intensity of conflict is not driven by the level or structure of local economic activity, nor is the occurrence or intensity of conflict events systematically related to firm characteristics. We also show that our results remain robust across several alternative specifications. These include controlling for placebo firm exposure to account for potential non-random assignment of conflict events, restricting the estimation sample to clean controls, and incorporating the conflict exposure of suppliers and buyers to address potential violations of the SUTVA. Moreover, we address the possibility that our findings are driven by selection on unobservables. Finally, we show that our conclusions are robust to a range of sample restrictions, alternative definitions of conflict exposure—including variations in buffer size, time window, event type, and data source—as well as to different choices for clustering standard errors.

Next, we explore the mechanisms through which conflict exposure reduces sales and total costs, ultimately leading to a decline in output. We first show that conflict leads to a reduction in firms’ purchases of intermediate inputs and raw materials—both domestic and imported—as well as electricity. Given that prices are unlikely to decrease during periods of conflict, this offers indirect evidence that firms are purchasing fewer production inputs. Furthermore, conflict disrupts access to these inputs by increasing import clearance times and intensifying both the frequency and duration of power outages, further contributing to the decline in output. In addition, conflict heightens competitive pressure from informal firms. Since such competition reduces output, employment, and investment among formal firms, this channel further helps to explain the observed decline in sales.

Faced with these pressures, firms respond by adjusting their cost structures to maintain profitability. While limited access to inputs mechanically lowers expenditures, firms also reduce labor costs by substituting skilled workers with unskilled ones. We also find that conflict reduces sales by decreasing both domestic and foreign demand. In contrast, other potential channels—such as increased credit constraints, corruption, or crime—do not appear to explain our findings. Taken together, these findings indicate that conflict reduces sales through lower output, intensified informal competition, and diminished demand, while profits remain stable due to firms’ adaptive cost-cutting responses.

A key advantage of using a harmonized global dataset is the ability to compare the effects of conflict on firms across countries with different structural and institutional characteristics. Our results show no meaningful heterogeneity in the effects of conflict exposure across countries with varying levels of per capita income, state fragility, or dependence on agriculture and natural resources. However, we do find substantial variation along other dimensions. Conflict exposure has more negative effects—reducing both sales and profits—for firms operating in countries with lower economic complexity, greater openness to international trade, lower bureaucratic quality, higher levels of corruption, or involvement in the production of illegal drugs. Importantly, the impact of conflict also differs depending on a country’s initial conflict status. Higher conflict exposure reduces both 2