Terrorism, openness and the Feldstein-Horioka paradox

- Why is capital substantially more mobile in developing countries?
- This is despite the fact that they are less open.
- Terrorism marginally increases the size of the savings retention coefficient.
- Openness offsets this effect and capital leaves domestic boundaries.
- All types of terrorism adversely affect investment.

This paper investigates how terror threats and international openness affect the savings retention coefficient in the Feldstein-Horioka equation. We find that terrorism marginally increases the size of this coefficient, which may result from an increase in the precautionary saving motives. However, even a small increase in openness offsets this effect and significantly lowers the propensity to retain domestic savings for investment. This suggests that, given more channels, capital leaves domestic boundaries to land in safe places abroad. At least partly, the results explain the paradoxical finding in the literature that capital is more mobile in developing countries, even though they are less open. We also find that all types of terrorism reduce investment.