Foreign Direct Investment and Territorial Disputes

Abstract

This study evaluates the relationship between foreign direct investment (FDI) and interstate conflict, focusing on four prominent causal mechanisms: the declining benefits of territorial conquest, increasing preference similarity, increasing opportunity costs of violence, and improved information signaling. Empirical analyses show that new territorial issues are less likely to arise as global levels of FDI increase, although monadic and bilateral FDI flows have no effect on states’ decisions to start new issue claims. Higher bilateral FDI flows between two disputants significantly reduce the chances for escalation to high levels of violence over issues and improve the chances for peaceful management. Increasing global levels of FDI also reduce the chances for severe militarized conflicts. Opportunity costs are an important mechanism linking FDI and states’ conflict management practices, as the pacifying effect of bilateral and monadic FDI on militarized conflict becomes stronger in dyads with a history of militarization over the issues at stake.