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The attraction of FDI to conflicted states: the counter-intuitive case of U.S oil and gas

Skovoroda, Rodion; Goldfinch, Shaun; Derouen, Karl; Buck, Trevor

Authors

Rodion Skovoroda

Shaun Goldfinch shaun.goldfinch@gmail.com

Karl Derouen kderouen@ua.edu

Trevor Buck trevor.buck@glasgow.ac.uk



Abstract

States burdened with conflict have been considered to be undesirable destinations for foreign direct investment (FDI) due to, inter alia, political instability, regulatory unpredictability, and expropriation risk. However, we develop an alternative view based on corporate governance and real option theories. We analyze a dataset of FDI location decisions made in the Oil & Gas sector by 250 US firms across 44 countries between 2007 and 2013. After controlling for energy reserves, the results show counter-intuitively, that civil war and terrorism risks, and terrorist events are positively associated with US investment in Oil & Gas. US subsidiaries also show high levels of ownership commitment. It is tempting to conclude that US Oil & Gas is a wholly unique, resource-bound case, but we argue that this disconnect may have occurred for two reasons. First, a threat of conflict and violence can make MNEs exercise their growth options and expand resource extraction sooner rather than later. Second, political instability does not necessarily lead to higher levels of FDI expropriation risk. On the contrary, instability can reduce the incentives for the state to seize assets from technologically superior MNEs, i.e. it may reduce expropriation risk. Just as the rule of law and " good " governance can constrain a state from expropriation, there are theoretical reasons why " bad " governance resulting from instability and incapacity may do so, too.

Journal Article Type Article
Publication Date 2019-04
Journal Management International Review
Print ISSN 0938-8249
Electronic ISSN 1861-8901
Publisher Springer Verlag
Peer Reviewed Peer Reviewed
Volume 59
Issue 2
Pages 229–251
APA6 Citation Skovoroda, R., Goldfinch, S., Derouen, K., & Buck, T. (2019). The attraction of FDI to conflicted states: the counter-intuitive case of U.S oil and gas. Management International Review, 59(2), 229–251. https://doi.org/10.1007/s11575-018-0374-y
DOI https://doi.org/10.1007/s11575-018-0374-y
Keywords Civil war risk; Terrorism events; Foreign Direct Investment; Expropriation risk; Rule of law; Corporate governance

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