Foreign Direct Investment And Growth In Fragile And Conflict Affected Countries

Sep 11, 2020

This study assesses the relationships between foreign direct investment (FDI), growth, natural resources, and UN peacekeeping operations (PKOs) in fragile and conflict-affected countries (FCAs). An unbalanced panel-dataset on conflict and peacekeeping covering 127 countries from 1989-2018 was created to estimate how FDI and growth are associated with periods of peace, conflict, and post-conflict, including the significance of having a PKO in the last. Main findings are:

·         In 2018 all but two of the top 32 FCAs were either low income (LIC) or lower-middle income (LMIC) countries, and two-thirds could be categorized as resource dependent (RD). As a share of total LIC and LMIC, they accounted for 40% of countries, one-third of population, little more than 20% of GDP, and received about 20% of FDI.

·         The group of countries that can be categorized as both FCA and RD receive the highest ratios of FDI-to-GDP averaging 5.6% per annum (2006-2018), whereas the group of non-RD FCAs has not attracted even 2%.

·         Post-conflict periods without a PKO are not associated with recovery (higher than peacetime) rates of FDI nor economic growth, whereas periods coinciding with a PKO presence have higher FDI-to-GDP of close to 2 percentage points, and with so-called transformative PKOs a higher real GDP growth of more than 4 percentage points. Results also provide some tentative evidence that transformative PKOs and PKOs in resource-dependent economies are more effective in facilitating recovery rates of FDI and growth.

In conclusion, the study finds that fragility is not a major deterrent of resource-seeking FDI, largely explained by its set of unique investment determinants. Furthermore, that peacekeeping and natural resources are important overlooked factors in understanding the large country heterogeneity regarding the economic impact of conflicts and post-conflict economic recovery, and that peacekeeping could be an important measure in closing conflict-attributable GDP losses.

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