Determinants of FDI: A Componentwise Analysis

For two decades, the questions of what really motivates foreign investors to invest in a certain country remains unanswered and a controversial issue. Moreover, previous studies have overwhelmingly treated FDI as unidimensional rather than multidimensional. In reality, FDI is rather multidimensional in that it is composed of components (equity capital, reinvested earnings, and other capital), each with its intrinsic characteristics in response to the same economic fundamentals, such as growth, institutional quality, exchange rate, taxes, market size, skill abundance, etc. Therefore, the main objective of this study was to seek the major determinants of each sub-component of the total FDI inflows in Turkey separately to avoid a distorted empirical prediction concerning the total FDI, which is greatly neglected in the FDI literature. Accordingly, we employed the panel corrected standard error model for annual data between 2003 and 2012. We found that reinvested earning and other capital as sub-components of FDI are responsive to the country risk indices of both Turkey and EU and to the tax measures of 2006. On the other hand, the variations in equity capital flows may be due to some other macroeconomic fundamentals. The responsiveness of the reinvested earning and other capital can be attributed to the nature of these components which are thought to be reversible in general.