The impact of terrorism on international mergers and acquisitions: Evidence from firm-level decisions
| Author | Michiel Gerritse,Babet Hogetoorn |
| Published date | 01 May 2021 |
| DOI | 10.1177/0022343319900207 |
| Date | 01 May 2021 |
| Subject Matter | Articles |
The impact of terrorism on international
mergers and acquisitions: Evidence from
firm-level decisions
Babet Hogetoorn
University of Groningen
Michiel Gerritse
Erasmus School of Economics, Erasmus University Rotterdam
Abstract
Does terrorism inhibit a country’s ability to attract international direct investment? If so, terrorism may have large
costs in terms of employment losses, macroeconomic instability, and missed development opportunities. However,
do investors fear terrorism because of direct risks to their assets, or because the opportunities in the host country
deteriorate? And how do they adjust investments? We study the impact of terrorism on merger and acquisition
decisions of 8,872 firms over 116 countries over 16 years. The firm-level perspective allows the isolation of host-
country terrorism from firm-level characteristics such as size or experience as an explanation, by comparing decisions
for the same firm across destinations. It also allows separation of investment responses into reductions or entire
withholding of investme nt. A sample standard deviation increase in terrorism reduces merger and acquisition
investment by around 30%. Firms do not generally reduce the size of their investment in the face of terrorism –
instead, they decide not to enter the country altogether. We find no evidence to suggest that multinational firms are
more sensitive to attacks on local business assets. A country-level analysis, which necessarily does not control for firm-
level characteristics, yields materially different conclusions.
Keywords
foreign direct investment, location choice, terrorism
Introduction
Do terrorist attacks discourage multinational investment?
Multinationals probably wish to avoid the risk to their
personnel, physical damages, and reputational costs of
presence in terrorism-ridden countries. For instance, the
rise of Boko Haramin Nigeria led local multinationals like
Nestle
´and Heineken to raise concern over the local logis-
tics, access to local inputs, and the value of their local
assets.
1
Intuitively, various recent results suggest that the
impact of terrorism is substantial. Abadie & Gardeazabal
(2008) conclude that a one standard deviation increase in
terroristic risk reduces the net foreign direct investment
(FDI) position of the country – a measure of multina-
tional investment – by approximately 5% of gross domes-
tic product. Similarly, Enders & Sandler (1996) find that
terrorism reduced annual country-level FDI by 13.5%
and 11.9% in Spain and Greece, respectively. Enders,
Sachsida & Sandler(2006), on the other hand, report that
US FDI flows show modest responses to terrorist attacks
in host counties. Strikingly, even if the physical costs of
terrorist attacks to firm assets are often low compared to
many other risks, the response of multinationals is strong.
One explanation is that international investments are
Corresponding author:
gerritse@ese.eur.nl
1
See for example the respective ann ual reports of Nestle
´Nigeria
PLC, Heineken, and Nigerian Breweries PLC.
Journal of Peace Research
2021, Vol. 58(3) 523–538
ªThe Author(s) 2020
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DOI: 10.1177/0022343319900207
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particularly mobile and respond sensitively to small differ-
ences in (risk-adjusted) returns across countries(Abadie &
Gardeabazal, 2008).
The indirect costs of terrorism may be sizable,if terror-
ism discourages foreign investments. Foreign investment
generates employment opportunities, alleviatescredit con-
straints, fills shortages of local savings, and brings knowl-
edge and skill to the country, so it is often heralded as a
pathway to economic development (e.g. Di Giovanni,
2005; Javorcik, 2004; Keller, 2010; Haskel, Pereira &
Slaughter, 2007). These opportunities are wasted if ter-
rorist attacks deter international investments.
The response of international investment to local con-
flict is also fundamental to theories of commercial liber-
alism and (external) capitalist peace. Foreign traders and
investors can amplify penalties on conflict, poor institu-
tions or human rights violations, thus encouraging peace
(Schneider, 2014; Faber & Gerritse, 2012; Greenhill,
Mosley & Prakash, 2009; Blanton & Apodaca, 2007).
