Leeds Metropolitan University

International Business

Individual Assignment

MNEs and their Hosts: An Impact

Assessment on Turkey

by

Atilla Kibar

Module: Multinational Enterprises

Lecturer: Gerry Stewart

Student (ID): Atilla Kibar

Hand in Date: 15th May 2007

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Table of Content

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A List of Figures ii

B List of Tables iii

C List of Appendices iv

Introduction 1

Aims and Objectives 1

Section 1 2

1.1 Past Developments and Obstacles of FDI in Turkey 2

1.2 Recent Trends and Structure of FDI in Turkey 4

Section 2 (Theoretical Analysis) 12

2.1 Balance of Payments effects 12

2.2 Employment effects 14

2.3 Technology transfer effects 14

2.4 Sovereignty effects 15

Section 3 (Empirical Analysis) 16

3.1 Balance of Payments effects 16

3.2 Employment effects 18

3.3 Technology transfer effects 21

3.4 Sovereignty effects 21

Section 4 22

4.1 Policy Implication and Recommendation 22

Appendices 24

Bibliography 45

i

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A List of Figures

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· Figure 1: FDI Permits, Inflows and Outflows of FDI to and from Turkey 2

· Figure 2: Turkey, Consumer Price Inflation 3

· Figure 3: Turkey, Real GDP 1994-2003 3

· Figure 4: Turkey′s FDI Inflows 4

· Figure 5: FDI Inflows into Turkey, Top 5 Countries and Top 5 Sectors 7

· Figure 6: Source Country of MNEs investing in Turkey 8

· Figure 7: : FDI Projects by Key Business Function in Turkey 9

· Figure 8: FDI projects by cluster in Turkey 10

· Figure 9: Unemployment Rate 20

ii

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B List of Tables

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· Table 1: FDI Inflows and Outflows by Region and Economy 4

· Table 2: FDI Inward and Outward Stock by Region and Economy 5

· Table 3: FDI Flows as a per. of GFCF and FDI Stocks as a per. of GDP 5

· Table 4: FDI Inflows by host region and major host economy 6

· Table 5: Source Country of MNEs investing in Turkey 8

· Table 6: FDI Projects by Key Business Function in Turkey 9

· Table 7: FDI projects by cluster in Turkey 1 10

· Table 8: Sectoral Breakdown of FDI Inflow 11

· Table 9: Number of Companies with Foreign Capital by Sector 11

· Table 10: Intra-Firm Trade 18

· Table 11: Market shares in Turkish automobile industry 19

· Table 12: Benchmarking the quality of labour in Turkey 20

iii

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C List of Appendices

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Recent Articles from Today′s Zaman

· IMF director calls Turkey a success story 24

· Erdoan: Foreign investment to reach $30 billion this year 25

· DEK: Turkey may surpass Brazil, Russia in 2007 26

· Progress in Turkey attracting foreigners 27

· Turkey′s largest concrete transmixer factory launched 27

Appendix 1

· Potentials of the Turkish Economy 29

Appendix 2

· Turkey′s Investment Environment 33

Appendix 3

· Balance of Payments Report / 2006-Quarter III 39

Appendix 4

· Additional Data from the World Investment Report 2006 40

iv

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Introduction

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Foreign Direct Investment (FDI) has become the most important determinant in the

globalization process and has been increasingly seen as an important stimulus to the industrial

growth and development for developing countries (Baykal, 2003). Especially TNCs1

operating through FDI abroad may affect a countries balance of payments, growth,

employment objectives, technological transfer, and sovereignty. Furthermore FDI shows

according to several studies that it contributes to international trade, helps to create a more

competitive business environment, generates spillover effects, and enhances enterprise

development. Nevertheless, under different conditions, there might be not only positive but

also negative effects of FDI for the host country, for instance caused through poor

performances by TNCs (Daniels & Radebaugh, 2006).

Aims and Objectives
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The aim of this report is to provide a detailed overview of Turkey as a host country of FDI.

For this purpose, past developments, obstacles, recent trends, and structures of FDI in Turkey

will be discussed in the first section. The second part reveals a detailed analysis both in

theoretical and empirical terms of the costs and benefits of FDI in Turkey. The final section

examines policy implications based on the research in the previous chapters and also presents

a concluding statement. The selected articles as well as the appendices should support and

confirm the statements given in this work. Additionally, it should assist the reader to get a

clearer picture about the current situation of FDI in Turkey.

1

Transnational Company

1

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Section 1
1.1 Past Developments and Obstacles of FDI in Turkey

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The development of FDI in Turkey dates back to 1954, where the first law regarding foreign

investment was established. Anyhow, the cumulative FDI until 1980 was only $228 million,

which was far less than other comparable countries. This was mainly caused by the fact that

Turkey was at this time a relatively closed market to foreign companies. As the first liberal

foreign investment and privatization policies2 began to show their results FDI increased in the

mid 1980s and reached $1 billion in 1990 (Erdal &Tatoglu, 2002). However, during the 1990s

when global FDI significantly increased, Turkey remained static and FDI flows per annum

have not increased for a decade.

Figure 1 shows this trend in the level of annual inflows of both actual and authorized FDI for

the period 1980-2003. An interesting observation in Figure 1 is the difference between

approved and real FDI. For the last 23 years Turkey underperformed in attracting FDI

because approved and realized investment has not been quite closely matched. This indicates

that the government was unable to facilitate the large interest shown by inward investors into

real investment (Yilmaz, 2005).

Figure 1: FDI Permits, Inflows and Outflows of FDI to and from Turkey ( in Million $)

2 In 1980, the Turkish Government initiated a series of reforms aiming to accomplish the following

objectives: (i) minimizing state intervention; (ii) establishing a free market economy; and (iii) integrating

the economy with the global economic system.

2

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Foreign direct investment is crucial for the development of the Turkish economy. As

mentioned above foreign investors responded positively to the liberalization of policies.

Additionally, not only political instability discouraged foreign investors to invest in the

Turkish economy but also the macroeconomic instability. For the last 20 years, Turkish

economy is suffering from a high rate of inflation3 which is a major obstacle to FDI (Yilmaz,

2005).

Figure 2: Turkey, Consumer Price Inflation

(Source: OECD)

Inflation peaked in the mid 1990s to 100% and Turkey′s economy had to overcome also

several recessions and economic crisis, namely in 1994, 1999 and the most recent in 2001.

While unstable political and macroeconomic climates may have contributed to the weakness

of FDI, a degree of discrimination against foreign firms, difficult bureaucratic procedures and

an unfavourable legal environment have also been obstacles. However, a law liberalising the

legislation on foreign investment, which should substantially improve the situation, entered

into force in June 2003 (OECD, 2004).

Figure 3: Turkey, Real GDP 1994-2003

(Source: OECD)

3

An interesting Documentary about the History of Inflation in Turkey is available on the website of the

Central Bank of the Republic of Turkey. Video available on: http://www.tcmb.gov.tr/yeni/eng/index.html

3

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