Andrew Vorkink

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Foreign Direct Investment in Turkey
Andrew Vorkink Turkey Country Director The World
Bank
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Outline

• The role of FDI in the economy and FDI trends
• Key factors affecting FDI
• Turkeys progress to date and the remaining
  agenda
• Conclusions

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FDI Sustainable growth and employment

• Potential to generate large capital inflows
• Gives access to foreign markets, especially in
  multinational corporations (MNCs) countries
• Efficient way to access foreign technology, in
  turn increasing productivity
• Preferred method of financing current account
  deficits caused by episodes of rapid growth
• Leads to knowledge, management and technology
  transfers --if the right conditions are in place

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But FDI does come with risks

• Possible abuse of dominant market position by
  MNCs
• Possible MNCs attempts to influence the political
  process and coax concessions from governments in
  return for location decisions
• Possible increased volatility of balance of
  payment flows
• Possible that MNCs continue to do business
  exclusively with parent companies, without
  generating local transfer of knowledge and
  technology

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The role of FDI in the global economy is growing
steadily

• MNCs do about 2/3 of world trade
• About 30-40 of this trade is within MNCs
• MNC export activity is taking new forms global
  production networks, with very fine vertical
  specialization by function/component between
  countries
• FDI is growing faster than other economic
  factors national investment, GDP or exports
• Local companies are also involved in global
  production networks, but only if
• They have very high levels of technological
  capabilities and form strong ties with MNCs to
  access and absorb their technological know-how
  and management skills Skills and Education are
  key

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FDI in Turkey has been chronically low
FDI/GDP. International Comparison.
Bulgaria
EU 8
China
Turkey
While worldwide FDI has increased by a factor of
12 in the last ten years, in Turkey it has been
stagnant since the mid-90s. While now growing, it
was less than 1 of GDP in 2004.
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Quality also matters RD-intensive FDI to the
whole ECA Region is close to negligible
US Multinationals RD (US million)
South and East Asia
East Europe
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Traditional key factors of FDI location

• Some remain relevant
• Stable macroeconomic environment
• Stable, transparent and welcoming policies
• Large and/or fast growing markets
• Primary resources
• Cheap and trainable labor
• But others are becoming less important
• Cheap unskilled labour
• Protected markets

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New factors in FDI location and to establish
links with the local economy

• Strong legal systems and property rights
• Low transaction costs (entry, exit, expansion,
  taxation, customs, employment, cross-border MAs)
• Modern ICT infrastructure and logistics plus RD
• Human capital new skills, flexible practices,
  training provisions, ease of expatriate entry
• Strong supplier and service networks
• Effective FDI promotion, targeting and
  coordination with supply side policies

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How to promote supplier linkages with MNCs?

• Local content rules are often inefficient and
  are now forbidden by the WTO
• Fiscal incentives are costly and can only play an
  initial stimulating role
• What works best
• Improving supplier capabilities, directly and
  with MNC assistance
• Matchmaking, information dissemination
• International best practice
• Ireland comprehensive strategy to attract FDI
• Malaysia SMART, Global Supplier Program

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Turkeys progress to date

• Macroeconomic stability
• EU accession
• FDI Act in June 2003
• Eliminated the minimum capital investment
  requirement (US50,000) no need to obtain
  approval from the foreign Investment General
  Directorate foreign firms allowed to invest in
  real estate
• Improvement in several aspects of the business
  environment (e.g., reduction of tariff and
  non-tariff barriers, reduction of corruption)

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Turkeys Agenda

• Consolidate macroeconomic stabilization by
  removing vulnerabilities
• Further improve the investment climate
• Reform financial and capital markets
• Reduce administrative procedures for firms
  operation focus on licensing, registration
  costs and exit procedures
• Reduce corporate tax and improve tax
  administration
• Improve efficiency of the judiciary for business
  dispute resolution
• Remove remaining regulatory constraints on
  foreign ownership
• Reduce limitations on foreign investment in civil
  aviation, fishery, maritime transport and
  broadcasting
• Reduce permissions needed to operate in mining
  and tourism

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Turkeys Agenda

• Improve competition levels and reduce industrial
  concentration
• Continue with accelerated privatization
• Monitor and reduce State Aid
• Strengthening anti-monopolistic behaviour of
  large groups
• Continue successful implementation of anti-trust
  policies
• Increase use of quality standards and technology
  among local firms and improve the skills of the
  labor force
• Quality align legislation to EU, reform
  Standards and Quality Agency (TSE), increase
  firms and labs use of standards
• Technology Foster technology adoption at the
  firm level reform TUBITAK and create a new
  innovation agency align IPR legislation with
  Acquis and improve IPR enforcement
• Strengthen skills by modernizing the higher
  education admission system and reforming
  curricula at all levels

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Conclusion

• Turkey is fully committed to a modern and
  efficient economy as a mean to improve the life
  of its citizens
• FDI is an important ingredient in achieving this
  objective
• There is strong competition in attracting FDI and
  while Turkey has made great progress, important
  challenges remain
• The agenda ahead is clear and the country has the
  ability to meet these challenges