In addition, other factors might lead to changes in their relative prices. Uncertainty in conflict situations might reduce the relative attractiveness of domestic investments leading to capital outflows, driving up the cost of capital. Inter-regional migration might either increase or decrease labor supply and consequently prices in a particular location. If there are severe disruptions in any factors of production, firms may find it optimal to change their technology altogether.<sup>6</sup> Even if capital, labor and technology do not change, conflict likely causes output/efficiency loss due to looting of output, bribe extortion or because businesses have to stop operating when there is a high risk of violence. Further, destruction of infrastructure and supply disruptions of intermediate inputs such as materials, electricity and other utilities can drive up the operating costs. There is anecdotal evidence of these effects in Cˆote d’Ivoire<sup>7</sup> . Firms’ operating costs might also increase because they have to pay for “non-productive” inputs for security purposes to protect their output and investments.<sup>8</sup> Another channel of impact is through demand effects. Conflict is often associated with reduced consumption due to reduced income. There are also potential changes in preferences. In the context of Cˆote d’Ivoire for example, anecdotal evidence suggests that some customers might divert their consumption away from foreign owned firms.

All these effects imply that the expected returns of investments may decrease. As a result, firms might reduce investments in both physical and human capital. Moreover, beyond these direct effects, conflict will likely increase uncertainty in terms of how demand will change and how much violence will happen in the future, leading to changes in investment dynamics.<sup>9</sup> Firms with bleak current and future prospects may opt out of the market. Heterogeneity in opportunity costs and all the effects discussed above will determine how the responses differ across firm owners. In fact, foreigners were reportedly leaving Cˆote d’Ivoire or looking to move their businesses elsewhere after the 1999 coup (BBC 2000b).

Quantifying and disentangling all these transmission channels is difficult, particularly without direct data on output/input losses or prices. We will present evidence in section 5 which suggests destruction of capital and labor is not severe. Our analysis employs a production function framework that uses available data on output and firm’s use of capital, labor and material inputs<sup>10</sup> to

> 6These effects have been documented empirically. Imai and Weinstein (2000) argue that reduced private investment by a process of portfolio substitution is a primarily channel through which war affects economic growth and find supporting evidence in cross-country data. Collier and Duponchel (2010) suggest firms in Sierra Leon switched to using inferior technology after the war due to severe shortages of skilled labor.

> 7Africa Research Bulletin (2001 and 2003) reports widespread looting and property destruction targeting businesses owned by West Africans and other foreigners after both the 1999 and 2002 coups.

> 8Cross-country enterprise surveys find that the costs of security technology and services represented 13 percent of sales in Senegal, South Africa, Tanzania, and Uganda, and 6 percent in Kenya (World Bank 2011).

> 9Bloom (2009) finds that uncertainty reduces investments because firms take a “wait and see” approach. Further, Bloom et al. (2007) note that the partial irreversibility of investment and fixed costs of hiring and firing influence the timing of actions and response to shocks. They find that firms with adjustment costs is much less responsive to demand shocks than firms not subject to the costs.

> 10It is also possible that firms might fudge their accounting figures to avoid extortion from the government. Without a secondary data source, we cannot identify this effect.

8