Bounds test approach to the relationship between human capital and foreign direct investment as regressors of economic growth in Turkey

Abstract

Although the linkages between Foreign Direct Investment (FDI), Human Capital Investment (HC) and economic growth have been of special interest in many lines of research for quite some time, there is no clear-cut evidence as to suggest a concrete arrow of causality between these variables. This article employs a bounds test analysis for co-integration and Granger causality test to investigate a long-term relationship between FDI, HC and economic growth in Turkey after 1970. Our results indicate that although there is no evidence for the FDI-led growth hypothesis in Turkey, there is evidence for causality in the backwards direction. There is also a strong arrow of causality running from HC to FDI and economic growth. Our findings are in line with the existing literature on the linkages between HC and economic growth; however, the fact that FDI does not cause economic growth contradicts a vast range of work in the literature. To this end, we employ a trivariate framework to analyse whether FDI and HC jointly Granger-cause per capita economic growth. Although FDI alone does not exhibit a causal relationship with per capita income growth, it is the case where FDI and HC jointly produce this result.