Why foreign direct investment does not enter to Turkey

FDI can be described as international capital flows in which a firm in one country creates or expands a subsidiary in another. Its basic function is to provide capital to developing countries that face capital inadequacy due to and consequent of structural problems in the finance of economic development. Today, an increasing number of countries are using FDI and showing tremendous effort to attract FDI to their country. In 1982, FDI inflows and outflows were 57 and 37 billion USD at present value, which remain very small compared to 2000 inflows and outflows of 1271 and 1150 billion USD, respectively.

Asia and the Pacific region, in which Turkey is included, have a share of 11. 3 %, corresponding to 143. 8 billion USD. As seen, there is a general attitude to use more and more FDI. Turkey, in this context, is by no means an exception. This can be proven by the fact that FDI to Turkey amounted 1. 707 billion USD in 2000, compared to 167 million USD in 1982. However, Turkey faces a serious problem in FDI issue: it can attract much less FDI than desired. In the 2001 Annual Report of Directorate General of Foreign Investment, FDI for 1999 amount to 813 million USD.

This amount is 1,707 million USD and 3,044 million USD for the years 2000 and 2001, respectively. The sharp increase is undeniable, but so is the huge difference between realizations and expectations. I am going to defend in this paper this thesis: Turkey can attract much less FDI than it desires because of two kinds of problems, economic and administrative. I am going to devote the rest of this paper to the proof of this thesis. After a brief overview on FDI, I am going to talk about the economic and administrative problems, respectively.

In the conclusion part, I am going to express my views on how these problems can be overcome. Economic Problems The first and the most important of the problems forming the economic group of problems is "high inflation". Inflation can be described as "decline in purchasing power of money". When inflation occurs, you can buy less and less goods when you sell the same amount of goods. A reasonable strategy to overcome this situation is to charge more than the amount that will preserve the purchasing power and wait as the it is eroded by inflation. This situation automatically reduces the facility of the investor to compete globally.

The investor, in order to make profits, will have to buy some inputs. However, when inflation occurs, s/he will have to buy these inputs at a higher price. When these inputs are provided at a higher price, then the costs will increase and sale prices will be higher, too. However, there are other places where inflation is low, compared to Turkey. Here, because of the reason mentioned above, goods can be produced at lower costs. Thus, the investor, if s/he decides to invest in Turkey will have to sell her/his goods at higher prices in the world markets and will be at a permanent disadvantage.

The second problem in this group is "not implementing the taken economic decisions". Two valid rules for FDI have been detected by three Swiss economists a couple of years ago. The first of these rules is that economic laws and decisions in countries expecting FDI must not be changed frequently and unexpectedly. The second rule, on the other hand, states that governments and other official institutions assigned to implement these rules and decisions must not look for ways round them. Unfortunately, it is hard to say that Turkey has abided by both of the rules, because of the recent cases.

The clearest example for the violation of the first rule is probably the unimplemented regulation changes regarding income tax in 1998. The most important of these changes was the fact that the main principle of income taxing had been changed. All incomes, regardless of their origin were taxable unless otherwise stated in the Turkish income tax law, as of January 1, 1999. These changes had later been postponed, as known. The clearest example for the violation of the second rule is, on the other hand, the circular of official vehicles.

According to this circular, significant constraints had been put to allocation of official vehicles and consequently, it was expected that 20,000 official vehicles were going to be returned. However, as of April 2002, the number of official vehicles returned was 2,441 and most of these vehicles were the ones that had completed their economic life. Under these circumstances, it is very clear that public officials looked for ways round the circular. Another economic problem that prevents foreigners from investing in Turkey is "corruption".

Economists argue that the amount of FDI a country can attract falls as the level of corruption increases. On the contrary, such a country can only attract loans instead of FDI. If this is the case, then is Turkey a country where corruption is widespread? Unfortunately, the answer to this question is "Yes". In the West Europe and North America section of "Global Corruption Report 2001" published by Transparency International, the following statement can be found: "Turkey, where democracy is fragile, has set about the task of tackling corruption but, as was evident in its 2001 economic crisis, it has a long way to go.

" From here, one can clearly understand that corruption is existent and is a factor in preventing foreign investors from investing in Turkey. To summarize, one can show high inflation, absence of inflation accounting, not implementing the taken economic decisions and corruption. These problems are deterring foreigners from investing in Turkey. However, it is hard to say that these are the only factors that lead Turkey to attract much less FDI than expected. On the other hand, a number of administrative problems, which I am going to mention now, accompany these economic problems.