Abstract:-
Terrorism imposes a tax on firm investment hindering economic development, but the causal impact of terrorism incidents on firm performance has rarely been captured. This is due to two reasons – first, a paucity of investment data on firms in high-conflict regions, and second, a lack of high-dimensional data on terrorism incidents spread over an extensive geographical area that is subject to similar political institutions. Moreover, it is also challenging to obtain such data over long-periods of time. This is the first study on the causal impact of terrorism on firms’ capital investments in Jammu and Kashmir, a Union Territory in India of over 42,000 sq. km. We merge firm-level annual industry microdata provided by the Government of India’s Ministry of Statistics and Programme Implementation (MoSPI) and district-wise Terrorist Incidence data from South Asia Terrorism Portal (SATP) over the period 2001-2010 to investigate how terrorist incidents affect new investments in capital. After accounting for district, year and industry-fixed effects and district-specific trends, we find that a 1 SD increase in Terrorism Incidents causes a reduction in new capital investment by about 20%. These negative responses in investments to terrorism are almost entirely driven by the top-quartile of capital-intensive firms and show partial recovery after more than a year of terrorism incidents.