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Conflict and firm dynamics: some issues and some wishes

Michele Di Maio

In the past two decades, the literature on the economics of conflict has grown significantly in both quantity and quality due to the increasing availability of micro-level data sets. As a consequence, we now know much more about the effects of conflict on health, education and employment and about how, for instance, extremely poor health conditions or ethnic differences may facilitate the beginning and the persistence of conflict. However, very few contributions in the literature have focused on how a violent conflict may have an impact on firm dynamics and how firms’ activities may favour the onset of conflict. This is paradoxical given the centrality of firms’ performance in the process of economic development. In this sense, the economics of conflict literature seems to still lack a good understanding of the economic part of the story.

Curiously, the main constraint on the improvement of our knowledge on the relationship between violent conflict and firm dynamics is often not the availability of conflict data—which is now available for several conflicts—but instead that of firm-level data. Statistical agencies in conflict-ridden countries obviously have serious difficulties in collecting this data, but this is not the only reason for the scarcity of this information.

In the first place, entrepreneurs are usually more reluctant than households to divulge information, especially during a conflict. This is compounded by the unwillingness of some statistical agencies to share all the information they have, especially information related to the location of the firm which makes it almost impossible to carry out empirical analyses. The motivation for this behavior usually stems from the desire for confidentiality.

In most cases, this is a weak excuse since, even though the number of observations in an enterprise survey is significantly smaller than that of a typical household survey, it would be impossible to identify a specific firm. While this fact is absolutely clear to any researcher, it seems not to be so clear to several statistical agencies around the world.

Despite these difficulties, the relationship between conflict and economic activity is a fascinating field of research because heterogeneity is high both in terms of effects and in terms of the possible underlying mechanisms. In fact, as surprising as it may appear, it is not even obvious a priori if the effect of a conflict on firm dynamics will be positive or negative.

On the one hand, we would expect the conflict to negatively affect firm sales and growth. There are several possible reasons for this: decrease in local demand, reduction in supply of (skilled) workers, increased difficulties in buying inputs, reduction in the incentive to invest (given the higher risks), and so on.

On the other hand, firms can benefit from the conflict, directly or indirectly. In the first case, they may be producing inputs used in the conflict. In the second case, they may be selling goods that have become more scarce—and thus more expensive—because of the conflict. Thus, the sign and magnitude of the effect is far from obvious.

Disentangling the relationship between conflict and firm dynamics is not only interesting per se but it is also important because of its policy implications. In fact, policies to support firms are justified only if firm growth reduces conflict intensity. Moreover, which specific policies to implement would depend on the channels through which the economic environment and firm characteristics are affected by the conflict.

There is no doubt that the data-related difficulties mentioned above are a serious obstacle to our understanding of these important issues and to the possibility to suggest appropriate policies. Yet, some simple actions may improve the situation:

  • Integrate the existing, available data sets in order to facilitate cooperation among researchers
  • Standardize questionnaires in enterprise surveys, following the example of health and household surveys 
  • Act to facilitate the building of mutual trust between researchers and the statistical agencies managing the firm-level data

Despite the hurdles, the microeconomic analysis of the relationship between conflict and firm dynamics is definitely an intriguing and fascinating topic for research. The good news is that there is still a lot to be learned in this domain—and this is exactly what we, as researchers, (should) always look for.


This blog post is published as part of a collaborative partnership between SIPRI and Economists for Peace and Security (EPS).