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14 July, 2022

FDI drivers in 2022: Conflict

Covid-19 and the war in Ukraine have altered the way in which many companies view FDI drivers, with exposure to conflict now a key consideration.

By Viola Caon

As well as echoing eerie memories of the Cold War, Russia’s invasion of Ukraine has heightened concerns among investors about the possibility of a country or region becoming caught up in conflict.

Having caught many companies and investors off guard, the conflict in Ukraine has had significant repercussions for the energy sector and trade more generally.

Conflict is one of the aspects of a broader and very important foreign direct investment (FDI) driver, that of political stability.

Political stability can be looked at through many filters, including corruption, terrorism, strength of institutions and rule of law, which often makes it a deal-breaker in a multinational company’s (MNC) site-selection process.

Conflict caused an exodus from Russia

Russia’s war in Ukraine has not only had repercussions for key sectors of the global economy, it has also very quickly turned Russia into a business pariah and caused many companies to leave the country.

In the table above, Investment Monitor has analysed data from research conducted by the Yale School of Management showing that more than 1,000 companies curtailed operations in the country in the wake of the conflict, although others decided to remain.

A score of 5 suggests a completely clean break from Russia, while a score of 1 suggests that companies from the countries analysed are carrying out business as usual in Russia.

From this analysis, the UK emerges as the country with the best score per number of companies to leave Russia since the invasion, with a score of 4.27 and 93 companies that had been present in the country pre-invasion.

Finland, Poland and Sweden also appear to have acted quickly to withdraw their operations from Russia, with scores of 4.16, 4.16 and 4.18, respectively.

France, however, sits at the other end of the spectrum, with a score of 2.69 and 75 companies present pre-invasion. It still sits behind Italy, with a score of 2.33 and 39 companies, and, unsurprisingly, China, with a score of 1.41 and 51 companies.

In the table above, Investment Monitor has identified the sectors that have suffered the most from companies’ departures from Russia. Non-governmental organisations have the highest score of 4.33, perhaps unsurprisingly, while real estate follows closely with a score of 4.3. Next comes communication services (4.14) and IT (3.97).

Healthcare and (very much in line with expectations) utilities and energy are at the opposite end, with scores of 2.38, 3.2 and 3.22, respectively.

Civil unrest is on the rise globally

The problem with conflict, however, is not exclusive to the Russia-Ukraine region. A recent report from risk analytics company Verisk Maplecroft shows that more than one-fifth of major global cities face high risks of terrorism, conflict, crime or civil unrest.

Investment Monitor has analysed FDI projects in UNCTAD’s World Investment Report by destination in 2021 in line with Vision of Humanity’s 2021 Global Terrorism Index. While not showing an unequivocal link between levels of FDI and terrorism, the chart below shows a generally strong correlation between the two.

It is interesting to note that the three countries that attracted significantly higher numbers of FDI projects in 2021 all sit halfway through the terrorism index, suggesting that terrorism is not a deal-breaker alone when it comes in average proportions.

The US was the country that attracted the largest number of FDI projects by far – 1,671 – with a terrorism score of 4.96. It was followed by Germany and the UK with respective scores of 1,118/4.73 and 1,073/4.77.

Below the score of 4.7, there are no countries that did not manage to attract a single FDI project in 2021. That is where Palestine sits, with a score of 4.74 on the terrorism index and zero projects in its pocket.

Countries with a terrorism score of 7 and above all performed poorly in terms of FDI attraction, with the sole exception of India, which attracted 455 projects while having a 7.43 terrorism score.

Somalia and Afghanistan sit at the bottom of the ranking, with scores of 8.4 and zero projects, and 9.11 and zero projects, respectively. Afghanistan and Somalia are also at the bottom of the World Bank’s Political Stability and Absence of Violence scores, with 2.73 and 2.52, respectively.

India, however, which has a relatively high score in the risk of terrorism index, is a more politically stable country generally speaking with a score of 0.8 in the World Bank’s ranking. This, as well as other positive drivers playing in its favour, may explain why it still managed to attract a healthy number of FDI projects in 2021.

The three countries that attracted the highest levels of FDI in 2021 – the US, Germany and the UK – while sitting halfway through the terrorism index, all scored highly in the World Bank’s Political Stability ranking, at 0.02, 0.671 and 0.471, respectively.

With such a wide reach, conflict – or the possibility of conflict – should be carefully considered by MNCs when selecting a new FDI location.

This article is part of a series focusing on FDI drivers that are rising in importance in the post-Covid environment. The full list comprises:

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