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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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2011-004.

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Date of creation: 2011
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Handle: RePEc:fip:fedlwp:2011-004

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Keywords: Investments; Foreign ; Terrorism ; Foreign aid program;

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References

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  1. 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, 07.
  2. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
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Cited by:
  1. Wim Naudé, 2011. "Foreign Aid for Innovation: The Missing Ingredient in Private Sector Development?," Working Papers 2011/35, Maastricht School of Management.
  2. Subhayu Bandyopadhyay & Sajal Lahiri & Javed Younas, 2011. "Should easier access to international credit replace foreign aid?," Working Papers 2011-023, Federal Reserve Bank of St. Louis.
  3. Azam, Jean-Paul & Thelen, Véronique, 2012. "Where to Spend Foreign Aid to Counter Terrorism," IDEI Working Papers 725, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. 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.
  5. Subhayu Bandyopadhyay & Todd Sandler, 2011. "Immigration policy and counterterrorism," Working Papers 2011-012, Federal Reserve Bank of St. Louis.

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