How Do Foreign Direct Investment and Growth Interact in Turkey?

This paper empirically investigates the relation between growth and Foreign Direct Investment (FDI) in Turkey. There are mixed conclusions about the impact of FDI on growth and the literature includes many studies where FDI has negative, positive and no significant effects on growth. Turkey serves like an open lab for such empirical studies since the country has experienced high and persistent levels of inflation for about thirty years as well as several economic crises in the last decade after which the inflation is taken under control and high growth rates are attained. Furthermore, Turkey has managed to start receiving considerable FDI recently. We establish a VAR Model with 5 variables to examine the FDI-Growth relation and consequently the impulse-response analysis are carried out to see the impact of shocks on the variables entering the VAR equations. We also included the variance decomposition to work out the sources of variance in both growth and FDI. Our model provides empirical support to bi-directional causality between FDI and growth.