The Role of Foreign Direct Investment in Post-Conflict Economic Recovery and Peace-Building

Abstract Recently, post-conflict foreign direct investment (FDI) has garnered scholarly interest due to its potential for ending the “poverty-conflict trap” endured by many developing countries. However, few empirical studies have investigated whether FDI breaks such a vicious poverty-conflict cycle and, if so, how. Using intrastate armed conflict data from 1970 to 2019, where more than half the states experienced civil conflict recurrence, we test whether FDI curbs post-conflict onset through the mediation of economic recovery. Empirical results from two-stage generalized structural equation models appear to show that post-conflict FDI increases the magnitude of economic reconstruction and lessens grievances, indirectly decreasing the probability of conflict recurrence. Empirical findings also offer evidence in support of the mediation mechanism. We conclude that post-conflict FDI is a catalyst that could help war-torn countries escape the poverty-conflict trap.