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The Triangular Causal Links Between Economic Development, FDI and Exports: Evidence from Turkey

Economic development, foreign investments and trade are widely discussed by academics and scholars concentrating mainly on the deterministic relationship running from trade flows and foreign capital to economic growth. Nevertheless, it is the more contemporary studies that underline the possible reverse links. Originating from such a discussion, this study investigates the causal links between economic development, foreign capital penetration and foreign trade for a European Union candidate country, Turkey, during the period 1970–2009. Empirical findings on the long-term relationship between the tested variables are based on cointegration test. The Granger Causality test results using Vector Auto Regression (VAR) estimates and the Error Correction Model imply that there is no dynamic two–way causal link between GDP per capita, FDI flows and Exports for Turkey. However, results indicate unidirectional causalities running from FDI to GDP, exports to GDP and Exports to FDI. These triangular causal links highlight exports as a key variable for Turkey’s economy. Collectively, results suggest that Turkey’s capacity, to progress in economic development and to attract foreign capital investments will strongly depend on the country’s efficiency to further develop and promote its exports.