Environmental impact of foreign direct investment in Turkey: does the quality of institutions matter? Evidence from time series anaylsis with the fourier extension

Abstract

Foreign direct investment (FDI) and ecological footprint (EFP) has exhibited a notable surge in Turkey since the 1980s. It is widely acknowledged that FDI can have a significant impact on ecological changes. The phenomenon whereby FDI contributes to environmental degradation is commonly referred to as the pollution haven hypothesis, whereas the converse phenomenon, whereby FDI mitigates environmental degradation, is known as the pollution halo hypothesis. On the other hand, institutional quality has a significant impact on the FDI-EFP relationship. In this study, the environmental effects of FDI in Turkey for the period 1984–2018 are examined employing time series with Fourier extension, considering the institutional quality. Fourier function models give more effective results in modeling structural breaks. Initially, the Fourier techniques are used to explore the unit root and cointegration relationship. Then, following cointegration, the DOLS estimator extended with Fourier terms are employed to derive the long-term coefficients. Ultimately, the causal relationship between the variables is examined through with the Fourier causality test. The results highlight that FDI increases environmental degradation (pollution haven hypothesis valid), whereas the interaction between FDI and institutional quality reduces environmental degradation (pollution halo hypothesis is valid). Based on these empirical results, this research suggests that enhancing the institutional quality in Turkey is likely to amplify the environmental advantages of FDI besides its economic benefits.