Foreign Direct Investment in Turkey: Historical Constraints and the AKP Success Story

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Notes

1. In the period between 1990 and 2004 annual average FDI inflows amounted to US$1 billion and in the preceding decade of 1980–90 well below this amount, on average. By contrast, the increase of FDI in Turkey was 240 per cent during 2004–5 and 105 per cent during 2005–6. In 2006, Turkey attracted US$20.2 billion, the highest ever amount of FDI in its history. Based on that figure, Turkey ranked among the top five developing countries. Based on A. Erdilek, ‘Turkey's Recent Inward Foreign Direct Investment Developments’, Today's Zaman, 22 June 2007; H. Loewendahl and E. Ertugal-Loewendahl, Turkey's Performance in Attracting Foreign Direct Investment: Implications of EU Enlargement (Brussels: European Network of Economic Policy Research Institutes, 2001); A. Hadjit and E. Moxon-Browne, ‘Foreign Direct Investment in Turkey: The Implications of EU Accession’, Turkish Studies, Vol.6, No.3 (2005), pp. 321–340.

2. We refer here to works such as those by Y. Atasoy, Turkey, Islamists and Democracy: Transition and Globalization in a Muslim State (London and New York: I.B. Tauris, 2005), and M.H. Yavuz, Islamic Political Identity in Turkey (Oxford: Oxford University Press, 2003).

3. D. Quataert, ‘The Age of Reform, 1812–1914’, in H. İnalcık and D, Quataert (eds.), An Economic and Social History of the Ottoman Empire, Volume Two 1600–1914 (Cambridge: Cambridge University Press, 1994), pp.773–4.

4. See C. Issawi, ‘The Transformation of the Economic Position of the Millets in the Nineteenth Century’, in B. Braude and B. Lewis (eds.), Christians and Jews in the Ottoman Empire: The Functioning of a Plural Society (New York: Holmes and Meier Publishers, 1982), pp.262–3.

5. On this, also see A. Aktar, Türk Milliyetçiliği, Gayrimüslimler ve Ekonomik Dönüşüm (İstanbul: İletişim, 2006).

6. W. Hale, The Political and Economic Development of Modern Turkey (London: C. Helm, 1981), pp.38–9.

7. B. Kuruç, ‘Ulus Devletin Payandaları: Ekonomik Büyüme ve Mali Disiplin, 1923–1950’, in Demokrasi ve Gençlik Vakfı (ed.), Uluslararası Atatürk ve Cağdaş Toplum Sempozyumu (İstanbul: İş Bankası Kültür Yayınları, 2002), pp.42–3.

8. A.G. Ökçün, Türkiye İktisat Kongresi 1923–İzmir: Haberler–Belgeler–Yorumlar (Ankara: Ankara Üniversitesi Sosyal Bilimler Fakültesi Yayınları, 1981), p.248, cited in A. İnsel, ‘Milliyetçillik ve Kalkınmacılık’, in T. Bora (ed.), Milliyetçilik (İstanbul: İletişim, 2002), p.769.

9. Kuruç, ‘Ulus Devletin Payandaları’, pp.47–8.

10. Ibid., pp.49–50.

11. For an overarching account of the global ebbs and flows of market opening, which the Empire and subsequently Turkey, has followed, see J.A. Frieden, Global Capitalism: Its Fall and Rise in the Twentieth Century (New York and London: W.W. Norton & Co., 2006).

12. Istanbul non-Muslims had largely escaped the fate of their co-religionists in Anatolia and managed to maintain a prominent position in the economic life of Turkey's main business centre.

13. A. Aktar, Varlık Vergisi ve ‘Türkleştirme’ Politikaları (İstanbul: İletişim, 2000), pp.140–41.

14. A. Aktar, ‘Homogenising the Nation, Turkifying the Economy: The Turkish Experience of Population Exchange Reconsidered’, in R. Hirschon (ed.), Crossing the Aegean: An Appraisal of the 1923 Population Exchange between Greece and Turkey (New York and Oxford: Berghahn Books, 2003), p.92.

15. Similar were for example the nationalization policies of the Egyptian economy which Gamal Abdel Nasser followed in the 1950s, aiming to marginalize Egypt's Levantine, Greek, Jewish and Armenian minorities.

16. For a periodization of the evolving relationship between the Turkish state and business, see A. Buğra, State and Business in Modern Turkey: A Comparative Study (Albany, NY: State University of New York Press, 1994).

17. Loewendahl and Ertugal-Loewendahl, Turkey's Performance in Attracting Foreign Direct Investment, p.7.

18. A.M. Rugman, The Regional Multinationals: MNEs and ‘Global’ Strategic Management (Cambridge: Cambridge University Press, 2005).

