Environmental impact of foreign direct investment in Turkey: does the quality of institutions matter? Evidence from time series analysis using the Fourier extension.

Abstract

Since the 1980s, Turkey has experienced a significant increase in both foreign direct investment (FDI) and its ecological footprint (EFP). While FDI is widely acknowledged as a pivotal driver of economic growth, its impact on environmental degradation is multifaceted and debated. Moreover, a country's institutional framework plays a key role in shaping this relationship. Yet, the influence of institutional structures on the FDI-environment nexus is often neglected in current literature. In this study, we investigate the environmental implications of FDI in Turkey from 1984 to 2018, employing time series analysis with a Fourier extension and accounting for institutional quality. Fourier function models give more effective results in modeling structural breaks. We first use Fourier techniques to assess the unit root and cointegration relationship. Upon establishing cointegration, we employ the DOLS estimator, extended with Fourier terms, to determine the long-term coefficients. We then assess the causal relationship between the variables using the Fourier causality test. Our findings indicate that while FDI exacerbates environmental degradation (supporting the pollution haven hypothesis), the interaction term of FDI-institutional quality mitigates this degradation (supporting the pollution halo hypothesis). Given these empirical findings, this study suggests that strengthening Turkey's institutional quality has the potential to amplify the environmental advantages of FDI, alongside its economic benefits.