Foreign Direct Investment, Aid, and Terrorism: An Analysis of Developing Countries

Federal Reserve Bank of St. Louis Working Paper No. 2011-004A

35 Pages Posted: 23 Jan 2011  

Subhayu Bandyopadhyay

Federal Reserve Bank of St. Louis - Research Division; IZA Institute of Labor Economics; West Virginia University

Todd M. Sandler

University of Texas at Dallas - School of Economic, Political and Policy Sciences, Department of Economics & Finance

Javed Younas

affiliation not provided to SSRN

Date Written: January 19, 2011

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.

Keywords: Foreign direct investment, Domestic and transnational terrorism, Foreign aid, Dynamic panel model

JEL Classification: D74, F21, F35

Suggested Citation

Bandyopadhyay, Subhayu and Sandler, Todd M. and Younas, Javed, Foreign Direct Investment, Aid, and Terrorism: An Analysis of Developing Countries (January 19, 2011). Federal Reserve Bank of St. Louis Working Paper No. 2011-004A. Available at SSRN: https://ssrn.com/abstract=1745142 or http://dx.doi.org/10.2139/ssrn.1745142

Subhayu Bandyopadhyay (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
PO Box 442
St. Louis, MO 63011
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

West Virginia University ( email )

Morgantown, WV 26506-6025
United States
304-293-7879 (Phone)
304-293-7061 (Fax)

Todd M. Sandler

University of Texas at Dallas - School of Economic, Political and Policy Sciences, Department of Economics & Finance ( email )

Richardson, TX 75083
United States

Javed Younas

affiliation not provided to SSRN ( email )

No Address Available

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