Global sanctions, foreign direct investment, and global linkages: evidence from global data

Abstract

Using a rich and updated dataset on the Global Sanction Data Base (Felbermayr et al. “The Global Sanctions Data Base,” European Economic Review 2020; 129: 1–23), this study examines the effect of sanctions on FDI flows across 1,717 pairs of 66 countries during the 2000–2012 period and the role played by international linkages such as global value chains and global bank linkages in the sanction-FDI nexus. Results from the gravity model show that sanctions indeed have heterogenous effects on FDI flows when separate types of sanctions are put into consideration. They significantly reduce FDI flows in the pre- and during the crisis period. Both global value chains (GVCs) and global bank linkages (GBLs) play a moderating role in the sanction-FDI nexus, where the consequences of sanctions on FDI flows become more severe in the presence of these two types of international linkages. It is also found that GVCs signify the negative impacts of trade sanctions, while the GBLs can be regarded as a channel through which financial sanctions affect FDI flows more significantly. These findings bridge two strands of literature on sanctions and international linkages, where the latter is on the rise due to the worldwide presence of multinational corporations’ activities and the globalization of the financial markets.

KEYWORDS:

• Global economic sanctions
• foreign direct investment
• global value chains
• global bank linkages
• global financial crisis

JEL Classifications:

• F21
• G21
• O16
• C33

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The findings of this check could be provided by authors upon the request.

2 Backward participation is the value added of country B, contained in exports from country A to country B; forward participation is the value added of country A, which is embodied as intermediate goods that support the production of exports from country B to country C. For the second measure of global bank linkage, we use the aggregate number of the bank linkages of country i in country j and this is the sum of bank pairs in which banks in country i lend to those in country j. This measure is better than others such as cross-border flows of stocks and outstanding linkages since it bases on the long-term interbank relationship, which helps us capture the information acquisition of banks (Le et al. 2021).

3 We thank Caballero, Candelaria, and Hale (2018) for sharing the data.

4 As revealed by Poelhekke (2015) and Le et al. (2021), an incorporation of the pair country fixed effects can reduce a possibility that the globalization trend or historically established country ties may lead to the correlation between global economic sanctions and the flow of bilateral FDI.

5 For further checks on this finding, we employ alternative measures of global bank linkage, for example financial openness index from Chinn and Ito (2006). Our results confirm the conclusions. The results can be provided by authors upon the request.

6 For the robustness check, this article employs the use of the outstanding bank claims (Claims) available from the BIS database as an alternative measure of bank linkages. Our results confirm the conclusions. The results can be provided by authors upon the request.

7 Thank anonymous Reviewers for this suggestion.

8 These countries include Bahamas, Ireland, Hongkong, Luxembourg, Netherland, Panama, and Switzerland.

9 The detailed description of the PSM model is provided in Appendix B.