The effect of foreign direct investment on the use and success of US sanctions

Abstract

Although the relationship between trade and the use and success of sanctions is frequently studied in international relations, researchers have generally failed to address the importance of foreign direct investment (FDI) on sanctions despite global capital markets dwarfing the exchange of goods and services. Using panel data for 171 countries from 1971 to 2000, we test the effect of FDI on the use and success of sanctions imposed by the USA. We find evidence that a high level of economic engagement in the form of US FDI as a percentage of the recipient county’s gross domestic product reduces the likelihood of the use of US sanctions. We also find that, when sanctions are imposed, declining US FDI generally has a positive and significant effect on sanctions success. However, if non-US firms offset lost US FDI, the probability of sanctions success decreases. The results show that investors may have an important influence on foreign policy outcomes.