Are multinationals afraid of social violence in emerging markets? : Evidence from the Indonesian provinces

Purpose – The fact that previous studies regarding the effects of social violence on foreign direct investment (FDI) flows come to contradictory conclusions motivates this paper. Therefore, it seeks to investigate the social violence‐FDI relationship in an ethnically heterogeneous and resource‐rich country, Indonesia. Design/methodology/approach – The theoretical framework of the paper examines the social violence‐FDI relationship and identifies the circumstances under which social violence in the host country adversely affects FDI inflows. The empirical analysis uses a unique dataset that consists of FDI flows and different types of social violence in 26 provinces of Indonesia during the period 1992‐2001. A fixed‐effects regression is applied to estimate the effects of social violence on FDI flows in Indonesian provinces. Findings – The results indicate that only certain types of social violence such as ethnic and industrial relations violence are detrimental to FDI. Multinational firms seem to differentiate among the several types of social violence and respond only to those that may affect their expected future profits. Practical implications – The immediate policy implication of this result implies that developing countries having the desire to attract FDI flows should be aware of the fact that multinational firms seem to differentiate among the several types of social violence and respond only to those that may affect their expected future profits. Originality/value – This paper contributes to the literature in two ways. First, the dataset employed in the empirical analysis is unique in that it contains different types of social violence and associated damage in a country. Second and because of the first point, the empirical findings provide an explanation of the conflicting results reported in the literature regarding the social violence‐FDI relationship.