The Journal of Economic Asymmetries 20 (2019) e00125

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The Journal of Economic Asymmetries

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An empirical investigation of FDI inflows in developing economies:

Terrorism as a determinant factor
Kechagia Polyxeni, Metaxas Theodore *
University of Thessaly, Department of Economics, 28th October Str. 78, 38333, Volos, Greece

A R T I C L E I N F O A B S T R A C T

JEL classification: The international allocation of capital flows is determined by various political, institutional, social
F21 and financial conditions. Recipient countries proceed to significant reforms in order to increase
K42 their attractiveness towards multinational companies and foreign investors. The purpose of the
C33
present paper is to empirically examine the determinant factors of foreign capitals in the devel-
O1
oping economies with terrorist activity from 1970 to 2016, focusing on foreign direct investment
Keywords:
(FDI) inflows. The sample of the study consists of 18 developing countries that present terrorist
Foreign direct investment
activity, of different geographic regions. Using FGLS in panel data the study concludes that
Developing economies
Terrorism terrorism is a deterrent factor of FDI and that both traditional and emerging determinants affect
Panel data analysis FDI inflows in the recipient countries. The contribution of the study refers to the fact that an
extended econometric model of FDI is tested and presented. Suggestions for policymakers are
presented.

1. Introduction

The modern economic system is determined, among others, by the trade relationships developed during capital transfer. Over the
past years developing economies made significant efforts in order to improve their attractiveness towards foreign investors. The
developing economies that absorb more capital flow, among which FDI inflows, present certain common characteristics. FDI are defined
as the acquisition of capital or share in a country by an investor based on a different country (WTO, 1996). A favorable political and
economic environment is more likely to attract FDI inflows in developing countries (Vidal & Correa, 2007). Recipient countries absorb
FDI in order to achieve economic growth (Adams, 2009; Doytch & Uctum, 2011; Tiwari & Murascu, 2011; Pegkas, 2015; Malikane &
Chitambara, 2017; Khobai and Mavikela, 2018). Furthermore, economic shocks could affect FDI inflows and capital allocation (Dor-
€
nean, Isan, & Oanea, 2012; Ucal, Ozcan, Bilgin, & Mungo, 2010).
Based on the above, the present study aims at the empirical investigation of the FDI determinants among developing economies,
focusing on countries that present terrorist activity, as well as on the role of the location and the financial crisis of 2007–2008 on the FDI
inflows. The case of countries that present terrorist activity is selected under the criterion that previous empirical studies reached to
vague or contrasting findings. Certain researchers argued that terrorism has a negative impact on FDI inflows in developing countries
(e.g. Bhasin & Garg, 2018; Shahbaz, Javed, Dar, & Sattar, 2013), others that it does not affect FDI inflows (Ullah & Inaba, 2014; Younas,
2009) and certain researchers concluded that its impact is unclear (e.g. Efobi, Asongu, & Beecroft, 2015; Koko, Aminurraasyid, &
Tapiwa, 2017).
The study contributes to the exiting literature in several ways. Firstly, the study sets highlight to a wide variety of factors that affect

* Corresponding author.
E-mail addresses: kehagia@uth.gr (K. Polyxeni), metaxas@econ.uth.gr (M. Theodore).

https://doi.org/10.1016/j.jeca.2019.e00125
Received 18 June 2019; Accepted 17 July 2019
1703-4949/© 2019 Elsevier B.V. All rights reserved.
K. Polyxeni, M. Theodore The Journal of Economic Asymmetries 20 (2019) e00125

FDI inflows in developing economies through studying several explanatory variables. To our knowledge this group of variables has not
been a subject of study so far. Previous empirical studies investigated some of them, including the research of Bisson (2012) who studied
5 of these explanatory variables (GDP, trade openness, infrastructure, exchange rates and terrorist attacks). However, the present paper
extents to the empirical investigation of both traditional and non – traditional FDI factors.
Secondly, the initial model presented by Liargovas and Skandalis (2012) is extended including explanatory variables which have not
been a subject of extensive empirical research and applied in the case of countries with terrorist activity. Among the researchers that
used FDI inflows as a dependent variable, it is observed that forms of globalization have been included by limited studies (Bobenic
Hintosova et al., 2016; Dogan & Arslan, 2016; Leitao, 2012; Mascarenhas & Sandler, 2014; Motahari & Dehghani, 2015; Salahodjae
et al., 2016). Similarly, military expenditure has been studied by few empirical studies (Asongu & Amankwah – Amoah, 2016; Awan,
Ahmad, Shadid, & Hassan, 2014; Aziz & Khalid, 2017), as well as official development assistance (Anyanwu & Yameogo, 2015; Ara-
zmuradov, 2015; Kaur, Khatua, & Yadav, 2016; Xaypanya, Rangkakulnuwat, & Paweenawat, 2015; Yasin, 2005) and life expectancy
(Alsan, Bloom, & Canning, 2006; Anyanwu & Yameogo, 2015; Azemar & Desbordes, 2009; Elfakhani & Mulama, 2011; Malikane &
Chitambara, 2017).
Thirdly, the study extents to a large period of time (1970–2016), which has not been a subject of previous research. The study of
Morrison, Ajoku, Nwikiabeh, and Leekaaga (2016) is an exception, but the researchers studied the period 1970–2010, focusing on a
specific geographic region, namely the African economies. It should be noted that the period 1970–2016 has been a subject of study by
Khobai and Mavikela, 2018 and Orimolade and Olusola (2018), who both, however, performed a time series analysis using FDI inflows
as an explanatory variables, contrary to the present study in which a panel data analysis is conducted using FDI inflows as a dependent
variable.
Therefore, contrary to previous empirical studies, the present paper contributes to the existing literature though extending
the investigation of FDI determinants on countries with terrorist activity including emerging factors, considering that pre-
vious researches who focused solely on traditional FDI determinants (Shah & Faiz, 2015; UNCTAD, 1996) and reached to vague
results. To our knowledge and through conducting an extended literature review, little attention has been paid to non –
traditional FDI factors, especially in the case of countries with terrorist activity. For this purpose, several emerging FDI factors,
along with traditional FDI explanatory variables are empirically investigated. Thus, the present study aims at empirically
investigate the traditional and transitional FDI determinants in developing countries, applying a panel data analysis over the period
1970–2016. Additionally, the study focuses on the developing economies that present terrorist activity because of the increasing rates of
terrorism worldwide. Furthermore, the impact of the global financial crisis of 2007–2008 on the FDI inflows is studies, as well as the role
of the recipient countries’ geographic position.
The research questions tested are the following.

