Ms Villiers made the remarks the day after 10 police officers were injured during a riot in east Belfast.
The trouble flared during a loyalist protest against a council decision to limit the number of days the union flag is flown at Belfast City Hall.
Further protests are taking place across the city on Friday evening.
Translink said some Belfast metro bus services have been withdrawn.
Ms Villiers said the violence that had resulted from some of the demonstrations in recent weeks was "completely unacceptable".
"The incredibly damaging thing is the image it projects of Northern Ireland around the world, she told BBC Radio Ulster's Evening Extra programme.
"Northern Ireland is in a global race for investment and jobs and we need to be projecting the reality of a forward-looking, modern Northern Ireland, not one which is tied up in the kind of conflict which is associated with its past rather than its present."
Street protests have been taking place, almost on daily basis, since councillors voted to change their long-standing flag policy on 3 December.
The secretary of state said retailers representatives had expressed "a huge amount of concern" to her about the impact the violence had on pre-Christmas trade.
"Thankfully no investor has come to me directly to say that this is affecting their decisions - and I certainly hope it won't - but there must be a risk that it does, and that's one of many reasons why these flag protests are damaging and they're actually counter-productive.
"They're undermining the cause they are seeking to promote," Ms Villiers said.
She called on all political parties in Northern Ireland to engage in dialogue to resolve disputes over flag and emblems,
"Political leadership in Northern Ireland has grappled with more difficult than this one," she added.
"It does demonstrate that it is crucial there is a push to address division in society, to address sectarian division and build a genuinely shared future, because if we do that, then surely it's possible to make these kind of decisions in a way which is far less fraught with tensions than we've seen in recent weeks," Ms Villiers said.
The secretary of state confirmed that she has not spoken directly to the leaders of the two main unionist parties, the DUP and UUP, since they announced they were setting up a unionist forum to deal with cultural issues such as flag on 18 December.

John Morley, 29, of Deanstown, Finglas West, is alleged to have carried out a sustained weekend attack at the Chimney Corner Hotel in Mallusk.
The victim, Derek White, was said to have been stabbed in the chest and leg.
Mr Morley, is charged with the attempted wounding of Mr White and possession of an offensive weapon with intent to commit an offence.
He is further accused of disorderly behaviour and possession of Class B drugs, namely cannabis.
He will not be released from custody until all conditions are met - including the lodgement of a Â£2,000 cash surety.
Police detained him after being called to the hotel just outside north Belfast in the early hours of Sunday.
Paramedics were already on the scene treating Mr White, who is believed to be aged in his 30s.
At the defendant's first appearance before Belfast Magistrates' Court it was alleged that he chased the victim through the hotel with a flick knife.
A police officer revealed the two men had travelled to Northern Ireland with their children for a football match.

The degrees form part of the UK's cyber security strategy published in 2011.
The strategy recognised that education was key to improving defences against hackers and online fraud.
Cabinet Office minister Francis Maude said internet cyber security was a "crucial part" of the government's long-term plan for the British economy.
He said the courses would help to make the "UK one of the safest places in the world to do business online".
He said: "Through the excellent work of GCHQ, in partnership with other government departments, the private sector and academia, we are able to counter threats and ensure together we are stronger and more aware."
UK universities were invited to submit their master's degree courses for certification.
The universities now running GCHQ-approved programmes in cyber security are Edinburgh Napier University, Lancaster University, the University of Oxford and Royal Holloway, University of London.
GCHQ has also given provisional accreditation to Cranfield University's cyber defence and information assurance course, and the University of Surrey's information security course.
A spokesman for GCHQ said the universities "were judged to provide well-defined and appropriate content, delivered to the highest standard".
Violence during flag protests is damaging the image of Northern Ireland internationally, the Secretary of State, Theresa Villiers, has said.
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A Dublin man accused of stabbing his friend in a County Antrim hotel has been granted bail.
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Intelligence agency GCHQ has accredited six UK universities to teach specialist master's degree courses to future internet security experts.