TURKEY WAS JUST beginning to look like a neglected and potentially fruitful target for foreign direct investment. But a government skirmish with the military, the slow pace of reform and recent investor flight from emerging markets have taken it back towards the bottom of the FDI hit list.
A headline-grabbing showdown between the moderately Islamist government and the secularist military and establishment over religious education is casting a long shadow.
As recently as March, Turkey played host to a team of influential executives, the Investment Advisory Council, including Citigroup's Michael Klein and Mitsui's Norio Shoji, and led by World Bank president James D Wolfensohn. All of them claimed that Turkey was on the verge of transformation, amid new stability, near single digit inflation and the looming embrace of the EU. "Turkey can be a magnet for FDI, the country has huge potential," Wolfensohn said, wrapping up the first meeting of the council, which has been set up by the International Finance Corporation/World Bank's Foreign Investment Advisory Service to improve Turkey's investment climate.
Such talk is music to the ears of business and political leaders. All acknowledge that without a solid flow of FDI, Turkey will struggle to achieve rapid economic growth. But now, while a few bright spots exist, including an expected acceleration of privatization, the mood is decidedly sombre once more.
"If you'd asked me six weeks ago, I would have been cautiously optimistic," says Metin Ar, CEO of Garanti Securities and an adviser on FDI deals in the industrial and service sectors "But frankly there are a lot of background problems to overcome."
Garanti Bank is itself near to closure of a merger with Italy's Banca Intesa, and other investments in the financial sector are said to remain on track. But such activity is yet to amount to the turnround that had been hoped for amid speculation about annual inflows of the order of $20 billion and rapid progress towards EU membership.
Attractions ignored
Despite Turkey's customs union with the EU, a bridge position linking Europe and Asia, and some dramatic FDI successes (particularly in the automotive sector), foreign investors have been lukewarm.
There is a long list of frustrating ironies for Turks. The labour force scores higher in skills availability than Ireland, which has specifically marketed that very quality to attract FDI. International rankings place Turkish managers eighth in the world, well ahead of eastern Europe, the region that has left Turkey trailing in the competition for FDI. The hard fact remains that Turkey has attracted less than $20 billion in its history.
After the banking crisis of 2001 and the subsequent recession, the inflow of significant investment all but stopped, with the notable exception of HSBC's acquisition of the failed Demirbank for $350 million.
In the face of such statistics, the government of the Justice and Development party, which came to power in 2002, has taken big steps towards improving the difficult and complex investment environment.
Some 20 FDI-related bills in a package of 34 advanced by industry and the Foreign Investors Association (Yased) were approved last year. These include abolition of a host of screening requirements, opening of all types of companies to foreign investment, acceptance of international arbitration, abolition of minimum capital requirements, removal of restrictions on real-estate acquisition and a clear restatement of the free transferability of profits, dividends or the proceeds of asset sales.
The legislation also guarantees national treatment of foreign firms by local authorities – foreign businesses complain that they were often singled out by municipal authorities for inspections and rules bordering on extortion.
Legal reforms still have some way to go, but the basic prerequisites of an internationally competitive position for Turkey are now in place, says Abdurrahman Ariman, a former Yased director who now heads SPN Investment Consultancy. In his view, the agreement of a formal date in December for the beginning of negotiations for EU accession is now critical.
"If there is a firm roadmap into the EU in place, that brings stability," Ariman says. "And stability brings confidence from investors. I don't think a lot will change before agreement with the EU."
He and other observers have estimated that Turkey should be able capture 2.5% of worldwide FDI flows – an annual $20 billion to $25 billion.
Neslihan Tombul, vice-president at Bank of New York, believes an agreement with the EU is all but assured. In the interim, what is needed, she argues, is better enforcement of existing protections for foreigners, particularly in pharmaceuticals, patents and intellectual property.
"It's a question of how sincerely you want FDI," says Tombul, who heads BNY's Turkish and regional operations. "The existing companies have to be happy for new companies to follow and there needs to be a real commitment to a level playing field."
Confidence is lacking. There is growing concern about the EU and many leading voices argue that a government-led quest for FDI is not enough: Turkish firms need to be more aggressive in attracting partners.
The leading voice for a new approach is Ethem Sancak, CEO of Hedef-Alliance, Turkey's largest wholesaler of pharmaceutical and healthcare products. His company attracted attention in the early days of the 2001 crisis when it successfully negotiated a $66 million investment by UK-based Alliance UniChem for a 25% share in the company. That stake subsequently became a 50-50 partnership and the marriage has led to ambitious regional expansion.
"Turkey is not Africa, where a company comes in and starts from scratch," says Sancak. He makes the point that internationally much of the FDI flow has been essentially greenfield investments into eastern Europe, taking over decrepit Soviet-era plants or creating new enterprise or infrastructure in the virgin territory of China. "But in Turkey," he says, "almost any sector a foreign company might enter will already have a dominant domestic player."
This approach to attracting FDI has not really been incorporated into official strategy and is an important omission that requires more robust private sector action, Sanjak argues.
His thesis is supported by the Istanbul Chamber of Industry's list of the top 10 most profitable companies, which indicates that half are foreign joint ventures.