Faculty of Arts and Social Sciences
POLITICAL SCIENCE SEMINAR
Economic Sanctions, Foreign Direct Investment and Firms' Ex Ante Risk Assessment
(St. Olaf College)
NOVEMBER 11, 2019
Abstract: When do firms choose to invest in markets that were previously sanctioned by the United States? How can target countries lure investment in the aftermath of sanctions removal? The reward of investing in target countries following the lifting of sanctions is often high, since early investors can avoid competition and thus have proprietary access to lucrative contracts. However, firms are also wary of risks in host markets, especially the risk of sanctions recurrence and disinvestment. In this paper, I argue that firms assess the risk of sanctions recurrence and choose to invest in countries if they are convinced that the relationship between the U.S. and their potential host country is normalizing. I empirically show that U.S. foreign aid to target countries serves as a credible signal of rapprochement between the two countries and gives confidence to firms. Additionally, sanctions that end with target concessions, as well as the ones that last for a relatively short period of time create a more attractive investment environment for firms in the post-sanctions period.