An assessment of trade and investment flows between Turkey and the European Union: Perspectives on future political integration

The last three decades have witnessed a deep change in Turkish economic integration with the world economy, and have also caused an impact in the bilateral relationship with the European Union. The political challenge of accession to the European Union has demanded an important shift in order to favour structural changes in the Turkish economy and the involvement of society in those transformations. The growth in foreign trade and direct investment figures is a consequence of trying to accomplish these objectives. However, especially in comparison to the level attained by Central and Eastern European countries, there are still outstanding possibilities for a closer commercial and industrial connection with the European Union and in general with the most developed OECD countries. In this research we use a panel data econometric specification, based on the gravity model, in order to identify the main determinants of Turkish exports and foreign direct investment inflows. Results reveal that labour cost differences and joint market size are among the main factors behind those bilateral flows.