Terrorism and Political Instability Implications for Foreign Direct Investment: A Case Study of South and South East Asian Countries

In the late 20th and at the onset of 21st century the concept of capital-flow in the form of both, portfolio investment and foreign direct investment (FDI) flourished across many countries. This tendency became an important debate for researchers as to what are the factors responsible for such flows and what are the benefits associated with these flows, to the hosting countries. Much emphasis has however been placed on the economic factors, whereas, the non-economic determinants have generally been bypassed. The present study is an attempt to bridge the gap by emphasizing on both, the economic and non-economic factors with special focus on political instability and terrorism. The countries of South Asia and Southeast Asia are targeted for analysis. A panel data is employed for the period 1996-2010 covering most countries of the region. Findings of the study reveals that market size, exports of the host country, rising prices, and hence, the implicit profits, the level of human capital and financial sector development are important factors in attracting the FDI. In contrast, the dependency ratio, military expenditures, real exchange rate, high rate of domestic investment and high taxes are prominent impediments in the way of FDI flows to developing countries. In addition to these, the major findings of the study indicate that political instability and terrorism adversely affect the flow of FDI to the region. In other words, countries with stable political system and better law and order situation have succeeded in attracting large volume of the FDI flows.