Andrew Vorkink Turkey Country Director The World Bank

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

2. Outline • The role of FDI in the economy and FDI trends • Key factors affecting FDI • Turkey’s progress to date and the remaining agenda • Conclusions

3. 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”

4. 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

5. 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

6. … 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.

7. Quality also matters: R&D-intensive FDI to the whole ECA Region is close to negligible US Multinationals R&D (US$ million) South and East Asia East Europe

8. 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

9. ‘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 M&As) • Modern ICT infrastructure and logistics plus R&D • 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

10. 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

11. Turkey’s progress to date • Macroeconomic stability • EU accession • FDI Act in June 2003 • Eliminated the minimum capital investment requirement (US$50,000); 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)

12. Turkey’s 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

13. Turkey’s 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

14. 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