A panel data study of determinants of FDI in Turkey and selected European countries

ABSTRACT: Foreign direct investments are international investments which are performed by foreign investors in a country and depend on several factors. Some of these factors have been represented in the previous studies, such as: market size, growth prospect, macroeconomic stability, level of exchange rate and business environment. In line with those studies, the current study seeks to analyze the determinants of FDI in some selected European countries as well as Turkey. To do so, a panel data of 17 countries (including Turkey, 9 West European and 7 East European countries) across 11 years (from 2000 to 2010) has been used. Explanatory variables used in this study are: real GDP, GDP growth rate, inflation as a proxy for macroeconomic stability, real exchange rate, internet user and school life expectancy, where the last two are taken respectively as proxy for physical capital and human capital. The panel data estimation with random effects provided support for all six control variables with correct sign. Moreover, the results showed that all six variables were significant for selected countries. It seems that large market size, strong macroeconomic stability, growth prospects, depreciation of currency, and technology such as internet and school life expectancy, are important factors for absorbing foreign investors into these countries for a specified period. Key Words: FDI, Panel data, Turkey, European countries, real change rate, macroeconomic stability, growth, physical capital and human capital. …………………………………………………………………………………………………………………………………………………………………………………………………………