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Following the Flag: Troop Deployment and U.S. Foreign Direct Investment


  • Author’s note: The authors would like to acknowledge the helpful comments of participants at the Political Economy of MNE Conference at Washington University, St. Louis in 2005 where an earlier version of this paper was presented. We also wish to thank Matthias Busse, Erik Gartzke, Doug Gibler, Nate Jensen, Junsoo Lee, Quan Li, Edmund Malesky, Monty Marshall, Guillermo Rosas, Marc Simon, Andy Sobel, Jeff Wooldridge, and the anonymous reviewers at ISQ. We are especially indebted to the keen insights of David D’Lugo. Please visit the ISA’s online data archive at for access to the data used in this article.


In contrast to the 19th and early 20th centuries, the effects of security factors on foreign direct investment (FDI) have received limited interest in the post-Cold War era. Using panel data for 126 developing countries between 1966 and 2002, and controlling for macroeconomic conditions, economic reforms, and level of democratization, this essay tests the effects of “follow the flag” variables on U.S. FDI. Security factors can affect FDI in two stages: the initial decision over whether to invest and the second stage, which involves the amount invested. Our results indicate a selection effect and that follow the flag factors are influential both in the selection phase and in the main equation for U.S. investors. However, such results are not found for global investors, suggesting that positive links between economic and security goals only hold for U.S. firms.