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Foreign direct investment in Turkey Global foreign direct investment (FDI) flows is one of the hot topics on the agenda of developing countries. Attracting more FDI is an indispensable requirement to remain competitive in today's globally integrated economy. Since the developing countries can be identified as more capital-scarce compared to developed countries, they need more external resources to expand their productive capacity and maintain a sustainable growth. These countries can not ignore the benefits that can be acquired by the accrual of FDI in their economies. These benefits are not simply the increase in the employment, and tax revenues but also transfer of technology and management know-how, intensified competition in the local market which will result in a more competitive private sector, improvement in exports both in volume and quality, integration to global networks and expansion of capital base. Nevertheless the continuous expansion of FDI flows since 1990 with a growth rate higher than major economic determinants such as the growth in world output and world trade volume had been interrupted with the two consecutive sharp declines in 2001 and 2002. Although the expectations of the world investment promotion agencies for the future FDI flows turned out to be positive according to recent surveys, the intensified competition among FDI recipient countries triggered by the shrinkage in volume of FDI flows seems to last longer. Given the importance of FDI as a package of internationally mobile assets for growth and development, it is not surprising that all countries are eager to introduce new investment promotion strategies and employ policy measures such as liberalization and incentives to stay one step a head of their competitors. These efforts typically focus on the following areas;
ü Improving regulatory framework for FDI ü Facilitating Business ü Improving the Economic Determinants Turkey as the largest economy in the region dedicated all of its efforts to enhance its comparative advantages as a host country for FDI, currently carrying out very comprehensive reform programs in all of the above mentioned areas. These reform programs basically aim to enhance private sector development and to achieve a smaller but more efficient public sector while stabilizing the macro economic determinants for paving the way for sustainable growth. For facilitating the business in the country "Reform Program for the Improvement of the Investment Environment" was introduced to remove the barriers to investment and promote competition in the markets. The Government has established a Co-ordination Board for Improving Investment Climate. The Board assigned specialized technical committees which will work on developing concrete proposals and strategies in order to overcome the determined obstacles on critical topics concerning the investment environment. Each technical committee consists of private sector and government agencies representatives to ensure that policy reforms truly reflect and address private sector concerns. The Board's mandate will be to make specific recommendations to the Council of Mınısters who will give the political decisions to remove the obstacles impeding the improvement of investment environment. Technical Committees are responsible for the following topics: ü Company establishment ü Employment ü Sectoral Licenses ü Location of Investment
ü Taxes and Incentives ü Customs and Standards ü Intellectual Property Rights ü Small and Medium Sized Enterprises ü Promotion of Investment ü FDI Regulation
Decisive implementation of the reform program has given its fruitful results. 13 laws was enacted, 4 laws are on the agenda of National assembly, 4 laws was submitted to Prime Ministry and 4 draft laws was prepared and waiting to be submitted to the Prime Ministry. One of the most important outcomes of this reform program is the new Foreign Direct Investment Law. The Foreign Direct Investment Law which has a liberal structure since 1954 and further liberalized in 1980 and 1995 was replaced by the new up-to-date FDI law that serves as a declaration to foreign investors of their rights and will enable a shift from an "investment permission system" to an " investment monitoring system". This law defines investment and investor in line with the international practices and abolishes minimum capital requirement of USD 50,000 per real or legal person for foreign investors. Some of the important features of the new law are as follows: ü Broader Definition of Investor -Foreign Nationals
-Turkish Nationals Resident Abroad -Foreign Legal Entities -International Organizations ü Freedom to Invest ü Internationally-accepted FDI Definition- (All Kinds of Assets)
ü National Treatment ü Guarantee to Transfer Proceeds ü Key Expatriate Personnel ü Protection Against Expropriation ü Access to Real Estate ü International Dispute Settlement
