Hostname: page-component-758b78586c-cmtlc Total loading time: 0 Render date: 2023-11-28T17:19:35.399Z Has data issue: false Feature Flags: { "corePageComponentGetUserInfoFromSharedSession": true, "coreDisableEcommerce": false, "useRatesEcommerce": true } hasContentIssue false

Profiting from Sanctions: Economic Coercion and US Foreign Direct Investment in Third-Party States

Published online by Cambridge University Press:  15 June 2015

Get access


Scholarship on the determinants of foreign direct investment (FDI) flows has produced valuable insights into the role of host state characteristics and home-host relations. This study draws attention to another factor in investment decisions—the political and economic relations that home and host states maintain with third-party states. More narrowly, we focus on how investors respond to their home-state's imposition of economic sanctions against a trading partner. Greater economic integration has allowed states to use economic sanctions more frequently in recent decades. At the same time, economic sanctions are thought to have a distorting effect on global trade and financial flows as firms and governments adjust to new constraints. We argue that as firms at home in the sanctioning state respond to coercive measures against a trading partner by looking for alternative sources of profit, they will shift investments to states that can provide indirect access to the sanctioned economy. In particular, those states that are perceived as prospective sanctions-busters—major trading partners of the sanctions target or states with a history of sanctions-busting behavior—will benefit disproportionately from the misfortune of others. We test this conjecture using data on US economic sanctions and global flows of US FDI from 1966 to 2000. The findings reveal that investor decision making in part responds to political developments beyond the home-host dyad.

Research Article
Copyright © The IO Foundation 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