Economic openness might also increase the levels of
development and contracting quality, and eliminate
incentives for conflict or rebellion (e.g. Weede, 2005;
Mousseau, 2010; de Soysa & Fjelde, 2010). Some argue
that capital mobility in particular has a disciplining effect
(Gartzke, Li & Boehmer, 2001; Polachek, Seiglie &
Xiang, 2012; Kim & Trumbore, 2010): international
investors penalize local conflict severely. Recent results
suggest, however, that multinationals do not care about
local conflict as much as they care about potential attacks
on businesses (Powers & Choi, 2012). If multinationals
only avoid direct hostility towards themselves but do not
avoid destructive conflict in general, their role in capital-
ist peace may be small. This argument also links to
potential conflict traps. Once a state falls prey to terror-
ism or other conflict, international investment with-
draws, diminishing any force of punishment of the
conflict. A state might thus end up in an undesirable
equilibrium, both unable to decrease local conflict and
unable to attract investment (e.g. Collier, 2006; Buss-
mann, 2010). The contribution of international invest-
ment to such a conflict trap, however, rests on the precise
way in which investors turn away local conflict.
In this article, we study the impact of terrorism on
international merger and acquisitions decisions (the
majority of FDI decisions; Antras & Yeaple, 2014;
Davies, Desbordes & Ray, 2016) of a large set of firms.
Hence, we add to the literature that studies effects of
terrorism on international investment flows, which by and
large takes a national perspective. It generally documents
negative impacts of terrorism, althoughthe estimated sen-
sitivity varies (Abadie & Gardeazabal, 2008; Enders &
Sandler, 1996; Bandyopadhyay, Sandler & Younas,
2014; Enders, Sachsida & Sandler, 2006). There are two
arguments for focusing on firm-level decisions.
First, the firm-level analysis allows us to compare the
investment decisions of the same firm for different loca-
tions. Thus, we keep the characteristics of the firm – the
supply side of the decision – constant in the analysis. This
approach rules out that firm differences in, for example,
ability, quality of management, control, risk appetite, or
the need for resources from terrorism-affected countries
explain the relationwe find between terrorism and invest-
ment decisions (Chen & Moore, 2010; Yeaple, 2013;
Witte et al., 2017). We show that failing to control for
firm-specific characteristics (as an analysis of nationally
aggregated flows would) yields results that may under-
or overstate the investment sensitivity to host country
terrorism. Our results suggest that a sample standard
deviation in terrorism leads to around 30% lower
expected investment. That is in line with the literature,
which puts the number between 10 and 50%.
Second, the firm-level analysis provides a closer pic-
ture of the dynamics by which firms adapt their entry
strategies. Our results imply that when faced with terror-
ism, firms might decide not to enter at a country at all
(i.e. they adapt through the ‘extensive margin’). The
evidence for adjustments of the size of investments, the
‘intensive margin’, is far less convincing. Arguably,
investment adjustment along the extensive margin rather
than the intensive margin is more dramatic, because
extensive margin adjustment may lead to loss of technol-
ogy and supply chains, tends to increase host country
volatility, and complicates recovery of investments (Ber-
gin, Feenstra & Hanson, 2009; Bernard et al., 2009).
Moreover, we investigate what forms of terrorism most
evidently discourage firm entry. In contrast to related
literature (Powers & Choi, 2012), we find that terrorism
that targets businesses is not significantly more or less
discouraging than other forms of terrorism. Nor do
attacks on local firms’ assets have stronger impact than
other types of attacks. That suggests that indirect adver-
sities of terrorism, such as logistical disruptions or a
paralyzed business environment, may be as important
as the risk of direct damages.
The next sections briefly review theories of multina-
tional entry strategies in light of host countries’ terrorism,
before discussing the data, methodology, and results.
Conceptual framework
Terrorism has come to play a big role in economic deci-
sions, including the location choices of people,
524 journal of PEACE RESEARCH 58(3)
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