There are intense debates around effectiveness of economic sanctions in political economy. Sanctioned governments are being under pressure of travel bans, financial restrictions, military coercion, surviving in a difficult economic situations and being forced to change policies and seek compromises. It is well studied that economic coercions have a negative effects on target states economies, especially with military interventions. But what is the effect of sanctions for countries which impose those sanctions having FDI inflow in targeted economies?
The main question of all collected articles is relationship between economic sanctions and foreign direct investment (FDI). The objective is to highlight how FDI has been negatively or positively affected in targeted countries and how investors benefit from FDI. All articles used literature reviews and empirical analyses based on time-series cross-national data.
The critical analysis of the study will be divided into 3 categories: 1. Unilateral and bilateral sanctions which describe relations between a sender and a target 2. The role of third-party countries in terms of cooperation as allies or rivals who undertake the dominant position of a sender 3. Important aspects when sanctions are effective to be imposed such as aspect of time (short or long-run), a degree of economic pain (military or economic coercion), entry mode (through multilateral corporations or join ventures), competitiveness of firms and the value of exchange rate.
Table of Contents
1. A sender vs. a targeted country. Loss or benefits?
2. Third-party countries. Allies or competitors?
3. Important aspects of effectiveness of sanctions.
Objectives and Research Focus
This work examines the complex relationship between the imposition of economic sanctions and the flow of Foreign Direct Investment (FDI) into targeted economies, aiming to identify how investors respond to sanctions and the conditions under which these economic measures succeed or fail.
- The impact of unilateral vs. multilateral sanctions on FDI inflows.
- The role of third-party countries as either allies or competitive "sanctions-busters."
- The influence of FDI entry modes, such as multinational subsidiaries versus joint ventures.
- Macroeconomic determinants, including exchange rate fluctuations and political risk assessment.
- The effectiveness of sanctions based on duration, economic pain, and firm competitiveness.
Excerpt from the Book
1. A sender vs. a targeted country. Loss or benefits?
Restrictions and barriers can be seen as business opportunities for multinational corporations at some point. FDI flows could help to substitute for a large share of import flows and loaned financial resources. G.Biglaiser and D.Lektzian brought the evidence of the hypothesis that in order to avoid the risk US investors withdraw prior from investment which is followed by support of US government and international organizations. “Once the sanctions placed investors would like to get lowered costs using “fire sales” followed by crisis, then a host country opens doors to investors to increase profit opportunities. Investors also have a great profit when sanctions are in effect” (G. Biglaiser, D.Lektzian 2011). Basically under sanctions investors feel balanced and backed up by the support of a government and IO, and they play “buy low, sell high” which leads to successful return.
In the another article they brought another hypothesis towards effect of FDI decisions on the success of sanctions. The authors admit that if global FDI increases while US FDI falls down, the US won’t be effective enough to punish target countries which leads to unsuccessful and less effective sanctions. For example, when US imposed sanctions against Cuba, Soviet Union backed up and provided the aid. Even after the Soviet Union collapse Cuba found Venezuela as a new donor. The authors do not mention about the effectiveness of multilateral sanctions. But in conclusion they point out that the US FDI case does not apply to global FDI, but US sanctions are highly relevant and US investors act as “black knights” who can prevent sanction attempts by other countries (G.Biglaiser, D.Lektzian, 2014). The question of effectiveness of US sanctions towards global FDI arises here. Would other foreign companies create opportunities when US disinvest from the sanctions imposed country? Or would it be too risky for global investors to step up on a vacated role which might lead to a global decline in investment?
Summary of Chapters
1. A sender vs. a targeted country. Loss or benefits?: This chapter investigates whether US sanctions effectively deter FDI or create new profit opportunities for investors who "buy low and sell high" in sanctioned markets.
2. Third-party countries. Allies or competitors?: This section explores how third-party nations and "black knights" act as sanctions-busters, often benefiting from the disinvestment of primary sender countries.
3. Important aspects of effectiveness of sanctions.: This chapter analyzes critical variables affecting sanction success, including the duration of measures, the degree of economic pain, the mode of FDI entry, and broader macroeconomic factors.
Keywords
Economic Sanctions, Foreign Direct Investment, FDI, Third-party Countries, Sanctions-busting, Black Knights, Macroeconomic Determinants, Political Risk, International Trade, Joint Ventures, Multinational Corporations, Economic Coercion, Trade Policy, Global Economy, Investment Strategy.
Frequently Asked Questions
What is the core subject of this publication?
The publication provides a critical literature review analyzing how the imposition of economic sanctions influences Foreign Direct Investment (FDI) inflows into targeted states.
What are the central thematic fields covered?
The main themes include the behavior of multinational corporations under sanction pressure, the role of third-party countries in undermining sanction efficacy, and the importance of entry modes like joint ventures.
What is the primary objective of this research?
The objective is to synthesize empirical analyses from various economic papers to determine whether sanctions lead to a decline in FDI and how different political and economic variables modulate these outcomes.
Which scientific methodology is utilized?
The author performs a systematic literature review of 15 economic journal articles and working papers, evaluating empirical studies that utilize time-series cross-national data.
What topics are discussed in the main body?
The main body covers the strategic behavior of firms, the concept of "black knights" who bypass sanctions, the difference between short-run and long-run effects, and the impact of macroeconomic variables like currency devaluation.
Which keywords best characterize this work?
Key terms include Economic Sanctions, Foreign Direct Investment, Sanctions-busting, Political Risk, and Macroeconomic Determinants.
How does the entry mode of FDI affect a company's response to sanctions?
The research suggests that companies with wholly-owned subsidiaries face higher exit costs and greater vulnerability compared to those using joint ventures, which can adapt more flexibly to the host country's changing political environment.
How do "black knights" influence the success of sanctions?
"Black knights" are third-party countries or firms that provide economic support to a sanctioned target, effectively lowering the costs of sanctions and often undermining the sender's political objectives.
What does the author conclude about the relationship between sanctions and FDI?
The conclusion states that while the relationship is generally negative, the actual impact is highly contextual, depending on political games, the duration of sanctions, and the specific economic policies of the involved parties.
- Quote paper
- Liliya Kenzhebayeva (Author), 2020, How Do Economic Sanctions Affect Foreign Direct Investments (FDI)?, Munich, GRIN Verlag, https://www.grin.com/document/907119
