Today’s increasing level of globalisation has given rise to the mobility of resources, labour and capital. Numerous organisations have been moving across their national boundaries for the sake of new markets, resources and higher returns in recent years. Thus, foreign direct investment (FDI) flows between countries have shown a historical increase worldwide.
Similar trends have also been seen in Turkey, where FDI inflows gradually increased after the liberalisation reforms toward global integration initiated in the mid-1980s. Adapting free market economy and modernising the business legislation in the 1980s have enabled Turkey to increase the volume of exports and imports and improve the performance of inward FDI flows (Erdal and Tatoglu, 2002).
As Figure 1.1 illustrates, while total inward FDI to Turkey between 1975 and 1985 was only $686 million; FDI inflows increased to $885 million in 1995; climbed to $3.350 billion in 2001 and reached a peak level of $22.087 billion in 2007 (The World Bank, 2016). Today, along with other developing countries which attract a high amount of FDI such as China, Brazil, and India; Turkey is considered as a destination with high growth potential by international investors (Ernst& Young 2013).
With a population of 79 million and a gross domestic product (GDP) of $718.2 billion and with its strategic location at the crossroads of three continents, Turkey increasingly attracts the attention of foreign investors. However, as it is typically mentioned in the literature, Turkey’s inward FDI performance has been insufficient considering its potential. Dumludag (2009) states that, “Turkey has never been able to attract substantial FDI inflows that would be expected from a nation with such a strategic location”. Some of the reasons for the low FDI performance of Turkey can be listed as political and economic instabilities, lack of transparency, bureaucratic obstacles and differences in business culture and so on. On the other hand, Turkey adapts to the necessities of changing world; priorities improvements of its investment climate and offers numerous incentives – such as privatisation programs and liberalisation of financial markets and tax incentives for the local and foreign investors.
The Importance of FDI inflows in the Turkish Economy
A sustainable presence of foreign investors in the Turkish economy is essential for its development as in many other developing countries. FDI is considered as engines of economic development for developing countries (UNCTAD, 2013). Studies suggest that foreign investments contribute to the increase in income level and productivity in developing countries with the help of greater competition triggering research and development activities and bringing about the production of better quality goods and services (OECD, 2002). In order to improve Turkey’s competitiveness in the world economy, there is requirement for an increase in the production of higher quality goods and services, a higher volume of the exports and a competent workforce, all of which can be stimulated by FDI inflows into the country. Studies support the idea that the rise in the level of FDI inflows in Turkey has had a positive effect on the volume of total production of goods and services in the long term, and thereby on the GDP growth.
Therefore, it is essential for developing markets authorities and academics to examine and understand how these economies can attract a higher level of FDI and how it can benefit from the foreign investments in the future.
Dabour (2000) ‘The role of foreign direct investments (FDI) in development and of growth in OIC Member Countries’,Journal of Economic Cooperation, 21(3), pp. 27-55.
Dumludag, D. (2009) ‘An analysis of the determinants of foreign direct investment in Turkey: the role of the institutional context’, Journal of Business Economics and Management, 10(1), p.16. doi: 10.3846/1611-1699.2009.10.15-30
Erdal, F. and Tatoglu, E. (2002) ‘Locational determinants of foreign direct investment in an emerging market economy: Evidence from Turkey’, Multinational Business Review, 10(1), pp. 21-27.
Ernst & Young, (2013) Ernst & Young’s attractiveness survey Turkey 2013: The shift, the growth and the promise. Ernst & Young’s attractiveness surveys. EYGM Limited, pp.1-60.
International Monetary Fund (1993) Balance of Payment and International Investment Manual, 5th edition. Washington: International Monetary Fund, Publication Services.