Determinants of foreign direct investment and it's economic impacts: The case of developing countries and Turkey

This thesis aims to answer three important questions related with foreign direct investment. First, the importance of foreign direct investment for the growth process of Turkey is investigated. Then, the determinant effects of country risk factors on foreign direct investment were analyzed. Lastly, the links between foreign direct invest, financial markets and growth was examined. According to the non-debt-creating growth model, explained in this study, the amount of foreign direct investment that Turkey needs to attract in order not to increase the foreign debt ratio is at least 3.02% of GDP. In the last parts of this study, panel data analyses were implemented by grouping countries according to their development levels. Results show that country risk factors, represented by credit ratings and risk premium, have a significant positive effect on foreign direct investment for developing countries. For developed countries this effect is insignificant. Therefore, for developing countries, an important component of foreign direct investment policy should be ensuring macroeconomic and political stability. In developing countries banking system has an important role in creating positive spillover effects of foreign direct investment on growth. On the other hand, stock market has such an important role in developed countries. In order to benefit from foreign direct investments' technological knowledge and skills, local firms' access to financial resources is necessary. The more developed the local financial markets, the easier it is for credit constrained local entrepreneurs to invest on new businesses. KEYWORDS: Foreign Direct Investment, Developing Countries, Panel Data, CountryRisk Factors, Financial Markets