Following the Flag: Troop Deployment and U.S. Foreign Direct Investment

Abstract

In contrast to the 19th and early 20th centuries, the effects of security factors on foreign direct investment (FDI) have received limited interest in the post-Cold War era. Using panel data for 126 developing countries between 1966 and 2002, and controlling for macroeconomic conditions, economic reforms, and level of democratization, this essay tests the effects of “follow the flag” variables on U.S. FDI. Security factors can affect FDI in two stages: the initial decision over whether to invest and the second stage, which involves the amount invested. Our results indicate a selection effect and that follow the flag factors are influential both in the selection phase and in the main equation for U.S. investors. However, such results are not found for global investors, suggesting that positive links between economic and security goals only hold for U.S. firms.