Spillovers in the MENA Region :the Case of Turkey

This paper examines the impact of foreign direct investment (FDI) flows on the Turkish economy in the aftermath of its liberalization in the early eighties, with an emphasis on the technology transfer related aspects of FDI, i.e. FDI-related productivity and wage spillovers. We first examine the sources of internationalization of the activities of foreign firms and discuss the evolution of the role assigned by economic theory to FDI in the industrialization process of developing countries, with the focus being on the factors leading to the diffusion of intangible assets of foreign companies to domestic firms (competitors, suppliers or customers). A section is devoted to the analysis of the evolution of FDI flows in the world economy in an effort to grasp the new trends occurring in this domain. We then turn our attention to the Turkish case and carry out a thorough descriptive analysis of the characteristics of FDI flows in the Turkish economy on the basis of a number of indicators such as the evolution of the amount of FDI, number of foreign firms, sectoral distribution of FDI, the equity structure of foreign firms, their country of origin. We then carry out an econometric analysis in order to test for the existence of FDI-related productivity and wage spillovers in the Turkish manufacturing sector, and to identify the channels through which they transit. A unique firm-level database for the Turkish manufacturing industry covering the period 1983-2001 is used in our analysis. Productivity and wage equations are estimated by using appropriate estimation techniques and including control variables at the firm and sector level are added. Our findings point to a negative effect of FDI-related spillovers on the productivity of domestic firms and to a significant and positive impact on the wages paid by domestic firms.