CHAPTER 1: INTRODUCTION
Several scholars and policy makers agree that the Foreign Direct Investment (FDI) inflows have some significant positive impacts on the economic development aspects of the host country. Apart from the direct capital used to finance its supplies, Cho (2003) has asserted that the FDI can be a key source of the valuable know-how and technology as well forging some 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 the FDI in order to foster the FDI in their economies (Choe 2003).
However, recently, the merits associated with the FDI and the effectiveness of incentives offered to foreign corporations is increasingly becoming questioned. This debate is further fuelled by the fact that the empirical evidence linking the FDI to positive economic spillovers for host nations is unclear at both macro and micro levels (De Mello 1999). When surveying the existing literature, Hanson (2001) has asserted that the evidence linking the FDI to positive economic spillovers is rather weak. Gorg & Greenwood (2002), when reviewing the micro data related to spillovers from foreign firms to domestic firms, have concluded that the effects are generally negative. However, Lipsey (2002) has taken a rather favorable point of view when reviewing the micro literature. He has pointed out the evidence of positive impacts ensuing from the FDI. Nevertheless, Lipsey (2002), when reviewing the macro data, has concluded that there is no consistent relationship between the FDI inward flows and the economic growth as well as the Gross Domestic Product (GDP). In this regard, Lipsey (2002) has argued that it is imperative to analyze various scenarios that tend to either promote or hinder the economic spillovers from FDI inflows. It is apparent that there is no clear evidence regarding the interplay between the FDI and the economic development. In this regard, this research seeks to explore the interplay between the FDI and economic development in Turkey, which has, in the recent past, embarked the 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 a 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 the FDI plays in Turkey’s economic development. Therefore, this study will evaluate the relationship between the FDI inflows and the measures of the economic development. The following ones are the specific objectives of this study:
- To determine the relationship between the FDI and the real Gross Domestic Product in Turkey;
- To determine the relationship between the 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 indicators (variables) for this study has been based on their relevance to the FDI. As a result, the variables of the economic development that are associated with the FDI are such as the life expectancy that has been not considered basing on the scope of this study.
CHAPTER 2: REVIEW OF LITERATURE
2.0 Key Theoretical Foundations
In its broadest sense, the economic development refers to the increase in the living standards of the population of a given country. The economic development is a result of the sustainable economic growth from a low income economy to a high-income one. The economic development of any nation is subject to factors such as the political structure and the policies of a nation, and the social structure of the population. Borenztein, De Gregorio & Lee (1998) have perceived the economic development in the light of some qualitative and quantitative changes in the country’s economy, which can involve several areas such as the human capital, literacy, safety, human health, social inclusion, environmental sustainability, regional competitiveness and critical infrastructure. It is imperative to note that the economic development is not the same as the economic growth. According to Cho (2003), the economic development is mainly a policy intervention undertaking a main objective of improving the social and economic wellbeing of individuals; whereas the economic growth focuses on the market productivity and an increase in the Gross Domestic Product. In order to evaluate the economic development, key indicators such as literacy rates, human development, health and education and other economic aspects, an improvement in the above indicators denote the economic development. The theoretical models have been used to explain the linkage between the FDI and the economic development (Choe 2003).
Most of the past economic literature sources regarding the FDI have always treated the FDI as a component of the general theory of global capital movements. It draws upon the differences existing between some countries with respect to the cost and abundance of capital. For instance, if a country X creates a direct investment into another country Y, it is evident that the country Y will have an added physical capital as well as the improved production capacity. The investing corporation from the country X will have opted to transfer some of its capital to the country Y instead of investing in the country X (De Mello 1999). In the event that the output can be traded, some of the production taking place in the country Y following the direct investment may substitute the production that was formerly taking place in the country X. There is a likelihood that the investing company may have cut its production in its home nation; the country X, perhaps, by closing or selling up the establishment and setting up a new plant in a foreign country, though serving the demands of the same market (De Mello 1999).
There is a different possibility, let’s say, that a company in the Country X has opted to undertake a direct investment in the country Y. However, there is no relative change regarding the level of production and physical capital in both nations. For instance, the managers and owners of the firm in the Country X can opt to acquire a firm in the 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 the financial and physical capital between the countries. However, it is an instance of the FDI (De Mello 1999).
