FDI in Turkey: An Out-Of-Sample Analysis Of Unexploited Potential

The EU’s 2004 decision to begin membership negotiations with Turkey marked the turning point in FDI (Foreign Direct Investments) flows to Turkey. The EU decision probably convinced international investors and multinational corporations that the future of Turkey lies with the EU, so that FDI inflows in 2006 and 2007 boomed. The trend slowed down in 2008 and 2009 because of the pervasive financial crisis, though the government has recently been adopting extended measures in order to attract more investments from abroad. After a brief survey of the state-of-the-art FDI potential measures for Turkey, I try to understand the main reasons for the country’s relatively laggard position and then which could have been the FDI inflows and stocks into Turkey if the country had already been an EU accession country in the recent years (referring to the 2004 and 2007 enlargement). Using an out-of-sample estimation technique in a gravity environment I find that the unexploited potential for more FDI in Turkey is indeed exceptional.