How Does Armed Conflict Shape Investment? Evidence from the Mining Sector

Abstract

How does conflict affect firms’ investment decisions? Past research on instability and investment generates mixed findings: a third of studies in our systematic review report null or mixed correlations; some suggest that conflict increases investment. We rationalize these results, arguing that armed conflict has divergent effects depending on firms’ proximity to violence. Conflict can deter investment by disrupting production or raising uncertainty. Yet, conflict can encourage investment by hampering government oversight. We use data from the mining sector to test these claims and report three main results. Firms operating at conflict sites dramatically reduce investments. By contrast, firms operating in the territory surrounding conflict, but at a remove from the fighting, actually increase their investment. Firms far from violence see a small negative effect. These divergent responses cannot be inferred from aggregate flows; we show that conflict depresses aggregate investment, but this reflects responses among firms far from fighting.

Publication
Working Paper
Darin Christensen
Darin Christensen
Assistant Professor of Public Policy and Political Science

Political economist interested in conflict and development.