Why This Question Matters
US economic sanctions aim to punish foreign governments by choking off resources and encouraging domestic disinvestment. David Lektzian and Glen Biglaiser probe an overlooked channel: what happens to foreign direct investment (FDI) from third-party countries when US firms pull out? The answer matters for debates about sanctions effectiveness and who ultimately bears their economic costs.
What the Authors Measure
Lektzian and Biglaiser compile a global panel of 171 countries from 1969 to 2000 to assess how US-imposed sanctions and related US firm disinvestment affect net inflows of FDI from non-US sources. The study is presented as the first empirical test of sanctions’ impact on global capital flows to targeted states.
Approach and Evidence
- The authors use panel data methods across four decades and a large cross-section of countries to estimate the relationship between episodes of US sanctions (and associated US disinvestment) and subsequent FDI into the targeted country.
- The analysis examines whether third-party investors replace withdrawn US capital and whether such replacement undermines the intended economic pressure of sanctions.
Key Findings
- When US firms disinvest during US sanctions, global FDI into the targeted country increases significantly.
- Third-party capital appears to offset much of the lost US investment, providing a reliable source of capital replacement for sanctioned regimes.
- These patterns imply limits to the ability of US sanctions to restrict access to international capital and suggest that US firms — rather than the intended foreign targets — may incur large economic costs.
What This Means for Policy and Research
The findings complicate the standard logic of economic sanctions: capital can be reallocated by other international investors, reducing sanctions’ bite. For policymakers, the results highlight a trade-off between signaling disapproval and inflicting economic pain on target countries. For scholars, the study opens new empirical questions about investor motives, the role of third-party states, and when sanctions succeed or fail in altering target behavior.
