How Rising Conflict Is Undermining Foreign Investment and Economic Growth

A new study by the International Finance Corporation (IFC), part of the World Bank Group, and King's College London reveals that armed conflict is doing far more than causing humanitarian suffering. It is also driving away foreign investment, reducing jobs, and slowing economic development. Using investment data from Financial Times' fDi Markets and Refinitiv Eikon, alongside conflict records from the Uppsala Conflict Data Program, the researchers examined how violence affected foreign direct investment (FDI) between 2003 and 2023.

Their findings show that conflict creates a powerful economic penalty, making it harder for countries to attract the foreign capital needed for growth and recovery.

Violence Means Fewer Investments and Jobs

Foreign direct investment is a key source of jobs, technology transfer, and economic growth. However, the study finds that countries experiencing conflict attract significantly fewer foreign investment projects than peaceful nations.

The impact goes beyond investment volumes. Conflict reduces the number of jobs created through foreign-funded projects, limits the range of sectors receiving investment, and discourages investors from multiple countries. In short, violence not only shrinks investment flows but also weakens economic diversification, making countries more vulnerable to future shocks.

The research also finds that investors have become increasingly sensitive to conflict in recent years, particularly since 2020, as geopolitical tensions have intensified worldwide.

Ukraine Shows the Long-Term Economic Damage

Ukraine offers a striking example of how conflict affects investment. The researchers compared Ukraine's actual investment performance after Russia's annexation of Crimea in 2014 with a statistical estimate of what might have happened without the conflict.

The results suggest Ukraine lost around 10,000 potential foreign investment-related jobs each year between 2014 and 2020. Over six years, that translated into roughly 60,000 jobs that were never created.

The case highlights how conflict can generate long-term economic costs long before reconstruction begins, affecting livelihoods, business confidence, and growth prospects for years.

Not All Conflicts Affect Investors the Same Way

The study found that the nature of conflict matters. Violence spread across large parts of a country has a stronger impact on investment than conflict confined to one area. Investors worry when instability disrupts transport networks, supply chains, and economic activity across multiple regions.

State-based conflicts, including civil wars and interstate wars, are the biggest deterrents because they threaten institutions, governance, and economic stability. Violence against civilians also significantly reduces investor confidence.

Some industries are more vulnerable than others. High-tech sectors such as semiconductors, biotechnology, and advanced manufacturing are among the most sensitive to instability because they rely on predictable policies and strong institutions. In contrast, oil, gas, and mining investments tend to be more resilient because companies are often willing to accept higher risks to access valuable natural resources.

The Economic Impact Spreads Across Borders

One of the study's most important findings is that conflict affects neighbouring countries as well. Even peaceful nations located next to conflict zones can experience declines in foreign investment.

Investors often view regional instability as a broader risk, choosing to avoid entire regions rather than just the countries directly affected by violence. This means the economic consequences of war can spread far beyond national borders, reducing growth opportunities across entire regions.

For policymakers, this highlights the importance of regional cooperation, cross-border security efforts, and diplomatic initiatives aimed at preventing conflicts from escalating.

A Clear Message for Policymakers

The study carries an important lesson for governments and development agencies: peace is an economic asset.

Conflict destroys infrastructure and lives, but it also discourages the investment needed to rebuild economies. As investors become increasingly cautious about geopolitical risks, governments seeking to attract investment must focus not only on economic reforms but also on strengthening institutions, improving security, and building investor confidence.

The findings also suggest that conflict prevention may deliver significant economic benefits. Investments in governance, social stability, and early-warning systems can help reduce conflict risks before violence erupts. For development partners and international financial institutions, the message is equally clear: peacebuilding and economic development should go hand in hand.

As global conflicts become more frequent, countries that can provide stability and predictability will be best positioned to attract investment, create jobs, and achieve sustainable growth. The study ultimately shows that maintaining peace is not just a humanitarian priority; it is increasingly becoming a prerequisite for economic prosperity.