate Tables 1–3 from the paper with robust standard errors clustered on country. The main findings hold. In Table A7, we present 10 new models that, among other things, show a bivariate test of CPA implementation on FDI; limit the temporal scope of the analysis to termination plus 5 years; swap the dependent variable from FDI inflow (ln) to raw FDI inflows (not logged); swap various democracy measures; include Legal System and Property rights; include Official Development Assistance; swap GDP growth with GDP per capita; and drop all high FDI cases from the sample. In Table A10, we replicate an additional six models from Table 1 with fixed effects with robust standard errors to gauge any remaining autocorrelation issues. Original findings hold.

Conclusion

In this study, we examined a new area of research at the intersection of FDI and civil war termination. While many studies find that civil war deters FDI inflows, none have dealt with the fact that civil wars end in a variety of ways and recognizing when a civil war is ending poses significant “[c]onceptual and empirical complexities” even for social scientists who specialize in the timing of civil war termination (see Kreutz, 2010; Sambanis, 2004). The study’s main contribution is the advancement of a general framework of post-civil war FDI that takes into account the ways in which modern civil wars end and how investors might distinguish between these outcomes. The motivating research question of this study concerns how firms are able to determine which civil wars are ending; which are likely to remain ended; and which are likely to have a favorable policy climate for investment—all without the luxury of hindsight. We argued that investors should be drawn to particular types of peace processes where conflict actors implement a collection of mutually acceptable reforms over time to end the civil war. Our analysis of 73 countries and 271 different terminations revealed that governments that end a civil war through a process of negotiating and implementing a comprehensive peace agreement will attract substantially more FDI. The findings have straightforward policy implications for countries currently engaged in civil war.

An immediate line of future research on civil war termination and FDI concerns the fact that CPAs contain different types of social, political, and economic reforms. Future research should differentiate between aggregate and sub-aggregate peace accord content, implementation, and FDI. Particular types of political reforms in peace agreements (e.g. powersharing, judicial reforms) could be more (or less) attractive to investors than other types of reforms. Existing FDI studies, for example, argue that firms are particularly fearful of discrimination and being “treated differently than domestic investors by the host government” (Li, 2006: 235). Thus, foreign firms may prefer CPAs with a greater number of legal protections, for instance. The current paper leaves untouched the effects of within-accord content variation on FDI.

Supplemental Material

Replication files

Replication files for ‘Civil War Termination and Foreign Direct Investment, 1989-2012’

Footnotes

Authors’ note

Authors are listed alphabetically. An earlier version of this article was presented at the 2015 annual meeting of the Midwest Political Science Association: “Peace Dividends: Comprehensive Peace Agreement Implementation and Foreign Direct Investment in Post-Conflict States.” In August 2014, a policy brief summarizing some of the findings from this analysis was presented to the Colombian government. We are thankful to the CMPS editors and three anonymous reviewers for their comments and suggestions on previous drafts. All errors and omissions are the sole responsibility of the authors. The dataset, , and all other supporting materials used to produce this article can be accessed via a Supplemental data file hosted on Sage’s CMPS website.

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Notes

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Civil war termination and foreign direct investment,1989–2012

Abstract

Keywords

Introduction

Political risk and FDI

Contemporary civil war termination and FDI inflows

Low-activity terminations

Non-comprehensive and comprehensive peace agreements

Military victories

Research design

Data

The dependent variable

Main explanatory variables

Control variables

Empirical analysis

Robustness tests

Conclusion

Supplemental Material

Replication files

Footnotes

Authors’ note

Funding

Notes

References

Supplementary Material