The Relationship between Foreign Direct Investment and Economic Growth: A Case of Turkey

TL;DR

This study investigates the short-term and long-term relationship between FDI inflows and real GDP in Turkey from 1970 to 2019, finding a short-term positive effect of GDP on FDI but no long-term impact.

Contribution

It provides empirical evidence on the uni-directional short-term influence of GDP on FDI in Turkey using advanced econometric models.

Findings

Short-term positive effect of real GDP on FDI inflows

No significant long-term relationship between FDI and GDP

Policy implications for attracting FDI to boost economic growth

Abstract

This paper examines the relationship between net FDI inflows and real GDP for Turkey from 1970 to 2019. Although conventional economic growth theories and most empirical research suggest that there is a bi-directional positive effect between these macro variables, the results indicate that there is a uni-directional significant short-run positive effect of real GDP on net FDI inflows to Turkey by employing the Vector Error Correction Model, Granger Causality, Impulse Response Functions and Variance Decomposition. Also, there is no long-run effect has been found. The findings recommend Turkish authorities optimally benefit from the potential positive effect of net incoming FDI on the real GDP by allocating it for the productive sectoral establishments while effectively maintaining the country's real economic growth to attract further FDI inflows.