Multinational Corporations and Financial Fueling of Terrorism in the Shadow of Globalisation

Trade policies are vulnerable to the possibility of being used as an instrument for terrorist financing. The paper is an attempt to construct a theory of terrorist financing in the backdrop of world trade and payments. In contrast to the majority of the extant studies that examine the effects of terrorism on trade and foreign investment, this paper looks at how globalisation may contribute to the incidence of terrorism. First, we provide a micro-theoretic framework to explain the social and economic rationale of terrorism, of which endogenous determination of labour supply in terrorist activities is a consequence. Based on the partial equilibrium results, we develop a general equilibrium model that examines the trade policies exploited by multinational corporations (MNCs) and their subsidiaries in order to finance terrorism. Our study demonstrates that capital rerouting and transfer pricing are crucial instruments of terror financing. Furthermore, we examine the effectiveness of counter-terrorism enforcement strategies. Interestingly, our findings reveal that the outcomes of increased foreign capital inflow and greater globalisation in the foreign economy, particularly facilitated by the liberalisation of foreign taxes, unequivocally led to an escalation in the incidence of terror financing and terrorist activities, while the effects of domestic tax liberalisation and stringent enforcement strategies exhibit ambiguity in their impact on such activities.