FDI and sanctions: An empirical analysis of short- and long-run effects

Although the relationship between trade and the success of international sanctions has been a topic of many debates in political economy over the past 30 years, the effect of sanctions on foreign direct investment (FDI) is still largely unexplored. Using the data for 184 countries from 1970 to 2010 and bias-corrected estimators, this study tests the effect of sanction imposition on foreign investment. I find that the effect of sanctions on foreign investment indeed changes over time, depending on sanction costs, primary sanction imposer, and decade. High-cost sanctions lead to a significant decrease in FDI in the short run, although they do not have a long-run effect. In many sanctions episodes in the 1990s, FDI has been negatively affected in the short run, although this effect has partially dissipated in the long run. Sanctions episodes from other decades, on average, did not have a significant effect on foreign investment.