Factors Influencing Foreign Direct Investment Flows into Turkey

Abstract

Objective: Foreign direct investment (FDI) is an important determinant of development. Thus, identifying the main drivers of investment is critical especially for emerging markets. The main aim of the article is to verify factors influencing FDI flows into Turkey. Research Design & Methods: Foreign investment can be affected by structural factors, such as growth and trade openness; stability factors, such as high fiscal deficits, inflation, and exchange rate changes; and global factors, such as the EU accession and the level of global liquidity. We examine the importance of these variables in affecting FDI flows into Turkey using quarterly data from 1992 to 2010 and cointegration and VECM methodology. Findings: We conclude that for Turkey (and perhaps other emerging markets) structural reforms that expand market size and trade opportunities yield more capital inflows than economic stabilisation efforts that address prices, exchange rates, and budget balances. Moreover, we find that during that period in Turkey, trade and investment were substitutes. Implications & Recommendations: Stabilisation efforts to control prices, exchange rates, and budgets matter, but not as much as structural reforms that impact market potential and trade flows. Contribution & Value Added: Previous literature generally finds that FDI and trade are complements in emerging countries. This was the case in Turkey as well in the eighties and early nineties. We show that the EU candidacy prospects have transformed the relationship between FDI and trade in Turkey.