Skip to main content

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

  • Colin M. Barry and Katja B. Kleinberg

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.

Hide All
Alchian, Armen A., and Demsetz, Harold. 1972. Production, Information Costs, and Economic Organization. American Economic Review 62 (5):777–95.
Amuzegar, Jahangir. 1997. Adjusting to Sanctions. Foreign Affairs 76 (3):3141.
Andreas, Peter. 2005. Criminalizing Consequences of Sanctions: Embargo Busting and Its Legacy. International Studies Quarterly 49 (2):335–60.
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.
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.
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.
Bennett, D. Scott, and Stam, Allan C.. 2000. EUGene: A Conceptual Manual. International Interactions 26 (2):179204.
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.
Biglaiser, Glen, and DeRouen, Karl Jr. 2007. Following the Flag: Troop Deployment and US Foreign Direct Investment. International Studies Quarterly 51 (4):835–54.
Biglaiser, Glen, and Lektzian, David. 2011. The Effect of Sanctions on US Foreign Direct Investment. International Organization 65 (3):531–51.
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.
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.
Blonigen, Bruce A. 2005. A Review of the Empirical Literature on FDI Determinants. Atlantic Economic Journal 33 (4):383403.
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.
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.
Busse, Matthias, and Hefeker, Carsten. 2007. Political Risk, Institutions, and Foreign Direct Investment. European Journal of Political Economy 23 (2):397415.
Bussmann, Margit. 2010. Foreign Direct Investment and Militarized International Conflict. Journal of Peace Research 47 (2):143–53.
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.
Caruso, Raul. 2003. The Impact of International Economic Sanctions on Trade: An Empirical Analysis. Peace Economics, Peace Science, and Public Policy 9 (2):134.
Caves, Richard E. 2007. Multinational Enterprise and Economic Analysis. 3rd ed. Cambridge, UK: Cambridge University Press.
Chakrabarti, Avik. 2001. The Determinants of Foreign Direct Investment: Sensitivity Analyses of Cross-Country Regressions. Kyklos 54 (1):89114.
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.
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.
Coase, Ronald H. 1937. The Nature of the Firm. Economica 4 (16):386405.
Cortright, David, and Lopez, George A.. 2000. The Sanctions Decade: Assessing UN Strategies in the 1990s. Boulder, CO: Lynne Rienner.
Cox, Ronald W. 1994. Power and Profits: US Foreign Policy in Central America. Lexington: University Press of Kentucky.
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.
Dunning, John H. 1981. International Production and the Multinational Enterprise. London: Allen and Unwin.
Dunning, John H., Kogut, Bruce M., and Blomstrom, Magnus. 1990. Globalization of Firms and the Competitiveness of Nations. Lund, Sweden: Lund University Press.
Early, Bryan R. 2009. Sleeping with Your Friends’ Enemies: An Explanation of Sanctions-Busting Trade. International Studies Quarterly 53 (1):4971.
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.
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.
Evans, Peter. 1979. Dependent Development: The Alliance of Multinational, State, and Local Capital in Brazil. Princeton, NJ: Princeton University Press.
Farmer, Richard D. 2000. Costs of Economic Sanctions to the Sender. World Economy 23 (1):93117.
Gleditsch, Kristian Skrede. 2002. Expanded Trade and GDP Data. Journal of Conflict Resolution 46 (5):712–24.
Henisz, Witold J. 2002. The Institutional Environment for Infrastructure Investment. Industrial and Corporate Change 11 (2):355–89.
Hirschman, Albert O. 1980 [1945]. National Power and the Structure of Foreign Trade. Berkeley: University of California Press.
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.
Hufbauer, Gary C., Schott, Jeffrey J., Elliot., Kimberly A., and Oegg, Barbara. 2007. Economic Sanctions Reconsidered. 3rd ed. Washington, DC: Institute for International Economics.
Jakobsen, Jo, and de Soysa, Indra. 2006. Do Foreign Investors Punish Democracy? Theory and Empirics, 1984–2001. Kyklos 59 (3):383410.
Jensen, Nathan. 2003. Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment. International Organization 57 (3):587616.
Jensen, Nathan. 2006. Nation-States and the Multinational Corporation: Political Economy of Foreign Direct Investment. Princeton, NJ: Princeton University Press.
