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Labor and Employment Relations in a Globalized World pp 43–70Cite as

Can FDI Be a Panacea for Unemployment?: The Turkish Case

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Abstract

Foreign Direct Investment (FDI) currently constitutes the main mechanism for economic globalisation. Despite the rising integration of the Turkish economy into the global economy, FDI performance of Turkey remained lower than many other developing countries until the early 2000s. This was followed by a period of a boom in which Turkey attracted record levels of FDI inflows in her history. Accompanying these inflows, the country also achieved high rates of growth. However, high unemployment rates continued to be a major problem. This chapter seeks to explain the role of FDI inflows in job creation in Turkey at a sectoral level for the period 2000–2008. We use panel data analysis and find a positive, but weak relationship between FDI inflows and employment. Merger and acquisitions, as the dominant mode of foreign entry in Turkey, and/or the dominance of the FDI inflows in the financial sector after 2004 might be the reasons for this weak employment effect. Moreover, the tendency for the shift of foreign investment from low-tech to medium-and high-tech industries in Turkish manufacturing could lead to the negligible effect on employment.

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Notes

  1. 1.

    See also (Erdilek, 2003; Yılmaz, 2007) for the reasons of the low FDI inflows in the 1980s and 1990s.

  2. 2.

    For the liberalisation of the FDI regime see Güven (2008) and Erçakar and Karagöl (2011).

  3. 3.

    In 2000, the share of Turkey in global FDI was still 0.08 %. As well, the country’s share in FDI flows to developing countries was 0.41 % (Güven, 2008, p. 84). However, in the West Asia region in 2011, with FDI inflows amounting to $15.9 billion, Turkey became the second top FDI receiving country following Saudi Arabia (UNCTAD, 2012, p. 49).

  4. 4.

    For an evaluation of why the customs union did not positively affect FDI inflows as much as expected see Güven (2008, p. 91).

  5. 5.

    The FDI Act removed the screening and pre-approval procedures for FDI projects, redesigned the company registration process so that it was equal for domestic and foreign firms, facilitated the hiring of foreign employees, included FDI firms in the definition of “domestic tenderer” in public procurement, granted foreign investors full convertibility in their transfers of capital and earnings and authorised foreign persons and companies to acquire real estate in Turkey (ERF, 2005; Erdilek, 2003, p. 93).

  6. 6.

    The Spanish BBVA purchased 24.89 % of Turkiye Garanti Bankasi by $5.9 billion while Vallares of the UK invested $2.1 billion to acquire General Enerji (see UNCTAD, 2012).

  7. 7.

    There were around 33,700 foreign capital firms in Turkey as of November 2012.

  8. 8.

    Similar to the reduction in corporate taxes in 2006, decreases in indirect tax rates are demanded to lower down essential input costs (see Erçakar and Karagöl, 2011, p. 12).

  9. 9.

    Such as the partial or full acquisitions of Akbank, Garanti Bank, Oyakbank and Finansbank.

  10. 10.

    See Appendix Table 3.4 for a descriptive list of these sectors and sub-sectors.

  11. 11.

    Sector 30 (office machinery and computers) is excluded due to unavailability of data on employment. Similarly, sectors 32 (radio, TV, communication equipments) and 33 (medical, precision and optical instruments, watches and clocks) are excluded since there were no inflows to these sectors.

  12. 12.

    See Canova and Ciccarelli (2013) for a wide review and discussion of different applications of panel VAR models.

  13. 13.

    Similarly, statistical properties of the Generalised Least Squares (GLS) or Maximum Likelihood (ML) estimates for dynamic panel models strongly depend on the assumptions made for the initial value of the dependent variable as well as how the number of time periods and cross-sectional units approaches to infinity.

  14. 14.

    GM Mestimation of dynamic panel data models was first introduced by Holtz-Eakin et al. (1988) and Arellano and Bond (1991), which is also referred as “difference GMM”. System GMM is an augmented version of this method, which was introduced by Arellano and Bover (1995) and later on developed by Blundell and Bond (1998).

  15. 15.

    The panel VAR models are estimated by a Stata program written by Inessa Love and is used in Love and Ziccihino (2006). Time dummies are also controlled for during the estimations.

  16. 16.

    The Cholesky decomposition of residual variance-covariance matrix assumes that the variable listed earlier in the VAR model affects the other endogenous variables both contemporaneously and with a lag while the variables listed later in the model affect the other endogenous variables with a lag only. In this respect, the first variable listed in the model could be said to be “more exogenous” than the other (Boubtane et al., 2012). This distinction is not as clear-cut in our model as both variables could be said to affect each other simultaneously. Impulse response functions and variance decompositions are calculated changing the ordering of both variables in the specification. Results and the implication of both specifications were almost identical.

