The recent terror attacks in Europe have temporary depressive shocks on the stock market and lasting impact on travel, leisure, and consumer spending, but foreign direct investment into Europe is relatively unaffected. However, terrorist attacks in the Middle East have a significant lasting impact on foreign direct investment since smaller, less diversified economies are less able to withstand the economic effects of terrorism. Countries with higher incidents of domestic and transnational terrorism see lower incoming foreign direct investment and foreign aid.
Large, diversified economies like Europe are able to better withstand the effects of terrorist attacks;; if terrorist disrupt productive activities in one sector, resources can easily flow to another unaffected sector. Terrorist attacks in Europe have a temporary effect on the stock market, but do not have long term effects on investor confidence since richer economies have more resources to devote to counterterrorism efforts, which reduce terror attacks and reinstate investor confidence. Travel and leisure companies are affected disproportionately more due to slowdown in travel and consumer spending, for example, French stock market index dropped 1% after Nov. 13th, 2015 Paris attacks, while hotel, travel, and leisure companies saw of 3 – 6% drop in stock price. Effects on stock markets are temporary: March 22nd Brussels attacks saw a 2% drop on France’s CAC and Germany’s DAX index, which recovered by the end of the day. Foreign direct investment in Europe remains unchanged; for example, Brussels terrorist attack did not alter the Ontario Teachers’ Pension Plan outlook on making infrastructure investments in airports and shopping centers in Belgium. Governments are increasing defense and security spending, particularly in munitions, drones, and offensive cybersecurity, which is benefiting U.S. Companies like Lockheed, Raytheon, and General Dynamics.
Middle East, North Africa and Pakistan
Conflict in Syria, terrorist attacks, and the refugee crisis have had a significant lasting impact on foreign direct investment and portfolio investment for countries in the Middle East. Political instability and market volatility leads investors to become increasingly risk averse. Gulf countries, like UAE, Saudi Arabia, and Qatar, are less affected by terrorist incidents and are still seen as attractive, stable investments by outside investors. In Turkey, investment climate is worsening; ; between 2007 and 2015, foreign direct investment dropped from USD 22bn to 12.5bn and Turkey experienced credit rating downgrades. Tourism in Egypt has been significantly impacted; ; it will see its sixth consecutive year of decline in tourism since 25 January uprising. Pakistan is seeing significant outflows of portfolio investment, which slashed its overall foreign private investment by 50% from last year.