H1: Is terrorism a deterrent factor of FDI inflows in the developing countries?

H2: Does market size in developing countries with terrorist activity attract FDI inflows?
H3: Does trade openness in developing countries with terrorist activity attract FDI?
H4: Do stable exchange rates influence FDI inflows in developing countries with terrorist activity?
H5: Do the political, economic and social integration of the developing countries with terrorist activity attract FDI inflows?
H6: Are the host country's geographical location and the economic shocks FDI determinants in developing countries with terrorist
activity?

The paper is organized as following: Firstly, the results of the literature review are presented. Secondly, the empirical analysis is
presented, including the description of the sample, the methodological approach and the empirical results. The study concludes with a
discussion of the findings, highlighting policy implications.

1.1. Review of empirical literature

FDI determinants have long been a subject of study by both theoretical and empirical studies. However, it is crucial to constantly re –
evaluate the factors that determine FDI inflows because of the rapid technological process and the financial, political and social evo-
lution and shocks. Certain determinants are traditionally taken into consideration when investigating FDI inflows, including market size,
trade openness, macroeconomic stability etc (Noorbakhsh, Paloni, & Youssef, 2001; Shah & Faiz, 2015). These factors are characterized
as “traditional” on the FDI empirical studies because the majority of the multinational enterprises base their investment decisions on
them (UNCTAD, 1996).
The present study is not limited solely to the investigation of the traditional FDI determinants. The constant political, social and
economic changes worldwide render traditional FDI factors as important as secondary factors, assigning higher value to transitional FDI
determinants, among which the political stability and violence, official development aid, globalization etc. In addition, it is observed
that the researchers’ interest evolves and changes over time, orienting the FDI studies towards incorporating new variables and esti-
mating the impact of political and economic shocks (Kechagia & Metaxas, 2018).
The present research is based on the study of Liargovas and Skandalis (2012), who empirically investigated FDI inflows in developing
economies. Through the above presented literature review the variables that have not been adequately examined are studied and added
to the initial model presented by the researchers. Among the several types of determinants factors, the present paper focused on
terrorism as an explanatory variable of FDI inflows, including other control variables as well.
The case of terrorism as a main dependent variable has been chosen for several reasons. Firstly, the increasing rates of terrorism

2
K. Polyxeni, M. Theodore The Journal of Economic Asymmetries 20 (2019) e00125

worldwide are nowadays a subject of major concern. Terrorist activities have a significant negative impact on the socioeconomic and
political condition of the countries, which furthers affects its productivity, economic stability and capital flows (Kollias, Papadamou, &
Stagiannis, 2011). Secondly, regardless of the level of development of its country, terrorism increases fear and insecurity because of the
fatalities and injuries associated to terrorist incidents (Shah & Faiz, 2015). Thirdly, at present, in economic science terrorism is
considered a major issue, especially after the 9/11 attack, as suggested by Drakos and Kallandranis (2015), Fatima, Latif, Chugtai,
Hussain, and Nazik ve Aslam (2014) and Altay and ve Celebioglu (2015). Fourthly, Blomberg, Gaibulloev, and Sandler (2011) argued
that more studies should be oriented towards the investigation of terrorism because, over the past years, there are no signs of reduction.
Additionally, the study has been motivated by the fact that it is crucial to study FDI inflows in developing countries with terrorist
activity, considering that terrorism has been empirically proven to negatively influence a country's economic growth (Meierrieks &
€
Gries, 2013; Ocal & Yildirim, 2010). Thus, the paper focuses on developing countries considering that terrorist attacks hinder their
economic growth. Mostly in the case of countries with terrorist activity, it is important to investigate FDI inflows as a mean for political
stability and growth.

2. Materials and methods

2.1. The sample

In order to investigate the above presented researcher hypotheses secondary data is used from international databases. The
description of the variables, the data sources and the expected signs are presented in the Appendix (Table A1). The sample of the study
consists of 18 developing countries. The countries are selected under the criterion that they are listed as low, lower – middle and upper
middle – income economies according to the classification of the World Bank. As mentioned above, the studied period extents from 1970
to 2016. Furthermore, it should be noted that apart from the classification criterion, the sample selection is determined by data
availability. The countries of the sample are located in different geographical regions, as presented in Table A2 in the Appendix.
When regarding to the FDI inflows, as presented in the following Fig. 1, it is observed that certain geographical regions manage to
attract more total inflows compared to other group of countries. Therefore, the Latin American and the Caribbean countries attract the
majority of the FDI inflows. This is attributed to the fact that 8 of the studied economies are located in Latin America and to the fact that
Mexico and Brazil are listed among the top FDI recipient economies worldwide.
Similarly, when regarding to terrorist attacks, South Asian countries present higher terrorist activity compared to the rest regions of
the sample (Fig. 2). Increased terrorist activity in the specific geographic region is attributed to the fact that Pakistan is at the epicenter
of violence and the country considered a victim of terrorism over time, as observed by several socio – economic studies (Ahmed, Yousaf,
& Zeb, 2018; Nizami, Hassan, Yasir, Rana, & Minhas, 2018; Shahzad, Zakaria, Rehman, Ahmed, & Fida, 2016).

2.2. Methodological approach

2.2.1. The dependent variable

Several definitions have been presented on FDI so far. The present study is in accordance with the definitions presented by IMF
(1993) and OECD (2008), according to which FDI refer to the lasting interest that a resident equity obtains in an enterprise which is
resident in a different country. FDI inflows in a developing economy are determined by the foreign investors' perceptions on the
country's investment risk. Recipient countries that present unstable political, financial and social environment are less likely to absorb
significant amount of FDI inflows (Buckley, Clegg, Wang, & Cross, 2002; Enders, Sachsida, & Sandler, 2006). Developing economies
should make longtime efforts in order to improve their competitiveness as FDI recipients and to increase their attractiveness compared
to other developing countries (Zhang, 2001). Similarly, FDI lagged are also studied considering that it is observed that they could affect
the foreign investors' decision at a given year (Lin & Kwan, 2016; Wheeler & Mody, 1992). In addition, it is argued that FDI are
characterized by self – reinforcement (Bevan & Estrin, 2004; Cheng & Kwan, 2000; Hanafy, 2015), because of which FDI lagged are a
crucial determinant of future FDI flows.
FDI inflows could also be affected by economic shocks, such as the financial crisis of 2007–2008. Dornean et al. (2012) observed that
in Central and East Asian economies the financial crisis of 2007–2008 had a negative impact on the FDI inflows. Similarly, Ucal et al.
(2010) reached to the conclusion that in 148 recipient countries FDI inflows reduced significant as a result of the recent financial crisis.

