This paper studies the effects of foreign direct investment (FDI) on domestic terrorism. Using a cross-national, time-series analysis of 114 countries from 1991–2017, and employing structural equation modeling to test a number of mediating factors, we find that the impact of FDI on domestic terrorism depends on the host state's level of economic development. For host countries at higher-income levels, FDI boosts economic development and global integration promoting prosperity, increasing counterterrorism resources, and reducing the economic grievances that foster terrorism. Conversely, for lower-income host countries, increased FDI fuels higher domestic terrorism, as it intensifies clashes between traditional and modern elements within society, raises economic discrimination, heightens perceptions of economic insecurity, and subsequently leads to grievances directed against the state. Our results indicate a curvilinear relationship between FDI inflows and domestic terrorism, suggesting that FDI produces a double-edged sword between promoting economic development and increasing domestic terrorism in host states. [ABSTRACT FROM AUTHOR]