MNEs and their hosts: an impact assessment on Turkey

Table of Content

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  A List of Figures ii  

  B List of Tables iii  

  C List of Appendices iv  

  Introduction 1 NA  

  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 NA  

  Bibliography 45 NA  

  i NA  

A List of Figures ________________________________________________________________

• 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

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B List of Tables ________________________________________________________________

• 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

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C List of Appendices ________________________________________________________________

Recent Articles from Today’s Zaman

• IMF director calls Turkey a success story……………………………………………24

• Erdoğan: Foreign investment to reach $30 billion this year………………………….25

• DEİK: 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

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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 TNCs 1 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.

Transnational Company

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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 policies 2 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.

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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 inflation 3 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

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1.2 Recent Trends and Structure of FDI in Turkey

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After long years of dramatic failure in attracting FDI, the inward FDI flows to Turkey have

accelerated particularly in the last couple of years. The amount of FDI was only 1.1 billion in

dollars (in average) between 1993-2002. The amount of FDI in recent years, however, was realized at $1.8 billion in 2003, $2.8 billion in 2004, $9.7 billion in 2005 4 and according to

UNCTAD an estimated amount of $17.1 billion in 2006.

Figure 4: Turkey’s FDI Inflows

Source: (Central Bank of the Republic of Turkey)

Table 1: FDI Inflows and Outflows by Region and Economy (2003-2005) Source: (World Investment Report 2006)

4 „The United Arab Emirates was the largest recipient of FDI in West Asia, with a record high of $12 billion. Turkey followed, with a few mega deals that included the privatization of Türk Telekom (with $1.3 billion paid in 2005) and two deals in banking amounting to some $4 billion”. (World Investment Report 2006, p. 60)

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Moreover, FDI stock in Turkey in 2005 more than doubled the stock in 2000 and has become $42 billion.

Table 2: FDI Inward and Outward Stock by Region and Economy (1990;2000;2005) Source: (World Investment Report 2006)

FDI inflows as a percentage of gross fixed capital formation were 13.6 percent in 2005, higher than world average of 9.4 percent and developing countries average of 12.8 percent. The share of FDI stock in GDP has reached only 11.6 percent, which is still unsatisfactory when compared to world average of 22.7 and developing countries average of 27 percent.

Table 3: FDI Flows as a percentage of GFCF and FDI Stocks as a percentage of GDP

Source: (World Investment Report 2006)

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In terms of growth rate of FDI, Table 4 shows that Turkey increased its inflows from 2005 to 2006 about 76 %. Compared to the world (+ 34%), developed economies (+ 48%), Europe (+ 36%), European Union (+ 30%), United States (+ 78%), and developing economies ( + 10%) this is a quiet remarkable performance.

Table 4: FDI Inflows by host region and major host economy, 2004 - 2006 Source: (UNCTAD)

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