Globalization and International Conflict: Can FDI Increase Peace?

This paper extends the analysis of the conflict-trade relationship by introducing foreign direct investment (FDI). We present a formal model that shows why FDI can improve international relations. We then proceed to test the model empirically. Our empirical results in fact show that foreign direct investment plays a similar role to trade in affecting international interactions. More specifically, we find that the flow of FDI has reduced the degree of international conflict and encouraged cooperation between dyads during the period of the late 1980 and the decade of the 90s. This is an especially important finding since one of the main characteristics of globalization has been the reduction of barriers to international capital flows. As a consequence, these have expanded enormously relative to trade flows. Finally, we also find that trade and FDI complement each other in reducing conflict. The policy implication of our finding is that further international cooperation in reducing barriers to both trade and capital flows can promote a more peaceful world.