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Foreign direct investment, aid, and terrorism: an analysis of developing countries

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  • Subhayu Bandyopadhyay
  • Todd Sandler
  • Javed Younas

Abstract

Using a dynamic panel data framework, we investigate the relationship between the two major forms of terrorism and foreign direct investment (FDI). We then analyze how these relationships are affected by foreign aid flows. The analysis focuses on 78 developing countries for 1984- 2008. Our findings suggest that all types of terrorism depress FDI. In addition, aid mitigates the negative effects of total and domestic terrorism on FDI; however, this is not the case for transnational terrorism. This finding highlights that different forms of terrorism call for tailoring mitigating strategies. Foreign aid apparently cannot address the causes and supply lines of transnational terrorism. Aid?s ability to curb the risk to FDI for total and domestic terrorism is extremely important because (i) domestic terrorism is an overwhelming fraction of the total terrorism for many developing nations, and (ii) FDI is an important engine of development for these nations.

Suggested Citation

  • Subhayu Bandyopadhyay & Todd Sandler & Javed Younas, 2011. "Foreign direct investment, aid, and terrorism: an analysis of developing countries," Working Papers 2011-004, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2011-004
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    References listed on IDEAS

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    1. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    2. Philipp Harms & Matthias Lutz, 2006. "Aid, Governance and Private Foreign Investment: Some Puzzling Findings for the 1990s," Economic Journal, Royal Economic Society, vol. 116(513), pages 773-790, July.
    3. Axel Dreher & Noel Gaston & Pim Martens, 2008. "Measuring Globalisation," Springer Books, Springer, number 978-0-387-74069-0, February.
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    1. Heri Beziæ & Tomislav Galoviæ & Petar Miševiæ, 2016. "The key goal of this research is to empirically determine the effects of terrorism on FDI of the selected EU and EEA member countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 34(2), pages 333-362.
    2. Bandyopadhyay, Subhayu & Lahiri, Sajal & Younas, Javed, 2011. "Should Easier Access to International Credit Replace Foreign Aid?," IZA Discussion Papers 6024, Institute of Labor Economics (IZA).
    3. Bandyopadhyay, Subhayu & Sandler, Todd, 2014. "Immigration policy and counterterrorism," Journal of Public Economics, Elsevier, vol. 110(C), pages 112-123.
    4. Wim Naudé, 2011. "Foreign Aid for Innovation: The Missing Ingredient in Private Sector Development?," Working Papers 2011/35, Maastricht School of Management.
    5. Baba, Isa Abdullahi & Rihan, Fathalla A. & Hincal, Evren, 2023. "A fractional order model that studies terrorism and corruption codynamics as epidemic disease," Chaos, Solitons & Fractals, Elsevier, vol. 169(C).
    6. Nahil Boussiga & Malek Ghdamsi, 2016. "The Corruption-Terrorism Nexus: A Panel Data Approach," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(11), pages 111-117, November.
    7. Nahil Boussiga & Malek Ghdamsi, 2016. "The Corruption-Terrorism Nexus: A Panel Data Approach," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(11), pages 111-111, November.
    8. Hafiz Muhammad Abubakar Siddique & Rabia Liaqat & Kaleem Ullah, 2017. "Impact of Terrorism on Investment: Evidence from Pakistan," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 6(4), pages 195-199, December.
    9. Joseph Young & Michael Findley, 2011. "Can peace be purchased? A sectoral-level analysis of aid’s influence on transnational terrorism," Public Choice, Springer, vol. 149(3), pages 365-381, December.
    10. Azam, Jean-Paul & Thelen, Véronique, 2014. "Did the Aid Boom Pacify Sub-Saharan Africa?: Ex-Post Evaluation Using a Near-Identification Approach," TSE Working Papers 14-544, Toulouse School of Economics (TSE), revised Jun 2019.
    11. Subhayu Bandyopadhyay & Todd Sandler & Javed Younas, 2016. "Terrorism, Trade and Welfare: Some Paradoxes and a Policy Conundrum," Working Papers 2016-2, Federal Reserve Bank of St. Louis.
    12. Sule, Abubakar* & Mohammed, I.D & Wada, Yahaya, 2022. "Interrogating the Level of Unemployment, Insecurity and Its Implication on Foreign Direct Investment in Nigeria: ARDL and Granger Causality Approach," Noble International Journal of Economics and Financial Research, Noble Academic Publsiher, vol. 7(1), pages 10-23, 03-2022.
    13. Dong, Yan & Fan, Cijun, 2017. "The effects of China's aid and trade on its ODI in African countries," Emerging Markets Review, Elsevier, vol. 33(C), pages 1-18.
    14. Azam, Jean-Paul & Thelen, Véronique, 2012. "Where to Spend Foreign Aid to Counter Terrorism," TSE Working Papers 12-316, Toulouse School of Economics (TSE).

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    Keywords

    Investments; Foreign; Terrorism; Foreign aid program;
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