Alchian, Armen A., and Demsetz, Harold. 1972. Production, Information Costs, and Economic Organization. American Economic Review 62 (5):777–95.Google Scholar
Amuzegar, Jahangir. 1997. Adjusting to Sanctions. Foreign Affairs 76 (3):3141.Google Scholar
Andreas, Peter. 2005. Criminalizing Consequences of Sanctions: Embargo Busting and Its Legacy. International Studies Quarterly 49 (2):335–60.Google Scholar
Askari, Hossein G., John Forrer, Hildy Teegen, and Yang, Jiawen. 2003. Case Studies of US Economic Sanctions: The Chinese, Cuban and Iranian Experience. Westport, CT: Praeger.Google Scholar
Bapat, Navin A., and Clifton, T. Morgan. 2009. Multilateral Versus Unilateral Sanctions Reconsidered: A Test Using New Data. International Studies Quarterly 53 (4):1075–94.Google Scholar
Barry, Colin M., Clay, K. Chad, and Flynn, Michael E.. 2013. Avoiding the Spotlight: Human Rights Shaming and Foreign Direct Investment. International Studies Quarterly 57 (3):532–44.Google Scholar
Bennett, D. Scott, and Stam, Allan C.. 2000. EUGene: A Conceptual Manual. International Interactions 26 (2):179204.Google Scholar
Biglaiser, Glen, and DeRouen, Karl Jr. 2006. Economic Reforms and Inflows of Foreign Direct Investment in Latin America. Latin American Research Review 41 (1):5175.Google Scholar
Biglaiser, Glen, and DeRouen, Karl Jr. 2007. Following the Flag: Troop Deployment and US Foreign Direct Investment. International Studies Quarterly 51 (4):835–54.Google Scholar
Biglaiser, Glen, and Lektzian, David. 2011. The Effect of Sanctions on US Foreign Direct Investment. International Organization 65 (3):531–51.Google Scholar
Blanton, Shannon Lindsey, and Blanton, Robert G.. 2007. What Attracts Foreign Investors? An Examination of Human Rights and Foreign Direct Investment. Journal of Politics 69 (1):143–55.Google Scholar
Blanton, Shannon Lindsey, and Blanton, Robert G.. 2009. A Sectoral Analysis of Human Rights and FDI: Does Industry Type Matter? International Studies Quarterly 53 (2):469–93.Google Scholar
Blonigen, Bruce A. 2005. A Review of the Empirical Literature on FDI Determinants. Atlantic Economic Journal 33 (4):383403.Google Scholar
Blonigen, Bruce A., and Wang, Miao. 2005. Inappropriate Pooling of Wealthy and Poor Countries in Empirical FDI Studies. In Does Foreign Direct Investment Promote Development, edited by Moran, Theodore H., Graham, Edward M., and Blomström, Magnus, 221–44. Washington, DC: Pearson Institute.Google Scholar
Burbridge, John B., Magee, Lonnie, and Robb, A. Leslie. 1988. Alternative Transformations to Handle Extreme Values of the Dependent Variable. Journal of the American Statistical Association 83 (401):123–27.Google Scholar
Busse, Matthias, and Hefeker, Carsten. 2007. Political Risk, Institutions, and Foreign Direct Investment. European Journal of Political Economy 23 (2):397415.Google Scholar
Bussmann, Margit. 2010. Foreign Direct Investment and Militarized International Conflict. Journal of Peace Research 47 (2):143–53.Google Scholar
Büthe, Tim, and Milner, Helen V.. 2008. The Politics of Foreign Direct Investment into Developing Countries: Increasing FDI Through International Trade Agreements? American Journal of Political Science 52 (4):741–62.Google Scholar
Caruso, Raul. 2003. The Impact of International Economic Sanctions on Trade: An Empirical Analysis. Peace Economics, Peace Science, and Public Policy 9 (2):134.Google Scholar
Caves, Richard E. 2007. Multinational Enterprise and Economic Analysis. 3rd ed. Cambridge, UK: Cambridge University Press.Google Scholar
Chakrabarti, Avik. 2001. The Determinants of Foreign Direct Investment: Sensitivity Analyses of Cross-Country Regressions. Kyklos 54 (1):89114.Google Scholar
Chan, Steve, and Mason, Melanie. 1992. Foreign Direct Investment and Host Country Conditions: Looking from the Other Side Now. International Interactions 17 (3):215–32.Google Scholar
Choi, Seung-Whan, and Samy, Yiagadeesen. 2008. Reexamining the Effect of Democratic Institutions on Inflows of Foreign Direct Investment in Developing Countries. Foreign Policy Analysis 4 (1):83103.Google Scholar
Coase, Ronald H. 1937. The Nature of the Firm. Economica 4 (16):386405.Google Scholar
Cortright, David, and Lopez, George A.. 2000. The Sanctions Decade: Assessing UN Strategies in the 1990s. Boulder, CO: Lynne Rienner.Google Scholar
Cox, Ronald W. 1994. Power and Profits: US Foreign Policy in Central America. Lexington: University Press of Kentucky.Google Scholar
Crenshaw, Edward. 1991. Foreign Investment as a Dependent Variable: Determinants of Foreign Investment and Capital Penetration in Developing Nations, 1967–1978. Social Forces 69 (4):1169–82.Google Scholar