  17. 17.

    Average wage payments are calculated by diving the total wage/salary payments within the sector by the number of employees in that sector.

  18. 18.

    Research and development expenditures, intra-industry trade and trade balance at industry level were also experimented, but are not included in the final specification.

  19. 19.

    Summary statistics for variables used in the estimations are given in Appendix, Table 3.5.

  20. 20.

    There were, respectively, three and four observations with negative and zero FDI inflow values. The natural logarithm of the zero inflows is taken by replacing the zero value with a 0.001 and for the negative flows, the natural logarithm of the absolute value of FDI inflow is multiplied by −1. These observations are: 2004 textiles and wearing apparel (−6); 2003 refined petroleum and other treatments (−22); 2005 rubber and plastic products (−23); 2003 wood, publishing and printing (0); 2005 refined petroleum and other treatments (0); 2002 rubber and plastic products (0); 2004 other transport equipments (0).

  21. 21.

    The common autocorrelation parameter calculated for FGLS II is 0.619 while the sector-specific autocorrelation parameters range from 0.316 to 0.927 (Food products: 0.519; textiles: 0.684; wood, publishing, printing: 0.733; refined petroleum: 0.899; chemical products: 0.690; rubber and plastic products: 0.361; metal products: 0.718; mechanical products: 0.316; motor vehicles: 0.329; other transport equipments: 0.927).

  22. 22.

    See for example the statement by Özilhan (2003) as the Head of the Turkish Industry and Business Association.

  23. 23.

    When we look at the sectoral distribution of FDI flows to Turkey, it is seen that foreign capital mainly prefers the non-tradable sectors such as banking and finance, energy, telecommunications, and retailing. Therefore, instead of tackling foreign exchange scarcity in the long run, foreign investment can even potentially lead to net capital outflows via profit transfers.

  24. 24.

    The low-cost based specialisation of the maquiladora industry in Mexico proved to be fragile in the 2000s as the industry and employment declined due to the increased competition by China and other Latin American countries. Thus, in order to remain internationally competitive, the industry moved away from simple assembly activities to manufacturing and knowledge-intensive design of products. This ‘high-road competitive strategy’ caused a higher demand for skilled workers (Ernst, 2005, p. 25).

  25. 25.

    See Erdilek (2009) for the demands of the Investment Advisory Council for Turkey (IAC), comprising top-level executives of major multinational corporations, international organisations and business associations, from the AK Party Government for an improvement in the business climate.

  26. 26.

    See for example the demands of International Investors Association (YASED) which represents major transnational companies in Turkey in Yılmaz (2007); TUSIAD (2004).

  27. 27.

    Whatever the factors that reduce competitiveness, the need for a higher-skilled labour appears to be common for all sectors in the manufacturing industry in order to achieve a higher level of productivity. For example, in the electronic industry, even though the costs of labour have been lower than the rival countries, there has been a need for a qualified workforce and, firms in the sector try to fill the gap through on-the-job training.

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Acknowledgements

The authors would like to thank to Inessa Love and Christian Danne who have kindly shared the Stata code and help file that are used for the panel VAR estimations in this study.

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Authors and Affiliations

  1. Faculty of Business Education and Law, Business School, Staffordshire University, Brindley Building, Leek Road, ST4 2DF, Stoke-on-Trent, UK

    Mehtap Hisarciklilar

  2. Faculty of Management, Istanbul Technical University, Macka, 34367, Istanbul, Turkey

    Derya Gultekin-Karakas & Ahmet Atil Asici

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  1. Mehtap Hisarciklilar
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  2. Derya Gultekin-Karakas
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  3. Ahmet Atil Asici
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Correspondence to Mehtap Hisarciklilar .

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Editors and Affiliations

  1. Isik University Department of Management, Istanbul, Turkey

    Toker Dereli

  2. Isik University Department of Management, Istanbul, Turkey

    Y. Pinar Soykut-Sarica

  3. Isik University Department of Economics, Istanbul, Turkey

    Asli Şen-Taşbaşi

Appendix

Appendix

See Tables 3.4 and 3.5.

Table 3.4 ISIC Rev.3 codes of industries and sub-sectors included in the study
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Table 3.5 Main summary statistics for the variables used in manufacturing estimations
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Hisarciklilar, M., Gultekin-Karakas, D., Asici, A.A. (2014). Can FDI Be a Panacea for Unemployment?: The Turkish Case. In: Dereli, T., Soykut-Sarica, Y., Şen-Taşbaşi, A. (eds) Labor and Employment Relations in a Globalized World. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-04349-4_3

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