Explaining foreign direct investment inflows to Turkey: Using time-series and augmented gravity model estimations

Foreign Direct Investment (FDI) is a very important economic indicator for a country, especially for a developing one. It does not only provide jobs and value addition for the host country, but also creates a positive spillover effect and know-how transfer to it. Hence, it is not surprising that researches find a positive effect of FDI on economic growth and development of host countries. As a developing country with a current account deficit problem, Turkey aims to be a more attractive place for foreign investors as it can be seen from its medium-term economic program. Therefore, understanding the factors behind the FDI inflows to Turkey is an important topic both for academia and policy-makers. However, it seems that there is not enough research about the determinants of FDI inflow to Turkey in the literature. Moreover, to best of our knowledge, none of these researches used Gravity Model to analyze the determinants of FDI inflow and they rather used outdated data sources when they analyzed this question empirically. Hence, we firstly employed Gravity Model to explain determinants of FDI inflow to emerging countries and Turkey. Secondly, to investigate whole period after globalization of the country, we used time series model by using data from 1980 to 2014. Our findings for emerging countries show that distance between host and source country has significant and negative relationship with FDI inflow like it has been found for the trade flows in the literature. Furthermore, when GDP of host or source country is higher, FDI flow between these two countries is getting increased. Except from economic size and distance, our augmented gravity model also showed that countries with higher rule of law scores have higher FDI inflows. However, our empirical analysis could not find any statistically significant relationship of recession and common language with FDI inflows which is understandable as FDI is a kind of long-run oriented investment and short-run changes in the economy like recessions does not have a enduring effect on the FDI flow decisions. As we explain in the theoretical part of the thesis, one important reason of FDI flows is to reach the local markets by foreign companies, which is a long-run decision and therefore it is also not depending on the common language factor. When we repeated the same augmented gravity model analysis only for FDI flows to Turkey, we found that our results were very close to the findings when we have used the whole emerging country dataset although some exceptions emerged. Firstly, the relation between rule of law and FDI inflow to Turkey is found to be statistically insignificant. Secondly, the economic significant of the association between the FDI inflow and GDP is found to be much more higher in the latter case which suggests that Turkey economic well-being in terms of gross productivity is the key factor behind the FDI inflows. Lastly, our time series analysis showed that increase in market size of Turkey, infrastructure investments and economic growth of the country are both statistically and economically significant and positively correlated with FDI inflow increase to Turkey. In addition, relationship between exchange rate change and FDI inflow variation in found to be statistically significant and negative which can be interpreted that macroeconomic stability is also important factor for explaining the FDI inflows to Turkey.