Governance institutions in the face of terror: a study of domestic investment in Pakistan

Purpose This study aims to investigate the impact of terrorism on domestic investment in Pakistan during the first two decades of the 21st century. This study pays special attention to the interaction between violence, governance and economic freedom to isolate the institutional consequences of terrorism. Design/methodology/approach An autoregressive distributed lag model with error-correction is used. Findings The empirical conclusions are twofold. First, terrorism has an adverse but indirect effect on domestic capital formation. This adverse effect is particularly pronounced in the short run. Second, the indirect effects of terrorism are transmitted through institutional channels only. In other words, the negative influence terrorism exerts on capital formation is solely dependent on its harmful impact on governance institutions. There is no evidence of non-institutional transmission mechanisms. Originality/value Literature so far has focused mostly on physical destruction and loss of life associated with violent conflict. This paper sheds light on the institutional impact, which is oft ignored but significantly more consequential.