Does Terrorism Affect Foreign Greenfield Investments?

This work assesses the impact of terrorism suffered by a country on the capacity to attract foreign greenfield investments. To this end, we estimate a theoretically consistent structural gravity equation which accounts for several well-known estimation biases such as 'home bias', endogeneity and multilateral resistance. This specification makes it possible to identify the effect of a country-specific time-varying characteristic such as terrorism on bilateral foreign direct investment. We exploit a dataset that covers domestic and foreign investment of 182 countries in the period 2006-2016 on both the extensive and intensive margins. Our study finds that foreign investors are reluctant to invest in countries affected by terrorism and also reduce the amount of their investments in such cases. Sensitivity to terrorism is higher for foreign than for domestic investors. Terrorist attacks have a more intense impact on foreign investors' decision-making when they are international or when these violent acts hurt governments. However, our results also evidence that good governance appears to be an effective tool for counterbalancing these damages in the eyes of foreign investors.