The Effect of Public Investment and Firm-Based Investment Incentives on Employment: A Panel Data Analysis for Turkey

By Karaalp, Hacer Simay | Journal of Economic and Social Development, March 2014 | Go to article overview

The Effect of Public Investment and Firm-Based Investment Incentives on Employment: A Panel Data Analysis for Turkey


Karaalp, Hacer Simay, Journal of Economic and Social Development


1. Introduction

Although the effectiveness and the success of the public policies on private sector performance have been discussed since the earlier regional development policies, they still preserve their prominence in the development process of countries, especially to stimulate economic activities in the lagged regions and thus to attract investment, government support for firms' production and investment costs by applying public policies. Therefore, firms' competitiveness and the scale of new investments will increase and new employment opportunities will be revealed.

Turkey, which is an emerging economy, has been struggling with regional and local economic development problems like many other developed and developing countries. One of the main problems in Turkey is the unbalanced economic development between eastern and western regions of the country. Since the inception of the Turkish Republic and with the initiation of the planned period since the 1960s, different regional development policies have been implemented in order to induce investment, to create jobs and to increase growth in low income regions to equalise interregional per capita income. While, in the period of etatism, the main attempts were towards the redistribution of public services and industrial investment to different parts of the country in order to develop a national economy, since the planned period regional development policies have focused on the growth centres. After the 1980s, following the rise of endogenous development theories in regional economy, the incentives for enhancing local potentials in priority regions for development (PRD) was applied in the regional policy of Turkey (http://research.sabanciuniv.edu/8875/1/MILESTONES_OF_REGIONAL_POLICY_IN_TURKEY. doc). In the 1990's, in parallel with the rise of the new regionalism approach, the effect of active regional policies in general and the necessity of public intervention gained importance (Karaçay-Çakmak and Erden, 2004; Pirili, 2011). In this context, during the last decades of the 20th century, Turkey's attempts to adopt the regional policy criteria of the EU in order to harmonise its legislation and the effect of public policies in regional economic development also became important in Turkey. Within this framework, Law No. 5084 enacted in 2004 comprises of the incentive for regional investment and employment as the most comprehensive and the most recent regulation for 49 provinces.

Investigating the impact of public policies, in this context public investment and incentives, together or separately on output and employment has been an issue for limited empirical studies dealing with the national and regional levels of Turkey in recent years (see Kaynar, 2001; Karaçay-Çakmak and Erden, 2004; Ay, 2005; Erden and Karaçay-Çakmak, 2005; Akan and Arslan, 2008; Özkök, 2009; Eser, 2011; Yavan, 2011). The results of these studies generally point to the positive effects of investment incentives on output and employment. However, some studies found no clear evidence of the positive effect of investment incentives (see for instance Karaçay-Çakmak and Erden, 2004; Erden and Karaçay-Çakmak, 2005; Eser, 2011). Eser (2011) concluded that, although the effect of investment incentives with Law No. 5084 increased employment in the less developed regions, due to problems arising from the structure of investment incentives they were sometimes inefficient in directing the investments in terms of regions and sectors. On the other hand, most of the limited number of empirical studies analysed the impact of public investments on income with the national and regional levels (see Karadag, Önder and Deliktas, 2004; Yildirim, 2005; Deliktas, Önder and Karadag, 2009; Önder, Deliktas and Karadag, 2010). According to the findings of these studies, public investment is an effective policy tool for increasing regional income and reducing regional disparities.

Therefore, the main aim of this paper is to analyse the effects of two public policies, public investments and the firm-based investment incentives within the context of Law No. …

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