to firms serving domestic customers, making it unlikely that a reduction in consumer demand alone explains our results.

Next, we explicitly examine heterogeneities based on firms’ export status. Results in column 2 show that the negative impact of conflict on sales is smaller for exporting firms, and column 3 indicates that this mitigating effect increases with the export share in total sales. However, even for firms that export 100% of their output, the effect remains economically and statistically significant. Our estimates suggest that a one-standarddeviation increase in nearby conflict events reduces median sales by approximately 2.7% for a firm exporting _all_ of its output. This implies that even firms with no domestic customer base are substantially affected by conflict occurring close to their location.<sup>27</sup> Finally, we analyze the effect of conflict on capacity utilization to further assess whether changes in demand could explain our findings. The WBES defines _Capacity utilization_ as the firm’s actual output expressed as a percentage of its maximum potential output using all available inputs, providing a useful proxy for identifying demand-driven fluctuations in production. Since a firm’s production capacity is directly tied to input availability, a drop in capacity utilization would suggest that firms are producing less in response to weaker demand. However, the results in Table A24, column 4, show that capacity utilization is not significantly affected by conflict exposure. This suggests that lower sales are unlikely to be the results of a limited use of installed production capacity, which would be the case if the firm is responding to a conflict induced reduction in demand.<sup>28</sup> Taken together, these results indicate that while demand-side factors may contribute in some cases, they are unlikely to be the main driver of the observed decline in firm performance.

# **4.2.5 Other obstacles to firms’ activity**

Next, we explore whether the decline in firms’ sales could be explained by a conflictinduced worsening of various obstacles to business activity. Table A25 provides little support for this explanation. Columns 1-4 report results for several potential barriers, including access to finance, corruption, transportation, and land availability. None of these are more likely to be reported as severe obstacles by firms more exposed to conflict, suggesting they do not significantly contribute to the observed decline in performance. Similarly, columns 5-7 show that the reduction in sales is not driven by conflict-induced increased exposure to crime (measured by losses due to theft), or higher costs or spending in security measures. Overall, these results indicate that the worsening of the business

> 27While it is possible that foreign buyers reallocate their sourcing away from firms located in conflictaffected countries (Korn and Stemmler, 2025), the finding that the negative effect on sales diminishes with the export share suggests that this type of substitution likely plays only a limited role in explaining the overall decline in sales among exporting firms.

> 28While it is theoretically possible that firms fully anticipate conflict-induced demand shocks and adjust input purchases accordingly, our findings—particularly the sharp (forced) decline in imported input use and electricity consumption (see Section 4.2.1)—suggest that conflict directly restricts firms’ ability to procure essential inputs.

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