Causal relationship between foreign direct investments and macro-level polıtıcal stability in Turkey

Abstract

A number of empirical and theoretical studies as well as real life experiences provide supportive evidence to the fact that political instability has an ability to harm the inflow of the Foreign Direct Investments (FDI). This study aims to explore the causal relationship between macro-level political stability and FDI while focusing on Turkey. The choice of Turkey as a subject of study is motivated by the fact that Turkish ruling party has ended the political and economic instability caused by the previous coalition governments. Despite of MTC (Multinational Terrorist Corporation)’s recent attacks and 15 July failed coup attempt which was completely different from the previous similar attempts, since it was a bloody-terrorist coup attempt targeting Turkish stability, Turkey continued to stand strong in the sense of political and economic conditions thanks to the political stability and national will. Political risk is studied since it has not received much attention in up-to-date studies treating the case of Turkey. For this purpose, the causal relationship between FDI and political stability is estimated using several econometric methods including Johansen cointegration test, the bounds testing (ARDL) approach, ECM-ARDL model as well as Granger causality test. Time series data are collected over the 15 years period ranging from 2002 to 2016. To the best of our knowledge, there have been no studies identified yet which give empirical evidence on the causal relationships between political stability and FDI inflow in Turkey. Our study aims to fill in this gap in literature and may be useful for the foreign investors and key decision makers. The results confirm a bidirectional long-run and short-run positive causal relationship between political stability, absence of violence and terrorism and FDI.