| In a world where foreign direct investment (FDI) has been growing rapidly, the issue of whether FDI and trade are substitutes or complements remains an important question. The theory behind FDI assumes substitution, but empirical research has also found evidence of complementarity. Using detailed firm- and product-level data from Turkey between 1980–1997, we find strong evidence of substitution, a result supporting Mundell's 1957 paper.; Economic theory predicts that tariff-induced capital inflow, insufficient to eliminate imports of the capital-intensive good, might lead to “immiserizing” growth in an incompletely specialized small host country. No previous empirical study has estimated the magnitude of this potential welfare loss. Starting with an indirect utility function measuring the welfare of a representative consumer, we device a basic tool to measure part of this welfare loss in terms of foregone tariff revenue. Applying this methodology to Turkish data for 1993, we find that the tariff revenue loss was more than 1,400 billion Turkish Liras (TL) in 1990 prices. This corresponds to approximately 2.1 percent of the value of Turkey's total merchandise imports in 1993.; Even though the potential welfare loss due to tariff jumping FDI is well-known, host countries still consider FDI an important source of capital. This desire for FDI could be motivated by perceived positive wage and employment effects in the host country, as well as benefits associated with the transfer of superior technology. Applying a specific factors approach to panel data from the Turkish manufacturing industry for the 1980–1996 time period, we show that FDI affects real wages positively in its first and second lags. We also estimate an increase of 28.01 TL per hour in the real wage rate in 1993 due to FDI. This counts for 14.04 percent of the total increase in the real hourly wage rate, leading to an increase in the total wage bill by 48.18 billion TL in 1990 prices. In terms of explaining the increasing wage gap between skilled and unskilled labor in Turkey, FDI is not found to be an influential factor. |
