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Gambling on Conflict: Profiling Investments in Conflict Countries
Unformatted Document Text:  Andreea Mihalache Updated: March 20, 2008 but with investments similar along certain dimensions perceive systematically lower (or higher) threats from political violence than other firms. While I do not discount the importance of the country-level probability of political violence for firm perceptions of the investment environment, I emphasize the fact that the distribution of perceptions within a given country is not random around a mean determined solely by the probability of violence. Instead, within each country, the threat perceptions of firms with different types of investment characteristics are drawn from distributions with different means; the within-country variation of these means is caused by the different investment profiles of firms. From this point of view, a firm’s threat perception is a function of two variables: the probability that political violence occurs and the firm-level outcomes of political violence. The former variable has already been addressed in some detail in the literature, while the latter variable has so far been ignored and is the focus of my argument. A useful way to sum up these firm-level outcomes is the magnitude of the firm’s loss, should political violence occur: the greater the expected loss, the higher the threat perceived by the firm. Investment attributes are the main determinant of a firm’s expected loss from political violence. So what are these attributes? 5.1. Relevant investment attributes The discussion earlier in the paper establishes that political violence alters the investment environment in several ways: it increases transaction and transportation costs, it destroys assets, it disrupts labor and goods markets, and it leads to policy changes that more often than not hurt foreign investors. What remains is to identify the attributes that 23

Authors: Mihalache, Andreea.
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Andreea Mihalache
Updated: March 20, 2008
but with investments similar along certain dimensions perceive systematically lower (or
higher) threats from political violence than other firms.
While I do not discount the importance of the country-level probability of
political violence for firm perceptions of the investment environment, I emphasize the
fact that the distribution of perceptions within a given country is not random around a
mean determined solely by the probability of violence. Instead, within each country, the
threat perceptions of firms with different types of investment characteristics are drawn
from distributions with different means; the within-country variation of these means is
caused by the different investment profiles of firms. From this point of view, a firm’s
threat perception is a function of two variables: the probability that political violence
occurs and the firm-level outcomes of political violence. The former variable has already
been addressed in some detail in the literature, while the latter variable has so far been
ignored and is the focus of my argument. A useful way to sum up these firm-level
outcomes is the magnitude of the firm’s loss, should political violence occur: the greater
the expected loss, the higher the threat perceived by the firm. Investment attributes are
the main determinant of a firm’s expected loss from political violence. So what are these
attributes?
5.1. Relevant investment attributes
The discussion earlier in the paper establishes that political violence alters the
investment environment in several ways: it increases transaction and transportation costs,
it destroys assets, it disrupts labor and goods markets, and it leads to policy changes that
more often than not hurt foreign investors. What remains is to identify the attributes that
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