Terrorism and Foreign Direct Investment: An Empirical Analysis of SAARC Countries

The current state of terrorism has posed serious challenges to stability of macroeconomic environment causing the displacement of foreign direct investment (FDI). This study aims to find the impact of terrorism along with other important location variables such as market size, economic growth, exchange rate, infrastructure and trade openness on FDI inflows in five SAARC member nations, namely, Bangladesh, India, Nepal, Pakistan and Sri Lanka. Utilising a panel econometric estimation model on annual data from 1980-2012 the results of the study showed a significant positive impact of market size, trade openness, infrastructure availability and economic growth on inward FDI in these SAARC countries. Whereas, exchange rate volatility exhibited a negative relationship with FDI inflows. The results revealed that terrorism has statistically significant and negative rapport with FDI inflows. This empirically establishes the fact that terrorism is a serious threat to FDI and economic growth for the economies in this region.