Much scholarship finds a negative but inconsistent statistical relationship between host-state terrorism and overseas foreign direct investment (FDI). However, empirical studies generally have not investigated terrorism in the context of Chinese overseas FDI. Comparing United States and Chinese overseas FDI for up to 107 developing countries from 2004–2018, and using a Two-Stage-Difference-in-Difference approach as well as a dynamic panel data analysis approach (i.e., the System General Method of Moments), we find a negative and at times statistically significant association between terrorism and U.S. FDI and a positive and frequently statistically significant relationship between terrorism and Chinese FDI, and this is true for both Chinese public and private investors. We argue that the U.S. and Chinese governments have different effects on overseas FDI, where the U.S. has a limited impact while China often encourages its firms to tolerate risk. Our research suggests that the nature of home governments affects the risk perception of their overseas investors.
Policy implications
- Given the U.S. government's attempts to maintain global dominance, especially with China closing the gap, our work suggests that the U.S. may want to take steps to promote risk reduction that supports U.S. overseas investment. Specifically, the U.S. government may need to increase the services of U.S. International Development Finance Corporation (DFC), a U.S. government agency, to expand its issuance of political risk insurance. The DFC should offer low-interest rate loans and bonds to U.S. MNCs who invest in countries that serve U.S. foreign policy goals.
- Given that Chinese MNCs are substituting for U.S. firms fleeing as a result of growing terrorism, the U.S. government needs to recognize that its access to critical natural resources and rare-earth minerals may be located in high-risk countries, and China may have increased access to it. The U.S. government may need to increase its investment at home and in lower-risk countries to assure access to such materials.
- Terrorism in host governments influences risk that may lower foreign investment and capital inflows from some MNCs. Host governments should therefore develop and communicate sensible counterterrorism measures to help reduce terrorism and increase foreign investment inflows.
- Given the riskier investment environment for Chinese FDI, the Chinese Government, and public and private overseas firms, should continue to assess how investment in higher-risk environments aligns with their financial and strategic goals.
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