Does Terrorism Affect Foreign Direct Investment?

The present work assesses the impact of terrorism suffered by a country directly and by neighbour countries on the capacity of attracting greenfield investment. To this end, we estimate a theoretical consistent structural gravity equation which accounts for most known estimation biases: “home bias”, endogeneity and multilateral resistance. We exploit a dataset which covers domestic and foreign investment of 162 countries during 2003-2016 in both extensive and intensive margins. Our methodological strategy allows us to identify the effect of a country-specific time-varying characteristic (terrorism), while controlling for time-varying multilateral resistance. Relative to domestic firm creation, results show that terrorism refrains more the number of greenfield projects. Then, our study highlights that foreign investors are reluctant to invest in a country or in a region affected by terrorism. Though, our results also evidence that good governance appears as an effective tool to counterbalance this damage.