The relationship betweeen direct foreign investment and exchange rate: The case of Turkey

One of the biggest problems seen in developing countries is that the saving rates are not at the desired level. This problem forces the countries that face the lack of savings to benefit from foreign sources, especially foreign direct investments. Both developed and developing countries are making great efforts to attract these investments to their countries due to many advantages such as new technology, employment opportunities and contribution to the export of the country provided by the foreign direct investment to the host country together with the capital. Foreign direct investments are affected by many variables, including the exchange rate. In this study, the relationship between the foreign exchange rate affecting foreign direct investment and foreign direct investment is investigated. In the first part of the study, exchange rate concept and theories are explained. Then, foreign direct investments, the determinants of these investments, their realization patterns and the factors affecting these investments are given. Finally, the relationship between foreign exchange rates and foreign direct investments was measured with ADF unit root tests, Engle-Granger cointegration tests, error correction models and Hendry model tests. As a result of ADF unit root tests applied to the variables, it was observed that the variables were stationary at the first difference values. The estimation results showed that there is a relationship between foreign direct investments and foreign exchange rates in the long run. In the short term, it is concluded that there is no relationship between these two variables and that foreign direct investments are affected by their previous values.