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ID: 093822

How opportunity costs decrease the probability of war in an inc / Polachek, Solomon; Xiang, Jun

Xiang, Jun	Journal Article
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Publication

2010.

Summary/Abstract

This article shows that the opportunity costs resulting from economic interdependence decrease the probability of war in an incomplete information game. This result is strongly consistent with existing empirical analyses of the inverse trade-conflict relationship but is the opposite of the conclusion reached by Gartzke, Li, and Boehmer, who reject the opportunity cost argument in a game-theoretic framework. As a result of our findings, one cannot dismiss the opportunity cost argument as the explanation why trading nations fight less. Instead our study reaffirms the central position of opportunity costs as the basis for the inverse trade-conflict relationship, thus implying that one need not rely on signaling.

Key Words

Economic Interdependence ; Incomplete Information Game ; Trade - Conflict Relationship

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ID: 078977

Impact of foreign direct investment on international conflict / Polachek, Solomon; Seiglie, Carlos; Xiang, Jun

Polachek, Solomon	Journal Article
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Publication

2007.

Summary/Abstract

This paper extends the analysis of the conflict-trade relationship by introducing foreign direct investment (FDI). We present a formal model that shows why FDI can improve international relations. We then proceed to test the model empirically. Our empirical results show that foreign direct investment plays a similar role to trade in affecting international interactions. More specifically, we find that the flow of FDI has reduced the degree of international conflict and encouraged co-operation between dyads during the period of the late 1980s and the decade of the 1990s. This is an especially important result since one of the main characteristics of globalization has been the reduction of barriers to international capital flows and, as a consequence, the amounts of capital flows have expanded enormously dwarfing those of trade flows. The policy implication of our finding is that further international co-operation in reducing barriers to capital flows can promote a more peaceful world.

Key Words

International Cooperation ; FDI ; Foreign Direct Investment

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