Dunning, John H. 1981. International Production and the Multinational Enterprise. London: Allen and Unwin.Google Scholar
Dunning, John H., Kogut, Bruce M., and Blomstrom, Magnus. 1990. Globalization of Firms and the Competitiveness of Nations. Lund, Sweden: Lund University Press.Google Scholar
Early, Bryan R. 2009. Sleeping with Your Friends’ Enemies: An Explanation of Sanctions-Busting Trade. International Studies Quarterly 53 (1):4971.Google Scholar
Early, Bryan R. 2011. Unmasking the Black Knights: Sanctions Busters and Their Effects on the Success of Economic Sanction. Foreign Policy Analysis 7 (4):381402.Google Scholar
Early, Bryan R. 2012. Alliances and Trade with Sanctioned States: A Study of US Economic Sanctions, 1950–2000. Journal of Conflict Resolution 56 (3):547–72.Google Scholar
Evans, Peter. 1979. Dependent Development: The Alliance of Multinational, State, and Local Capital in Brazil. Princeton, NJ: Princeton University Press.Google Scholar
Farmer, Richard D. 2000. Costs of Economic Sanctions to the Sender. World Economy 23 (1):93117.Google Scholar
Gleditsch, Kristian Skrede. 2002. Expanded Trade and GDP Data. Journal of Conflict Resolution 46 (5):712–24.Google Scholar
Henisz, Witold J. 2002. The Institutional Environment for Infrastructure Investment. Industrial and Corporate Change 11 (2):355–89.Google Scholar
Hirschman, Albert O. 1980 [1945]. National Power and the Structure of Foreign Trade. Berkeley: University of California Press.Google Scholar
Hufbauer, Gary C., Elliott, Kimberly A., Cyrus, Tess, and Winston, Elizabeth. 1997. US Economic Sanctions: Their Impact on Trade, Jobs, and Wages. Working Paper. Washington, DC: Institute for International Economics.Google Scholar
Hufbauer, Gary C., Schott, Jeffrey J., Elliot., Kimberly A., and Oegg, Barbara. 2007. Economic Sanctions Reconsidered. 3rd ed. Washington, DC: Institute for International Economics.Google Scholar
Jakobsen, Jo, and de Soysa, Indra. 2006. Do Foreign Investors Punish Democracy? Theory and Empirics, 1984–2001. Kyklos 59 (3):383410.Google Scholar
Jensen, Nathan. 2003. Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment. International Organization 57 (3):587616.Google Scholar
Jensen, Nathan. 2006. Nation-States and the Multinational Corporation: Political Economy of Foreign Direct Investment. Princeton, NJ: Princeton University Press.Google Scholar
Jensen, Nathan. 2008. Political Risk, Democratic Institutions, and Foreign Direct Investment. Journal of Politics 70 (4):1040–52.Google Scholar
Jensen, Nathan M., Biglaiser, Glen, Li, Quan, Malesky, Edmund, Pinto, Pablo M., Pinto, Santiago M., and Staats, Joseph L.. 2012. Politics and Foreign Direct Investment. Ann Arbor: University of Michigan Press.Google Scholar
Jensen, Nathan, and Young, Daniel J.. 2008. A Violent Future? Political Risk Insurance Markets and Violence Forecasts. Journal of Conflict Resolution 52 (4):527–47.Google Scholar
Jones, Geoffrey. 2005. Multinationals and Global Capitalism. New York: Oxford University Press.Google Scholar
Kaempfer, William H., and Lowenberg, Anton D.. 1999. Unilateral Versus Multilateral International Sanctions: A Public Choice Perspective. International Studies Quarterly 43 (1):3758.Google Scholar
Kobrin, Stephen J. 1989. Enforcing Export Embargoes Through Multinational Corporations: Why Doesn't It Work Anymore? Business in the Contemporary World (Winter):31–42.Google Scholar
Leblang, David. 2010. Familiarity Breeds Investment: Diaspora Networks and International Investment. American Political Science Review 104 (3):584600.Google Scholar
Lektzian, David, and Biglaiser, Glen. 2013. Investment, Opportunity, and Risk: Do US Sanctions Deter or Encourage Global Investment? International Studies Quarterly 57 (1):6578.Google Scholar
Lektzian, David, and Biglaiser, Glen. 2014. The Effect of Foreign Direct Investment on the Use and Success of US Sanctions. Conflict Management and Peace Science 31 (1):7093.Google Scholar
LexisNexis, . 2012. Corporate Affiliations Online Database. Available at <> Accessed March–September 2012.+Accessed+March–September+2012.>Google Scholar
Li, Quan. 2006. Democracy, Autocracy, and Tax Incentives to Foreign Direct Investors: A Cross-National Analysis. Journal of Politics 68 (1):6274.Google Scholar
Li, Quan, and Resnick, Adam. 2003. Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries. International Organization 57 (1):175211.Google Scholar
Li, Quan, and Vashchilko, Tatiana. 2010. Dyadic Military Conflict, Security Alliances, and Bilateral FDI Flows. Journal of International Business Studies 41:765–82.Google Scholar
