Paper

Monday, April 8th

Harshal Zalke (Princeton University)

Title: Investment Strategies in the Shadow of Conflict

Abstract:

How sensitive are countries to economic loss due to conflict? To what extent does global economic exchange deter conflict between countries? How do firms factor in the possibility of war when making their investment decisions? Much of the previous research on this issue studies the relationship between trade and military conflicts. However, trade constitutes only a small part of the global economy. By shifting the focus to financial markets, which constitute a much larger portion of the global economy, this paper deepens our understanding of the relationship between global economic exchange and inter-state conflicts. Using a combination of a game theoretic model and empirical analysis, this paper re-examines the pacifying effect of economic ties between countries. The formal model in this paper accounts for the inherent endogeneity of investment flows to inter-state conflict. By modelling this endogeneity, this paper provides a framework that more accurately captures how foreign investments affect military conflicts. The empirical analysis builds on the framework provided by the formal model. Using data on mergers and acquisitions decisions of multinational firms, the empirical analysis validates the insights generated from the formal model and presents a more efficient valuation of the deterrence effect of foreign investments.

Moderator: Nicola Nones (University of Toronto)