Perceptions of Risk and Foreign Direct Investment in Post-sanction Economies

• In Event: Political Risk and Foreign Direct Investment

Abstract

What factors influence international investment patterns into previously-sanctioned economies? The United States has increasingly deployed financial sanctions as its primary foreign policy response to its international adversaries. Since 2015, the number of blacklisted actors has nearly tripled, coinciding with US financial campaigns against Venezuela, Iran, North Korea, and Russia. This paper centers on an under-examined paradox of this proliferation: the complexity of lifting financial sanctions. Evidence has shown that many targeted states struggle to recover once financial sanctions are lifted, but to date little is yet known about the factors and conditions limiting post-sanction recovery. To investigate this, this study deploys an experimental survey of risk and compliance professionals within the financial services sector. Respondents were randomly primed with a hypothetical sanction-removal scenario, highlighting one of three conditions that could be present in a previously-sanctioned state: reputational risk, political risk, or a control (no risks); respondents were then asked to assess the likelihood of reinvestment, and which risk factors were most prominent in their investment decision. Results show that most risk and compliance professionals, across all scenarios, choose to avoid investing in previously sanctioned economies, with reputational risk concerns being the most prominent factor influencing such decisions.

Author

• Benjamin Raynor, University of California, Irvine