One of the most desired characteristics of foreign direct investment (FDI) destinations is political stability.
That seems to be growing scarcer currently, though, as wars and domestic rivalries plague nations worldwide. Political violence increased 25% from 2023 to 2024 and in the past five years, it has almost doubled, according to Armed Conflict Location & Event Data.
However, FDI still does enter conflict zones, in particular because there are industries that are accustomed to operating under difficult conditions and because the high risk a firm takes may pay off during that country’s reconstruction.
Courtney Fingar, an FDI specialist and former editor-in-chief of Investment Monitor, discussed the nuances of FDI flows in conflict zones during ESSCA School of Management’s 5th FDI & Cities Forum held in Paris, France, last week. She highlighted the dynamism that Ukrainian agencies have displayed amid Russia’s invasion, the importance of private capital during periods of reconstruction and the potential pitfalls of FDI under such complex environments.
Countries in the middle or aftermath of a violent period are vulnerable in many respects. Firstly, conflict tends to occur in countries that already have complicated investment environments whether that be a result of the conflict itself or because of circumstances such as poverty and corrupt governments. In periods of reconstruction, investors may take note of increased opportunities, but “you often have vultures circling around thinking what they can get out the place,” Fingar says.
She highlighted a UNCTAD study that suggests that about 50% of the FDI that enters fragile states comes from extractive industries. These sorts of firms “have a high tolerance for risk,” so they are not as easily deterred in the face of violent conflict. There is also the question of whether investments from oil and mining companies, for example, are necessarily conducive to the development of that country. Fingar raised the question too of what happens to places suffering conflict that do not have these coveted natural resources. “People just don’t care that much,” she added.
For example, in oil-rich Angola, during just the last five years of the civil war (1998-2002), FDI stock increased over 155% “because the oil majors were circling around and keen to get involved at the earliest opportunity.”
But, more often, a rift takes place. Where the countries that need the investment the most because they are undergoing reconstruction and “were already suffering from a gap in major needs for investment” don’t attract enough FDI.
However, taking the risk of investing in a high-risk area could also lead to greater rewards. A World Bank study found that “there's actually an 8% higher return on investment in countries with lower levels of peace, and that's really the driver.”
Fingar also suggested that, given the mass scaling back of American foreign aid ongoing under US President Donald Trump, “it becomes even more important to rethink where the needs are and to try to fill the gaps in conflict zones.”
Kingspan Group is an Irish building materials company. It has over 200 factories, employs 22,000 people worldwide and has over $1b in annual turnover. In 2023, it went through with an investment project worth over $280m (€269m), just over a year after Russia invaded Ukraine.
Fingar explains that this investment did not come by accident. Only a month after the war began, the relatively new Ukrainian promotion investment agency (Ukraine Invest) did a “full-on outreach campaign while Russian tanks were rolling around,” she explained. It was a way to plan ahead as thoughts turned to what would be needed for Ukraine’s long-term recovery.
Only a month after the invasion had begun in February 2022, Ukraine Invest was already working on updating the country’s investment laws to provide more incentives. The changes came into effect in 2023, lowering the threshold of investment needed to access incentives, expanding the types of projects that would be eligible, simplifying issues around land rights and offering tax incentives.
This was accompanied by a strong media campaign. Fingar explained that Sergiy Tsivkach, the CEO of Ukraine Invest, “was out front,” in the “international media, saying to investors, don’t wait until the war is over [...] We’re open for business.”
Kingspan would build a high-tech campus to produce construction materials and create over 700 jobs.
She also highlighted, that while there was a “moralistic corporate social responsibility aspect to the investment of being seen to do the right thing,” Kingspan was adamant about it ultimately being a business decision. They already had a presence in the country before the war broke out and had been active in the region.
It was significant also, “for what it represented in the signal it gave to other companies,” that a mid-conflict investment was possible and could make good business sense.
It is worth noting that the FDI inflows in Ukraine still took a dive after the war began. According to UNCTAD data, the country received $7.3bn of inward FDI in 2021, which dropped to $848m in 2022.
While Ukraine had a mid-level economy before the war, it is located in regional proximity to major markets like the EU and the UK. These are important factors in attracting FDI that many developing nations undergoing periods of violence do not have.
The UN World Institute for Development Economic Research (UN WIDER) published a working paper in 2023 analysing the localised effects of FDI inflows in conflict zones. In its framework, the location of FDI projects affected the government’s counterinsurgency strategies because “investors are sensitive to political risk” and the economic rents derived from a certain greenfield investment “play an important role in determining when it is worth fighting over a particular territory.”
This means that governments put resources into trying to capture territories linked to investments. However, “heightened military presence in areas close to FDI projects reinforce rebel group reliance on irregular warfare, thus amplifying civilian victimisation as a tool to elicit cooperation or enforce control.”
The study suggested that areas with ongoing FDI projects experience over 25% more civilian casualties than areas with projects planned for the future. It highlights that the phenomenon is most clearly observed “when looking specifically at the influx of extractive FDI.” The study focused on conflict in African countries from 2003 to 2019.
While attracting FDI during a conflict is still possible and may have long-term benefits, the type of industry involved and the country's wider set of circumstances still seem central in determining the value of that investment.
"The paradox of foreign investment in conflict zones " was originally created and published by Investment Monitor, a GlobalData owned brand.
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