19. Loewendahl and Ertugal-Loewendahl, Turkey's Performance in Attracting Foreign Direct Investment, p.13.

20. For a debate on how and why contemporary economic nationalism has actually been supportive of free market reforms in certain CEE countries, see E. Helleiner and A. Pickel (eds.), Economic Nationalism in a Globalizing World (Ithaca, NY: Cornell University Press, 2005).

21. Surveys and scholars of FDI agree that a powerful combination between administrative inefficiency and lack of transparency together with political and macroeconomic instability acted as an effective constraint to FDI in Turkey despite the fact that the economy was open and that legislation no longer discriminated against FDI. See Loewendahl and Ertugal-Loewendahl, Turkey's Performance in Attracting Foreign Direct Investment; TÜSİAD and YASED, FDI Attractiveness of Turkey: A Comparative Analysis (Istanbul: TÜSİAD and YASED, 2004); and Hadjit and Moxon-Browne, ‘Foreign Direct Investment in Turkey’.

22. See, for example, Türkiye Anayasa Mahkemesi, Telgraf ve Telefon Kanununun Bir Maddesinin Değiştirilmesi ve Bu Kanuna Bazı Ek ve Geçici Maddeler Eklenmesine Dair Kanun ile Ilgili Anayasa Mahkemesi Kararı (22027/1994).

23. The banking crisis of 2001 resulted from the interplay of a variety of factors. Weak banking supervision perversely made sense, as it eased deficit finance and rollover of maturing state debt – local banks held 70 per cent of government securities at the time of the crisis. Banks in turn increased their short term foreign exchange exposure in order to speculate on longer term lira denominated assets. In addition, a series of coalition governments provided protection, from regulatory censure, to their various business allies engaged in banking. To compensate for losses from directed lending, to loss-making companies and agriculture, state banks resorted to bidding up deposit rates, thus putting pressure on their private competitors and promoting excessive risk taking throughout the industry. Private banks channelled lending and investment to group affiliates in the absence of forceful supervision by the central bank. Significantly, at the time of the crisis the value of the banking system's non-financial participations was equal to that of their lending, 26.8 per cent to 27 per cent of Turkey's GDP respectively. A shift in international investor sentiment, partly occasioned by Turkey's rising trade deficit and inflation, brought the whole house of cards down in 2001.

24. The AKP's antecedent political force in the 1950s, the Democrat Party (Demokrat Parti–DP) was toppled by a military coup in 1960. The poor status of the economy was one of the pretexts used by the generals.

25. See Government of Turkey, Letter of Intent of the Government of Turkey to the IMF (Ankara, 2003). Available from: http://www.imf.org.

26. For a broad analysis of AKP's strategy and coalition-building, see Z. Öniş, ‘The Political Economy of Turkey's Justice and Development Party’, in M.H. Yavuz (ed.), The Emergence of a New Turkey: Islam, Democracy and the AK Party (Salt Lake City: University of Utah Press, 2006). Öniş argued that the AKP, by ignoring the reflationary policy references of its own small and medium business supporters and agreeing to IMF's scriptures, actually moved closer to Turkey's secular business elite, as it was represented by the business association TÜSİAD. What the AKP lost in potential dissatisfaction within its own ranks was more than made up in increasing domestic and external legitimacy, as well as accelerated economic growth.

27. On numerous occasions in his travels abroad, Erdoğan promoted the attractions of Turkey as an investment destination and defended this practice domestically by arguing that it was part of his job, like other foreign leaders, to market his country to investors. He also chaired high profile meetings of the Investment Advisory Council (Yatırım Danışma Konseyi), a body established by the Turkish Treasury, which brings together personalities from the Turkish business elite, heads of major multinational enterprises (MNEs) and international financial institutions, the aim being to lift barriers to FDI in Turkey.

28. It is indicative of the AKP's success relating to FDI, in substance and perception, that Turkey in the 2005 FDI Confidence Index compiled by A.T. Kearney, the management consultancy, jumped to the thirteenth place as a most attractive FDI destination from below the top 25, with Italian investors ranking Turkey their number one investment location. The Index is based on a survey of senior executives from the world's 1,000 largest corporations so it would tend to reflect formed, educated but also conventional opinion on a country as it is reported in international business media. Thus the higher visibility of Turkey recorded in the A.T. Kearney Index signifies something which is at least as important as the shifting opinion of this global corporate elite: the increasingly positive perception of Turkey as a marketplace and with a promising economy, a perception which is generated abroad and then is imported back into the country, critically influencing public discourse. See ATKearney, FDI Confidence Index Volume 8 (Alexandria, VA: Global Business Policy Council, 2005).

29. For a discussion of the impact of macroeconomic volatility on Turkish productivity see McKinsey Global Institute, Turkey: Making the Productivity and Growth Breakthrough (London, 2003). Available from: http://www.mckinsey.com/mgi/publications/turkey/executive_summary.asp. According to McKinsey, macroeconomic and political instability accounts for half of the gap between Turkey's current and potential productivity levels.