Fig. 1. Total FDI inflows by region (1970–2016).

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K. Polyxeni, M. Theodore The Journal of Economic Asymmetries 20 (2019) e00125

Fig. 2. Total terrorist attacks by region (1970–2016).

On the contrary, Alquist, Mukherjee, and Tesar (2016) did not observe reduction on the FDI inflows because of the financial crisis of
2007–2008. However, the researchers argued that a country's strategy towards facing the consequences of the financial crisis depends on
its geographic location. Therefore, both financial crisis and the recipient economy's location are studied.

2.2.2. The independent variables

A series of independent variables are studied in the present essay. Among them, as mentioned above, the study focused on terrorism
as the main independent variable. Terrorist attacks could affect the international allocation of capital flows because they increase a
country's multidimensional uncertainty (Abadie & Gardeazabals, 2008). It is also argued that terrorism could lead to the reduction of the
FDI inflows and to the increase of FDI outflows towards countries that present political stability and lack of violence (Blomberg & Mody,
2005). Furthermore, Li (2006) suggested that terrorism represents a country's political instability and that it affects negatively human
capital, infrastructure, financial structures and economic growth. Blomberg, Hess, and Orphanides (2004) argued that terrorism has a
negative impact on a country's economic activities and investments.
Therefore, terrorism is expected to be negative associated to FDI inflows, as observed by several previous studies (Abadie & Gar-
deazabals, 2008; Papaioannou, 2009; Shahbaz et al., 2013; Rauf, Mehmood, Rauf, & Mehmood, 2016; Bhasin & Garg, 2018 etc).
However, other researchers argued that terrorism does not affect FDI inflows in the developing economies (Daude & Stein, 2007; Ullah
& Inaba, 2014; Younas, 2009) or reached to vague results regarding the interaction between FDI and terrorism (Efobi et al., 2015; Koko
et al., 2017; Okada, 2013; Resnick, 2001). It is therefore interesting to investigate the relation between the two variables in the specific
set of countries.
Apart from terrorism, other control variables are investigated as well. GDP is studied as explanatory variable of FDI inflows and it is
used a proxy for the market size. Bevan and Estrin (2004) observed that countries with larger market size are more likely to attract FDI.
In addition Dunning (1977, 1988) argued that GDP contributes to the expansion of the multinational companies abroad, mostly when
they perform market – seeking FDI. Therefore, a positive interaction between FDI and GDP is observed by the majority of the empirical
studies (e.g. Asongu, Efobi, & Beecroft, 2018; Blomberg & Mody, 2005; Powers & Choi, 2012; Ullah & Rahman, 2014).
Trade openness refers to the abolition of trade barriers and restrictions and is also expected to be positively related to FDI inflows. It
represents the international liberalization of capital and services and it is associated to a country's expansion abroad (Seyoum, Wu, &
Lin, 2014). According to Dunning (1977, 1988) is mostly related to efficiency – seeking FDI. Several previous researchers observed a
positive impact of trade freedom on the amount of FDI inflows (e.g. Busse & Hefeker, 2007; Efobi et al., 2015; Ezeoha & Ugwu, 2015;
Rauf et al., 2016; Ullah & Rahman, 2014). Thus, it is expected that trade openness is positively related to FDI inflows.
The stability of exchange rate has also been a subject of study as a FDI determinant. The depreciation of the local currency is expected
to attract more FDI because of the fact that it is associated to reduced production cost (Blonigen, 1997). On the contrary, countries with
stronger currency are more likely to perform outward FDI rather than to absorb inflows (Lily, Kodig, Mulok, Sang, & Asid, 2014).
Therefore, the exchange rate stability is used as a proxy for exchange risk and it is expected to be positively related to FDI inflows, as
suggested by Kosteletou and Liargovas (2000), Ali, Fiess, and MacDonald (2010), Shah and Faiz (2015), Akbar and Akbar (2015) et al.
Among the non – traditional FDI factors, little attention has been paid on the role of the various forms of globalization. Globalization
has a direct effect on the distribution of FDI inflows worldwide, as suggested by Lutz and Lutz (2015). According to UNCTAD (1996) the
role of globalization should be taken into consideration when studying FDI because it determines the expansion of the multinational
companies, rendering the index as important as traditional FDI factors. Previous studies that investigated the various types of global-
ization, meaning economic, social and political, reached to unclear findings. Thus, certain studies reached to positive interaction be-
tween the forms of globalization and FDI inflows (e.g. Amal, Raboch, & Tomio, 2009; Dogan & Arslan, 2016; Leitao, 2012) while others
conclude to a negative association (e.g. Bobenic Hintosova et al., 2016; Mascarenhas & Sandler, 2014). Therefore, the forms of glob-
alization are studied in order to clarify their impact on FDI inflows.
Moreover, gross fixed capital formation is studied as proxy for infrastructure. It is expected that foreign investors are attracted by
countries with adequate infrastructure. Therefore, gross fixed capital formation and FDI are expected to be positively related, as
observed by Vijayakumar, Sridharan, and Rao (2010), Tiwari and Murascu (2011), Arazmuradov (2015), Ezeoha and Ugwu (2015) et al.
Recipient countries with high human capital are expected to attract more FDI. In the present study life expectancy is used as a proxy
for human capital and a positive interaction is expected. Similarly, previous studies also suggested that life expectancy is positively
associated to FDI inflows (e.g. Abadie & Gardeazabals, 2008; Alsan et al., 2006; Azemar & Desbordes, 2009).
In addition, official development assistance has been studies as a determinant factor of FDI inflows, but the findings are fuzzy.

