An Analysis between Foreign Direct Investment and Intra-Industry Trade in Turkey: A VECM Approach

Abstract

The stylized world of identical technologies between countries, perfect competition and homogeneous products in the markets, and inactivity of production factors/inputs between countries is no longer valid. Knowledge economy, imperfect competition, differentiation, industrial clusters, new economic geography, transportation and transaction costs are among the factors that create the transformation in international trade. However, there is a specific literature that highlights the existence of examples of firms that are competitors or interconnected as parts of a single supply chain in the international economy, and spread of production activities to the world geography as an extension of the global transformation in production processes. In this context, since multinational firms mostly produce differentiated goods and a large part of intra-industry trade (IIT) is based on intra-firm trade of these firms, the linkage between foreign direct investment (FDI) and IIT is important. This connection is also supported by the fact that FDI is among the country-specific determinants of IIT in the literature. For this purpose, in this study, IIT index values for the period 1995-2020 in Turkey are calculated based on the distribution of exports and imports according to BEC classification. And FDI values related to industrial sectors in the same period are taken as basis. The relationship between the series is examined by cointegration analysis and the direction of the relationship is revealed by causality analysis based on vector error correction model (VECM). In the results of the study, it has been determined a one-way causal relationship from FDI to IIT for capital goods; and from IIT (total) to FDI. This is consistent with the result of the existence of a significant and positive relationship between technology intensity and IIT thanks to FDI in the literature.