An Empirical Analysis of the Impacts of Investment Incentives on Provincial Economic Growth in Turkey

Abstract

There are significant differences between governments in the context of the objectives of incentive policies. However, they are generally focused on macroeconomic purposes such as eliminating regional inequalities and increasing investment level, employment, industrialisation and therefore raising economic growth. In Turkey, The New Investment Incentive System, which has been implemented since 2012, essentially aimed to mitigate interregional inequalities. This study investigates the impact of investment incentives on provincial per capita growth of 81 provinces for the years 2004-2017. Our data are also available for capital types and sectoral levels. The dynamic panel data estimates show that while the impact of the number of incentive certificates on provincial growth is significantly positive, there is no effect of fixed investment and employment on provincial growth. Moreover, given the significantly positive estimated coefficients on all three measures of investment incentives for the energy and manufacturing sectors, we conclude that incentives raise provincial growth for these two sectors. However, investment incentives in services, mining and agriculture sectors have no impact on regional growth. Results of the analysis of investment incentives by investor type imply that while investment incentives provided to domestic firms have no effect on growth, incentives for firms owned by foreigners have positive effects. Our study thus makes important contributions to the literature by considering both province-level incentive measures and five main sectors, namely energy, manufacturing, services, mining and agriculture in the sectoral analysis.