DOES FOREIGN DIRECT INVESTMENT ACCELERATE THE ECONOMIC DEVELOPMENT IN TURKEY? | Homework Helpers

CHAPTER 1: INTRODUCTION

1.0 Background

            Several scholars and policy makers agree that Foreign Direct Investment (FDI) inflows have significant positive impacts on the economic development aspects of the host country. Apart from the direct capital used to finance its supplies, Cho (2003) asserts that FDI can be a key source of valuable know-how and technology as well forging linkages with domestic enterprises; this can play an instrumental role in jumpstarting the economy. Using these arguments as a theoretical basis, both developed and developing nations have provided numerous incentives, which act as the determinants of FDI, in order to foster FDI in their economies (Choe 2003).

However, recently, the merits associated with the FDI and the effectiveness of the incentives offered to foreign corporations is increasingly becoming questioned. This debate is further fuelled by the fact that empirical evidence linking FDI to positive economic spillovers for host nations is unclear at both the macro and micro levels (De Mello 1999). When surveying existing literature, Hanson (2001) asserts that the evidence that links FDI to positive economic spillovers is rather weak. Gorg & Greenwood (2002), when reviewing micro data relating to the spillovers from foreign firms to domestic firms, concludes that the effects are generally negative. However, Lipsey (2002) took a rather favorable point of view when reviewing micro literature and pointed out evidence of positive impacts ensuing from FDI. Nevertheless, Lipsey (2002), when reviewing macro data, concluded that there is no consistent relationship between FDI inward flows and economic growth and Gross Domestic Product (GDP). In this regard, Lipsey (2002) argued that it is imperative to analyze the various scenarios that tend to either promote or hinder economic spillovers from FDI inflows. It is apparent that there is no clear evidence regarding the interplay between FDI and economic development. In this regard, this research seeks to explore the interplay between FDI and economic development in Turkey, which has in the recent past, embarked adopted policies to increase its FDI-attractiveness. As a result, Turkey has witnessed a steadfast increase with respect to the FDI inflows. As of 2011, there were about 30,000 corporations with foreign capital operating in the country. This research seeks to determine whether these high levels of FDI inflows make any significant contributions to Turkey’s economic development.

1.1 Aims and Objectives

The primary aim of this study is to determine the role that FDI plays in Turkey’s economic development. Therefore, this study will evaluate the relationship between FDI inflows and the measures of economic development. The following are the specific objectives of this study:

1. To determine the relationship between FDI and real Gross Domestic Product in Turkey;
2. To determine the relationship between FDI and per capita income;

1.2 Scope of this Study

It is imperative to that economic development is a wide concept measured using several indicators. The selection of the indicators (variables) for this study was based on their relevance to FDI; as a result, variables of economic development that are associated with FDI such as life expectancy were not considered given the scope of this study.

CHAPTER 2: REVIEW OF LITERATURE

2.0 Key Theoretical Foundations

In its broadest sense, economic development refers to the increase in the living standards of the population of a given country. Economic development is as a result of sustainable economic growth from a low income economy to a high-income economy. Economic development of a nation is subject to factors such as the political structure and policies of a nation, and the social structure of the population. Borenztein, De Gregorio & Lee (1998) perceives economic development in the light of qualitative and quantitative changes in a country’s economy, which can involve several areas such as human capital, literacy, safety, human health, social inclusion, environmental sustainability, regional competitiveness and critical infrastructure. It is imperative to note that economic development is not the same as economic growth. According to Cho (2003), economic development is mainly a policy intervention undertaking having the main objective of improving the social and economic wellbeing of individuals whereas economic growth focuses on market productivity and an increase in the Gross Domestic Product. In order to evaluate economic development, key indicators such as literacy rates, human development, health and education and other economic aspects, an improvement in the above indicators denote economic development. Theoretical models have been used to explain the linkage between FDI and economic development (Choe 2003).

Most of the past economic literature regarding FDI has always treated FDI as a component of the general theory of global capital movements, which draws upon the differences existing between countries with respect to the cost and abundance of capital. For instance, if country X creates a direct investment in another country Y, it is evident that country Y will have an aIDed physical capital as well as improved production capacity. The investing corporation from country X will have opted to transfer some of its capital to country Y instead of investing in country X (De Mello 1999). In the event that the output can be traded, some of the production taking place in country Y following the direct investment may substitute the production that was formerly taking place in country X. There is the likelihood that the investing company may have cut its production in its home nation, country X, perhaps by closing or selling up the establishment and setting up a new plant in a foreign country but serving the demands of the same market (De Mello 1999).

There is a different possibility, say, that a company in Country X opts to undertake a direct investment country Y but there is no relative change regarding the level of production and physical capital in both nations. For instance, the managers and owners of a firm in Country X can opt to acquire a firm in Country Y with the aim of increasing the efficiency of the newly acquired firm. In such a transaction, it is apparent there is no net transfer of financial and physical capital between the countries although it is an instance of FDI (De Mello 1999).