According to Dees (1998), the 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 addition, an access to the advanced technology can be a potential source of the sustainable growth. As a result, Dees (1998) has pointed out that the manner in which the 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) have pointed out that the 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 addition, 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. They may lack the resources needed to initiate the internal research and development. In addition, the FDI means sharing risks between capital importing countries and capital owners. This makes the capital and technology transfer a more favorable strategy when compared to seeking loans. Gorg & Greenaway (2002) have also pointed that the FDI is the most cost efficient means of accessing the new technology for developing countries.
A number of empirical studies have evaluated the linkage between the FDI and the economic development of various countries. When evaluating the impact of the FDI on the economic development of South Korea, Hanson (2001) has pointed out that the economic development can be achieved without the FDI. This is because South Korea has relied significantly on the alternative means to access technology and capital. It has adopted a restrictive policy on FDI inflows. In addition, Hanson (2001) has pointed that South Korea has reported the significant economic development regardless of relying significantly on foreign loans and high domestic saving rates to spur investments.
Evidently, Hermes (2003) has stipulated that the effect of the FDI on the domestic economy is expected to greater especially when the economy is characterized by high rates of unemployment. Johnson (2005) has asserted that there is a direct impact; with everything constant, the FDI increases the demand for labor in the host country. Lipsey (2002) has also outlined an indirect impact of the 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 labor demand. This reduces the rates of unemployment and increases wages. The following subsections discuss the detailed mechanisms of FDI impacts on the local economy. They have been the focus of literature regarding the host country impacts of the FDI including linkage impacts, technological spillovers and competition impacts.
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) have asserted that is an opportunity for domestic firms to learn from their foreign counterparts. The empirical research affirms that technological spillovers that lead to a 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 relative to utilize the technology brought in by foreign firms effectively. An empirical study by Choe (2003) has pointed out that FDI inflows result in a substantial income growth for the advanced developing nations although having no significant impact on the least developed countries. Secondly, Borenztein, De Gregorio & Lee (1998) have pointed out that nations have the strict limitations regarding inward FDIs and oblige foreign companies to forge some sort of partnership with domestic firms. They do not benefit significantly from technological spillovers. This is mainly because the headquarters of the foreign corporations may be unwilling to introduce some new technologies to nations where they have a limited control with respect to their proprietary knowledge.
Linked to the spillovers’ impact, the question of whether foreign enterprises establish some linkages with domestic firms have been explored in the FDI literature. According to De Mello (1999), strong linkages mean that the employment impact associated with the FDI may be significantly large. In addition, 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 some strict requirements of the intermediates supply such as the high quality and timely delivery. This forces the local suppliers to increase their efficiency.
Dees (1998) has found out strong linkages between local firms and import substituting multinational corporations in large economies. The same holds for multinationals that progressively change from the import substituting towards the export oriented production, particularly for those that rely significantly on unsophisticated and stable technologies. On the other hand, the purely export oriented multinational enterprises have relatively weaker linkages with domestic firms.
Dees (1998) has asserted that the entry of foreign firms is likely to lessen the concentration of domestic enterprises in a market, which, in turn, increases the competition. Gorg & Greenaway (2002) have stipulated that this is likely to result in reduced prices and a wide variety of goods for consumers. In addition, the 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) has pointed out that, inefficient policies are likely to discourage investments. For instance, De Mello (1999) reports that 16 leading multinationals in India cited regulatory control, the 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 the efficient bureaucracy and adequate infrastructure to attract investments regardless of the relatively high costs of doing business. This can be attributed to the nature of the policies adopted by the country.
Hermes (2003) has asserted that the most commonly used public policy to attract the inward FDI is the tax policy. Several countries have embarked on providing the special tax privileges to foreign corporations. According to Cho (2003), providing numerous incentives aimed at increasing the FDI inflow is a rational policy, provided that the FDI inflows result in positive spillovers owing to the fact that relying on market forces alone would only attract the little FDI.
