Kemal Ataturk, the founder and first President of the Republic of Turkey, said, "I look to the world with an open heart full of pure feelings and friendship". According to The website, http://www.ataturk.com, “The new government’s basic principles stress the republican form of government representing the power of electorate, secular administration, nationalism, mixed economy with state participation in many of the vital sectors, and modernization. Atatürkism introduced to Turkey the process of parliamentary and participatory democracy. The first Moslem nation to become a Republic, Turkey has served since the early 1920s as a model for Moslem and non-Moslem nations in the emerging world.” Turkey’s friendly attitude, stable government and economic success have made it a candidate for membership in the European Union and for foreign investors to conduct business in Turkey. Turkey has been steadily progressing economically since 2002 when a tough economic recovery program was established. When doing business in Turkey, an American business has to consider their energy limitations, great location, strong transportation system, recent political stability, balance-of-accounts deficit, growing economic stability, contract with the International Monetary Fund, and the fact that Turkey’s acceptance into the EU is considered likely by 2015. These issues will be addressed in this paper, and concluded with a recommendation for an American firm that would develop profitably in Turkey.
Turkey has a land mass of 779,452 sq km (300,948 sq miles) and a population of, approximately, 75.8 million people according to the U.N. in 2008. Turkish exports include clothing, textiles, road vehicles, mechanical machinery, Iron, and steel (Index Mundi: Turkey). Turkey’s export partners include the EU27, Germany, U.K., Italy, and France (Turkey: Statistics). “Turkish exporters have borrowed heavily in foreign currencies and have around $28 billion to $30 billion in foreign-currency debt to refinance this year” (CURTIN). The EU market, Turkey’s major market, has quickly declined due to the current global credit crunch. Therefore, Ankara, Turkey’s President had signaled he is ready to sign an agreement for a $20 billion to $30 billion support package from the International Monetary Fund. Turkish exports have declined more than 30 percent. This is despite an outstanding 75 present of growth in exports to Iraq (Agency). The article in the Wall Street Journal states that exports during January and February of last year was around 473 million, and that this year the figure rose to around $830 million (Agency). Turkey is now trying to broaden exports to all major countries instead of just its neighboring countries. This policy is being utilized to prevent any restriction of growth from global crises that may arise. With American troops leaving Iraq, a crisis may be closer than Turkey expects. This could cause Turkey’s economy to sway in two directions. The first direction is if the government of Iraq does not stabilize once America leaves. This will make any long-term investments in Turkey’s market unattractive because Iraq is Turkey’s largest market right now. Without buyers, Turkey’s exports will sit in warehouses in Turkey. Yet, if Iraq does stabilize their governments after American troops leave, Turkey’s economic future would look much more attractive due to Iraq’s buying power. This is not the only determining factor that an American firm can utilize when deciding to do business in Turkey.
At the same time, major imports to The Republic of Turkey include mineral fuels, oil, chemicals, mechanical machinery parts, and road vehicles (Index Mundi: Turkey). Turkey does not have an oil reserve which is another major drawback. However, the central Asian country of Kazakhstan is looking to double its oil output by 2020 to become the world’s top oil producer. They are expected to add a minimum of 1.5 million barrels of oil a day. This oil will be piped from western region of Kazakhstan to the Caspian Sea and then on to Turkey. According to www.globaledge .com Turkey imported approximately 724,400 barrels a day in 2004. If Turkey can get this contract with Kazakhstan it will benefit Turkey’s import price of oil for years to come and possibly keep their balance-of-payments account in surplus. This could cause a large increase in Foreign Direct Investment (FDI). In turn, this would make business in Turkey attractive to American firms because of the fact that the relations between Turkey and Kazakhstan would help slow imports of oil. This is a major issue that causes Turkey’s balance of account to be in a deficit.
Moreover, an article in the Wall Street Journal, said that Azerbaijan is urging the EU to allow it another pipeline. This pipeline is backed by the US and it is projected to cost approximately $10.24 million dollars, and carry 31 billion cubic meters of gas per year. It also stated that the EU allocated €250 million to help the pipeline move eight billion cubic meters of oil from Turkey to the EU (CHAZAN). This will help Turkey get a political gain on admission into the EU. This is also very attractive to any American firm wanting to engage business with Turkey. Since Turkey is located in the middle of Europe and the Middle East, it creates a large amount of opportunities that would make Turkey an attractive place for an American firm to invest. Location is an important factor for an American firm to consider.
Negatively, Turkey continually faces energy shortages. This is due to the lack of funding in the sector by the Government of Turkey’s (GOT) “control over prices and slow progress in market liberalization (Global Edge).” Nevertheless, the country is trying to purchase large energy producing turbines to supply this problem with watts. Thirty gas-powered turbines will be sent to Saudi utilities to increase their energy supply twenty percent. An Article in the Wall Street Journal says that GE is looking to develop a deal with Turkey for energy turbines for $2.5 billion that will help with an energy shortage (Johnson). In addition, the pipelines mentioned above will also supply Turkey with much needed megawatts. These movements toward a more powerful Turkey could create an increase in revenue because production would be much more efficient throughout Turkey. Any technologically driven company would need more energy to function. Therefore, a steady flow of energy would bring more technology to Turkey. This would increase the need for more international firms to conduct FDI in Turkey. An increase in FDI would be a huge advantage to Turkish citizen’s way of life as well as making Turkey an attractive investment possibility.