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K. Polyxeni, M. Theodore The Journal of Economic Asymmetries 20 (2019) e00125

Therefore, certain studies reached to a positive interaction (e.g. Asongu et al., 2018; Efobi et al., 2015; Kaur et al., 2016; Ullah & Inaba,
2014; Ullah & Rahman, 2014), while others argued that official aid crowds out FDI inflows and thus there is a negative association
between them (e.g. Anyanwu & Yameogo, 2015; Asongu et al., 2018; Ezeoha & Ugwu, 2015).
Furthermore, military expenditures are considered because they are often associated to a country's political insecurity (Awan et al.,
2014; Li, 2006). It is argued that countries that present high terrorist activity should increase the amount of military expenditures in
order to prevent terrorist activities (Asongu & Amankwah – Amoah, 2016). However, the findings of previous researchers are vague
because some of them reached to a positive association with FDI inflows (e.g. Asongu & Amankwah – Amoah, 2016) while others to
negative association (e.g. Awan et al., 2014; Aziz & Khalid, 2017).
Finally, population aged from 15 to 64 has been used as proxy for labor force. According to the eclectic paradigm of Dunning (1977,
1988) adequate and low – cost workforce attract FDI inflows. Therefore, FDI inflows are expected to be positively related to population
aged 15–64, as observed by Yasin (2005), Zebua (2016), Aziz and Khalid (2017) et al.

2.2.3. The empirical model

The empirical model of the present research is based on the model presented by Liargovas and Skandalis (2012) and it is developed as
following:

lnFDIi,t ¼ C þ β1lnTerrorist Attacksi,t þ β2lnGDPi,t þ β3lnExchange ratesi,t þ β4lnTrade opennessi,t þ εi,t (1)

It is noted that the error tern εi,t is not serially correlated. The variables added and tested in Eq (1) are: economic, social and political
globalization as proxies of the economic, political and social conditions, official development assistance, gross fixed capital formation as
a proxy for domestic investment in infrastructure, life expectancy as a proxy for health status and well – being and military expenditure
as a proxy for a country's national power. Furthermore, population aged from 15 to 64 is examined as a proxy for labor force. It is
observed that the model is transformed in logarithmic function in order to control for heteroscedasticity because of outliers, to compress
large values and to better interpret the coefficients and the empirical findings.

3. Empirical results

Firstly, a correlation matrix is used in order to test for multicollinearity and to control the pair – wise correlation among the
explanatory variables. Secondly, several methods have been suggested in order to remove multicollinearity, including at one hand the
avoidance of the problem, which could lead though to statistically insignificant variables and on the other hand the inclusion of new
variables or a sample increase (Brooks, 2014; Gujrati, Porter, & Gunasekar, 2012), which in the present study is not allowed due to data
unavailability. It is also suggested that multicollinearity could be solved through a stepwise regression (Gujrati et al., 2012), which is
used in order to automatically remove the highly correlated variables, while maintain the regressions’ R square.
As a result of the stepwise regression, 12 models have been estimated, including both static and dynamic equations. Fourthly, in
order to choose among the estimation techniques the sample size (N) and the time period (T) have been taken into consideration.
Therefore, Hausman test is conducted in order to choose between Fixed Effects (FE) and Random Effects (RE) and Breusch – Pagan
Lagrange Multiplier test is conducted in order to choose between RE and Ordinary Least Squares. The empirical results of the correlation
matrix, the stepwise regression and the Hausman tests are available upon request.
Finally, the robustness of the results is tested. In particular, in order to test for cross – section dependence the Breusch – Pagan LM test
is used, in order to test for heteroscedasticity the Wald test is used and in order to test for autocorrelation the Durbin Watson test is used.1
The detection of heteroscedasticity, cross – section dependence and autocorrelation rendered necessary the use of Feasible Generalized
Least Squares (FGLS), which are suitable when T > N, so as to solve the above mentioned problems.
Among the estimated models, the most suitable is selected based on the overall significance, the number of the explanatory variables
and the R2. Furthermore, two dummy variables are used: one standing for the global financial crisis of 2007–2008 and another standing
for the geographic region in which the studied countries are located. It is noted that all variables, as in the initial model, are used in
current prices. However, the models have been re – estimated using deflated prices, leading to similar results. The deflated results, as
transformed using the GDP deflator of the World Bank database, are available upon request. All models are estimated using Eviews 10.
The variables added to the model presented by Liargovas and Skandalis are terrorist attacks (instead of the political risk), exchange
rates, economic globalization, gross fixed capital formation, life expectancy, military expenditure, official development assistance,
political globalization, population 15–64, social globalization and FDI lagged. Among them, the regressors added to the initial model
according to the stepwise regression results are: FDI lagged, gross fixed capital formation, social globalization, economic globalization
and political globalization.
The static and dynamic models have been estimated using FGSL in order to test for heteroscedasticity, autocorrelation and cross –
section dependence. The results of FGLS for the static models are presented in Table 1.
It is observed that the static model lead to the expected negative sign regarding the terrorist attacks in the model 1, model 3 and
model 4, among which, however, terrorist attacks are statistically insignificant (p ¼ 0.299 in model 1, p ¼ 0.281 in model 2 and
p ¼ 0.281 in model 3) at α ¼ 95%. Nevertheless, in model 4 the variable “terrorist attacks’ takes a negative sign and it is statistically

1
Breusch and Pagan LM test was chosen in order to detect cross-section dependence considering that it is suitable in panel data model in case the
number of time periods is large.

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K. Polyxeni, M. Theodore The Journal of Economic Asymmetries 20 (2019) e00125

Table 1
FGLS results for the static models.
Dependent variable: FDI inflows

Independent variables Model 1 Model 2 Model 3 Model 4

Terrorist attacks 0.058 (0.299) 0.071 (0.281) 0.095 (0.11) 0.127* (0.049)
GDP 0.479** (0.000) 0.591** (0.000) 0.665** (0.000) 0.751** (0.000)
Trade openness 1.009** (0.000) 1.352** (0.000) 3.218** (0.000) 4.052** (0.000)
Official exchange rates 0.479** (0.000) 0.232** (0.000) 0.331** (0.000) 0.304** (0.000)
Social globalization 0.895** (0.000)
Economic globalization 8.79** (0.000)
Gross fixed capital formation 2.598** (0.008)
Political globalization 5.039** (0.000)
C 15.605** (0.000) 74.45** (0.000) 49.14** (0.000) 7.356** (0.158)
R2 0.76 0.736 0.746 0.769
Adjusted R2 0.757 0.732 0.742 0.766
SE of regression 1.011 1.013 1.012 1.009
F-statistic 275.432 222.481 242.394 301.076
Prob. (F-statistic) 0.000 0.000 0.000 0.000
Durbin Watson 1.411 1.412 1.423 1.417
Obs. 846 846 846 846

(p-values are presented in the parentheses).

