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Does Foreign Direct Investment Encourage State Militarization and Reduce Societal Security? An Empirical Test, 1980–2017

Indra de Soysa

Abstract

Scholars debate the effects of foreign direct investment (FDI) on poor societies. Apparently, FDI could embolden governments to securitize rather than reform, an argument put forth recently by (Kishi, Roudabeh, Maggio, Guiseppe, & Raleigh, Clionadh. (2017). Foreign investment and state conflicts in Africa. Peace Economics, Peace Science and Public Policy, 23(3), https://doi.org/10.1515/peps-2017-0007) who supply evidence within a sample of Sub Saharan African countries showing that FDI increases the number of conflict events. This study takes a critical view of their argument on conceptual and methodological grounds. Using new data for the entire world as well as a sample of developing countries, this study directly tests securitization as militarization measured as military spending and the size of armed forces and finds that several alternative measurements of the stock and flow of FDI reduces militarization, results that are robust to fixed effects estimations, Heckman selection models, and models with and without controls for ongoing armed conflict and interstate tension. Testing an Africa-only sample yields no statistically significant effects either way, but compared to the global sample, an interaction of FDI in Africa does show a positive effect. This result, however, is substantively very slight compared with the net effect of the African region where military spending is unusually greater than in other regions, but size of armed forces are smaller. These results are replicated using a measure of societal security capturing more than just the absence of war as measured by the World Economic Forum’s data. If FDI increases security without increasing militarization, then FDI is potentially a sound source of finance for poor countries. Case-study-based research might usefully unpack the political economy of defence spending in Africa and identify precisely how TNCs can be implicated in the story. Our results show, however, that generally, FDI might actually reduce militarization while increasing societal security beyond just the absence of armed violence.

Appendix

Exhibit A. Intercorrelations among the variables.

Intercorrelation

1234567891011
1. Military exp./GDP1
2. Armed forces/labor0.62741
3. FDI stock/GDP−0.142−0.00661
4. FDI flow per cap.−0.02340.22920.60921
5. FDI flow/GDP−0.13290.0040.67880.66891
6. per capita income0.11960.37570.25250.7780.12891
7. population size0.0466−0.1583−0.3234−0.2661−0.3086−0.15781
8. Electoral democracy−0.3225−0.10510.15590.43760.08540.5245−0.09061
9. Civil war ongoing0.26760.1276−0.2089−0.2417−0.1643−0.22160.3537−0.23051
10. peace years−0.15340.0330.3350.48490.26140.459−0.37080.3379−0.56741
11. External peace−0.2377−0.11920.09310.19760.08770.2529−0.16070.3402−0.37760.31691

Exhibit B. Summary statistics.

Summary statistics

VariableObsMeanStd. Dev.MinMax
1. Military exp./GDP44571.0956660.494726603.566046
2. Armed forces/labor3459−0.0512340.9621307−5.9902632.610277
3. FDI stock/GDP44292.8844711.08349706.968076
4. FDI flow per cap.42613.9216762.163131−4.7877512.50372
5. FDI flow/GDP43741.1234420.8532921−4.9021155.534606
6. per capita income44568.3081141.5400434.88011911.62597
7. population size445716.275261.50132512.6912521.04997
8. Electoral democracy44570.52977070.27349220.0148550.9399808
9. Civil war ongoing44570.18263410.386409601
10. peace years445723.354518.57701057
11. External peace285110.076091.535854312

Exhibit C. List of WENAO countries.

Industrialized democracies

Australia
Austria
Belgium
Canada
Switzerland
Germany
Denmark
Spain
Finland
France
United Kingdom
Greece
Italy
Japan
Luxembourg
Netherlands
Norway
New Zealand
Portugal
Sweden
United States

Table 6:

Replication of Table 1 including external conflict as control

(1)(2)(3)(4)(5)(6)
lnmilexpgdplnmilexpgdplnmilexpgdplnarmforcelflnarmforcelflnarmforcelf
FDI inflow/GDP (ln)−0.02**−0.03**
(0.01)(0.01)
FDI inflow per capita (ln)−0.01**−0.03***
(0.00)(0.01)
FDI inward stock/GDP (ln)−0.03***−0.05***
(0.01)(0.02)
Income per capita (ln)0.020.030.020.20**0.25***0.26***
(0.04)(0.04)(0.04)(0.09)(0.08)(0.08)
Population size (ln)0.020.01−0.02−0.20*−0.15−0.24**
(0.06)(0.06)(0.05)(0.10)(0.10)(0.09)
Electoral democracy−0.04−0.03−0.01−0.20−0.20*−0.12
(0.07)(0.07)(0.07)(0.12)(0.12)(0.12)
External peace−0.01*−0.01−0.01*−0.01−0.02*−0.01
(0.00)(0.01)(0.00)(0.01)(0.01)(0.01)
Constant1.551.612.22**2.531.502.84
(1.09)(1.09)(1.04)(1.99)(1.94)(1.87)
Countries127127127128128128
Observations287028192965298329403088

  1. Standard errors in parentheses.

  2. ***p < 0.01, **p < 0.05, *p < 0.1.

