# **7 Conclusion**

Using firm-level data from Cˆote d’Ivoire, this paper has examined the heterogeneous impacts of political instability and violent conflict on firms in terms of efficiency loss. Our approach relies on a measure of firm TFP derived from structural estimates of the production function parameters. We argue that under fairly general structural assumptions, this TFP term contains the reduced form impact of several channels through which conflict might have affected firms, including (i) output loss due to looting and extortion, (ii) increasing shares of unproductive inputs for security purposes or due to idle capacity, and (iii) demand changes.

We find that the conflict reduces firm TFP substantially and having foreign ownership/employment magnifies the impact of conflict. The results are qualitatively similar when we control for endogeneity of foreign employment using instrumental variables or using an alternative procedure to estimate production functions. These results suggest that the nature of the conflict, which spurred increasing anti-foreigner sentiments, creates distortions that disproportionally affect foreign firms. In response, we find evidence of firms employing fewer foreigners to mitigate the conflict impact.

Given the importance of foreigners in general and of foreign investment in Cˆote d’Ivoire, our results suggest that recovery effort would have to entail restoring confidence in the state’s commitment and ability to protect the interests of foreign investments and employees. Moreover, increasing hostility and discrimination towards foreigners, as signaled by economic impacts, might further exacerbate the country’s already eroding social cohesion. Blattman and Miguel (2010) argue that if the costs are borne unequally across groups, conflict itself could intensify inequality and social discord, hence further aggravating factors that feed into the risk of conflict reoccurrence. In a society with a history of strong presence of immigrants and long standing social disparity between the north and the south like Cˆote d’Ivoire, this concern might prove to be important. Just before the Civil War started in 2002, a survey in major cities by PEW Global Attitudes Project found that 78% of the survey respondents rate “ethnic conflict” as a big problem facing the country. Indeed, the civil war that erupted the following year confirms that view.

Our research is also of relevance for other contexts because the type of conflict studied in Cˆote d’Ivoire - characterized by “low-intensity” but repeated cycle of unrest - has become common in many other developing countries. Understanding how the private sector is affected and adapts in these “no war no peace” situations is critical in understanding the role of instability in underdevelopment in a large part of the world. While this paper focuses on the specific conflict in Cˆote d’Ivoire and the negative implications it has for foreigners, our approach provides a useful framework to analyze conflicts/shocks in other contexts, which frequently impose asymmetric costs on different groups in the population.

A limitation with our data is that we do not observe directly the type and magnitude of losses that firms incurred due to the conflict. We have used several firm and industry characteristics to investigate potential mechanisms through which the conflict might have affected TFP. We find 25