The impact of terrorist attacks on foreign direct investment : evidence from the Muslim world

Abstract

Do terrorist attacks with target variations affect foreign direct investment in the Muslim World? This thesis uses the panel data regression method (time-series and crossunits) with a quantitative approach based on 47 Muslim countries over 20 years to answer the question. The estimation model selected to provide the best prediction results in this research data is the random effect model. This thesis uses Stata 17 software as a panel data processing tool. The prediction result of this thesis is the impact of five variations of terrorist attack targets (business, tourist, government, police, and transportation) on foreign direct investment in the year after the attack. The Muslim World is the object of study because foreign direct investment is the main source of economic prosperity in these countries. The classification of terrorist attack variations is useful to determine the specific impact on foreign direct investment. The hypothesis and rationalization for determining research variables are based on Simon's political risk analysis. Political risk illustrates the classification of terrorist attack variations in affecting foreign investment assets and government. The vulnerability of Muslim countries in the face of political conflict (terrorism) and their dependence on foreign direct investment to support their respective macroeconomies makes this topic a necessary area of study. This thesis found that terrorist attacks on business targets (negative impact), police (negative impact), and government (positive impact) have a significant impact on foreign direct investment in the Muslim World. Meanwhile, terrorist attacks on tourist and transportation targets have no significant impact. Four variables that are the main components of FDI were included in the model to eliminate bias in the statistical calculation (OVB). The four variables are political globalization, political stability, trade openness, and Gross Domestic Product (GDP).