Lindell, Erik. 1986. Foreign Policy Export Controls and American Multinational Corporations. California Management Review 28 (4):2739.Google Scholar
Marshall, Monty G., Ted, Robert Gurr, and Jaggers, Keith. 2013. Polity IV Project: Political Regime Characteristics and Transitions, 1800–2012. Dataset Users’ Manual. Center for Systemic Peace. Available at <>. Accessed 26 May 2015..+Accessed+26+May+2015.>Google Scholar
Maxfield, Sylvia, and Nolt, James H.. 1990. Protectionism and the Internationalization of Capital: US Sponsorship of Import Substitution Industrialization in the Philippines, Turkey and Argentina. International Studies Quarterly 34 (1):4981.Google Scholar
McLean, Elena V., and Whang, Taehee. 2010. Friends or Foes? Major Trading Partners and the Success of Economic Sanctions. International Studies Quarterly 54 (2):427–47.Google Scholar
Morgan, T. Clifton, and Bapat, Navin A.. 2003. Imposing Sanctions: States, Firms, and Economic Coercion. International Studies Review 5 (4):6579.Google Scholar
Morgan, T. Clifton, Bapat, Navin A., and Krustev, Valentin. 2009. The Threat and Imposition of Economic Sanctions, 1971–2000. Conflict Management and Peace Science 26 (1):92110.Google Scholar
Neumayer, Eric, and Spess, Laura. 2005. Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries? World Development 33 (10):1567–85.Google Scholar
Nigh, Douglas. 1985. The Effect of Political Events on United States Direct Foreign Investment: A Pooled Time-Series Cross-Sectional Analysis. Journal of International Business Studies 16 (1):117.Google Scholar
Noorbakhsh, Farhad, Paloni, Alberto, and Yousseff, Ali. 2001. Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence. World Development 29 (9):15931610.Google Scholar
Nunnenkamp, Peter. 2002. Determinants of FDI in Developing Countries: Has Globalization Changed the Rules of the Game? Working Paper 1122. Kiel, Germany: Kiel Institute for World Economics.Google Scholar
O'Donnell, Guillermo. 1978. Reflections on the Patterns of Change in the Bureaucratic Authoritarian State. Latin American Research Review 13 (1):338.Google Scholar
Oneal, John R. 1994. The Affinity of Foreign Investors for Authoritarian Regimes. Political Research Quarterly 47 (3):565–88.Google Scholar
Polachek, Solomon, Seiglie, Carlos, and Xiang, Jun. 2007. The Impact of Foreign Direct Investment on International Conflict. Defense and Peace Economics 18 (5):415–29.Google Scholar
Resnick, Adam L. 2001. Investors, Turbulence, and Transition: Democratic Transition and Foreign Direct Investment in Nineteen Developing Countries. International Interactions 27 (4):381–98.Google Scholar
Rodman, Kenneth A. 2001. Sanctions Beyond Borders: Multinational Corporations and US Economic Statecraft. Lanham, MD: Rowman and Littlefield.Google Scholar
Root, Franklin R., and Ahmed, Ahmed A.. 1979. Empirical Determinants of Manufacturing Direct Foreign Investment in Developing Countries. Economic Development and Cultural Change 27 (4):751–67.Google Scholar
Signorino, Curtis S., and Ritter, Jeffrey M.. 1999. Tau-b or Not Tau-b: Measuring the Similarity of Foreign Policy Positions. International Studies Quarterly 43 (1):115–44.Google Scholar
Tomz, Michael. 2007. Reputation and International Cooperation: Sovereign Debt Across Three Centuries. Princeton, NJ: Princeton University Press.Google Scholar
Tuman, John P., and Emmert, Craig F.. 2004. The Political Economy of US Foreign Direct Investment in Latin America: A Reappraisal. Latin American Research Review 39 (3):928.Google Scholar
United Nations Conference on Trade and Development (UNCTAD). 2011. World Investment Report 2011. New York: UNCTAD.Google Scholar
Van Bergeijk, Peter A.G. 1995. The Impact of Economic Sanctions in the 1990s. World Economy 18 (3):443–55.Google Scholar
Van Bergeijk, Peter A.G. 2009. Economic Diplomacy and the Geography of International Trade. Cheltenham, UK: Edward Elgar.Google Scholar
Vernon, Raymond. 1971. Sovereignty at Bay: The Multinational Spread of US. Enterprises. New York: Basic Books.Google Scholar
Supplementary material: File

Barry and Kleinberg supplementary material

Barry and Kleinberg supplementary material 1

Download Barry and Kleinberg supplementary material(File)
File 7 KB
Supplementary material: File

Barry and Kleinberg supplementary material

Barry and Kleinberg supplementary material 2

Download Barry and Kleinberg supplementary material(File)
File 2 MB
Supplementary material: File

Barry and Kleinberg supplementary material

Web Appendix

Download Barry and Kleinberg supplementary material(File)
File 48 KB