TRADE, FOREIGN INVESTMENT, AND SECURITY

Trade interdependence does not always reduce hostility between states. It depends on whether the trade represents vulnerability or sensitivity interdependence. Portfolio investment also does not represent a tie that binds politically. Even more important, foreign direct investment (FDI) represents a link that is costly (and time-consuming) to break. Thus, FDI links between countries are more likely to reduce conflict than trading links. Evidence shows that symmetrical FDI is the most stable guarantor of low conflict between countries. One factor generating conflict may be that scarce factors of production are in political command. Abundant factors, now more generally in power among developed states, may be partly responsible for the diminishment of conflict among these states in recent years.