(***p < 0.01, significant at 1%, **p < 0.05, significant at 5%, * <0.1, significant at 10%).

significant at α ¼ 90% (p ¼ 0.049). On the contrary, GDP, trade openness and official exchange rates have the expected positive signs and
they are highly significant variables (p ¼ 0.000). In addition, trade openness has the expected positive sign, but solely in models 1 and 4.
In models 2 and 3 it has a negative sign, but in model 3 it is statistically insignificant.
Similarly, FGLS resuls for the dynamic models are presented in Table 2.

Table 2
FGLS results for the dynamic models.
Dependent variable: FDI inflows

Independent variables Model 5 Model 6 Model 7 Model 8

Terrorist attacks 0.038** (0.046) 0.085 (0.082) 0.048** (0.034) 0.036** (0.045)
GDP 0.227** (0.000) 0.182** (0.000) 0.204** (0.000) 0.223** (0.000)
Trade openness 0.695** (0.001) 0.003 (0.088) 0.171* (0.047) 0.258 (0.032)
Official exchange rates 0.079*** (0.034) 0.083*** (0.003) 0.041 (0.042) 0.087** (0.002)
Social globalization 0.296** (0.000)
Economic globalization 3.593** (0.000)
Gross fixed capital formation 3.635** (0.000)
Political globalization
FDI lagged 0.705** (0.000) 0.676** (0.000) 0.693** (0.000) 0.708** (0.000)
C 8.14** (0.000) 3.085 (0.032) 24.712** (0.000) 28.593** (0.000)
R2 0.811 0.808 0.813 0.814
Adjusted R2 0.809 0.806 0.811 0.812
SE of regression 1.007 1.008 1.008 1.007
F-statistic 497.129 456.602 491.893 497.382
Prob. (F-statistic) 0.000 0.000 0.000 0.000
Durbin Watson 2.07 2.039 2.05 2.086
Obs. 828 828 828 828
Terrorist attacks 0.026 (0.045) 0.083 (0.045) 0.082 (0.049) 0.056 (0.029)
GDP 0.264** (0.000) 0.177** (0.000) 0.174** (0.000) 0.218** (0.000)
Trade openness 0.843** (0.000) 0.304 (0.281) 0.791** (0.015) 0.703*** (0.042)
Official exchange rates 0.070* (0.014) 0.068** (0.018) 0.082** (0.004) 0.068** (0.02)
Social globalization 0.274** (0.000) 0.284** (0.000) 0.315** (0.000)
Economic globalization 1.413** (0.019) 1.411* (0.021) 1.845* (0.005)
Gross fixed capital formation 3.825** (0.000) 3.353** (0.001)
Political globalization 2.134** (0.002) 3.085** (0.000)
FDI lagged 0.702** (0.000) 0.674** (0.000) 0.671** (0.000) 0.668** (0.000)
C 3.834 (0.37) 9.886** (0.000) 31.302** (0.000) 12.864 (0.101)
R2 0.818 0.806 0.807 0.815
Adjusted R2 0.817 0.803 0.804 0.813
SE of regression 1.006 1.009 1.009 1.005
F-statistic 538.091 419.222 408.249 447.409
Prob. (F-statistic) 0.000 0.000 0.000 0.000
Durbin Watson 2.06 2.034 2.047 2.032
Obs. 828 828 828 828

(p-values are presented in the parentheses).

(***p < 0.01, significant at 1%, **p < 0.05, significant at 5%, * <0.1, significant at 10%).
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Table 3
Robustness tests for selected model.
Test Model 9 Decision

Cross – section dependence Breusch – Pagan LM 8.136 (p ¼ 0.000) No cross section dependence
Heteroscedasticity Wald test 1431.655 (p ¼ 0.0000) No heteroscedasticity
Autocorrelation DW 2.06 No autocorrelation

The dynamic models lead to interesting results. It is observed that terrorist attacks have a negative sign and are statistically sig-
nificant at α ¼ 95% in all dynamic models, except for the model 6 (p ¼ 0.082). Similarly, GDP has a positive sign and it is statistically
highly significant in the dynamic models (p ¼ 0.000). Similarly, trade openness takes the expected positive sign, but it is statistically
insignificant in model 6 and model 10. Finally, official exchange rates (statistically significant) and FDI lagged (statistically highly
significant) take the expected positive sign.
In order to choose with of the estimated models is more appropriate in interpreting the FDI determinants in the studies countries for
the given period, certain criteria are considered. Among the static models, it is observed that model 4 presented higher R2 ¼ 0.769
(N ¼ 846). In addition, model 4 presented the higher overall significance [F – statistic ¼ 301.076, pro (f-statistic) ¼ 0.000]. As for the
dynamic models, model 9 presented the higher R2 ¼ 0.818 (N ¼ 828) and higher F – statistic ¼ 538.091 [Prob (F statistic) ¼ 0.0000].
Moreover, the dynamic model 9 includes more independent variables compared to the static model 4, rendering therefore model 9 more
appropriate in the framework of the present study.
The robustness tests have been performed for model 9 in order to ensure that the model does not present heteroscedasticity,
autocorrelation and cross – section dependence. The results for the Breusch – Pagan LM test, the Wald test and the Durbin Watson values
are presented in Table 3.
In addition, the impact of the financial crisis of 2007–2008 on the FDI inflows has been investigated. The years 2007–2008 have been
used as structural breaks to control whether FDI inflows in the studied economies have been differentiated after this economic shock. A
dummy variable is therefore used, taking the value 1 of the periods 1970–2006 and 2009–2016 and the value 0 for the years 2007 and
2008, as suggested by previous empirical studies (Baby & Sharma, 2017; Castro & Campo, 2017). The results of the selected model,
including the crisis dummy variable are presented in Table 4.
Hence, it is observed that the inclusion of the financial crisis variable does not differentiate the signs and the statistical significance of
the selected model's variables. In addition, the crisis dummy variable has a negative sign and it is statistically significant at α ¼ 95%. The
selected model is re – estimated using a regional dummy variable, considering that the sample consists of 18 countries located in 6
different geographic regions. The results are presented in Table 5.
As presented in Table 5 the coefficients for the regions Latin America and the Caribbean, Central Asia and Sub – Saharan Africa are
positive, but solely the coefficients of Latin America and the Caribbean and Sub – Saharan are statistically significant at α ¼ 95%. On the
contrary, the coefficients of East Asia and Pacific, South Asia and North Africa are negative and statistical significant at α ¼ 95% only in
the case of the South Asian countries. Consequently, it is more likely for foreign investors and multinational companies to perceive East
Asia and Pacific, South Asia and North Africa as high risky when performing FDI. It is also possible that foreign investors are not fully
informed on the financial, social or political conditions of the countries located in the specific regions. In this case, they collect in-
formation from the neighboring countries.
Finally, it is observed that the sample consists of developing countries that present terrorist activity, for which data was available for
the studied period. However, some of these economies present higher rates of terrorism. Therefore, the countries have been into two sub
– samples and classified based on the total terrorist attacks presented from 1970 to 2016. When regarding the group of countries that