Another advantage of Turkey’s infrastructure is the fact that their transportation and communication are not hindered. Transportation is not different from any other developed country in the world. Someone doing business in Turkey can rent or own cars. International and domestic airports are scattered in various locations in Turkey. There are also ferryboats, sea buses, and shipping ports. The shipping ports are most attractive to incoming business. “The ports are classified into three groups: governmental, municipal and private ports” (Cerrahogullari). This is huge benefit for domestic businesses in Turkey. If international firms that want to interact and trade with Turkey, this would benefit the Turkish citizens. There is also a well-developed rail system that adds to the attractiveness of their trading logistics. Communication is available through the internet service, telephone and cell phone companies, or their mail system. There are no restrictions to the flow of goods and information in or out of Turkey. This helps Turkey due to the fact that American firms do not have to invest in building any infrastructure in transportation and communication. This saves international firms a lot of time and money. In turn this makes for a very attractive infrastructure.
The official currency is the New Turkish Lira (TRY), which was introduced on 1 January 2005. When introduced, six zeros were dropped from the old currency. Currency can be exchanged at banks, exchange booths, post offices, and airports much like other countries. ATMs are widely available in Turkey’s major cities. Most bank branches have ATMs which accept Cirrus and Plus, two common types of plastic used worldwide. Major credit cards are widely accepted. Cash or credit cards are the most accepted form of payment in Turkey. US dollars or Euros are preferred in the most popular destinations in Turkey. The current exchange rate for one dollar to the New Turkish Lira (TRY) is 1.61298 TRY as of 1627 (GMT-06:00) on April 07, 2009 (X Rates). This is an attractive number for American and European manufacturers when they are looking to buy materials for the production process. This would drive up the value of New Turkish Lira. In turn, this would be a great idea for an American business to adopt a manufacturing business in Turkey. This idea is discussed more in the last few pages of this paper.
As a result of the establishment of the Central Bank, a floating exchange rate has been established. A floating exchange rate is an exchange rate regime that allows a country’s currency value to change in relation to the foreign exchange market. Also, in reference to stability, the overall budget deficit of Turkey has been substantially reduced. Turkey’s economy has grown six percent in the past five years. Turkish investment is starting to look more attractive. With a more stable floating currency firms invest more because of the certainty in measuring the current and the projected changes in the New Turkish Lira.
Turkey has two income tax laws when dealing with international practices, which are individual tax and corporate tax. In Victor Thuronyi‘s review “Turkey’s Income Tax Laws in International Comparison” he wrote the information was incomplete and limited (Thuronyi). Turkey needs to translate the complete tax law of Turkey into the English language so firms looking to invest in Turkey can understand a detailed view of its tax system. One problem with tax system is that it has not been updated since 1949and is unable to handle the current global market. Turkey’s income tax system was a secular system that was composed of six categories. Each category had its own set of rules and procedures. Some of Turkey’s tax procedures have already been abandoned by other nations. This is because some of the tax laws in Turkey make it hard for the government to classify people. While other tax laws, make it complex to administer different rules to Turkey’s citizens. This could cause many double standards for people trying to do business. Turkey should take advantage of the IMF’s Legal Department to help revise and strengthen their tax system. Another article on the Global Edge web site states that many companies that do business in Turkey have a problem with high taxes as well as continuing gaps in intellectual property laws. A good revision of Turkey’s tax system needs to be addressed by the government because it is an unattractive aspect to a lot of international players. One appealing aspect, for American firms, is that Turkey has a standing contract with America that excuses them from the double tax system that most other countries experience when conducting business with Turkey. These mixed standards and difficult translations could be the deciding factors that would cause someone not to conduct international business in Turkey. In order for the government of Turkey to continue to develop a more attractive FDI their market should adopt more tax incentives. Turkey tax treaties with the United States is a good example in that it guarantees free protection of capital in convertible currencies and also eliminates double taxation.
On the other hand, after years of low levels of FDI in 2007, Turkey succeeded in attracting $16.6 billion in FDI. Turkey’s unemployment rate was approximately ten percent in 2007. One big risk that Turkey faces is the high unemployment rate that Europe and America are facing. The continuing protests by angry citizens that are frustrated by the destruction of their national economies due to overextended Icelandic banks and the subprime mortgage crises in America are a good sign that many FDI companies have their backs to the wall. Until this crises is over, some countries will be trying to conduct protectionist acts. According to Merriam-Webster’s electronic dictionary protectionism is a “policy of government economic protection of domestic producers by restricting foreign competitors.” However, since many countries have been conducting blogs against protectionism, it is possible that many of these international players will not turn inward toward protectionism.
