How Terrorism Affects Firm R&D Investment: A Real Options View

Abstract

Although the number of countries threatened by terrorism has been increasing in the past decades, our understanding of the impact of terrorism is still limited. This study examines the relationship between terrorism and firm R&D investment, and how a country’s institutional environments and a firm’s resource endowments may shape this relationship. Drawing upon the real options theory, we argue that terrorism dampens firms’ R&D investment because terrorism-induced uncertainty increases the value of the embedded deferral option while having little impact on the value of the growth option. However, good institutional environments (e.g., strong IPR protection, low public expropriation hazards) mitigate firms’ disincentive to invest in R&D stemming from uncertainty. In addition, large and cash-rich firms are less sensitive to terrorism-induced uncertainty because they face higher organizational inertia and rely less on the external financial market.