Table 4
Empirical results for the selected model including a crisis dummy variable.
Independent variables Dependent variable: FDI inflows

Terrorist attacks 0.025** (0.031)

GDP 0.223** (0.000)
Trade openness 0.856** (0.000)
Official exchange rates 0.069*** (0.002)
Political globalization 2.126** (0.003)
FDI lagged 0.698*** (0.000)
C 3.568 (0.397)
Crisis dummy variable 1.686** (0.027)
R2 0.817
Adjusted R2 0.818
SE of regression 1.018
F-statistic 524.192
Prob. (F-statistic) 0.000
Durbin Watson 2.041
Obs. 828

(p-values are presented in the parentheses).

(***p < 0.01, significant at 1%, **p < 0.05, significant at 5%, * <0.1, significant
at 10%).

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Table 5
Empirical results for the selected model including a regional dummy variable.
Independent variables Dependent variable: FDI inflows

Terrorist attacks 0.021** (0.029)

GDP 0.282** (0.000)
Trade openness 0.729* (0.003)
Official exchange rates 0.072** (0.000)
Political globalization 2.391** (0.018)
FDI lagged 0.702** (0.000)
East Asia and Pacific 46.68 (0.829)
South Asia 46.82** (0.021)
Latin America and the Caribbean 188.983** (0.000)
Central Asia 31.91 (0.283)
North Africa 102.291 (0.67)
Sub – Saharan Africa 198.791** (0.000)
C 3.291** (0.001)
R2 0.802
Adjusted R2 0.809
SE of regression 1.102
Durbin Watson 2.029
Obs. 828

(p-values are presented in the parentheses).

(***p < 0.01, significant at 1%, **p < 0.05, significant at 5%, * <0.1, significant at 10%).

Fig. 3. Total FDI inflows by country in high terrorism group (1970–2016).

present high terrorist activity, using median of total terrorist attacks in order to define the sub – samples, it is observed that India
attracted most of the FDI inflows among the countries of the certain group (Fig. 3).
Similarly, as for the total terrorist attacks and as noted above, Pakistan presents the highest terrorist activity among the countries of
the sample (Fig. 4).
Additionally, when regarding to the second group of countries, it is observed that Brazil is the top recipient FDI economy among the
economies of the specific sub – sample (Fig. 5).
Moreover, it is observed that in the second sub – sample, Ghana and Malaysia present the lowest level of terrorist activity (Fig. 6).
Therefore, the selected model is applied for the two sub – samples. The results of these estimations are presented in Table 6.
In conclusion, it is observed that the signs of the explanatory variables do not change when dividing the countries by their level of
activity. In particular, it is observed that terrorism has a negative impact in both sub – samples; however, terrorism is statistically highly
significant in the case of the group of countries that present high level of terrorist activity (α ¼ 95%).

Fig. 4. Total terrorist attacks by country in high terrorism group (1970–2016).

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Fig. 5. Total FDI inflows by country in low and medium terrorism group (1970–2016).

Fig. 6. Total terrorist attacks by country in low and medium terrorism group (1970–2016).

Table 6
Empirical results for the selected model for group of countries with different level of terrorist activity.
Independent variables Dependent variable: FDI inflows

High terrorist activity Low and medium terrorist activity

Terrorist attacks 0.094** (0.001) 1.332 (0.415)

GDP 0.301** (0.000) 0.173** (0.000)
Trade openness 2.707** (0.000) 0.067*** (0.057)
Official exchange rates 0.087 (0.156) 0.007* (0.057)
Political globalization 1.245 (0.079) 2.355** (0.001)
FDI lagged 0.651** (0.000) 0.813** (0.000)
C 14.279 (0.188) 21.397** (0.001)
R2 0.798 0.831
Adjusted R2 0.795 0.83
SE of regression 0.994 1.0141
Durbin Watson 2.084 2.026
Obs. 414 414

(p-values are presented in the parentheses).

(***p < 0.01, significant at 1%, **p < 0.05, significant at 5%, * <0.1, significant at 10%).

4. Discussion

The increasing rates of terrorism worldwide turned the interest of the present study on the factors that determine FDI inflows in
developing economies. A panel data analysis is conducted in order to investigate the characteristics of the recipient economies that are
mostly related to FDI attraction. Thus, the determinant factors of FDI inflows in the studied economies during 1970–2016 are the
terrorist attacks, GDP, official exchange rates, trade openness, lagged FDI and political globalization, which are statistically significant at
α ¼ 95%. The study reached to the expected signs for all of the explanatory variables, except for the political globalization.
In conclusion, it is observed that the signs of the explanatory variables do not change when dividing the countries by their level of
activity. In particular, the study concludes that terrorism has a negative impact in both sub – samples; however, terrorism is statistically
highly significant in the case of the group of countries that present high level of terrorist activity (α ¼ 95%).
In particular, as for the terrorist attacks, the findings are in accordance with the results of Nazik, Muhammad, Rashid, and Shaban
(2014), Akbar and Akbar (2015) and Shahzad et al. (2016), who also suggested that terrorism is a deterrent factor of FDI inflows in the
developing countries. Similarly, Li (2006) argued that terrorist attacks are an exogenous factor of FDI inflows, while Abadie and
Gardeazabals (2008) observed that terrorism increases the host country's investment risk and discourage FDI inflows. Agrawal (2011)
also observed a negative association between FDI inflows and terrorism, but argued that this relation depends on the sectoral

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distribution of the inflows. Therefore, the first research hypothesis is accepted.

