The Impact of Foreign Direct Investment on Economic Growth: A Case Study of Turkey 1980–2012

Abstract

This paper employs time series techniques to analyse the effect of foreign direct investment on economic growth in Turkey. The study uses annual data over the period 1980-2012. The gross domestic product (GDP) is the dependent variable and foreign direct investment (FDI), domestic investment (DIN) and trade liberalization (TL) are the explanatory variables. The empirical analysis starts with run ordinary least square (OLS). The result of Augmented Dickey Fuller (ADF) test hence shows that the series are non-stationary in the level form and stationary in the first difference. The paper further utilises the Johansen cointegration test whereby it finds no cointegration and long run relationship between variables. This study uses Vector Autoregression (VAR) model in order to find the causality. The result demonstrates that there is no causality linkage between GDP with both FDI and DIN. At the same time, there is one-way causality between GDP and trade liberalisation (TL) in the context of Turkey. On the other hand, it is found that there is statistically insignificant yet positive short run impact of foreign direct investment on gross domestic product (GDP) while OLS is used to analyse the magnitude of the impact by means of level form in Turkey. In addition to this, there is a significant as well as positive impact of domestic investment on economic growth; however, there is negative and significant impact of trade liberalization on economic growth. Keywords: foreign direct investment, gross domestic product, domestic investment, international liberalization, vector autoregressionAccording to (Nair-Reichert & Weinhold, 2001) in the last two decades the FDI has increased by 17 percent in the developing countries. In the last twenty years, globalisation has much supported the inflows of factors of production around the world supported by the advancement of communication and information technology. Multinational companies refer to various indicators and indices in their selection of the particular developing countries to invest. Therefore, despite the advancement in the use of technology in their operation and production, these companies require higher technology and well-educated labour force. In terms of the qualified www.ccsenet.org/ijef

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