US Sanctions Often Boost, Not Block, Foreign Investment to Targeted Countries

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• The analysis examines whether third-party investors replace withdrawn US capital and whether such replacement undermines the intended economic pressure of sanctions.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.