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Gambling on Conflict: Profiling Investments in Conflict Countries
Unformatted Document Text:  Andreea Mihalache Updated: March 20, 2008 I thus add another layer to the discussion in the literature, which has so far focused solely on country characteristics (i.e., the overall probability of political violence), excluding investment characteristics (i.e., uncertainty over the consequences of political violence for the firm). I rely on newly-released accounts of investors who filed claims on political violence insurance with the Overseas Private Investment Corporation (OPIC) to document the firm-specific consequences of conflict. Furthermore, I evaluate the empirical validity of my arguments using a new data set that specifically asks investors about their reactions to political violence 12 . Both my argument and my empirical analysis shatter the myth that all firms evade political violence. While the probability of political violence, a function of economic, political, and social parameters, remains an uncontested determinant of foreign investor behavior, the characteristics of a firm’s investment emerge as another important element in the relationship between conflict and FDI. My research identifies the attributes that separate firms unlikely to evade political violence from the rest. My study proceeds as follows. In the next section, I present a detailed description of the empirical puzzle. In the third section, I discuss the relationship between political violence risk and other types of political risk. In the fourth section, I summarize the relevant literature on the relationship between political violence and firm behavior. In the fifth section, I introduce my argument about firm characteristics and firms perceptions of political violence risk. In the sixth section, I describe the method of analysis. In the seventh section, I present my results. Section eight concludes. 2. The Puzzle 12 EIU-ACE 2006. 5

Authors: Mihalache, Andreea.
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Andreea Mihalache
Updated: March 20, 2008
I thus add another layer to the discussion in the literature, which has so far
focused solely on country characteristics (i.e., the overall probability of political
violence), excluding investment characteristics (i.e., uncertainty over the consequences of
political violence for the firm). I rely on newly-released accounts of investors who filed
claims on political violence insurance with the Overseas Private Investment Corporation
(OPIC) to document the firm-specific consequences of conflict. Furthermore, I evaluate
the empirical validity of my arguments using a new data set that specifically asks
investors about their reactions to political violence
. Both my argument and my
empirical analysis shatter the myth that all firms evade political violence. While the
probability of political violence, a function of economic, political, and social parameters,
remains an uncontested determinant of foreign investor behavior, the characteristics of a
firm’s investment emerge as another important element in the relationship between
conflict and FDI. My research identifies the attributes that separate firms unlikely to
evade political violence from the rest.
My study proceeds as follows. In the next section, I present a detailed
description of the empirical puzzle. In the third section, I discuss the relationship
between political violence risk and other types of political risk. In the fourth section, I
summarize the relevant literature on the relationship between political violence and firm
behavior. In the fifth section, I introduce my argument about firm characteristics and
firms perceptions of political violence risk. In the sixth section, I describe the method of
analysis. In the seventh section, I present my results. Section eight concludes.
2. The Puzzle
12
EIU-ACE 2006.
5


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