Academic journal article Political Research Quarterly

The Impact of Transnational Terrorism on U.S. Foreign Direct Investment

Academic journal article Political Research Quarterly

The Impact of Transnational Terrorism on U.S. Foreign Direct Investment

Article excerpt

This article investigates the extent to which transnational terrorist attacks altered U.S. foreign direct investment (FDI). Time-series intervention analysis shows that 9/11 generally had little lasting influence on U.S. FDI flows. Only a few countries that experienced subsequent terrorist attacks displayed a post-9/11 drop in U.S. FDI flows, which, except for Turkey, was not long-lived. For a panel of countries, this study also examines the effect that terrorist attacks against U.S. interests had on the stock of U.S. FDI. Based on a methodology previously applied to the study of U.S. assets abroad, we find that such attacks had a significant, but small, impact on these stocks in OECD countries. Greece and Turkey displayed the largest declines-5.7 percent and 6.5 percent of their average U.S. FDI stocks, respectively. There was no such effect for non-OECD countries. Terrorist efforts to limit U.S. FDI have been cost-effective.

(ProQuest Information and Learning: ... denotes formulae omitted.)

Terrorist campaigns are intended to impose sufficient political and economic costs on a government so that it concedes, at least in part, to the political demands of the terrorists. In its May report, the Joint Economic Committee (2002) of the U.S. Congress details the various costs associated with terrorist attacks. In addition to the direct loss of human and nonhuman capital, the report characterizes increased security costs as a tax on the economy. The report also indicates that the risk of subsequent attacks ". . . induces investors, for example, to move out of riskier assets, ... as well as commitments for long-term investments. . ." (Joint Economic Committee 2002: 2). Some terrorists seek to reduce U.S. foreign direct investment (FDl) to hurt not only U.S. investors but also those countries that host these investments. Annually, 40 percent of all transnational terrorist attacks are directed against U.S. interests (i.e., its people and property) but few attacks are staged on U.S. soil (Enders and Sandier 2006). By augmenting risks, these attacks may have a significant effect on reducing U.S. FDI.

The purpose of this article is to quantify the extent to which terrorism has altered the level or composition of U.S. assets abroad through the creation of an atmosphere of intimidation and fear. U.S. firms and investors are anticipated to shift assets from high-terrorism countries to safer venues for a number of reasons. First, even in the absence of a direct terrorist attack, protecting facilities from potential attacks raises operating costs and, therefore, limits returns. In addition to the costs of directly securing a plant, building, or office, a firm in a hostile environment must maintain security clearance for its employees and pay additional insurance charges. Second, terrorist attacks can destroy infrastructure, thereby causing business disruptions. For example, a terrorist attack on a railroad line may cause shipping delays for a substantial period of time. Third, recruiting costs may rise because personnel from the home office may not wish to work in a terrorism-prone region. These enhanced costs reduce the returns on U.S. FDI and may divert these assets elsewhere. Fourth, terrorism augments the general level of uncertainty, which redirects FDI to safer venues.

In the first part of the study, we apply time-series methods to ascertain the behavior of U.S. FDI flows immediately before and after the four terrorist hijackings on September 11, 2001 (henceforth, 9/11). Based on intervention analysis, we determine that 9/11 had little lasting influence on the location of these FDl flows. In the second part, we examine the effect that transnational terrorist attacks against U.S. interests abroad had on the stock of U.S. FDI for a panel of 69 countries. These attacks had a small, but significant, impact on U.S. FDI stocks in the Organization of Economic Cooperation and Development (OECD) countries but had no significant consequence on these stocks in non-OECD countries. …

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