Conflict and Firms' Performance: A Global Perspective
The Policy Research Working Paper Series examines the impact of conflict exposure on firms' performance globally. Utilizing a comprehensive dataset from the World Bank's Enterprise Survey, this study analyzes over 153,000 firms across 91 countries from 2006 to 2019, excluding the influence of the COVID-19 pandemic. The dataset incorporates geolocalized firm data combined with information on political violence events, enabling a nuanced understanding of the microeconomic effects of conflict.
Key Findings:
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Impact of Conflict on Profits: Contrary to expectations, higher conflict exposure does not significantly affect firms' profits. This paradoxical outcome arises from a dual mechanism: a decrease in sales due to reduced availability of production inputs and informal competition, offset by a reduction in labor and other production costs.
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Mechanisms Behind the Effects:
- Input Access: Conflict restricts firms' access to intermediate inputs, particularly imported goods, and decreases electricity supply, leading to lower output.
- Market Competition: Conflict intensifies informal competition, compelling firms to cut costs by substituting skilled labor with unskilled labor.
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Country Characteristics and Conflict Impact:
- Quality of Bureaucracy: The negative effects of conflict exposure are more pronounced in countries with low-quality bureaucracies, affecting sales and profits. High-quality bureaucracies mitigate these impacts.
- Initial Conflict Status: For firms in countries that were initially at peace or not consistently in conflict, an increase in conflict exposure leads to greater reductions in input usage, electricity availability, and labor substitution, impacting sales and output.
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Global vs. Local Dynamics: There is no significant difference in the impact of conflict exposure between high-income and low-income countries, or between fragile and non-fragile states. However, significant heterogeneity emerges based on the quality of bureaucracy and the conflict status of the country.
In summary, this study offers a global perspective on the complex relationship between conflict exposure and firms' performance, highlighting the dual impact of conflict on sales and costs, and the differential effects based on country characteristics. The findings underscore the importance of considering microeconomic dynamics in conflict-affected regions and the potential benefits of efficient governance in mitigating the adverse effects of conflict.