CHAPTER 3: RESEARCH METHODOLOGY AND DATA
3.0 Research Design
Wickham & Woods (2005) have defined the research design as a plan that outlines the steps needed for answering study questions and meeting the primary objectives of the research. The research design has some exact objectives drawn from the study questions and outlines the sources necessary for the collection of data (Fisher 2007). This study has used the case study research design together with a quantitative approach. A quantitative data analysis has employed statistical techniques to determine the relationship between the micro-variables of the economic growth and economic development in Turkey. Zainal (2007) has perceived the case study as a research strategy and an empirical inquiry. It seeks to explore a concept in its real-life concept. In this regard, this case study research strategy has been deployed to assess the impact of FDI inflows in Turkey’s economic development. Other research strategies such as surveys were inappropriate for this context. It implies that the case study research using the 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), the case selection should be based on its representativeness. When selecting a case to study, it is imperative to make use of the information-oriented sampling rather than random one (Laurel 2003). In this study, the case selection has been based on an inherent interest and the circumstances surrounding the case as well as on the researcher’s knowledge of the country, i.e. Turkey. In addition, the case analysis of this country could be used to illustrate the impact of the FDI inflow on the economic development of developing nations.
3.2 Data Analysis
This study has relied on the secondary data. It refers to the data documented by other scholars, researchers or institutions. The nature of the study design (a case study research) has demanded the use of secondary data (Uma & Roger 2010). The choice of Turkey as a case for this study has been done due to the researcher’s inherent interest in the country. The secondary data have been selected for this study because the data are already gathered, relieving the researcher the cost, time and efforts to invest in the data collection. Multiple sources of the secondary data have provided the background data for the cases selected. Some examples of the secondary data used in the study included the reports by the OECD, Eurostat, UN Centre on Trans-national Corporations (a part of the UNCTAD) and some government websites. Academic journals and business reports have also provided the vital sources of data for an analysis.
This study has relied on the statistical data related to FDI inflows and the variables of the economic development in Turkey. The variables used to measure the economic development have included a real Gross Domestic Product, real per capita income and living standards. O’Sullivan & Sheffrin (2003) have defined the GDP as a market value of recognized goods and services that are produced within a given country. It is a key indicator of the economic development. Per capita income, sometimes referred to as the income per person, it refers to the mean income computed with respect to an economic aggregate such as a city or a country. O’Sullivan & Sheffrin (2003) have defined the standard of living as the level of material goods, comfort and wealth being available to the citizens of a given country. It is determined by such variables as income levels, the employment availability, poverty rate, disparity in classes, life expectancy, costs of goods and services, the national economic growth, the quality of the environment, and the 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
The United Nations Conference on Trade and Development (2013) has reported that Turkey’s performance with respect to attracting the FDI during 2011 was outstanding. The inflow FDI in Turkey has reached $ 15.87 billion, which is mainly a result of a threefold increase in cross-border acquisitions and mergers, especially in the energy and banking sectors. The FDI inflows in 2005 and peaks during 2007 were at about $ 22 billion and declined during the global economic crisis of 2008-2009. At present, Turkey is ranked as the 13th most attractive FDI destination. The following Figure 1 shows the FDI inflows for Turkey during the period 2003-2011.
Source: The Eurostat (2013)
4.1 The Relationship between the FDI and the Real GDP in Turkey
The following graphs depict the GDP in Turkey for the years
Source: The World Investment Report (UNCTAD)
During the same time period, the FDI inflow is shown by the graph below.
Source: The World Investment Report (UNCTAD)
A cross comparison of the graphs points out that an increase in FDI inflows has 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 taking place around the same time. A striking finding is that a peak in the FDI during 2007 resulted in a peak in the GDP during the same year, which can be used to point out the role that FDI inflows plays in the economic development. Both the charts are combined in the graph below.
Source: The World Investment Report (UNCTAD)
4.2 Relationship between the FDI and Per Capita Income in Turkey
It is evident from the above graph that as the FDI inflow has 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: CONCLUSION
5.0 The Research Outcome and Recommendations for Turkey
This study had a main objective of determining whether FDI inflows can be used to accelerate the economic development in Turkey. From the findings above, it is evident that an increase in FDI inflows has resulted in an increase in the measures/indicators of the economic development, especially a real GDP and a per capita income of Turkey. Therefore, it can be concluded that FDI inflows can be used to accelerate the 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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