# **1 Introduction**

Conflict and political violence have become the _new normal_ in many developing and developed economies, with over 1.7 billion people worldwide living in fragile or conflictaffected countries. In 2024 alone, 167 countries reported incidents of political violence, with 50 facing extreme, high, or turbulent levels of conflict—resulting in more than 233,000 fatalities (ACLED, 2024).<sup>1</sup> Despite the severe suffering and disruption caused by political violence and conflict, economic activity continues. Economists and policymakers are increasingly interested in understanding how firms operate under such challenging conditions. A growing number of studies provide rigorous estimates of the effects of conflict on firm performance and offer in-depth analyses of the underlying mechanisms (see, e.g., Amodio and Di Maio, 2018; Couttenier et al., 2022; Korovkin and Makarin, 2023; Bernal et al., 2024). However, research on firm behavior in settings characterized by political violence and conflict remains limited to a small number of countries, and existing findings are largely countryand conflict-specific.

This paper is the first to provide a global perspective on the impact of conflict on a range of firm-level outcomes and the mechanisms underlying these effects. Moreover, by exploiting differences in cross-country characteristics, it shows how economic, institutional, and political factors shape the way in which firms cope with conflict exposure.

Our analysis relies on the combination of two main data sources. First, we use a confidential version of the global World Bank Enterprise Survey (WBES), which, beyond the rich firm-level data in the public version, includes geolocation information for each firm. We focus on its panel component, covering 89 countries from 2006 to 2019. Second, we draw on the Integrated Crisis Early Warning System (ICEWS) dataset to obtain geolocated data on conflict and political violence events in each country. This allows us to construct a firm-specific, time-varying measure of conflict exposure, which we use in a firm-level fixed-effects model to estimate the impact of conflict on several outcomes.

This study yields a number of empirical findings. We show that higher conflict exposure—as measured by the number of violent events occurring in the neighborhood around a firm—leads to a decline in both sales and spending on production inputs, indicating contradiction in output. These effects result in a null impact on profit for surviving firms. However, the estimated coefficient is consistently negative, and it becomes statistically significant in countries with particular characteristics, as detailed below We address several potential identification threats to the interpretation of our empirical results. First, we tackle the issue of reverse causality by showing that the local

> 1Political violence refers to the intentional use of power or force to achieve political objectives. It includes war and related violent conflicts, state violence, and similar acts carried out by organized groups WHO (2002). Throughout the paper, we use the terms exposure to political violence events and exposure to conflict-related events interchangeably.

1