Does Conflict Reshape the Military–FDI Nexus? Evidence From a Dynamic Panel Analysis

This paper examines the relationship between military expenditure and foreign direct investment (FDI) inflows in 61 low‐ and middle‐income countries over 1990–2018, with a focus on how this relationship is shaped by conflict dynamics and institutional contexts. Using a dynamic panel estimator (Arellano–Bover/Blundell–Bond), we find that military expenditure has no significant effect on FDI in non‐conflict settings. During conflict, however, higher military spending is positively associated with FDI inflows, suggesting that foreign investors may interpret such spending as a signal of state commitment to security. This effect is concentrated in lower‐income and institutionally weaker countries, where military expenditure may substitute for weak governance as a signal to foreign investors. The effect is also strongest at conflict onset and in the early years of conflict but fades as conflicts persist. In addition, military expenditure increases FDI during minor conflicts but has no significant effect during major conflicts, and we find no evidence of anticipation effects from future conflicts. Overall, the results suggest that military spending can reassure investors in the short run under specific conflict conditions, but that its effectiveness weakens as conflict endures and does not replace broader institutional improvements.