The huge cost associated with terrorist incidents and the related significant redistribution of economic resources motivate a better understanding of the economic consequences of terrorism. By using crosscountry panel data on FDI flows and terrorism for 1980-2000, this paper examines the effect of terrorism as well as some economic and institution factors on the FDI flows. In order to allow for possible endogeneity of terrorism, we use dynamic panel system GMM estimation. The estimation results confirm our hypothesis that terrorism deters FDI inflows. Depending on definition of terrorism variables, an increase of terrorism decreases FDI stock by 0.3-0.6%. It is shown that the FDI determinants of economic and institution factors play significant role as well.