Despite decades of violent conflict across countries like Afghanistan, Pakistan and Iraq, thousands of private sector firms are operating in those among other conflict-affected regions. As generators of jobs, incomes, profits, taxes and innovation, these firms are crucial not just to economic growth, but potentially to post-conflict peace agreements as well. Yet, they face significant obstacles to growth, according to a new report led by researchers at Princeton University.

This is one of several major findings in a report prepared by Princeton’s Empirical Studies of Conflict Project (ESOC) for the United Kingdom’s Department for International Development. Using firm-level data, the ESOC team examined private sector development in fragile states across the Middle East, North Africa and South Asia.

Among their major findings:

• Almost all businesses in conflict-affected countries pay for security;
• Insecurity and violence reduce access to credit, limiting firm growth;
• The effects of violence are persistent, continuing to reduce private sector investments even after the violence has ended.

“This is the first report on the private sector in conflict-affected countries to make intensive use of data,” said principal investigator Ethan Kapstein, associate director of ESOC at the Woodrow Wilson School of Public and International Affairs. “We empirically show that thousands of firms manage to operate in some of the world’s most conflict-intensive settings, but their growth is stunted by insecurity.”

“When we looked closely at data, there were some interesting surprises,” said Jacob N. Shapiro, professor of politics and international affairs at Princeton’s Woodrow Wilson School. “Firms in countries suffering intense civil wars paid no more in security than firms in countries where the fighting was less severe. This tells us private companies can manage the risks from conflict. The trick is to figure out how to help them do so.”

The report makes numerous recommendations, including using randomized control trials to assess the efficacy of various interventions aimed at private sector development; working more closely with academics on data collection and analysis; and rolling out programs in the safer parts of conflict-affected countries in order to create a “demonstration effect” for other regions. Much development spending, they noted, is targeted at the most violent parts of conflict-affected states.

The co-authors include other policy implications and suggestions in the report, which is titled, “Private Sector Development in Conflict Affected States: A Report to the U.K. Department for International Development.”

The ESOC Project compiles and analyzes micro-level conflict data on insurgency, civil war, and politically motivated violence worldwide. The group provides policymakers and war fighters with recommendations on how to respond to security threats.