Foreign Direct Investment in Turkey | LegaMart Articles
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Foreign Direct Investment in Turkey

Introduction

Foreign direct investment provides a driving force to an economy, much like an engine in a train. Though this may not always be the case; yet, FDI is a crucial instrument for economic growth. FDI boosts a country’s economy in so many ways. Transfer of foreign capital, technology, and experts are some ways FDI impact a nation’s economy.

Turkey is a business-friendly environment located between Europe and Asia. With its good infrastructure and skilled and young workforce, Turkey is a good place for foreign investment. Yet, foreign direct investment in Turkey and portfolio investment have recently decreased. In addition to economic fragilities and structural deficiencies, Turkey is also experiencing emigration, resulting in various economic effects and making foreign investors wary of investing in the country. Read along as we take you through foreign direct investment in Turkey. Here we will also discuss the foreign direct investment incentives in Turkey and the concerns of foreign investors in Turkey.

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Foreign Direct Investment in Turkey: Is it a Good Place to Invest?

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Turkey attracts Foreign Direct Investment for many reasons. Apart from being one of the top twenty economies in the world, so many other attributes make Turkey a hub for local and foreign investors. Here are some reasons Turkey is a good place for FDI.

Turkey has a fast-growing economy

The economy of Turkey has exhibited impressive growth since 1980. In 2020, Turkey ranked as the 11th largest GDP at Purchasing Power Parity (PPP). Also, Foreign Direct Investment in Turkey expanded by 290 USD million in March 2022. Turkey was the second-fastest growing economy amongst other OECD states in 2021. The country aims to be one of the ten largest economies in the world by 2023.

Turkey strategic location

Turkey’s geographical location between Europe and Asia makes it a good place for FDI. With its strategic location, Turkey provides access to key regional markets. It serves as a bridge between the western and gulf countries. The country’s proximity to markets in the middle east and West makes it a good place for FDI.

Turkey has incentives for foreign investors

Among other OECD members, Turkey has one of the most liberal legal regimes for FDI. To encourage foreign investment in Turkey, the Turkish government started incentive programs to stir up start-ups and FDI in Turkey. The Foreign Direct Investment Law of 2013 gives a foreign investor equal rights as a domestic investor. As such, investors can set up their businesses in Turkey despite their nationality. It is one of the many perks of investing in Turkey.

Turkey has a skilled and qualified workforce

With a young and educated workforce, Turkey’s workforce is an asset for investors. It is contrary to an aging and shrinking population in some European countries. The population of youths in Turkey makes up about 15.3% of the total population. Given the workforce in Turkey, investors can enjoy the rich labor pool.

Turkey has a well-developed infrastructure

Turkey’s infrastructure is remarkable. It has developed transport, communication, and modern infrastructural innovation. It makes it a hub that attracts foreign investment.

What is the Outflow of FDI in Turkey?

FDI outflow has sometimes caused controversy because it signifies the loss of Turkish capital to a foreign country. Yet FDI outflow facilitates technology transfer into Turkey. It also serves as a means of increasing competition amongst Turkish firms.

FDI inflow to Turkey amounted to 12 billion US dollars in 2021. FDI outward flows in Turkey fluctuated from over 2.3 billion US dollars in 2011 to 5 billion US dollars in 2021. This report is according to Statista data on the value of foreign direct investment (FDI) outward flows in Turkey from 2011 to 2021.

What is Foreign Direct Investment Incentives in Turkey?

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Turkey offers incentives to foreign investors to encourage foreign direct investment. The incentives are accessible by investors as a way to boost private investment activities in Turkey. Thus, the incentives an international business will enjoy depends on some factors. Factors like the sector, size, city, and type of business determine the incentive an FDI in Turkey will enjoy.

General investment, regional and sector investments, strategic investment, and project-based investments are the classes of investment in Turkey. FDI in Turkey is not a special type of investment that is entitled to general incentives. General incentives are custom duty and VAT exceptions on purchasing investment goods. Other incentives include corporate tax reduction, energy support, and property tax exemption, cash support, interest support on financing, Allocation of land, income withholding tax, to name but a few.

