civil conflict. Countries with more intense violence in their past are much more likely to host firms that report being constrained by political instability. We illustrate this in two figures. Figure 11 shows the share of firms reporting that political instability is no constraint on the y-axis and the log of the sum of past battle related deaths per capita on the x-axis. Firms in countries like India, Turkey or Ethiopia with past violent episodes that were small compared to their population, report constraints close to the overall average. In these countries more than 50 percent report that instability is not a constraint on their activity. This changes dramatically in countries that were heavily affected by violence in the past. Firms in Yemen, South Sudan and Afghanistan are almost all somewhat constrained by political instability. In Figure 12 we show the share of firms reporting that political instability is the worst constraint. The share is increasing in past violence and, strikingly, is higher than 20 percent in the most heavily affected countries. We will return to this data after we have discussed a model of expectations in the following section.

# **6.3 Foreign Investment During Recovery**

Data on internal investments is quite patchy or nonexistent in a post conflict context. We therefore approach this issue from a foreign investment perspective. Foreign investments are both a proxy for investment more general and for the particular interest of foreigners in the local economy. We use four different datasets on foreign investments: a unique data set from the Dutch Central Bank, data from the OECD, data from the UNCTAD and data from the World Bank. Details are discussed in the appendix.

In what follows we focus on net-flows of foreign investments. These are relatively noisy compared to gross flows but we stick to them nonetheless for two reasons. First, it ensures comparability across investment from the different sources we use. Second, results can be interpreted directly as the net amount of foreign investment attracted by the country.

To give a first impression of investment flows Figure 13 plots mean positive net flows in conflict and recovery periods. The blue line shows the average investment in countries that were in their first ten years of recovery, i.e. after conflict ended.<sup>38</sup> The red line shows the average investment flow in the same set of countries but instead during the last ten years of conflict, i.e. before conflict ends.<sup>39</sup> The most obvious feature of this comparison is a large uptick in investment flows during recovery episodes after 2005. Average positive investment flows from OECD countries was over 500 million USD for most of this period and reaches a peak of 2.5 billion USD in year 2008. In contrast, average inflows during conflict episodes is generally lower than the average

> 38The definition of conflict we use here is based on battle related deaths PRIO/UCDP. A country is defined as being in conflict if it suffers more than 0.00008 deaths per capita. The recovery period is defined as the first 10 peacefull years after a conflict ends. Results are robust to variations of this period.

> 39We use the last five years as this autmatically means that the end of the conflict is in the sample period which makes the two curves comparable. The picture does not change qualitatively if we look a the entire conflict period. In order to make conflict flows more comparable to the recovery period we show the four-year lag of flows during conflict, i.e. the number for 2004 refers to average flows during the year 2000.

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