Motivated by the history of terrorism, several theories have been developed in political science order to investigate the nature and
the consequences of such actions. According to Abbasi and Khatwani (2014) anarchism, fascism, anti – coloniasm and religion have been
historically used as political philosophies and theories of terrorism. Nowadays, rational choice theory could be applied in order to
explain the consequences of terrorism on FDI inflows, considering that the specific approach is used in order to theoretically investigate
the relation between terrorism and economy worldwide (Anderton & Carter, 2005). It is, thus, argued that the rational choice theory
could be used in order to economically investigate the behavior of terrorists.
In addition, GDP attracts FDI inflows in the developing economies and as a result the second research hypothesis is accepted.
Previous studies reached to similar results, including Ali et al. (2010), Liargovas and Skandalis (2012), Goswami and Haider (2014),
Zebua (2016) etc. Among them, Ali et al. (2010) argued that, ceteris paribus, GDP is positively correlated to FDI inflows in the
developing economies with terrorist activity. Similarly, Powers and Choi (2012) argued that a country's attractiveness depends on its
GDP, suggesting that economies that present higher GDP are more likely to attract FDI inflows.
As for the trade openness, it is observed that it is positively correlated to FDI inflows, resulting to the acceptance of the third research
hypothesis. This result is in line with the studies of Liargovas and Skandalis (2012), Asongu and Amankwah – Amoah (2016), Ullah and
Rahman (2014), who also observed a positive interaction between trade openness and FDI inflows in developing economies with
terrorist activity. Similarly, Busse and Hefeker (2007) argued that trade openness leads to the reduction of the transaction costs,
attracting therefore more FDI inflows.
As for the exchange rates stability, the study also reached to the expected sign. Thus, it is argued that FDI inflows are encouraged by
an increase of the exchange rates and the fourth research hypothesis is accepted. Liargovas and Skandalis (2012), as well as Kinuthia and
Murshed (2014) also reached to similar findings. Drake and Caves (1992) also observed that, under the criterion that the expectations of
changes on the exchange rates in the future are inelastic, there is a positive relation between FDI inflows and exchange rate stability.
When regarding to the political, economic and social globalization in countries with terrorist activity, it is observed that solely
political globalization is a determinant factor of FDI inflows. Furthermore, it is observed that there is a negative association between
political globalization and FDI inflows. The study of Lutz and Lutz (2015) also reached to similar results, arguing that political glob-
alization is associated to terrorist activity, which results in reduced FDI inflows. It is therefore likely that the studied economies have not
developed strong political bonds with other economies, rendering them more vulnerable to terrorist activity, or they might have not
received external aid in order to fight against terrorism. The fifth research hypothesis is thus partially accepted. The negative association
between FDI inflows and political globalization has also been observed by Mascarenhas and Sandler (2014), Reeshan and Hassan (2017)
and Bobenic Hintosov a et al. (2016). On the contrary, Motahari and Dehghani (2015) suggested that political globalization is positively
related to FDI inflows because increased political globalization index attracts more FDI. However, their study focused on the Middle East
and North Africa region.
It has also been investigated whether the financial crisis of 2007–2008 influences FDI inflows. It is observed that the financial crisis is
a determinant factor of FDI, as proven also by other researchers (Baby & Sharma, 2017; Castro & Campo, 2017; Ucal et al., 2010).
Similarly, Kinyanjui (2014) that in Kenya, which is studied in the present paper, FDI inflows reduced by almost 16,5% after the global
financial crisis. On the contrary, Alquist et al. (2016) studied 16 developing economies and reached to the conclusion that the financial
crisis did not affect the amount of FDI they attracted.
The geographic regions in which the recipient economies are located have also been studied. It is observed that among the studied
countries, the Latin American and the Caribbean economies managed to attract the majority of the FDI inflows during the studied period.
Furthermore, a negative association has been observed among FDI and countries located in East Asia and Pacific, South Asia and Middle
East. Consequently, foreign investors choose to invest their capitals mostly in Latin America and Caribbean, Central Asia and Sub –
Saharan Africa. Similarly, Bengoa and Sanzhez – Robles (2003) Amal et al. (2009), Metaxas and Kechagia (2016a) and Kechagia and
Metaxas (2016b) also observed that foreign investors choose to invest their capitals in the Latin American economies. Furthermore,
Doytch and Uctum (2011), Arazmuradov (2015) and Metaxas and Kechagia (2016c) also suggested that multinational companies are
mostly attracted by countries located in Central Asia, while Ndikumana and Verick (2008), Adams (2009), Azemar and Desbordes
(2009) and Ezeoha and Cattaneo (2012) suggested that Sub – Saharan African economies attract significant flows of FDI. The sixth
research hypothesis is therefore accepted. In sum, the researchers argued that these regions are top FDI recipients because they have
made a series of political and financial reforms in order to improve their attractiveness towards foreign investors.
Additionally, when dividing the countries into sub – samples based on the level of the terrorist activity, it is observed that terrorism has a
statistically significant (α ¼ 95%) negative impact on FDI inflows in the case of the countries that present high terrorist activity. No dif-
ferences regarding the signs of the explanatory variables have been observed between the initial sample of countries and the sub – samples.
The study is subjected, thought, to certain limitations. Firstly, the analysis is based on a specific set of countries for a given time
period. In addition, among the forms of violence, the study focused on terrorism. Therefore, it is difficult to generalize the findings in
other developing countries. Furthermore, other forms of violence, such as civil wars, are not investigated. Secondly, it is difficult to
predict with accuracy future terrorist attacks which could affect FDI inflows. Therefore, solely the terrorist incidents already occurred
are considered. Thirdly, solely the terrorist incidents over time have been investigated. Future studies could focus on the penetration
group, the attack type, the target type or the weapon type. Fourthly, panel data analysis is often associated to certain limitation,
including the data availability, the measurement errors or the selectivity errors (Hsiao, 2003). In order to overcome these problems
secondary data from reliable data sources has been collected, taking into consideration the databases used by previous researchers. In
addition, an extended literature review has been conducted in order to select the explanatory variables and solely the countries for
which there is data availability have been studies. Finally, it is noted that during the present research data for the year 2017 was not
available yet.

