Recovery of Turkey's foreign direct investment accelerates (2)

The government has significantly liberalized Turkey's IFDI regime. The FDI Regulatory Restrictiveness Index of the Organization for Economic Cooperation and Development (OECD) measures statutory restrictions on FDI in 55 countries, including all OECD and G-20 countries, and covers 22 sectors. It includes four main types of restrictions on FDI: foreign equity limitations; screening or approval mechanisms; restrictions on the employment of foreigners in key personnel roles and operational restrictions, e.g., restrictions on branching and on capital repatriation or land ownership. Although the index is not a comprehensive measure of a host country's FDI climate, it does reflect openness to FDI. According to the 2012 index Turkey is positioned 27th out of 55 countries ranked. While its index is only slightly less restrictive than the OECD average, it is far less restrictive than the non-OECD average. Since 2003 Turkey's index has made significant and steady improvements, dropping from 0.283 to 0.077.

This month Parliament enacted a bill facilitating FDI in land and real estate. The bill eliminates the reciprocity requirement imposed on source countries, increases the limit on vacant land that can be acquired by foreigners from 2.5 hectares to 30 hectares and relaxes several other restrictions on FDI in real estate. This measure should further improve Turkey's FDI Regulatory Restrictiveness Index.

Although not confined to foreign investors, the government's comprehensive New Investment Incentives Program, announced last month, is intended to attract more FDI, particularly to less developed regions in the East and Southeast. Subject to highly specific industrial, sizing and regional requirements, the incentives include value added tax and customs duty exemptions, income tax reductions, social security premium support for employer contributions, interest subsidies on loans to employers and subsidies for minimum wage salaries by employers. Although research on the effectiveness of such incentives in attracting FDI, especially to very underdeveloped regions, is inconclusive, the government deserves credit for giving them a try.

In 2004, as part of its IFDI promotion and facilitation, the government established the Investment Advisory Council of Turkey (IAC), comprising top executives from major multinationals, to spearhead and publicize the drive to improve Turkey's investment climate. The IAC, chaired by Prime Minister Erdoğan, has met annually -- excluding 2009 and 2011 -- and issued declarations containing recommendations, which form the basis of the government's IAC Progress Reports. Issued last March, the latest report surveys improvements to Turkey's FDI climate since 2010. (No reports were issued in 2010 and 2011.)

The most recent meeting of the IAC was held in Istanbul on May 11, following which a declaration was issued praising “Turkey's consistent policies in sustaining a stable economic environment as a progressive example for other countries.” However, it advised the Turkish government to remain committed to policies for macroeconomic stability and current account deficit reduction in order to minimize Turkey's vulnerability to the continuing crisis in the world's advanced economies. It also urged the government to implement labor market reform, enhance the effectiveness of the judicial system and further improve the investment climate.

The IAC specifically listed the following key areas of action with potential to promote IFDI: (1) Increase Turkey's attractiveness as a regional hub and center for headquarters, by providing, among other things, better foreign language skills and improved social infrastructure for expatriates. (2) Raise the skills of the labor force through better vocational education and increase the flexibility of the labor market. (3) Improve the legal environment by increasing the speed, efficiency and consistency of the judicial system. Toward this objective begin implementing smoothly the new Commercial Code, the Code of Obligations and the Code of Civil Procedure, which should be followed by a new Code of Administrative Procedures. (4) Promote renewable and local energy sources and further liberalize the energy market to reduce import dependency and increase international competitiveness. (5) Provide better physical infrastructure by further developing the transportation and telecommunications systems. (6) Promote innovation through more R&D as well as stronger protection of intellectual property rights. (7) Improve the legal, technical and institutional infrastructure and procedures to help investors in finding and acquiring the land required for their projects. (8) Make it easier to do business by continuing to improve the regulatory environment. The improvements should include higher efficiency and faster pace of customs procedures, greater predictability and consistency of the tax system and more rational regulatory permit procedures in areas such as provision of work permits for spouses of expatriates.

Clearly there is still much work to be done to increase Turkey's attractiveness as a destination for FDI.