The Impact of Terrorism on Direct and Indirect Investments: How Much Are Foreign Aids Compensative?

This paper investigates the relationship between terrorism, foreign direct investment and portfolio investment. In addition, this study analyses how these relationships are affected by foreign aid flows by focusing on developing and less-developed countries in the period of 2005-2011 using unbalanced panel data analysis. For this purpose, firstly the stationary process of the variables is examined and it is found that they are stationary at different levels. Furthermore, Pedroni and Kao co-integration tests show the existence of a long-run relationship between the variables. The results of Granger causality analysis indicate that there is at least one-way causality between the related variables. The findings of a fixed effect estimation model show that terrorism has a negative impact on direct and indirect foreign investments. In addition, foreign aid flows are found to mitigate the adverse effect of terrorism on foreign investments.