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Gambling on Conflict: Profiling Investments in Conflict Countries
Unformatted Document Text:  Andreea Mihalache Updated: March 20, 2008 Gambling on Conflict: Profiling Investments in Conflict Countries Andreea S. Mihalache Penn State University Contact: ## email not listed ## Abstract: Paralleling the upward trend in global FDI flows to developing countries, Kimberly-Clark quadrupled its equity holdings in Brazilian and Mexican affiliates over the past decade. Concurrently, Kimberly-Clark made sizable investments in Colombia while this country was facing high levels of civil conflict. The firm’s latter decision is unexpected, given the conventional wisdom that ongoing conflict in the host translates into high costs for any investor. However, Kimberly-Clark is not alone in exposing some of its foreign affiliates to political violence risk, which raises the question: Why do certain investors avoid conflict countries while others continue to select these locations? Previous research assumes homogeneity in investors’ reactions to political violence risk and does not solve this puzzle. I recognize that firms are heterogeneous and identify the attributes that increase firms’ sensitivity to political violence. Firms with investments that rely preponderantly on physical assets, have higher costs for exit, and serve non-host markets perceive higher threats from political violence. Data from a new survey of foreign investors, which includes questions about attitudes towards political violence, support my predictions. Prepared for the MPSA 66 th Annual Convention, Chicago, April 2008. 1

Authors: Mihalache, Andreea.
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Andreea Mihalache
Updated: March 20, 2008
Gambling on Conflict:
Profiling Investments in Conflict Countries
Andreea S. Mihalache
Penn State University
Contact:
Abstract: Paralleling the upward trend in global FDI flows to developing countries,
Kimberly-Clark quadrupled its equity holdings in Brazilian and Mexican affiliates over
the past decade. Concurrently, Kimberly-Clark made sizable investments in Colombia
while this country was facing high levels of civil conflict. The firm’s latter decision is
unexpected, given the conventional wisdom that ongoing conflict in the host translates
into high costs for any investor. However, Kimberly-Clark is not alone in exposing some
of its foreign affiliates to political violence risk, which raises the question: Why do
certain investors avoid conflict countries while others continue to select these locations?
Previous research assumes homogeneity in investors’ reactions to political violence risk
and does not solve this puzzle. I recognize that firms are heterogeneous and identify the
attributes that increase firms’ sensitivity to political violence. Firms with investments
that rely preponderantly on physical assets, have higher costs for exit, and serve non-host
markets perceive higher threats from political violence. Data from a new survey of
foreign investors, which includes questions about attitudes towards political violence,
support my predictions.
Prepared for the MPSA 66
th
Annual Convention, Chicago, April 2008.
1


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