Terrorism - Impact in Global Business

Terrorism in the broadest sense is defined as the use of intentional violence in a way to frighten people in an area, generally civilians, in order to achieve a political goal. It has been part of society throughout history ever since. In the modern world the motive behind the terrorism has become even more complex and complicated not only it is targeting citizens but also the factors which affect daily life and mechanism of state machinery, and the instruments of economy and economic functions are new targets of terrorism. Terrorism directly exploits a country’s ability to attract Foreign Direct Investment and reputation. The U.S. Department of State defines terrorism to be “premeditated politically-motivated violence perpetrated against non-combatant targets by sub-national groups or clandestine agents, usually intended to influence an audience”.

Terrorism’s direct effects are characterized by loss of human life, as well as by demolition of infrastructure, buildings, and equipment. While terrorism’s indirect effects tend to be widely influenced in buyer demand, increased global or international business transaction costs, interruptions in international supply chains, declines in foreign direct investment (FDI), and government regulations and procedures intended to tackle emergent threats. For example, international supply chain interruptions following the September 11, 2001 attacks in the United States led Ford to temporarily close five of its US auto plants. The global express delivery firm Federal Express lost over $100 million in the 48 h after the 9/11 attacks. Terrorism produces new barriers to cross-border trade and investment, as national and supra-national governments impose anti-terrorism policies, regulations, and procedures. Such responses have the potential to change the commercial environment adversely in the ways more harmful to business interests than the terrorist events that caused them.

Economic Consequences of Terrorism in Global Business

Tourism

Tourism in any region is inversely related to terrorism risk levels in the region. Tourism is a service-based industry which is comprised of several elements which include transportation, foods, tours, merchandising and short or long term stay in hotels. International tourism is a major source of Foreign Exchange for developing and developed countries and is one of the world’s largest industry and an important economic factor. Economic development in many countries depends upon tourism, as tourists from developed and other countries bring foreign currency for forex. A country or region prone to the terrorist attack is avoided by tourists, people avoid visiting and travelling the country due to the risk of their life; this, in turn, affects FDI. People often suffer from tighter security in borders, ports and airports. Visa regulations are often heightened after terrorist has attacked the country. Many tourists have to pay a higher cost of getting travel visa and have to ungergo intrusive security check while carrying liquids and electronic gadgets.

Indonesia is one such example which became a victim of the terrorist attack on September 11, 2002 and suffered economically.

Fear is generated among tourists who think twice before visiting a destination leading to cancellations. After the terrorist attacks from 2015 in Paris, it has been shown that the tourist rate decreased by 10% in the French hotels. Tourists prefer to either skip those particular destinations or to shorten their stay.

After the attack in 2011 in the US several airports were not functioning leading to the cancellation of a large number of flights. Once the airports were operating again,airlines suffered a loss of more than 30% in demand (World Economic Forum:2015)

Foreign Direct Investment

In developing country FDI is a vital source for development and considered major source of foreign capital and technology to support economic growth. Terrorist activities reduces the amount of FDI which affect the development of a particular country.A region or country prone to the terrorist attack attracts lower levels of FDI because no country will like to invest in countries like Syria and Turkey due to political unrest. It negatively affects the investment decision by a foreign firm. For example a multinational corporation based in Europe and US may find India an attractive location for setting up an industry due to the abundance of cheap and skilled labour force. However if that location is potential location for uprising and terrorism, the will have to weigh the benefit from cheap labour against the possibility of loss o plant, machinery, manpower and imported equipment. On an average,  higher incidence of terrorism will tend to negatively impact the willingness of foreign investor in terror infested area. As people avoid risk, a high level of errorism lowers the level of FDI.

Financial Sector

Global and national economy, both are victimized by terrorist activity.It has direct as well as inverse relation on financial market. Terrorist attack leas to increase in the Insurance claim.The September 11 attack on USA resulted in huge loss of life and property; there was an estimated claim of $40 billion. The risk caused by terrorism was new and uncertain and insurance companies didn’t have prior experience. As a result only a few insurers are offering limited and expensive coverage for terrorism.

In the wake of the attacks on World Trade Center on September 09, 2001, the New York Stock Exchange and the NASDAQ remained closed until September 17 On the first day of NYSE trading after 9/11, the market fell 684 points, a 7.1% decline and  the Dow Jones was down almost 1,370 points, a loss of over 14%. The Standard and Poor's (S&P) index lost 11.6%. An estimated $1.4 trillion in value was lost during those five days of trading. The Federal Reserve dropped the fed funds rate half a point to 3.0%.

Crude oil, an estimated worth 4.5%-6.5% of global GDP, is an industry constantly under terrorist attack because it is such a valuable commodity. For the economies of countries with large oil and gas reserves, terrorist incidents can cause significant disruption across various industries, pushing up costs and driving down economic growth. Two such countries, Nigeria and Colombia, were the targets of 745  of all attacks on the oil sector in 2016. Leading to the global rise in price of crude oil.

After 26/11  the Indian Hotels stock took a hit on November 28, 2008 when the market opened. It started 5.07% lower as compared to its previous close of the BSE. Intraday, the stock trading fell down to 17.44%. Finally, it closed at  17.04% lower than its previous closing price.