Political Risk and Sectoral Analysis: Foreign Direct Investment, Terrorism, and Extractive Industries in the Developing World

Abstract

Scholarship has reached different conclusions regarding the relationship between host-state terrorism and foreign direct investment (FDI) inflows. While most studies identify a negative (or no) relationship between terrorism and FDI, a few find a positive association. Terrorism is connected to increased political risk, so we might expect states under terrorism to attract less FDI and especially in riskier economic sectors, such as extractive industries, because of their immobility and greater upfront capital costs. Using panel data for up to 107 developing countries from 2004-2018, this paper investigates the relationship between host-state terrorism and sectoral FDI. We compare the United States and Chinese overseas FDI in the primary, secondary, and tertiary sectors and find that U.S. firms are more risk averse and Chinese firms are more risk acceptant and markedly in the extractive industries. Our research provides clues for why the terrorism and FDI literature have obtained such different results.