30. In fact, TÜSİAD, the business organization that represents Turkey's largest enterprises, argued forcefully in favour of Turkey's democratic consolidation from the mid-1990s onwards. This policy stance reflected the realization, on the part of an increasingly mature Turkish business elite, that they could optimize their benefits from international interaction and secure their successful development in such a political environment, and particularly in the context of Turkey's EU accession process. On these, see A. Buğra, ‘Class, Culture and State: An Analysis of Interest Representation by Two Business Associations’, International Journal of Middle East Studies, Vol.30, No.4 (1998), pp. 521–539, and Z. Öniş and U. Türem, ‘Entrepreneurs, Democracy, and Citizenship in Turkey’, Comparative Politics, Vol.34, No.4 (2002), pp. 439–456.

31. As a result of the 2001 crisis, ownership of 21 financial institutions, often with their associated holding companies and their subsidiaries covering a diverse range of activities, were transferred to the Savings and Deposit Insurance Fund (Tasarruf Mevduatı Sigorta Fonu–TMSF), a state organization administering failed financial institutions and their assets.

32. Macroeconomic stability by producing sustained interest by foreign institutional investors to a company's stock would tend to encourage greater transparency in corporate accounts and management. See M. Uğur and M. Ararat, ‘Does Macroeconomic Performance Affect Corporate Governance? Evidence from Turkey’, Corporate Governance, Vol.14, No.4 (2006), pp. 325–348. Establishing causality is complex, however, as the companies that would be most capable of improving their corporate governance mechanisms would tend to have acquired the size and sophistication to do so even earlier than the arrival of such stability. We should not fail to notice, in that regard, that Sabancı University, established by the homonymous leading Turkish business group, has spearheaded the initiative on improving corporate governance in Turkey. Sabancı Group has had a great deal of experience in relating to third parties from abroad, either through a series of joint ventures with highly reputable MNEs or through its flagship Akbank, which is the largest capitalization stock on the Istanbul Stock Exchange. On the other hand, it is the case that companies that have deeply problematic relationships with foreign institutional investors and other third parties from abroad do change their colours when incentives change. See for an example the Russian Yukos company obituary at: A. Ostrovsky, ‘Yukos Creditors Finally Bow to the Inevitable’, Financial Times, 27 July 2006.

33. Turkey's top three business groups, Sabancı, Koç and Doğan, have taken advantage of opportunities offered by the 2001 crisis and its aftermath, which has involved more aggressive regulatory intervention by the Turkish state and government, particularly in the financial sector. This has involved assets sold by the Tasarruf Mevduatı Sigorta Fonu (TMSF). In particular Doğan Group has bought mass media assets that used to belong to the Uzan Group, Sabancı Group has bought a cement company that was also a subsidiary of the Uzan Group and Koç Group was able to acquire a controlling stake in a joint venture with the Italian bank Unicredito, at Yapı Kredi Bank, one of Turkey's four largest private banks, where TMSF had become a shareholder.

34. Although we do not focus in this paper on the rising pro-AKP business class, they have also been beneficiaries of macroeconomic stabilization combined with increasing foreign interest in the Turkish economy. Bank Asya, an Islamic financial institution which offers only ‘interest free’ banking launched its Initial Public Offering (IPO) in April 2006 on the Istanbul Stock Exchange, benefiting from the high demand for Turkish banking stocks from both local and international investors. It was followed by Albaraka Türk, an institution also engaging in Islamic banking, in June 2007. İhlas Holding, a group which had faced great difficulties in the 2001 crisis, was covered by local brokers in the same period as a ‘restructuring story’ and was the first Turkish media company to sell the TV channel TGRT to a foreign investor, News Corporation owned by the media magnate Rupert Murdoch, for US$81.5 million.

35. Emerging market stocks, on the basis of the Morgan Stanley Capital International (MSCI) Emerging Markets Index have appreciated more than 100 per cent from mid-2003 to mid-2006, which is the period when Turkey attracted the unprecedented FDI flows which are the subject of this inquiry. Turkey has a 2 per cent weighting in the MSCI index which is composed of the major capitalization stocks quoted and traded in emerging market stock exchanges. For an extensive analysis of the trends and consequences of the recent record private capital flows to developing economies such as Turkey, see also World Bank, Global Development Finance – Development Potential of Surging Capital Flows (Washington, DC: World Bank, 2006).

36. For an astute analysis of how global liquidity conditions affect the dynamics of policy advocacy and implementation in emerging markets such as Turkey, see G. Pettis, The Volatility Machine Emerging Economies and the Threat of Financial Collapse (Oxford: Oxford University Press, 2001), p.48.