Table 7:

Replication of Table 2 including external conflict as control

(1)(2)(3)(4)(5)(6)
Variableslnmilexpgdplnmilexpgdplnmilexpgdplnarmforcelflnarmforcelflnarmforcelf
FDI inflow/GDP (ln)−0.01*−0.02*
(0.01)(0.01)
FDI inflow per capita (ln)−0.01*−0.03***
(0.00)(0.01)
FDI inward stock/GDP (ln)−0.03***−0.05***
(0.01)(0.02)
Income per capita (ln)0.000.01−0.000.19**0.23***0.24***
(0.04)(0.04)(0.04)(0.09)(0.08)(0.08)
Population size (ln)−0.03−0.03−0.06−0.24**−0.20**−0.28***
(0.06)(0.06)(0.06)(0.10)(0.10)(0.09)
Electoral democracy−0.04−0.03−0.02−0.20*−0.20*−0.13
(0.07)(0.07)(0.07)(0.12)(0.12)(0.11)
External peace−0.01−0.00−0.00−0.01−0.02−0.01
(0.00)(0.00)(0.00)(0.01)(0.01)(0.01)
Civil War 0.07***0.07***0.07***0.050.07**0.04
(0.02)(0.02)(0.02)(0.04)(0.03)(0.04)
Years of civil peace−0.00***−0.00***−0.00***−0.00***−0.00***−0.00***
(0.00)(0.00)(0.00)(0.00)(0.00)(0.00)
Constant2.35**2.41**2.97***3.272.303.58*
(1.12)(1.12)(1.07)(2.05)(1.99)(1.93)
Countries127127127128128128
Observations287028192965298329403088

  1. Standard errors in parentheses.

  2. ***p < 0.01, **p < 0.05, *p < 0.1.

Table 8:

Replication of Table 3 including external conflict as control

(1)(2)(3)(4)
Variableslnmilexpgdplnarmforcelflnmilexpgdplnarmforcelf
Sub Saharan Africa dummy−0.27***−0.72***−0.23**−0.58**
(0.10)(0.21)(0.10)(0.24)
FDI stock GDP (ln)−0.04***−0.07***
(0.01)(0.02)
SS Africa × FDI stock/GDP0.04**0.05
(0.02)(0.03)
SS Africa × FDI flow/GDP0.04**0.10***
(0.02)(0.03)
FDI flow/GDP (ln)−0.02***−0.05***
(0.01)(0.02)
Income per capita (ln)−0.000.24***0.010.19**
(0.04)(0.08)(0.04)(0.09)
Population size (ln)−0.11*−0.32***−0.05−0.30***
(0.06)(0.09)(0.06)(0.10)
Electoral democracy−0.02−0.13−0.04−0.22*
(0.07)(0.11)(0.07)(0.12)
External peace−0.00−0.01−0.01−0.01
(0.00)(0.01)(0.00)(0.01)
Civil war0.07***0.040.07***0.02
(0.02)(0.04)(0.02)(0.03)
Years of peace−0.00***−0.00***−0.00***−0.00**
(0.00)(0.00)(0.00)(0.00)
Constant3.94***4.85***2.96***4.72**
(1.06)(1.77)(1.11)(1.91)
Countries127128127128
Observations2965308828702983

  1. Standard errors in parentheses.

  2. ***p < 0.01, **p < 0.05, *p < 0.1.

Table 9:

Replication of Table 4 including external conflict as control

(1)(2)(3)(4)
Variableslnmilexpgdplnarmforcelflnmilexpgdplnarmforcelf
lnfdikgdp−0.04***−0.04***
(0.01)(0.01)
lngdppc−0.050.15−0.030.13
(0.03)(0.09)(0.04)(0.11)
lnpop−0.15***−0.44***−0.07−0.37**
(0.05)(0.12)(0.05)(0.14)
v2x_polyarchy−0.09−0.06−0.09−0.14
(0.06)(0.09)(0.06)(0.09)
extpeace−0.02***−0.01−0.01***−0.00
(0.01)(0.01)(0.00)(0.01)
civilwar0.07***0.040.06***0.05
(0.01)(0.04)(0.01)(0.04)
peaceyrs−0.00***−0.00*−0.00***−0.00**
(0.00)(0.00)(0.00)(0.00)
year−0.00*−0.01−0.01***−0.02*
(0.00)(0.01)(0.00)(0.01)
lnfdigdp−0.03***−0.00
(0.01)(0.01)
Constant10.11***32.57**15.05***39.37***
(3.18)(13.95)(3.41)(14.40)
Observations2428255823642481
Number of groups106107106107

  1. Standard errors in parentheses.

  2. ***p < 0.01, **p < 0.05, *p < 0.1.

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Published Online: 2019-08-12

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