Journal of Applied Finance & Banking

The Relationship between Sectoral Foreign Direct Investment and Macroeconomic Variables: Empirical Evidence from Turkey

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  • Abstract

    The aim of this paper is to analyze empirically the relationship between sectoral Foreign Direct Investment (FDI) and macroeconomic variables in the long-run and short-run in Turkey for the period from 2005 to 2016. The cointegration analysis and error correction models are used to test long-run relationship and short-run effects respectively. It is expected that the using of sectoral level data may disentangle the relationship FDI and macroeconomic variables. Taking into consideration the characteristics of the FDI flows into Turkey, real exchange rate, real GDP, openness of the economy and real interest rate are chosen as macroeconomic variables. The empirical results show that openness of the economy to international markets is an important variable on the FDI flows into Turkey. The sign of real exchange rate varies depending on the type of sectors as expected. Real GDP has positive effects on agriculture and three sectors. Real interest rate has positve effects on total FDI, financial and insurance activities and banking sectors that have the highest shares in total FDI.

    JEL classification numbers: F20, F21, F31, C12, C32
    Keywords: foreign direct investment, real exchange rate, unit root test, cointegration analysis, error correction models.