Under pressure. Global evidence on conflict and firms

This paper provides the first global analysis of the impact of conflict exposure on firm performance, combining geolocalized longitudinal firm-level data with information on political violence events across 89 countries between 2006 and 2019. Our results show that higher conflict exposure leads to declines in both sales and total costs, resulting in no significant effect on profits for surviving firms. The reduction in sales is driven by lower output, which reflects conflict-induced shortages of raw materials and production inputs, as well as increased informal competition. Firms respond to declining sales by adjusting labor costs, substituting skilled workers with unskilled ones. The negative effects of conflict on firms are more pronounced in countries that are more involved in international trade, have weaker institutions, infrastructure, and financial development, were initially at peace, or are characterized by more spatially diffuse conflict. In these settings, greater conflict exposure leads to reductions in both sales and profits.