Sanctions, Foreign Direct Investment, and Firms' Ex Ante Risk Assessment

• In Event: Strategic Decisions on Economic Sanctions

Abstract

How do private firms decide whether to invest in markets that were previously sanctioned? In this paper, I explore the conditions under which firms choose to invest or re-invest in targeted countries following sanctions removal. The reward of investing in previously targeted economies might be higher shortly after the removal of sanctions, since early investors can avoid competition and thus have proprietary access to lucrative contracts. However, firms are also wary of uncertainty in host markets and look to invest in countries that minimize risks. Therefore, I argue that firms assess the risk of sanctions recurrence when choosing to invest in previously targeted countries. I show that firms’ primary sources of information are how sanctions ended and how the sender-target relations are evolving in the post-sanctions period. Using data on economic sanctions and foreign direct investment, I demonstrate that targets that conceded to the demands of the sender are more likely to attract investment in the post-sanctions period than targets that stood firm. Moreover, I show that increased levels of foreign aid targets receive from the sender in the aftermath of sanctions removal can create a sense of safety for firms looking to invest in countries previously targeted with sanctions.

Author

• Menevis Cilizoglu, St. Olaf College