This paper examines the relationship between terrorism and foreign direct investment (FDI), with particular attention to the travel and tourism industry. It begins by tracing the growth of FDI over the past two decades and outlining the key factors multinational corporations weigh when choosing host countries, including political stability, infrastructure, and economic conditions. The paper then presents real-world case studies — Pakistan, Indonesia's Bali region, and the United States after September 11, 2001 — to illustrate how terrorism shapes investment decisions. It concludes that while terrorism is a significant deterrent to FDI, its effects vary by context and are often compounded by broader economic and infrastructural challenges.
The paper demonstrates comparative case analysis: it places Pakistan and Bali side by side to show how terrorism produces different effects depending on a country's existing economic and infrastructural conditions. This technique allows the author to isolate terrorism as a variable while acknowledging that it rarely operates in isolation from other deterrents to investment.
The paper opens with a theoretical overview of FDI and the factors influencing investment decisions, then traces two decades of FDI growth. It transitions into real-world examples, first examining Russia–U.S. relations, then devoting extended analysis to Pakistan and Indonesia. A final section addresses the post-September 11 shift in global FDI perception before a brief conclusion ties the threads together. The structure follows a classic funnel pattern: broad context, focused examples, synthesis.
Foreign direct investment (FDI) provides many opportunities for both the expanding company and the host country. The host country receives an influx of business into its economy, while the expanding company gains the ability to enter new and emerging markets. Many factors weigh into a decision to invest in another country, and a stable economy is among the most critical. The travel and tourism industry is one of the key sectors that engages in foreign direct investment — this is especially true among large multinational chains. The following research explores the factors that influence a decision to invest in a foreign country and then focuses on the impact that terrorism has on that decision.
As the world moves toward a more global economy, there is a greater trend toward foreign direct investing than at any previous time. The flow of foreign direct investments increased by nearly tenfold over the past 20 years (Stein and Daube, 2001). By comparison, imports and exports only doubled during the same period. This growth has not been linear; it has progressed in spurts followed by periods of stagnation, largely due to global factors such as wars and economic downturns in certain regions of the world (Stein and Daube, 2001).
This growth carries many benefits for the host country, though in some cases it can be problematic for a weak economy because of increased competition faced by native businesses. On the other hand, the host country often benefits from increased revenues and tax receipts from the new enterprise. The new enterprise also supplies additional employment for the area and brings in business from other regions. This is especially true in the travel and tourism industry (Stein and Daube, 2001).
Foreign investment can play a significant role in strengthening the economies of developing countries. The foreign investment decisions of Multinational Corporations (MNCs) are a major driver of the host country's development. Multinational hotel chains are among the most prevalent MNCs (Hong et al., 1999). They can often be the single most important driver of a local travel and tourism trade. Many factors enter into the decision of a hotel chain to develop in a particular area. MNCs usually have sufficient capital for such an enterprise, yet some areas of the world are more developed than others in this regard (Hong et al., 1999). For example, more than 70% of new hotel development in Latin America takes place in two key locations: Brazil and Mexico (Hong et al., 1999).
These countries have many features that make them attractive tourist destinations — pleasant weather, a warm climate, miles of sandy oceanside beaches, and inland tropical landscapes. Other Latin American countries share similar natural assets but are less developed in this regard. The reason is straightforward: those countries often have factors that make them less attractive to investors, such as a weak or highly inflationary economy, the risk of guerrilla warfare, or the possibility of a government overthrow. They possess natural resources but lack the right combination of conditions to make them an attractive location for expansion. In the travel and tourism industry, it must also be recognized that if a location is not attractive enough to relocate a business to, it is also not attractive enough for tourists to visit — for the same reasons.
For the travel and tourism industry, many hotels consider political risk one of the key factors in the decision to establish a presence in a particular area (Hong et al., 1999). Political risks are weighted heavily because they can influence the stability of a country, including its economy and the safety of staff and guests. MNCs do not engage in high-risk situations willingly. The cash outlay required to begin such projects is substantial, and companies are reluctant to take unnecessary risks when so much capital is involved. They will opt instead for a more suitable location.
Political risk is distinct from political instability (Hong et al., 1999). Political instability refers to the possibility of a government being overthrown and replaced by a new leader. Political risk refers to more localized events. Political instability does not necessarily pose a risk for the foreign company (Hong et al., 1999), especially if a transition of power is peaceful. On the other hand, political stability is no guarantee against isolated incidents such as terrorism (Hong et al., 1999). Hotels are often targets of terrorist attacks, and this is a consideration in relocation decisions. The United States had long been regarded as relatively safe from the risk of terrorism. The World Trade Center attack of September 11, 2001 proved to the world that no place is immune. However, certain areas — such as the Middle East — do appear to experience such events more frequently.
Travel and tourism sells leisure, fun, relaxation, and amenity. The product is a break from modern stress and pressure. These things do not sell well in an area where there is a perceived risk to one's life. Beyond providing relaxation and safety, an area must also have a sufficient local economy to support tourism in terms of attractions, shops, and other amenities that draw visitors. One of the key factors in establishing a presence in a new country is the quality of its government institutions. There must be a stable government, a stable economy, manageable levels of bureaucratic complexity, and reasonable tax rates. The inflationary index and general economic conditions all play important roles in the decision to relocate to a given area.
Political corruption and the quality of the legal system are also important considerations (Stein and Daube, 2001). Other factors include the living environment, social class dynamics, the risk of terrorism, the crime rate, and a host of additional variables (Stein and Daube, 2001). All of these factors combine to form an overall picture of the host country. The weight that a company places on each factor determines what constitutes the best host country for a particular enterprise.
Russia and the United States have been working to build relations since the end of the Cold War era, attempting to establish cooperative relationships and expand trade. However, the United States still wishes to Westernize Russia, while Russia resists that process. The two sides have been unable and unwilling to abandon the ideological positions held so dear during the Cold War (Bremmer and Zasslavsky, 2001). This inability to resolve their differences creates a hostile environment in which to establish a basis for trade, including foreign direct investment.
Each country is internally stable and secure, yet neither is a hospitable environment for the other due to political tensions. Both have functioning economies, and Russia's economy was experiencing steady improvement at the time. There was also a perceived risk to visitors stemming from citizens' prejudices toward Americans. This is a case where one factor — the economy — is positive, but the political situation is not favorable. Until these differences are resolved, they remain a barrier to expansion and hinder businesses seeking to open new enterprises in one another's markets.
Pakistan has long been an area prone to terrorist activity (Ahmed, 2002). However, the terrorism risk is not confined to Pakistan among Middle Eastern countries. The World Bank President expressed his desire to continue trading with Pakistan, which was reassuring to Pakistani officials who were beginning to appreciate the opportunities that foreign investment could offer their developing country.
Terrorism is a major deterrent to foreign direct investment. The September 11 attacks did not destroy the attractiveness of the United States as a safe investment destination — they removed the extreme advantage it had held and placed it on a level with other countries. In that respect, however, the terrorists completely undermined their own country's efforts to attract foreign investors. They also caused their own companies wishing to invest abroad to be viewed with suspicion.
You’re 39% through this paper. Sign up to read the remaining 2 sections.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.