Terrorism, Trade, and Foreign Direct Investment in Central and Eastern Europe

This paper investigates the impact of terrorism on bilateral trade and on Foreign Direct Investment (FDI) inflows into Central and Eastern Europe. We apply an extended gravity model to panel data, using per capita incomes of Central and Eastern European countries and their internal distance, along with traditional gravity variables. The results show that terrorism hurts imports and FDI flows into these countries. We then perform a comparative analysis across countries with high, medium, and low levels of terrorist activity. The results reveal that the impact is directly related to levels of terrorism. However, there is a disparity in the levels of statistical significance.