Jensen, Nathan. 2008. Political Risk, Democratic Institutions, and Foreign Direct Investment. Journal of Politics 70 (4):1040–52.
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.
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.
Jones, Geoffrey. 2005. Multinationals and Global Capitalism. New York: Oxford University Press.
Kaempfer, William H., and Lowenberg, Anton D.. 1999. Unilateral Versus Multilateral International Sanctions: A Public Choice Perspective. International Studies Quarterly 43 (1):3758.
Kobrin, Stephen J. 1989. Enforcing Export Embargoes Through Multinational Corporations: Why Doesn't It Work Anymore? Business in the Contemporary World (Winter):31–42.
Leblang, David. 2010. Familiarity Breeds Investment: Diaspora Networks and International Investment. American Political Science Review 104 (3):584600.
Lektzian, David, and Biglaiser, Glen. 2013. Investment, Opportunity, and Risk: Do US Sanctions Deter or Encourage Global Investment? International Studies Quarterly 57 (1):6578.
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.
LexisNexis, . 2012. Corporate Affiliations Online Database. Available at <> Accessed March–September 2012.
Li, Quan. 2006. Democracy, Autocracy, and Tax Incentives to Foreign Direct Investors: A Cross-National Analysis. Journal of Politics 68 (1):6274.
Li, Quan, and Resnick, Adam. 2003. Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries. International Organization 57 (1):175211.
Li, Quan, and Vashchilko, Tatiana. 2010. Dyadic Military Conflict, Security Alliances, and Bilateral FDI Flows. Journal of International Business Studies 41:765–82.
Lindell, Erik. 1986. Foreign Policy Export Controls and American Multinational Corporations. California Management Review 28 (4):2739.
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.
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.
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.
Morgan, T. Clifton, and Bapat, Navin A.. 2003. Imposing Sanctions: States, Firms, and Economic Coercion. International Studies Review 5 (4):6579.
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.
Neumayer, Eric, and Spess, Laura. 2005. Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries? World Development 33 (10):1567–85.
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.
Noorbakhsh, Farhad, Paloni, Alberto, and Yousseff, Ali. 2001. Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence. World Development 29 (9):15931610.
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.
O'Donnell, Guillermo. 1978. Reflections on the Patterns of Change in the Bureaucratic Authoritarian State. Latin American Research Review 13 (1):338.
Oneal, John R. 1994. The Affinity of Foreign Investors for Authoritarian Regimes. Political Research Quarterly 47 (3):565–88.
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.
Resnick, Adam L. 2001. Investors, Turbulence, and Transition: Democratic Transition and Foreign Direct Investment in Nineteen Developing Countries. International Interactions 27 (4):381–98.
Rodman, Kenneth A. 2001. Sanctions Beyond Borders: Multinational Corporations and US Economic Statecraft. Lanham, MD: Rowman and Littlefield.
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.
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.
Tomz, Michael. 2007. Reputation and International Cooperation: Sovereign Debt Across Three Centuries. Princeton, NJ: Princeton University Press.
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.
United Nations Conference on Trade and Development (UNCTAD). 2011. World Investment Report 2011. New York: UNCTAD.
Van Bergeijk, Peter A.G. 1995. The Impact of Economic Sanctions in the 1990s. World Economy 18 (3):443–55.
Van Bergeijk, Peter A.G. 2009. Economic Diplomacy and the Geography of International Trade. Cheltenham, UK: Edward Elgar.
Vernon, Raymond. 1971. Sovereignty at Bay: The Multinational Spread of US. Enterprises. New York: Basic Books.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

International Organization
  • ISSN: 0020-8183
  • EISSN: 1531-5088
  • URL: /core/journals/international-organization
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
Type Description Title
Supplementary materials

Barry and Kleinberg supplementary material
Barry and Kleinberg supplementary material 2

 Unknown (2.1 MB)
2.1 MB
Supplementary materials

Barry and Kleinberg supplementary material
Web Appendix

 Word (48 KB)
48 KB
Supplementary materials

Barry and Kleinberg supplementary material
Barry and Kleinberg supplementary material 1

 Unknown (7 KB)
7 KB


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed