FDI and Growth: The Case of Turkey

Abstract: Since 1980 foreign direct investment (FDI) has become the vital determinant of economic growth of the host country. FDI plays important role on improving the host country market, productivity, human capital, and brings new technological progresses, it also creates various job opportunities. Turkey is the unique country among the Islamic and Middle Eastern countries because of her close relationships with European countries, Russia, USA, Asia and Middle East. Her geographical location advantages, cheap labor cost and emerging market potential attract foreign investors. This paper aspires to analyze the impacts of economic growth on FDI in the case of Turkey. Many studies find a positive effect between these variables but it is hard to determine if FDI affects growth or if growth affects FDI. The direction of the causality between FDI and economic growth is examined by using Johansen Cointegration and Granger causality tests. The results show that whilst FDI and growth have long-run relationships, in the short-run the direction of relationship runs from economic growth to FDI. After determining the direction of the causality, time series data of Turkey is used to test if economic growth has significant impact on FDI by applying Ordinary Least Square (OLS) estimation model. The findings turn out that the amount of FDI is affected positively by economic growth in Turkey.