Determinants of Foreign Direct Capital Investments and Real Exchange Rate Relationship: The Case of Turkey

While the effect of capital movements on exchange rates is a widely accepted relationship in the relevant literature, there are also findings suggesting that reverse relationships may be valid. Especially in the analysis of the determinants of Foreign Direct Investment (FDI), this issue has started to be discussed more in the literature. In this study, the causality relations between exchange rates and FDI are analyzed within the scope of Turkey example with data covering the period 2005-2021. Causality relationships between variables were investigated by Hatemi-J (2012) asymmetric causality test. The data used for empirical analysis were obtained from the CBRT-EVDS database. According to the findings obtained from the asymmetric causality test, while the causality relationship from real effective exchange rate to FDI was determined, causality relationship from FDI to real effective exchange rate could not be determined. In terms of the results obtained, it is thought that internal dynamics may be more effective on the basis of this exceptional process between the real exchange rate and FDI in the Turkish economy. While the instability in the value of the currency makes it difficult to make long-term investment decisions such as FDI, it also causes the investment volume to decrease. As a matter of fact, in the relevant literature, the importance of institutional factors is frequently emphasized among the determinants of FDI for Turkey. Therefore, it is seen that Turkey's ability to establish a stable national currency is one of the prerequisites for attracting more FDI and it should increase its steps to strengthen institutional factors.