Intrastate Conflict,War Finance,and the Expropriation of Foreign Firms

Abstract

Intrastate conflict is often identified to increase the risk of foreign asset expropriation due to heightened incentives for short-term economic gains. In this paper, we investigate this notion both theoretically and empirically, and refine the conventional wisdom by examining conditions under which intrastate conflict incentivizes a host government to expropriate foreign assets. We argue that intrastate conflict increases the risk of expropriation when the government’s capability to finance civil conflict is significantly constrained. The empirical results indicate that intrastate conflict has a positive effect on the expropriation risk only when the government’s war financing capabilities are substantially low due to a high level of external debt burdens. The findings show that host governments take a strategic approach in revenue generation and the capability to finance war is the key to understanding the relationship between conflict and expropriation.