Since the 1980’s, a tendency toward privatization has grown worldwide and many counties that have not acted in such a fashion in the past have developed such doctrines. Turkey is one of the many countries that turned to this method. Since then, Turkey has not only shifted much of its resources to the private sector to ease the burden on the country’s national budget, but also to reallocate those resources toward new investments (Privatization Endeavor in Turkey). Turkey has set up two bodies, the Privatization High Council and the Privatization Administration, to administrate and monitor this shift. Five methods of privatization are through sale, lease, grant of operational rights, establishment of property rights other a ownership or profit sharing model, and other legal dispositions depending on the nature of the business. This is one of major reason Turkey has attracted so much FDI. Privatization allows a competitive market to develop which creates better living standards through better and cheaper products being produced. Coupled with increases in exports, the quality of life would be made a better for the Turkish people. Privatization has been proven to stabilize and grow a country’s economy. The more stable a country’s economy, the more attractive it looks to American firms.
Turkey’s Gross Domestic Product (GDP (US$ bn; market exchange rate)) in 2007 was an actual $655 billion. Their GDP Purchase Power Parity was $886 billion. The real GDP growth from 2003-2007 was 6.9 percent. Their inflation from 2003-2007 was 12.9 percent. Turkey’s current-account balance as a percent of GDP from 2003-2007 was -4.5 percent. Finally, their FDI inflow from 2003-2007 was 2.1 percent (The Economist). This means that Turkey has an out-of-control inflation rate. This could be what is keeping their current-account balance from becoming positive. Also, Turkey is borrowing money to stabilize its out-of-date energy supply system. Once Turkey’s infrastructure is stable, then revenues from FDI, exporting, and licensing will increase. However, the inflation percent is not an attractive percentage. This could possibly develop into hyper inflation. This would drive many international firms away from investing in Turkey’s economy.
According to The Economist Fact sheet, the IMF has helped reduce Turkey’s macroeconomic instability. Their instability is due to the country’s high inflation rate as noted above. Again, once The Republic of Turkey brings its energy infrastructure up to the standards most developed businesses operate at, they could increase revenue. An increase in revenue would help them pay off loans that they already have and are currently taking from the IMF. This coupled with the development of the new oil pipeline and the acceptance into the EU would decrease their inflation rate. The fact that the Turkish government implemented a floating exchange rate has helped, but much more work is needed to continue to discourage a relapse into hyperinflation and reduce inflation to a sustainable rate. This should be the main goal of the Turkish people nationwide.
Many of the changes in Turkey’s ideals, combined with being one of the only Middle Eastern counties that many of the world powers consider to be stable, is what makes Turkey a very attractive place to conduct business. If an investor can see past the youth of Turkey’s new privatization ideals, Turkey could potentially be an excellent place for young international investors to establish their roots. Currently in the Middle East there are continuing terrorist attacks that cause domestic and political tensions. This includes the Turkish people that are currently suffering. However, Turkey has an excellent police system and military operation. This could be a huge risk for American firms in the near future since terrorist attacks are usually conducted to cause major political and economic damage to any non-Muslim persons.
An American firm should conduct FDI in Turkey in the form of an auto part manufacturing company. With the low value of Turkish currency, many American firms will benefit from buying inputs for their auto industry from an American Turkish firm. Consequently, American auto makers are struggling to keep their companies out of bankruptcy courts. This is the perfect time for major automakers like General Motors and Chrysler to utilize this basic global strategy. It would benefit not only the Turkish workers, but also American auto makers. The entry mode should be wholly owned subsidiaries in the form of acquisition should be adopted by auto makers of America. Americans do not want to lose valuable technologies and create future problems for an already uncompetitive American auto maker in the future. The acquisition of shipping would also be beneficial because of this there are many opportunities to buy assets that could be more beneficial than one can predict.
Another angle an American auto part manufacturing company could take is a joint venture which could be even more profitable because Turkey would most likely match any figure with the $20 billion to $30 billion support package from the International Monetary Fund that they receive. America is currently trying to strengthen its relationship with Turkey. President Barack Obama’s visit after the G20 meeting shows that America is ready to invest in Turkey’s future.
Turkey is trying to strengthen their infrastructure to attract FDI. American business has to Consider Turkey’s energy limitations, great location, strong transportation system, recent political stability, balance-of-accounts deficit, growing economic stability, contract with the International Monetary Fund, and their future acceptance into the EU when deciding to do business in Turkey. When you consider of these global economic factors the risk factor of an American firm would be moderately high because of the uncertainty of the Iraqi government. However, if the firm waits too long before they invest in a Turkish business endeavor, then the American firm may lose the first mover advantage. Sometimes bold risks must be taken to accomplish something great in these uncertain times.
Bibliography
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—. "The Economist." 11 March 2009. Fact Sheet. 12 April 2009
—. Turkey: Statistics. 2008. 07 April 2009
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