Home market power and host market protection of foreign investment

Abstract

How do multinational firms trapped in host markets suffering from political violence find security? Terrorism and conflict repel foreign investment and recent research has sought to understand heterogeneity across firms in their response to violence. When multinational firms are unable to move their investments in the face of violence, we argue that their home governments use diplomatic capacity and security and economic resources to secure protection from host governments. Multinational corporations from home markets with significant leverage over host markets are therefore less likely to curtail their operations or investments in the wake of violence. Examining dyadic data on foreign direct investment (FDI), we show that home market diplomatic missions, aid, and alliances substantially abate the negative effects of violence on FDI. Consistent with our argument, this effect is observed after violence begins and is not an artifact of host markets garnering security aid from great powers other than the home market. A strong diplomatic presence matched to both hard and soft power resources positively contributes to the defense of core foreign policy interests.