Does terrorism affect greenfield investment? A structural gravity approach

This work assesses the impact of terrorism suffered by a country on the capacity of attracting greenfield investment. To this end, we estimate a theoretical consistent structural gravity equation which accounts for several well-known estimation biases such as “home bias”, endogeneity and multilateral resistance. This specification makes possible identifying the effect of a country-specific timevarying characteristic such as terrorism. We exploit a dataset which covers domestic and foreign investment of 182 countries during 2003-2016 on both, the extensive and intensive margins. Our study highlights that foreign investors are reluctant to invest in countries affected by terrorism and also reduce the amount of their investments in such cases. The sensitivity to terrorism is higher for foreign investors than for domestic ones. Terrorist attacks have a more intense impact on foreign investors’ decision when they come from international groups or when these violent acts hurt governments. Though, our results also evidence that good governance appears as an effective tool to counterbalance these damages in the eye of foreign investors.