Foreign direct investment,the impact of foreign direct investment on developing countries,empirical evidence and conclusions for Turkey

FDI can be defined as investments in which a firm establishes a new firm out of its home country where it is centrally located, or as investments in the form of buying an existing domestic firm or raising capital to make the firm dependable on the buyer. FDI, depending on its magnitude, can have some effects on competition, technology, exportation, importation, balance of payments, economic growth, production, national income, employment, rate of currency, interest rate, and welfare in the host country. FDI, had turned its direction towards developed countries recently as oppose to the previous period when it was channeled from developed countries to underdeveloped economies. It has been observed that the number of firms which belong to the developing countries that perform FDI has been on the rise in recent years. FDI has its root back to the period before the foundation of the Republic of Turkey. 1838 Commercial Agreement, Capitulations, and foreign debts are the first signs of foreign capital investments at the time of the Ottoman Empire. The area of activities are mostly related to the public services and the operation of natural resources. Some of these activities are freight, electricity, telephone services, tramway, natural gas, and water works. Of these investments, 45 percent German, 26 percent French, 17 percent British, 4 percent Belgium, and 2 percent belong to American capital holders. The exemption of customs or low custom taxes to foreign by capitulations caused the loss of income received and the erosion of domestic industrial production based on laborers. At the time, the Republic of Turkey established, its industry was based on agriculture with the exception of some business activities such as minerals, water works, electricity, natural gas services, telephone services, and transportation services in big cities which were operated by foreign companies who enjoyed the exemption of tax and customs obligations. In the years following the foundation of the Republic of Turkey, the effort had been made to draw the foreign capital investments into the country. However, the expropriation and nationalizations had blocked the way in receiving foreign capital at a desired scale. In the period of 1938-50, it has been observed that the measurements to channel the foreign capital through the country was not taken as in the previous period. After 1950, the perception on the foreign capital changed and some laws put into effect in order to make its flow into the country easier. The law code 6224 was put into effect in 18.01.1954 and the law code 6326 was also put into effect to give permission to the foreign companies to search for petroleum and encourage foreign capital investments. However, until 1980s, the policy implications had not complied with the laws that were trying to draw the foreign capital into the country. The liberal policies after 1980 had the desired effect to encourage foreign capital to invest in the country. However, the increase in FDI resided the increase in the portfolio and short-term investments. As a result of financial liberalization and foreign capital encouragement policies, there has been an increase in the foreign capital that has been drawn into Turkey. The channeled FDI after the second half of 1980 has more likely to do with the service sector. The share of Turkey?s FDI in the world is not sufficient as well as is not through the sectors that may contribute to real production and employment because they are mostly in the form of buying existing companies instead of building up new production facilities. According to the empirical study, the increase in FDI in Turkey has a meaningful effect on Gross National Product and the rate of currency in the second period. This statistically significant result is consistent with the expectations except for exportation. According to the result, a 1 percent increase in FDI will increase Gross National Product at 2.5 percent, and decrease exportation and the rate of currency at 7.6 percent and 10.9 percent respectively in the following year. The effect of FDI on FTT and inflation is consistent with the expectations.