What is Foreign Portfolio Investment in Turkey?

A investment graph on Foreign Direct Investment in Turkey

Turkey supports foreign portfolio investment in Turkey. The government has established a regulatory system to control portfolio investment in Turkey. Nonetheless, in recent years (2017-2022), foreign portfolio investment in Turkish stock shares and government bonds has declined. According to CEIC data, FPI in Turkey experienced an all-time high of 15.805 USD bn in December 2012. The country recorded an all-time low of -10.851 USD bn in June 2020. Investors have been concerned about the Turkish lira exchange rate crisis since 2020. In June 2022, FPI in Turkey fell by 5.076 USD bn.

What is FDI Screening Mechanisms in Turkey?

Various governments introduced FDI screening mechanisms to protect their economies against the impact of COVID-19. Likewise, the Turkish government adopted measures to cushion the COVID-19 pandemic. Yet, none of the measures adopted affects foreign direct investment in Turkey.

The Foreign Direct Investment Law and other regulations govern foreign investments in Turkey. The law establishes a notification-based system for FDI in Turkey. Generally speaking, Turkey does not screen or sanction foreign direct investments in Turkey. Nonetheless, various sectors may have specific regulations for different types of markets. These sectors are energy, real estate, banking and finance, insurance, aviation, technology, media, and telecommunications. Authorities in these sectors screen investments majorly for tax audits and not on discriminatory bases. Except for these sectors, foreign investors enjoy the same privileges as Turkish investors.

Screening mechanisms for FDI in Turkey are to ensure fair competition or other economic benefits. Where an investment fails a screening, the authorities may give notice and time for the error to be corrected. In other cases, a penalty may be levied.

What are the Concerns of Foreign Investors in Turkey?

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Excessive bureaucracy, absence of checks and balances, unstable economy, and inflation are some concerns of foreign investors in Turkey. Turkey’s economy has suffered structural problems since 2018. The Lira experienced an exchange rate crisis in the second half of 2018. The COVID-19 pandemic further exacerbated the economic situation. On December 20, 2021, Lira depreciated to 18.00 to the United States dollars.

According to the World Bank, inflation reached 61.1 percent in March 2022. The invasion of Ukraine by Russia has not helped matters as Turkey shares close economic ties with Russia and Ukraine.

Obscurity in governance, lack of checks and balances, and bad economic policies are the features of the present Turkey business environment. 

Turkey needs structural reforms and a stable economy to improve foreign investment in Turkey. The rule of law, transparency, checks and balances, low inflation rate, and stability of the lira could help achieve this.

Frequently Asked Question

What sectors have screening requirements in Turkey?

The FDI Law establishes a notification-based system, but different industries may have specific regulations and rules. Some regulated sectors include energy, real estate, banking and finance, aviation, and telecommunications.

What steps can the Turkish authority take to stop an investment?

Under the FDI law, no mechanism would lead to the suspension or stop of an investment. However, competent authorities monitor foreign investment and may cancel, suspend or decide against an investment.

Conclusion

With its fast-growing economy, skilled workforce, and well-developed infrastructure, Turkey is a hub for foreign investment. Its strategic location between Europe and Asia makes it more attractive to investors. To encourage FDI in Turkey, the Turkish government started investment incentive programs. Yet, in recent times, foreign investment in Turkey has decreased.

Since 2018, the Turkish economy has been unstable. The high inflation rate and currency crises have discouraged foreigners from investing in Turkey. The COVID-19 pandemic exacerbated the economic situation. 

The war in Ukraine has caused economic instability the world over, and Turkey is not left out. However, Turkey’s well-developed infrastructure and investment may attract international investment in the medium term. In the long run, structural reforms and a stable economy are needed to restore foreign direct and portfolio investment in Turkey.

Do you wish to invest in Turkey? You will certainly need the service of legal experts to guide you through the process. We are here to assist you. LegaMart is an online legal platform that offers direct interaction between lawyers and clients from multiple jurisdictions. We have all the solutions to your legal problems. Visit the LegaMart Lawyer directory and hire any legal professional that meets your requirements.

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