According to Dees (1998), FDI entails a combined flow of both technology and capital. Drawing upon the growth and trade theory, it is evident that capital inflows result in an increase in the Gross Domestic Product per capita, especially to the importing nation. In aIDition, access to advanced technology can be a potential source of sustainable growth. As a result, Dees (1998) points out that the manner in which advanced technology spills to the domestic economy and the practical significance of these spillovers have gained the interests of researchers and scholars in the recent years.

Gorg & Greenaway (2002) points out that FDI is not the only source of technology and capital since countries can depend on their savings or seek loans from global markets and financial institutions in order to increase their capital stock. In aIDition, countries may depend on their internal research and development in order to advance their technological sophistication. Nevertheless, developing nations may face significant constraints when seeking loans in global credit markets and may lack the resources needed to initiate internal research and development. In aIDition, FDI means sharing risks between capital importing countries and the capital owners, which makes capital and technology transfer a more favorable strategy when compared to seeking loans. Gorg & Greenaway (2002) also points that FDI is the most cost efficient means of accessing new technology for developing countries.

A number of empirical studies have evaluated the linkage between FDI and economic development of various countries. When evaluating the impact of FDI on the economic development of South Korea, Hanson (2001) pointed out that economic development can be achieved without FDI. This is because South Korea has relied significantly on alternative means to access technology and capital and has adopted a restrictive policy on FDI inflows. In aIDition, Hanson (2001) pointed that South Korea has reported significant economic development regardless of relying significantly on foreign loans and high domestic saving rates to spur investments.

Evidently, Hermes (2003) stipulates that the effect of FDI on the domestic economy is expected to greater especially when the economy is characterized by high rates of unemployment. Johnson (2005) asserts that there is a direct impact; with everything constant, FDI increases the demand for labor in the host country. Lipsey (2002) also outlines an indirect impact of FDI on the domestic economy through linkages. For instance, foreign firms are likely to link up with domestic firms to supply them with the intermediate goods. According to O’Sullivan & Sheffrin (2003), this indirect impact results in an increase in the labour demand, this reduces the rates of unemployment and increases wages. The following subsections discuss the detailed mechanisms of FDI impacts on the local economy that have been the focus of literature regarding the host country impacts of FDI, which include linkage impacts, technological spillovers and competition impacts.

2.0.1 Spillovers

Companies establishing subsidiaries in foreign markets often have some form of technological advantages allowing them to compete effectively with domestic companies. As a result, Schreyer & Koechlin (2002) asserts that is an opportunity for domestic firms to learn from their foreign counterparts. Empirical research affirms that technological spillovers that lead to higher factor productivity and rewards for domestic companies should be taken lightly. According to Cho (2003), the quality of human resources in developing nations is likely to be relatively too to utilize the technology brought in by foreign firms effectively. An empirical study by Choe (2003) pointed out that FDI inflows result in a substantial income growth for advanced developing nations although has no significant impact on least developed countries. Second, Borenztein, De Gregorio & Lee (1998) points out that, nations having strict limitations regarding inward FDIs and oblige foreign companies to forge some sort of partnership with domestic firms do not benefit significantly from technological spillovers. This is mainly because the headquarters of the foreign corporations may be unwilling to introduce new technologies to nations where they have limited control with respect to their proprietary knowledge.

2.0.2 Linkages

Linked to the spillovers impact, the question of whether foreign enterprises establish linkages with domestic firms have been explored in FDI literature. According to De Mello (1999), strong linkages mean that the employment impact associated with FDI may be significantly large. In aIDition, the interaction between foreign firms and local is one of the channels that facilitate learning, which may benefit the local firms. For example, foreign enterprises may impose strict requires of the intermediates supply such as high quality and timely delivery; this forces the local suppliers to increase their efficiency.

Dees (1998) found out strong linkages between local firms and import substituting multinational corporations in large economies. The same holds for multinationals that progressively change from import substituting towards export oriented production, particularly for those that rely significantly on unsophisticated and stable technologies. On the other hand, purely export oriented multinational enterprises have relatively weaker linkages with domestic firms.

2.0.2 Competition

Dees (1998) asserts that the entry of foreign firms is likely to lessen the concentration of domestic enterprises in a market, which in turn, increases competition. Gorg & Greenaway (2002) stipulates that this is likely to result in reduced prices and a wide variety of goods for consumers. In aIDition, increased competition leads to domestic firms increasing their efficiencies to remain competitive.

2.1 Policy Issues

According to Gorg & Greenaway (2002), the policies adopted by a country play an integral role creating a business environment attracting FDIs.  De Mello (1999) points out that, inefficient policies are likely to discourage investments. For instance, De Mello (1999) reports that 16 leading multinationals in India cited regulatory control, inadequate infrastructure especially transportation and telecommunication, and bureaucratic intervention as the main challenges to undertaking operations in the country. On the other hand, Singapore has been known to have efficient bureaucracy and adequate infrastructure to attract investments regardless of the relatively high costs of doing business, which can be attributed to the nature of the policies adopted by the country.

Hermes (2003) asserts that the most commonly used public policy to attract inward FDI is the tax policy. Several countries have embarked on providing special tax privileges to foreign corporations. According to Cho (2003), providing numerous incentives aimed at increasing FDI inflow is a rational policy, provided that, the FDI inflows results in positive spillovers owing to the fact that relying on market forces alone would only attract little FDI.

