Trade uncertainty and investments in an emerging country: a Fourier VAR approach

Abstract

Purpose: This investigation aims to determine the effect of trade uncertainty on domestic investment (DI) and foreign direct investment (FDI) for the Turkish economy from the first quarter of 2005 to the first quarter of 2020. Design/methodology/approach: The authors adopt the vector autoregression (VAR) model augmented with Fourier terms. Using this methodology, the authors obtain the empirical results of the impulse-response functions and the variance decomposition analysis. Findings: The empirical results demonstrate that a shock to trade uncertainty has a slight negative impact on DI for up to approximately 1.5 years, whereas its impact on FDI is negative but long-lasting. Moreover, the contribution of trade uncertainty to FDI is relatively higher than to DI in the error variance decomposition for the investigated period. These empirical results can be beneficial for shaping the Turkish authorities' trade policies in the following periods. Research limitations/implications: These findings have implications within the macroeconomic setting. Government authorities can provide tax exemptions for specified sectors and debureaucratize investment processes for both domestic and foreign entrepreneurs. Additionally, institutional quality and property rights should be protected strictly and developed gradually. Originality/value: This study is the first to examine the impact of world trade uncertainty on Türkiye’s DI and FDI. Because trade uncertainty might act as fixed costs, this creates the option value of waiting and seeing the market, and firms hesitate to incur investment.