Foreign Direct Investment, Domestic Savings and Economic Growth: The Case of Turkey

Abstract

The present study investigates long run equilibrium relationship between real income growth, foreign direct investment, and domestic savings in Turkey, which is a developing economy. Johansen cointegration tests confirm that foreign direct investments and domestic savings in Turkey are in long run relationship with real income growth. Foreign direct investment has positive, significant, and inelastic impact on real income (0.318) whereas the long run coefficient of domestic savings are not statistically significant. Error correction model reveals that real income of Turkey converges to its long term equilibrium level reasonably low at 6.59% by the contribution of foreign direct investment and domestic savings; but, it is important to note that this coefficient is statistically significant. Finally, Granger causality tests reveal that foreign direct investments in Turkey are output and savings driven. When income and savings in Turkey increases, this will attract more foreign direct investments. Furthermore, this study has again proved that savings are income driven in Turkey.