CHAPTER 3: RESEARCH METHODOLOGY AND DATA

3.0 Research Design

Wickham & Woods (2005) defined research design as a plan that outlines the steps needed in answering study questions and meeting the primary objectives of the research. Research design has exact objectives drawn from the study questions and outlines the sources necessary for collection of data (Fisher 2007). This study used the case study research design together with a quantitative approach. Quantitative data analysis employed statistical techniques to determine the relationship between the micro-variables of economic growth and economic development in Turkey. Zainal (2007) perceives the case study as a research strategy and an empirical inquiry that seeks to explore a concept in its real-life concept. In this regard, this case study research strategy was deployed to assess the impact of FDI inflows in Turkey’s economic development. Other research strategies such as surveys were inappropriate for this context, which implies that the case study research using secondary data was the only ideal research design that could be used in the context of this study (Fisher 2007).

3.1 Case Selection

According to Wickham & Woods (2005), case selection should be based on its representativeness. When selecting a case to study, it is imperative to make use of information-oriented sampling rather than random sampling (Laurel 2003). In this study, case selection was based on an inherent interest and the circumstances surrounding the case and the researcher’s knowledge of the country: Turkey. In aIDition, the case analysis of Turkey could be used to illustrate the impact of FDI inflow on the economic development of developing nations.

3.2 Data Analysis

This study relied on secondary data, which refers to data documented by other scholars, researchers or institutions. The nature of the study design (case study research) demanded the use of secondary data (Uma & Roger 2010). The choice of Turkey as a case for this study was because of the researcher’s inherent interest in the country. Secondary data was selected for this study because data is already gathered, relieving the researcher the cost, time and effort to invest in data collection. Multiple sources of secondary data provided the background data for the cases selected. Examples of the secondary data used in the study included reports by OECD, Eurostat, UN Centre on Trans-national Corporations (part of UNCTAD), and government websites. Academic journals and business reports also provide vital sources of data for analysis.

This study relied on statistical data relating to FDI inflows and the variables of economic development in Turkey. The variables used to measure economic development included real Gross Domestic Product, real per capita income and living standards. O’Sullivan & Sheffrin (2003) defines GDP as the market value of recognized goods and services that are produced within a given country and is a key indicator of economic development. Per capita income, sometimes referred to as the income per person, refers to the mean income computed with respect to an economic aggregate such as a city or country. O’Sullivan & Sheffrin (2003) defines the standard of living as the level of material goods, comfort and wealth that are available to the citizens of a given country and is determined by variables such as income levels, employment availability, poverty rate, disparity in classes, life expectancy, costs of goods and services, national economic growth, the quality of the environment, and education availability among others. For the purposes of this study, Turkey’s standard of living will be described qualitatively with respect to the trends in FDI inflows in the country.

CHAPTER 4: FINDINGS AND ANALYSIS

4.0 Case: FDI in Turkey

United Nations Conference on Trade and Development (2013) reports that Turkey’s performance with respect to attracting FDI during 2011 was outstanding. Inflow FDI in Turkey reached $ 15.87 billion, which was mainly as a result of a threefold increase in cross-border acquisitions and mergers, especially in the energy and banking sectors. FDI inflows in 2005 and peaked during 2007 at about $ 22 billion and declined during the global economic crisis of 2008-2009. At present, Turkey is ranked the 13^th most attractive FDI destination. The following figure 1 shows the FDI inflows for Turkey during the period 2003-2011.

Source: Eurostat (2013)

4.1 The Relationship between FDI and Real GDP in Turkey

The following graphs depicts the GDP in Turkey for the years

Source: World Investment Report (UNCTAD)

During the same time period, the FDI inflow is shown by the graph below.

Source: World Investment Report (UNCTAD)

A cross comparison of the graphs points out that an increase in FDI inflows resulted in an increase in the real GDP. The slump observed in both FDI inflows and real GDP during the years 2008-2009 can be attributed to the global economic turmoil that took place around the same time. A striking finding is that a peak in the FDI during 2007 resulted in a peak in GDP during the same year, which can be used to point out the role that FDI inflows plays in economic development. Both the charts are combined in the graph below.

Source: World Investment Report (UNCTAD)

4.2 Relationship between FDI and Per Capita Income in Turkey

It is evident from the above graph that, as FDI inflow increased, the amount of per capita income in Turkey also increased, which implies that FDI inflows helped in improving the living standards of Turkish people as indicated by the increase in per capita income, which is a measure of economic development.

CHAPTER 5: CONCLUSIONS

5.0 Research Outcome and Recommendations for Turkey

This study had the main objective of determining whether FDI inflows can be used to accelerate economic development in Turkey. From the findings above, it is evident that an increase in FDI inflows resulted in an increase in the measures/indicators of economic development, especially real GDP and per capita income of turkey. Therefore, it can be concluded that FDI inflows can be used to accelerate economic growth in Turkey. In this Regard, Turkey should adopt policies and incentives such as tax incentives and friendly business policies aimed at increasing the amount of FDI inflows in the country in order to accelerate its economic development.

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