Impact of Domestic and Transnational Terrorism on Capital Flight: Moderating role of Military Expenditure and Institutional Quality. Evidence from Asian & MENA Countries

Abstract

This research is fundamentally concerned with the issue of terrorism and its impact on capital flight from Asian countries and MENA countries. Terrorism remains an active research topic with respect to economic consequences; such that increase in terrorism causes political instability, which gives a poor economic outlook, hence investors tend to shift their money out of the victimized country. Furthermore, this study has explored the distinct impacts of domestic and transnational terrorism simultaneously for capital flight. Moreover, this study has discovered the role of military expenditure as a policy variable to combat terrorism. Besides this, the study also highlights the prominence of institutional quality because the effectiveness of government institutions plays a significant role to ameliorate the uncertainty arising due to terrorism and hence cause a reduction in capital flight. Panel data comprising of 9 Asian and 5 Mena countries from 2006 to have been used in this study. Generalized Method of Moment for empirical testing has been applied to address the issue of capital flight trap and endogeneity among variables. Findings reveal that both dimensions of terrorism have a significant impact on capital flight.