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Considering the limitations of the present study, future researchers could compare developing economies to the developed ones.
Furthermore, sectoral FDI inflows could be investigated, since according to Agrawal (2011) certain productive sectors could attract more
foreign inflows. In addition, future studies could compare FDI inflows and their determinants factors in recipient countries that present
different level of terrorist activity or among countries of different income classification. It would also be interesting to investigate the
motives that drive terrorist activities, such as religion fanaticism or racism. Additionally, the countries could be categorized using a
different criterion, such as total FDI inflows, so as to create a sub – sample of top recipient economies and a sub – sample of
countries that absorb less FDI inflows.
Moreover, other FDI determinants related to the political and governmental framework could be considered, including the political
risk of the recipient countries. However, data for these variables were unavailable for the studied period. Finally, apart from the FDI
inflows, it would be interesting to investigate whether terrorist attacks are related to increased FDI outflows. Similarly, financial
development could also be studied as another driver of FDI inflows in developing economies, considering that, according to
Chortareas, Magkonis, Moschos, and Panagiotidis (2015), financial openness is an important factor of economic growth for
advanced economies, while trade openness and financial deepening mostly affect economic growth in developing countries.
On the other side, it would be interesting to investigate whether FDI inflows could forecast financial development in host
economies, as proposed by Sahin and Ege (2015), focusing on countries with terrorist activity.
In conclusion, the research gives rise to a series of policy implications. The re – evaluation of the host economies' macroeconomic
policies is crucial because of the continuous political, social and financial changes. Therefore, recipient economies should not only focus
on improving the economic environment, but the legal, social and political framework as well. Therefore, that in order for the devel-
oping economies to attract more FDI, it is crucial that they proceed to structural reforms and to implement a certain stabilization plan
(Axarloglou & Pournarakis, 2005). The improvement of the institutional framework as well is expected to reduce the political risk and
improve the recipient countries’ attractiveness (Hamilton & Hamilton, 1983). Host countries should be oriented towards democrati-
zation considering that democratic and liberal economies are often related to increased FDI inflows (Burgoon, 2006; Plümper &
Neumayer, 2010).
Finally, developing countries should imitate the case of China, which is listed among the top FDI recipients worldwide and presents
low terrorist activity. It is observed that China influences its neighboring countries, among which India and Pakistan which have been
studies in the present paper, as for the FDI policies applied (Metaxas & Kechagia, 2013). Additionally, considering the positive influence
of trade freedom on FDI, it is suggested that recipient economies should expand trade liberalization. Similarly, recipient economies
should apply flexible and stable exchange rates in order to improve the investment climate (Abbott, Cushman, & De Vita, 2012).
Therefore, the governments' priority should be the citizens’ safety and the protection of the Rule of Law. Therefore, countries that
provide political stability and institutional quality are more likely to prevent terrorist attacks and to attract FDI inflows.

5. Conclusions

Terrorism is listed among the forms of violence that foreign investors and multinational companies take into consideration when
investing abroad. In the studied economies, terrorist attacks are a deterrent factor of FDI inflows. The main empirical findings of the
study refer to the traditional FDI factors (GDP, trade openness, official exchange rates and FDI lagged), while among the
emerging FDI determinants, it is observed that solely political globalization is an explanatory variable of the FDI inflows in the
countries of the sample during 1970–2016. Moreover, it is observed that FDI inflows have been affected by the financial crisis of
2007–2008, as well as by the region in which the host economy is located. Furthermore, the classification of the countries into two sub –
samples based on the level of terrorism activity did not affect the signs of the explanatory variables. Thus, traditional and non –
traditional factors influence the amount of FDI in the developing countries, among which terrorism is proven to prevent FDI inflows in
the recipient economies.

Conflict of interest

We declare that both authors do not have any conflict of interest.

Appendix

Table A1
Data description, sources and expected signs

Variable Description Database Expected

sign

FDI inflows FDI inflows in the reporting economies in currents prices (million US $) UNCTAD
GDP GDP at purchase prices is estimated as the sum of gross value added by all resident producers in an World þ
economy plus product taxes and minus subsidies not included in the value of the final products. Bank
Trade openness The sum of imports and exports of goods and services as a share of GDP. World þ
Bank
Exchange rates The annual average of exchange rates based on the monthly averages (local currency to US $). World þ
Bank
(continued on next page)

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K. Polyxeni, M. Theodore The Journal of Economic Asymmetries 20 (2019) e00125

Table A1 (continued )
Variable Description Database Expected
sign

Economic globalization The global integration through trade, financial flows and knowledge. It is estimated as the international KOF index þ
flow of products, equipment, information and services.
Gross fixed capital Land improvements, equipment machinery, plant, construction of railways, roads etc (As a percentage of World þ
formation GDP) Bank
Life expectancy Refers to the number of years that a newborn would live in case the prevailing mortality patterns World þ
remained the same throughout its lifetime. Bank
Official development It includes the disbursements of loans on concessional terms, minus repayment of principal and grants World þ/
assistance provided by the Development Assistance Committee, multilateral institutions etc. Bank
Political globalization The diffusion of government policies worldwide. It is estimated based on the number of foreign KOF index þ
embassies, of signed international treaties, of membership in international organizations etc.
Population aged 15–64 Total population between the ages 15 to 64 (as a percentage of the total population). World þ
years Bank
Social globalization The spread of information, ideas, people and images. It is estimated based on the cultural proximity, the KOF index þ
flow of information and personal contacts.

Table A2
Geographical classification of the studied countries

East Asia and Pacific South Asia Latin America and the Caribbean Central North Africa Sub – Saharan
Asia Africa

Malaysia, Thailand, India, Argentina, Bolivia, Brazil, Ecuador, Colombia, Mexico, Turkey Algeria, Ghana, Kenya
Philippines Pakistan, Honduras, Chile Tunisia

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Further reading

Baltagi, B. H. (2005). Econometric analysis of panel data (3rd ed.). West Sussex: John Wiley and Sons.

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