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Impact of Terrorism on Cross-Border Mergers and Acquisitions (M&As): Prevalence, Frequency and Intensity

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Abstract

This paper contributes to the literature on the impact of terrorism on international business by focusing on the specific case of cross-border mergers and acquisitions (M&As) using bilateral data for 59 countries over the period 2000–2011. We are interested in the following set of questions: (a) the impact of source and host country terrorism on bilateral M&A flows using various measures of terrorism (i.e. prevalence, frequency and intensity); (b) whether terrorism affects developing countries differently; (c) whether good institutions in developing host countries can offset the negative effects of terrorism; and (d) whether terrorism incidents in a particular economy has negative spillovers to its neighbors. To preview the main conclusions, we find that an augmented gravity model fits the data well. While the occurrence of terrorism in either the host or source does not appear to have any impact on bilateral M&A, the frequency and intensity of terrorist attacks significantly deter M&A flows, especially in the latter. We also find that good institutions negate the impact of terrorist attacks in the developing host country. There is also some evidence that regional spillovers reduce M&As in the host country.

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Notes

  1. However, since the global financial crisis, global FDI flows have slowed down considerably which have affected both Greenfield and M&A activity, though there appears to be a slow uptick in the numbers in 2012 (UNCTAD 2013). Also see Liu and Qiu (2013) who outline empirical facts on various performance measures for cross-border M&A deals.

  2. For the former, see Wang et al. (2013) who also examine determinants of other modes of FDI like joint ventures (JVs). For the latter, see Gopalan et al., Unpublished Working Paper and references cited within.

  3. There have been a few noteworthy studies using such data, including di Giovanni (2005); Hattari and Rajan (2009a, b) and Rossi and Volpin (2004).

  4. For instance, Hattari and Rajan (2009b) suggest that about one third of FDI inflows to emerging Asia have been transhipments from OFCs. Also see Gopalan and Rajan (2016) who use data on M&As to try and understand the actual country of origination of FDI into India, much of which has historically been transhipped via Mauritius.

  5. More broadly, as Egger and Gassebner (2014) observe, the related literature views terrorism as an example of an “an ad-valorem type trade cost factor…that exert a negative effect on the volume of bilateral trade by raising insecurity of trade transactions, by disrupting trust in international business relations, by physically destroying transport infrastructure and even goods themselves, and by rendering cross-border transactions more costly through the increased requirement of security standards” (p.4).

  6. The authors also investigate the impact of internal conflicts such as assassinations, guerilla activities, riots and revolutions on international trade and find a negative and statistically significant relationship between internal instability and trade flows.

  7. There may also be a reverse causality in that higher capital inflows could spur growth and possibly lower terrorist incidents. Li and Schaub (2004) estimate a pooled time series model for a sample of 112 countries from 1975 to 1997 and conclude that trade, FDI and portfolio investments do not have any have any direct positive effects on transnational terrorist incidents within countries.

  8. See Zelekha and Bar-Efrat (2011) for a discussion on the impact of domestic terror, crime and corruption on private investment in Israel.

  9. For a simple theoretical model outlining the deleterious effects of terrorism on FDI, see Asiedu et al. (2009) and Bandyopadhyay et al. (2014).

  10. We exclude host country fixed effects as we include host country institutional quality later in the regression to examine the joint effects of institutional quality and terrorism on FDI flows.

  11. Cushman (1985) and Goldberg and Kolstad (1995) suggest that exchange rate volatility tends to have positive impact on FDI. However, the option theory argues that firms will delay the acquisition while the exchange rate volatility is high.

  12. Lagging terrorism variables by one period does not alter results. Results are available on request.

  13. Even though we are aware that using the country-pair fixed effects can help overcome part of the endogeneity problem due to the omitted variable bias, the gravity model with a large number of fixed effects (there are over 3000 country pairs in our sample) is impossible to estimate using the Heckman method. Hence we control for time fixed effects and time-varying source country specific effects instead.

  14. The Heckman model with standard errors adjusted for country-pair clusters using full maximum likelihood estimate is also applied as the robustness check. The results remain mostly robust. Results are available on request.

  15. However, three-quarters of the M&A observations are zero. Given the way the data are collected some of these zero observation may just be unavailable.

  16. While two other databases - the Terrorism in Western Europe: Events Data (TWEED) and the RAND database include domestic and international terrorist events, both have limitations compared to GTD in the sense TWEED covers only internal terrorist events in 18 countries in Western Europe while RAND covers domestic incidents only for 1997–2009 (Sheehan 2012, p.29.)

  17. Accessible at http://www.start.umd.edu/gtd/downloads/Codebook.pdf. Also see http://www.start.umd.edu/gtd/ for more information about the database, methodology and the research papers using GTD.

  18. We thank Todd Sandler for kindly sharing the domestic and transnational terrorism data.

  19. http://privatewww.essex.ac.uk/~ksg/data-5.html.

  20. Terrorist attacks themselves could be endogenous to other factors such as domestic political instability (Campos and Gassebner 2013).

  21. http://info.worldbank.org/governance/wgi/index.aspx#faq. See Daude and Stein (2007) for a more comprehensive discussion of the role of institutions in impacting FDI.

  22. However, it is curious that the institutional coefficient per se is negative and statistically significant in the case of the occurrence of terrorism.

  23. For instance, does terrorism lead to an overall reduction in all types of capital flows or does it lead to a shift away from some types of financial flows to others?

  24. Ali et al. (2010) suggest that the most significant of these institutions in terms of impacting FDI are those linked to property rights.

  25. http://www.apec.org/Groups/SOM-Steering-Committee-on-Economic-and-Technical-Cooperation/Working-Groups/Counter-Terrorism/Secure-Trade-in-the-APEC-Region.aspx

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Acknowledgments

Valuable research assistance by Sasidaran Gopalan is gratefully acknowledged as are insightful and constructive comments by two anonymous referees of this journal. The usual disclaimer applies. Financial support from China National Social Science Fund (#16BJY167), Key Project of China Ministry of Education (#14JZD016) and CUFE Youth Innovation Fund are greatly acknowledged.

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Authors and Affiliations

  1. China Academy of Public Finance and Public Policy, Central University of Finance and Economics, Beijing, China

    Alice Y. Ouyang

  2. ESSEC School Business, Asia-Pacific Campus, 5 Nepal Park, Singapore, 139408, Singapore

    Ramkishen S. Rajan

  3. Lee Kuan Yew School of Public Policy, National University of Singapore, Singapore, Singapore

    Ramkishen S. Rajan

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  1. Alice Y. Ouyang
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Correspondence to Ramkishen S. Rajan.

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Ouyang, A.Y., Rajan, R.S. Impact of Terrorism on Cross-Border Mergers and Acquisitions (M&As): Prevalence, Frequency and Intensity. Open Econ Rev 28, 79–106 (2017). https://doi.org/10.1007/s11079-016-9407-y

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