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

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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