erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Investment, Uncertainty and Industry Structure: An Empirical Investigation Using the Turkish Panel Data

Alpay Filiztekin (Koç Unıversıty)
Öner Günçavdı (ITU)
Benan Zeki Orbay (ITU)

Abstract

At the theoretical level, significant advances have been made in recent years in understanding the basic principle of investment-uncertanity relationship. These relatively new theoretical models have some interestind policy implications. In particular, the literature on irreversible investment suggest that, if one of the govenment’s objectiveseev were to stimulate investment over the short to medium term, then staibility and credibility of macroeconomic policy may be more important than the actual level of policy variables such as tax rates or interest rates. Another interesting feture of the recent theroratical literature is the conclusion that the effect of uncertanity on investment is, in general, ambiguous and depends upon, among others, the degree of competition amongst firms in the industry.

In this proposed paper, we aim to estimate the investment-uncertanity relationship and its variation with industry structure by using Turkish industry level data. Most recent studies on Turkey have looked at the main determinats of aggragate private investment, and to best of our knowlegde none have looked in detail at the issue of whather the effect of uncertanity on investment varies with industry structure. This is also true for the investmant literature for developing countries. The aim of this paper is therefore to fill this gap by providing emprical evidence from Turkish manufacturing industry.

The data run from 1980 to 1995 at annual frequency for 29 three-digit industries (ISIC Rev.2). We use investment-output ratio as a development variable. To control for market structure we employ concentration ratios and mark-ups calculated a la Domovitz et al. (1988). We consider two different sources of uncertanity. A macroeconomic uncertanity that effects all industries simultaneously captured by volatility of aggregate prices, changes in money supply, volatility of excahange rate and so on (Beaudry et al., 1996); and a sector specific uncertainity measured as volatility in relative prices to capture demand uncertanity, and volatility of wages measuerd as volatility of relative wages of 4-digit industries that belong to the same 2-digit industry as the 3-digit industry fo concern to capture supply uncertanity.

Economic Research Center
Middle East Technical University
06531 Ankara Turkey
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e-mail: metuerc@metu.edu.tr