Abstract

This paper employs time series techniques to analyse the effect of foreign direct investment on economic growth in Turkey. The study uses annual data over the period 1980–2012. The gross domestic product (GDP) is the dependent variable and foreign direct investment (FDI), domestic investment (DIN) and trade liberalization (TL) are the explanatory variables. The empirical analysis starts with run ordinary least square (OLS). The result of Augmented Dickey Fuller (ADF) test hence shows that the series are non-stationary in the level form and stationary in the first difference. The paper further utilises the Johansen cointegration test whereby it finds no cointegration and long run relationship between variables. This study uses Vector Autoregression (VAR) model in order to find the causality. The result demonstrates that there is no causality linkage between GDP with both FDI and DIN. At the same time, there is one-way causality between GDP and trade liberalisation (TL) in the context of Turkey. On the other hand, it is found that there is statistically insignificant yet positive short run impact of foreign direct investment on gross domestic product (GDP) while OLS is used to analyse the magnitude of the impact by means of level form in Turkey. In addition to this, there is a significant as well as positive impact of domestic investment on economic growth; however, there is negative and significant impact of trade liberalization on economic growth.

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