Before 1982, few people in the UK would be able to point to the Falkland Islands on the map. However, this changed when Argentina’s military junta invaded the islands, signalling a new era for bilateral relations between the UK and Argentina.

Based in the South Atlantic Ocean, 500km away from the southern extremity of Argentina and 13,000km from the UK, the Falklands have been under British rule since 1833 (after a turbulent period in which the islands had French, British, Spanish and Argentine settlements), and the majority of its citizens have some level of British descent throughout this time.

However, in April 1982, Argentina’s president and military dictator Leopoldo Galtieri, one of the leading figures behind the country’s 1976 coup d’état, invaded the islands by force, and the UK Prime Minister Margaret Thatcher responded by sending a task force of more than 100 ships to retake the islands.

The conflict between the two countries quickly escalated into an undeclared war over the sovereignty of the Falkland Islands, or Islas Malvinas as the Argentinians called them, along with South Georgia and the South Sandwich Islands, which were also British Overseas Territories. During the 74-day conflict, more than 900 people were killed.

The conflict ended in June 1982, with Argentina surrendering and returning the islands to British control. Galtieri was then removed from power and Argentina was restored to a democracy. A festering feeling of injustice pervaded in Argentina, however, over the sovereignty of the islands, and further flashpoints have come through World Cup matches between England and Argentina over the following years, and in 2014, the British TV show Top Gear was forced to flee filming in Argentina when host Jeremy Clarkson drove a car with the registration number H982 FKL, something local authorities saw as a reference to the islands and the year of the war.

The UK retains sovereignty over the Falkland Islands, however, and its defence costs upwards of £60m ($66.49m) per year.

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By GlobalData

What was the Falklands conflict about?

Differing claims over the sovereignty of Falkland Islands drove the conflict between the UK and Argentina.

According to the House of Lords Library, “the British claim to sovereignty over the Falkland Islands is based on the argument that with the exception of two months of illegal occupation in 1982, Britain has continuously, peacefully and effectively inhabited and administered the islands since 1833. It also bases its case on the principle of self-determination, according to which the people of territories such as the Falklands have the right to choose their own future and status.” Argentina’s claim is based on it inheriting the islands when it declared independence from Spanish rule in the early 1800s, although it also states that its proximity to the islands should be a factor in it taking sovereignty of them.

However, by 1982, which flag flew over the Falklands capital of Port Stanley was more than just a sovereignty issue, and the Argentinian invasion was fuelled as much by nationalism, stoked up by the ruling military junta in the country, and also public opinion. Galtieri was looking for a way to distract Argentinians from the challenges that the country was facing and did not expect that the UK would be willing to enter a conflict over a series of small and little-known islands situated thousands of kilometres away.

However, the UK government was aware that not reacting to the Argentinian invasion would harm its standing with the public. Plagued by high unemployment figures, Thatcher had been struggling in the polls and was having difficulty in asserting her authority over her ruling Conservative Party. Criticisms over the proposed handover of Hong Kong to China, which was being negotiated in 1982 just as the Falklands War was flaring, had also made the government seem weak in the eyes of its critics, so entering what was seen as a winnable conflict, given the UK’s naval strength, was an alluring prospect.

It is frequently claimed that the oil reserves in Falkland Islands played some part in the conflict, but, in 1982, it was little mentioned and not considered a factor behind Galtieri’s claims. It played a key role in ensuring that tensions between the two countries have bubbled along ever since, however. Declassified British government documents reveal that UK ministers have expressed an interest in extracting oil in the Falklands Islands both prior to and following the conflict.

However, it would take several years for oil exploration in the area to take place due to issues such as the ongoing dispute over the sovereignty of the Falkland Islands, and suggestions of joint exploration largely being rejected.

Nevertheless, in 1996, seven production licences were awarded to 14 companies in the North Falkland Basin, and two years later there were six drilling projects in this area. Among the companies that operated drills in the North Falkland Basin were Hess, Lasmo, Lundin and Shell. More drills took place in the following years in several areas around the islands, including the North Falkland Basin, the Falkland Plateau Basin and in the South Falkland Basin.

Some of the drills resulted in the discovery of gas and oil, but concerns over the drill success rate, the local climate, the water depth, as well as the ongoing debate over the sovereignty of the islands meant investors were hesitant to commit to the doing business in the Falklands.

Nevertheless, the oil and gas exploration industry remains an attractive sector for investment in the islands, as well as a key sector in its economy, accounting for 3.4% of nominal gross domestic product in 2020, according to the Falkland Islands National Accounts.

Fishing and aquaculture is the largest economic activity in the islands, representing around 60% of nominal GDP. Other key sectors include public administration and defence, education and health.

Geopolitics and FDI relations between Argentina and the UK

Some 30 or so years after the conflict, in 2013, the Falkland Islands government held a referendum regarding the sovereignty of the Falkland Islands, and 99.8% of the local population voted to remain a British Overseas Territory. However, some still question whether a shared sovereignty would have been possible if hadn't invaded the islands in 1982. Indeed, there had been some political movements in the UK from the 1960s onwards to cede some rights over the Falklands' sovereignty in the direction of Argentina.

In many respects, the timing of Argentina's invasion could not have been worse. The UK was negotiating a deal to hand Hong Kong over to China – a move it would later claim demonstrated its willingness to part with some of its colonial 'possessions' – in the early 1980s, as the once great global superpower watched its global status reduced. Meanwhile, the post-industrial decline that many of the country's cities were experiencing, along with the sectarian violence in Northern Ireland, created an air of tension and frustration across the UK. It was not in the mood for further humiliation on the world stage. A meek surrender of the islands' sovereignty was not an option.

There has been little appetite for negotiation in the country since the conflict either. The Falklands are viewed as a symbol of national pride by many – given that they represent the last military victory chalked up by the UK independent of any allies. For any politician to hint at striking a deal with Argentina, punishment at the ballot box would likely ensue.

The conflict between the two countries resulted in a fallout of diplomatic relations, which were only restored in 1990. Since then, there have been some foreign direct investment (FDI) flows from the one country to the other; however, analysis from Investment Monitor shows that the UK has tended to back fewer FDI projects in Argentina than it has in neighbouring countries such as Chile and Brazil, when looking at the three-year period between 2019 and 2021. UK-based investors were behind 12 projects in Argentina in that time, compared with 20 in Chile and 55 in Brazil.

This may not be a result of tensions over the Falkland Islands, however. Argentina’s hyperinflation and political instability are other factors that could put investors off the country.

Most of the FDI projects from British companies in Argentina were in sectors related to software and IT, business and professional services and tourism. There were also projects in communications and media, education, financial services, pharmaceuticals and coal, oil and gas.

Argentina-based investors only backed one project in the UK during this three-year period. This came in 2019, when cybersecurity company VU Security, which focuses on fraud prevention and identity protection, announced the opening of a new office in London.

It is rare that the discovery of oil makes an area less prone to conflict or dispute, but this has to be the hope for the Falkland Islands. There is room for collaboration between the UK and Argentina regarding the islands and the resources in their surrounding areas, but 40 years on, the war is still too raw a subject for many in both countries. The costs of the defence of the Falklands are something that the UK has rarely questioned, but as the conflict becomes more of a distant memory, and as costs and inflation rates continue to rise, this lax attitude to these millions being spent can't be guaranteed to last. The near-permanent febrile political atmosphere in both countries – in which nationalism has reared its ugly head in recent years – doesn't help the situation either. It seems unlikely that the Falklands will be in anything other than British hands for the foreseeable future, but if Argentina comes to the negotiating table with honey instead of vinegar, there may be some hope of an agreement that is suitable for both sides.