What is it about?
Economic sanctions are widely used to influence countries’ political and strategic behaviour, but they can also affect economic outcomes. This study examines whether sanctions reduce Greenfield foreign direct investment (FDI)—new, long-term investments that create physical assets and jobs—in emerging markets and developing economies. Using a large bilateral (country-pair) dataset covering 110 investing countries and 113 host countries between 2003 and 2019, the paper analyses how different types of sanctions (financial, trade, arms, military, and travel) influence Greenfield FDI flows. The analysis distinguishes between sanctions imposed by the investing country itself and spillover effects on investment from other countries. The authors employ a structural gravity model with extensive fixed effects and robustness checks to isolate the impact of sanctions on investment decisions.
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Why is it important?
Greenfield FDI is especially important for developing economies because it supports capital formation, job creation, technology transfer, and long-run growth. Unlike mergers and acquisitions, Greenfield investments involve large sunk costs and long planning horizons, making them particularly sensitive to uncertainty. The study shows that: Sanctions significantly reduce Greenfield FDI, not only from the sanctioning country but also from third countries. Economic sanctions (financial and trade) have the largest and most persistent negative effects. Financial sanctions are especially damaging, with effects lasting beyond the year of imposition. Sanctions create negative spillovers, discouraging global investors more broadly rather than simply redirecting investment from sender to non-sender countries. These findings highlight an important trade-off: while sanctions may serve geopolitical objectives, they can unintentionally weaken investment and growth prospects in already vulnerable economies.
Perspectives
From a policy perspective, the results suggest that sanctions operate not only through trade restrictions but also through investment deterrence and heightened uncertainty. For host countries, sanctions reduce access to stable external finance precisely when development needs are greatest. For policymakers in sanctioning countries, the findings imply that financial sanctions are particularly powerful, but also potentially costly in terms of broader economic disruption. For multinational firms, the study underscores how sanctions increase the value of “waiting” rather than committing capital to long-term projects. Overall, the paper contributes new evidence by focusing specifically on Greenfield FDI and by demonstrating that sanctions can cool global investment flows well beyond the immediate sender–target relationship.
Dr. Usman Khalid
United Arab Emirates University
Read the Original
This page is a summary of: Do Sanctions Deter Greenfield FDI Inflows? An Empirical Investigation, Economic Modelling, December 2025, Elsevier,
DOI: 10.1016/j.econmod.2025.107421.
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