Foreign direct investments, democracy, and economic growth in Turkey

Abstract

Purpose In the last decade, foreign direct investment (FDI) flows have increased dramatically in the world, especially in the emerging economies. Some of these countries make changes in their market conditions that will improve the civil rights and liberties to attract better FDI flows. The purpose of this paper is to test the linkage between democracy and FDI flows to Turkey. Design/methodology/approach The present study employs a bounds testing procedure developed (Pesaran et al., 2001) for cointegration analysis on six different long-run models with selected determinants of FDIs with yearly data from 1977 to 2011. Findings The intuition the paper empirically provides how improvements in democracy have a significant positive impact on FDI flows to Turkey. The results may also put forward that, in the long run, FDI inflows will have spillover effects in Turkey’s economy. Research limitations/implications Although one drawback in the study is having a small sample size of 35 observations, estimating six different long-run models is one way to overcome it. Thus presented results may be in short of simplification for some readers. This, however, opens an opportunity for future studies to further the proposal by employing in different models and/or longer data sets if possible. Practical implications A stable government policies, more civil freedom, and sustained institution politics should not be ignored in Turkey given its geopolitical location. Originality/value This paper satisfies the established need to study of democracy and FDI flows link is necessary in an emerging market such as Turkey.

Country-specific determinants of FDI inflows to the MENA region

“…The economic rationale underlying MNEs' activities in a foreign market is that, ceteris paribus, MNEs should prefer locations with low labor costs, taxes and inflation over locations with high levels of these cost factors (Nielsen et al, 2017). However, for labor cost, the support for this hypothesis is mixed, with only two studies (Bouabdi, 2015;Durmaz, 2017) presenting it as a negative predictor of FDI, while two FDI inflows to the MENA region others (Elheddad, 2018;Rahmouni and Debbiche, 2017) find the opposite relationship.…”

“…Regarding taxes, the empirical results also range from studies revealing high tax rates to be negatively related to FDI (Durmaz, 2017) to studies reporting no significant impact (Onyeiwu, 2003;Rahmouni and Debbiche, 2017). Of the studies that include the inflation variable, most report its significant and negative impact on FDI (eight studies, i.e.…”

The political regime as a determinant of inward foreign direct investment

“…Sometimes democracy by itself is not as decisively important as certain political factors which are often part and parcel with liberal democratic institutions, providing a hospitable investment climate (Biglaiser and Staats, 2010;Durmaz, 2017;Moon, 2015). Hence, the importance of the enforcement of property rights, the adherence to the rule of law, and reliable court systems are mainly related to foreign investors' concerns about the risk and their decision to invest (Biglaiser and Staats,[39] 2010, pp.…”

“…They revealed the importance of the quality of political institutions in recipient countries and their findings are in favour of democratic regimes attracting higher levels of FDI than autocratic ones. In the same line, Durmaz (2017) examined the relationship between democracy and FDI in Turkey for the period 1977-2011. Durmaz's analysis presents democracy as a critical factor in MNEs' decisions for choosing Turkey to be a potential investment site.…”

“…Since the last military intervention in 1980, the country experiences a more structured and stable government with policies and institutions providing improved political rights and more civil liberties. Hence, Turkey's institutional improvements support the country's development as a recipient of FDI (Durmaz, 2017).…”