The impact of economic sanctions on foreign direct investment: empirical evidence from global data

Abstract

PurposeThis study investigates the impact of global economic sanctions on foreign direct investment (FDI).Design/methodology/approachData were gathered from several sources, including the United Nations Conference on Trade and Development (UNCTAD), the Global Sanction and the World Bank database, to build a dataset that consists of 172 countries during the period 2003–2019. The panel ordinary least square (OLS) with a fixed-effects estimator was exploited to achieve the research objective.FindingsThe research findings reveal that sanction exerts a detrimental effect on the total inflows of FDI and its components. Regarding different types of sanctions, while military and trade sanctions have little or even no impact on greenfield investment, they have more adverse and sizable effects on cross-border mergers and acquisitions (M&As). The authors further show that sanctions exert devastating influences through the infrastructure and economic development channels.Practical implicationOverall, this study implies that a closer look at particular types of FDI is required when implementing policies as different types of FDI may be affected differently by changes in the economy, such as economic sanctions.Originality/valueThis paper is the first empirical study that critically investigates the impact of sanctions on the total inward FDI flows and its two components: greenfield investment and cross-border M&As. It then explores how the sanction–FDI nexus varies depending on several country-level economic factors to understand better how sanctions and different types of sanctions are related to international trade and relations.