Foreign Direct Investment is a source of financing that allows businesses to grow, which can be seen as a source of innovation that promotes energy efficiency. As mentioned in my previous writings due to geographical limitations, energy firms can only focus on specific regions to produce and extract energy. This limitation occurs in hydrocarbon resource extraction as well in the renewable energy sector. Precious earth minerals which used in the renewable energy sector- production of solar and wind panels’ are- usually located in the developing world.
In addition to resource richness, such regions generally provide more profit to companies due to less developed labor rights and regulations. When we compare the hourly wages that a company has to pay to its labors in developing states (ie, Zimbabwe) to its workers who do the same job in developed countries (ie, USA), choosing developing nations becomes more profitable for the firms. At the same time, such investments allow developing nations to improve their sectoral and economic development. To preserve their prestige and standards, international firms implement specific regulations like not allowing child labor. If they can manage to perform regulations in accordance with international labor and child law, they can also contribute to the development and the domestic stability of the home state, which gives us a win-win case. However, these hydrocarbon or rare-earth mineral-rich regions tend to fall into vulnerable zones category in terms of security in comparison to the developing world, which causes firms to hesitate or don’t create long term investment plans for the home state.
In the literature, some scholars argue that arm conflicts reduce FDI by increasing expected loss in return of the firms; thus, firms abandon regions where arm conflict exists. Armed conflicts indeed cause detrimental environments for business both in terms of product competitiveness and price competitiveness. Still, the liability of the state can cause investors to avoid all of these risks. If a home state guarantees the security of firms by either sending its military protection or allows other nations to provide security to the firm, like the fallow-the-fag effect, then it can attract more FDI’s.
Nevertheless, conflict may end before it reaches an intensified level. Also, from a different perspective, armed conflicts lead to markup in the prices, which increases firms’ profit. This scenario can last until the conflict gets intensified; when it started to impose unbearable dangers to firms, investors have to pull out of the market. In that sense, conflict zones become desirable regions for the energy companies.
Resilience and expectations of other firms, sectors is another blurry area. States who own oil, natural gas, and rare-earth minerals usually more vulnerable to civil wars due to their developmental scale. Due to geographical limitations, if a firm wants to invest in the energy sector, their expected risks will be automatically higher than a firm which invests in another industry like technology items. In terms of a country selection, a firm that works in the IT sector may have various options, but when it comes to energy sector regions and states that firms invest much more limited. On top of that, even though energy companies try to avoid investing in hydrocarbon related businesses in conflict zones, they can only resist up until a particular time when it comes to extracting rare earth minerals. Energy firms need these minerals to produce renewable energy technologies because of the increasing demand for renewables due to state energy security concerns.