The law that redesigns company registration process which diminishes the prior 19 required steps to 3 steps and reducing turnaround from two and a half months to one day is another remarkable improvement that is facilitating the business. The company registration procedures which previously were taking almost two and a half months and requiring excessive documentation and approvals from several authorities have been simplified and streamlined. Now the registration can be done in a day. On the other hand over the last two consecutive years economy realized a rapid recovery and grew 7.8 % and 5.6 % respectively. The decisive implementation of the macroeconomic stabilization program was the major reason for that quick recovery. All the targets set by the program was achieved by the end of the year 2003. The inflation rate and the interest rates which are considered as significant variables to test the success of stabilization program, have been falling down steadily. Inflation rate fell below % 10 by the end of June 2004 which is far beyond the inflation target of % 12 for the end of this year. In spite of falling inflation rate and tight fiscal policy economy grew over 5 percent in 2003. Economic growth is expected to accelerate and reach 6 percent in 2004 Improved macro economic stability which removes the economic uncertainty will pave the way for flux of FDI to the country when coupled with the comparative advantages of Turkey as an investment location. Turkey offers great opportunities for foreign investors in terms of the most influential host country determinants. Today it is widely accepted that large domestic markets, access to regional markets and productive skilled labor force are the leading factors as investment determinants. A population of more than 67 million people and the place among the 25 largest economies in the world in terms of GDP are the best evidence of the opportunities offered by Turkey. Turkey's unique geographical location at the crossroads where Europe and Asia meet and, increasingly strategic economic, political and historical ties with its surrounding regions adds to its value as an export platform when coupled with the state of art infrastructure. Considering the complementarities of FDI and trade, the volume of foreign trade over 110 billion USD is one of the best indicators for the availability of huge business opportunities in the market.
Diminishing share of unskilled labor in all kinds of industries as the technology gains pace revealed the importance of knowledge capital as the most influential competitive strength. Having access to skilled labor force and competent managerial staff is one of the most influential investment determinants today. Turkey is well known for it's skilled labor and specialized technician abundant work force, which can offer investors the competitive edge power. Besides the favorable business environment and attractive host country determinants, Turkey also offers generous investment incentives to foreign investors. To benefit from investment incentives, local and foreign investors are equally treated; the foreign capital companies can benefit from all incentives and allowances granted to local companies. This equal treatment is guaranteed and reaffirmed by the Foreign Direct Investment Law and Treaties for the Reciprocal Protection and Promotion of Investments. In order to qualify for investment incentives, the foreign investors must receive an incentive certificate from the General Directorate of Foreign Investments. The main incentive tools granted to investors are: ü Exemption from customs duties and fund levies;
ü Investment allowance; ü VAT exemption for imported and locally pur chased machinery and equipment; Exemption from customs duties and fund levies: This incentive measure ensures that the import of machinery and equipment for investment purposes is exempted from customs duties and fund levies. The machinery and equipment, which are to be imported under this measure, must be included in the import machinery and equipment list to be approved by General Directorate of Foreign Investment (GDFI). Raw materials and intermediate goods cannot be imported under this provision.
Investment allowance: Investment allowance is a corporate tax exemption applied to taxpayers. Machinery and equipment are entitled to benefit from the investment allowance. With the latest amendment in the income tax law, all the investments which amounted above TL. 6 Billion are entitled to benefit from the investment allowance. Investment allowance rate is fixed at 40 % for all types of investments regardless of region or value. The withholding tax which has been levied up on the taxable income before deduction of the investment allowance prior to the amendment is abolished in order to provide more effective rate of 40 % with a net value. There is no need to obtain a prior approval or permission like an investment incentive certificate for the investment to be eligible for investment allowance incentive. The corresponding percentage amount of the fixed investment cost can be deducted from the future taxable profits starting with the year the cost realized. Investment allowance amount can also be readjusted for inflation. VAT exemption for imported and locally purchased machinery and equipment: The VAT, which is due to be paid for both the imported and locally purchased machinery and equipment, is exempted under this incentive measure. The imported machinery and equipment, which are included in the import machinery list approved by GDFI, can be brought into Turkey without paying VAT. The locally purchased machinery and equipment should also be included in the locally purchased machinery list to be approved by GDFI. With this approved machinery list, the investor can purchase the local machinery without paying VAT to the seller.