37. The main index of the Istanbul Stock Exchange, the ISE-100, composed of the top 100 listed Turkish companies, had appreciated from November 2002, when the AKP won power, to the end of 2005 by 215.89 per cent in US dollar terms, outperforming the MSCI Emerging Market Index, which in the same period rose by 107.89 per cent. This rise had represented gains by Turkey's capital holders in the hundreds of millions and even billions of US dollars. Nonetheless, by 11 August 2006, the ISE-100 had declined by 12.54 per cent, suffering from the generalized fall in emerging market equities, which had commenced in May of the same year, as well as by the perception of enduring Turkish weaknesses. For the purposes and timeframe of this study, capital market flows have been crucially helpful to AKP's economic policy, as well as to the sustainability of its alliance with Turkey's business elite.

38. This can be even literally true: the Doğan Group has a leading market share in the Turkish press, to the extent that its vehicles were generating, at the end of 2005, 60 per cent of newspaper advertising, 47 per cent of magazine advertising and 28 per cent of TV advertising in Turkey, following the collapse of most of its mass media competitors in the 2001 crisis. Under the AKP government, (i) it has benefited, in terms of the profitability and stock price valuation of its media subsidiaries, because of the increase in advertising revenue that the growing economy is generating; (ii) it has been an active participant in the government's privatization process as a buyer of state assets; and (iii) it has sold at a very considerable profit its financial sector subsidiary Dışbank to the Belgian/Dutch company Fortis. Doğan group newspapers, such as Hürriyet, Milliyet, Radikal and Referans have been broadly favourable of FDI under AKP.

39. Developments in the banking sector are highly illuminating in that they reveal the whole range of options made available to Turkey's main business groups under the AKP's stewardship of the Turkish economy. The Zorlu and Doğan Groups opted to realize major capital gains by selling their mid-sized banking subsidiaries to the Belgian Dexia and the Dutch Fortis, respectively, in order to redeploy capital to core activities where they have a defensible position. Koç Group took advantage of the weakened position of the Karamehmet Holding and in a 50–50 alliance with the Italian Unicredito, together with strong support from the Turkish government, acquired Yapı Kredi Bank. Doğuş Group, weakened by low performing non-core participations, realized capital gains by selling a controlling stake of its Garanti Bank to the US GE Consumer Finance. Fiba Holding sold its main shareholding in its subsidiary, the medium sized Finans Bank, to the National Bank of Greece in order to exit banking and redeploy its capital to other activities such as real estate. The Sabancı Holding sold 20 per cent of its flagship Akbank to Citigroup, while the military pension fund OYAK sold its financial sector subsidiary OYAK Bank to the Dutch ING. The diverse national origins of the acquirers, including Greeks, the elimination of the financial influence of whom had been planned and implemented since the end of the Ottoman period and throughout the Republican years, is particularly noteworthy, considering the perceived role of finance and banking, in Turkey and elsewhere, as one of the commanding heights of a national economy.

40. The phenomenon of how Gulf countries, in contrast to the 1970s, have recently tended to recycle their petrodollars in their increasingly diversified own economies and region, has been well documented by leading investment banks. The following are indicative: Morgan Stanley, ‘The Case of the Missing Petrodollars’, 28 Nov. 2005, Merrill Lynch, ‘Middle East Opportunities’, 8 Dec. 2005, and HSBC, ‘The Gulf's Petrodollars-How Much and for Whom?’, 10 Feb. 2006.

41. See A. Bürosu, ‘Erdoğan: Bunlar Sermaye Irkçısı’, Radikal, 12 Oct. 2005; Y. Bulut, ‘Sermaye Irkçılığı…’, Radikal, 13 Oct. 2005; and E. Baysal and İ. Sezen, ‘Sermaye Irkçılığı Yabancı Yatırımı Kaçırıyor’, Zaman, 15 Oct. 2005.

42. It is indicative of the levels of legitimacy that Turkish business leadership has enjoyed, by virtue of having proved that Turkey could become a modern industrial nation in the absence of foreign involvement, that when Sakıp Sabancı, the elder statesman of Sabancı Holding, died in 2003, he was given a state funeral.

43. EFG Istanbul Securities, ‘OYAK to Sell its Stake in Elazığ Altınova Çimento’, 1 Aug. 2006.

44. See İstanbul Bürosu, ‘Ulusal OYAK Bank Hollandalı ING Oldu’, Yeni Şafak, 20 June 2007; İstanbul Bürosu, ‘Asker Bankasını 2.7 Milyar Dolara Sattı’, Radikal, 20 June 2007; and İstanbul Bürosu, ‘Medya Banka Satışında ‘Tişörtlü Erdemir’ Haberlerini Hatırlattı’, Zaman, 21 June 2007.