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This paper empirically investigates the relation between growth and Foreign Direct
Investment (FDI) in Turkey. There are mixed conclusions about the impact of FDI on
growth and the literature includes many studies where FDI has negative, positive
and no significant effects on growth. Turkey serves like an open lab for such
empirical studies since the country has experienced high and persistent levels of
inflation for about thirty years as well as several economic crises in the last decade
after which the inflation is taken under control and high growth rates are attained.
Furthermore, Turkey has managed to start receiving considerable FDI recently. We
establish a VAR Model with 5 variables to examine the FDI-Growth relation and
consequently the impulse-response analysis are carried out to see the impact of
shocks on the variables entering the VAR equations. We also included the variance
decomposition to work out the sources of variance in both growth and FDI. Our
model provides empirical support to bi-directional causality between FDI and
growth.
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