Turkey Faces a Complex Foreign Investment Environment
Foreign direct investment is an important source of economic activity for emerging markets because it can support business expansion, employment, technology transfer, and long-term capital formation.
Turkey presents a particularly interesting case. Its strategic position between Europe, Asia, and the Middle East makes the country an important destination for international businesses. At the same time, Turkey has experienced substantial macroeconomic volatility, including fluctuations in foreign investment, monetary policy changes, inflationary pressure, and depreciation of the Turkish lira.
Traditional investment theory suggests that investors consider factors such as borrowing costs, economic growth, market size, and currency movements when deciding where to place capital. However, the researchers argue that these conventional indicators do not provide the complete picture.
Government quality and financial market development can also influence how international investors assess the security and long-term prospects of an investment destination. A stable government can provide greater legal certainty, while a developed financial market can improve liquidity, asset valuation, and access to financial instruments.
Researchers Analyze 14 Years of Turkish Data
Nusantara and Taufiq used a quantitative research design based on secondary economic and financial data. The analysis covered quarterly observations from the first quarter of 2011 through the fourth quarter of 2024.
The researchers collected information from official and international databases, including the World Bank, Central Bank of the Republic of Turkey, and national statistical and financial databases.
Five major factors were examined:
- Interest rate, measured through Turkey’s one-week repo policy rate.
- Gross Domestic Product (GDP), representing economic growth.
- Exchange rate, reflecting the Turkish lira’s value against the US dollar.
- Government Index, representing political stability and the absence of violence.
- BIST 100, representing the performance of Turkey’s stock market.
The researchers used an econometric approach known as the Autoregressive Distributed Lag (ARDL) model to distinguish between short-term movements and longer-term relationships among these economic indicators and FDI. The analysis also included statistical tests to ensure that the model was stable and reliable.
The results confirmed the existence of a long-term relationship among FDI and the economic, institutional, and financial variables examined.
Three Factors Have Significant Long-Term Effects
The study produced a clear distinction between traditional macroeconomic indicators and structural factors.
Exchange rates, government quality, and stock market performance were statistically significant long-term determinants of FDI inflows into Turkey.
Meanwhile, interest rates and GDP did not show statistically significant long-term effects.
The strongest findings include:
- A 1% depreciation in the exchange rate was associated with a 0.8731% decline in FDI inflows in the long run.
- A one-point increase in the Government Index was associated with a 0.0191% increase in FDI inflows.
- A 1% increase in the BIST 100 index was associated with a 0.7764% increase in FDI inflows.
- Interest rates and GDP showed no statistically significant long-term relationship with FDI.
These findings suggest that international investors may place greater emphasis on macroeconomic stability, institutional quality, and financial market strength than on headline economic growth or domestic borrowing costs.
Currency Stability Emerges as a Critical Concern
Among the significant factors, exchange rate movements provide one of the strongest signals for foreign investors.
The study found a significant negative long-term relationship between currency depreciation and FDI. A weaker Turkish lira can increase the cost of imported inputs, create uncertainty over future corporate earnings, and make it more difficult for foreign companies to predict the value of profits when converted back into their home currencies.
The result means that sustained currency instability can undermine Turkey’s attractiveness as a destination for long-term foreign capital, even when other economic indicators appear favorable.
For investors making long-term physical investments, currency risk can be more consequential than short-term changes in financing costs.
Better Governance Can Strengthen Investor Confidence
Government quality also emerged as an important factor.
The study found a positive and statistically significant long-term relationship between the Government Index and FDI. A stronger institutional environment can provide investors with greater confidence that contracts, property rights, regulations, and business operations will be protected over time.
In practical terms, the findings indicate that foreign investors are not simply evaluating Turkey’s economic numbers. They are also assessing whether the country provides a predictable environment for long-term business operations.
For Bintang Akbar Nusantara and M. Taufiq of UPN “Veteran” Jawa Timur, the evidence points to the importance of institutional certainty alongside economic indicators. Their analysis shows that strengthening governance can send a positive signal to international capital markets.
A Stronger Stock Market Supports Foreign Investment
The BIST 100, Turkey’s benchmark stock market index, also demonstrated a significant positive long-term relationship with FDI.
The researchers found a coefficient of 0.7764, with a probability value of 0.0003, indicating a statistically significant relationship. A stronger capital market can signal better corporate performance, greater liquidity, improved asset valuation, and a more developed financial infrastructure.
This finding suggests that financial market development can contribute to the broader attractiveness of Turkey as an investment destination.
Interestingly, some short-term relationships moved in the opposite direction. The researchers interpret these differences as evidence that foreign capital can react differently to temporary market movements than to long-term structural conditions.
What the Findings Mean for Turkish Economic Policy
The research carries several implications for policymakers.
First, currency stability should remain a major policy priority. Reducing excessive exchange rate volatility can provide international companies with greater predictability regarding costs, revenues, and profit repatriation.
Second, policymakers should strengthen government quality, regulatory consistency, political stability, and property rights protection. These institutional conditions can reduce non-commercial risks faced by foreign companies.
Third, financial authorities should continue developing the Turkish stock market, particularly by improving transparency and liquidity. A deeper and more reliable financial market can strengthen investor confidence and make Turkey more attractive to long-term foreign capital.
The findings also challenge the assumption that faster GDP growth or higher interest rates automatically determine foreign investment decisions. In Turkey’s volatile economic environment, structural stability may matter more than individual headline indicators.
Study Limitations and Future Research
The researchers note that the analysis focuses primarily on aggregate macroeconomic and institutional indicators. Factors at the company and industry levels were not included.
Future studies could examine sector-specific investment patterns across manufacturing, services, and primary industries. Researchers could also incorporate firm characteristics, infrastructure quality, trade agreements, and other factors that may influence foreign investment decisions.
Author Profile
Bintang Akbar Nusantara is the lead and corresponding author of the article and is affiliated with UPN “Veteran” Jawa Timur. The article does not specify his academic degree or a formal field-of-expertise designation, so these details are not added beyond the information provided in the publication.
M. Taufiq is also affiliated with UPN “Veteran” Jawa Timur and served as the academic advisor acknowledged in the article. The publication identifies his role in supporting the research but does not provide a specific academic degree or formal field of expertise.
Research Source
Article Title: Macroeconomic Indicators, Government Quality, and Financial Markets as Determinants of Turkish FDI Inflows
Authors: Bintang Akbar Nusantara, M. Taufiq
Affiliation: UPN “Veteran” Jawa Timur
Journal: International Journal of Economic, Finance and Business Statistics (IJEFBS)
Publication Year: 2026
Volume: 4, No. 4, pp. 353–370
DOI: https://doi.org/10.59890/ijefbs.v4i4.14
URL: http://journalijefbs.my.id/index.php/ijefbs
0 Komentar