Making ends meet: The widening gap between authorized FDI and realized FDI in the Turkish economy, 1980--2003

Foreign Direct Investment (FDI) has become an important vehicle of economic development for emerging markets over the course of the last twenty-five years in a neo-liberal global economic environment. The benefits of FDI include the eradication of unemployment through stable long-term funding and managerial, organizational and technological spill-overs, which policy makers in emerging markets can use as remedies to cure the chronic problems present in these economies in order to achieve sustainable growth rates. At this point, the issue of whether these emerging markets are able to fulfill their true FDI potential becomes crucial. In other words, the subject of what happens to FDI after it arrives at the host state requires further clarification. Although numerous studies exist in the political economy literature on the FDI-host state relationship through an FDI inflow determinants perspective, the issue of what happens to FDI in the aftermath of its arrival at the host state has not been sufficiently addressed. This thesis addresses this issue in the context of the Turkish economy as an emerging market in the 19802003 period through the lenses of economic neo-liberalism. The aftermath of the FDI inflows to the Turkish economy is analyzed by using the concept of "unrealized FDI permits", which categorizes FDI inflows to the economy as authorized FDI and realized FDI and which is defined as the portion of authorized FDI by the host state authorities that fails to be transformed into actual investment projects. Since 1980, observers witness a widening discrepancy between authorized FDI and realized FDI in the Turkish economy, the reasons of which are explored in this thesis in order to determine how much each reason contributes to this problem of unrealized FDI and to outline the policy implications of this situation for Turkey. By using an induction methodology, the media is scanned by using the Internet for the selection of particular case studies highlighting the reasons behind the investment decision reversals on the part of Multinational Enterprises (MNEs) and the structural problems of the Turkish economy contributing to the problem of unrealized FDI in the 1980-2003 period are determined as follows: the absence of sufficient environmental regulation, the presence of an inconsistent tax system, corruption and macroeconomic instability. These structural problems are discussed both theoretically and empirically from a neo-liberal perspective and the variables presented by these structural problems are measured in the Turkish context through the utilization of several indices in order to construct an econometric model linking unrealized FDI in the Turkish economy in the 1980-2003 period to these measured structural problems with the purpose of determining to what extent each structural problem contributes to unrealized FDI in Turkey. The hypothesis presented before the econometric analysis is that all these structural problems will have a significant correlation with the problem of unrealized FDI in line with the economic neo-liberal view. The conclusion reached at the end of the econometric analysis, however, is that the absence of sufficient environmental regulation and corruption significantly account for the presence of this problem in the Turkish economy, whereas the presence of an inconsistent tax system and macroeconomic instability do not. Furthermore, the absence of sufficient environmental regulation has a greater impact on unrealized FDI in comparison to corruption. Thus in line with the economic neo-liberal view, the policy implication of this outcome for Turkey is that enhanced public action is required to resolve these problems simultaneously through the strengthening of the relevant judicial mechanisms, while giving more emphasis to environmental regulation during this process, in order to make sure that Turkey fulfills its true FDI potential by reducing the size of unrealized FDI.