2003 INVESTMENT CLIMATE STATEMENT FOR TURKEY -

UNCLAS SECTION 01 OF 03 ANKARA 004546 SIPDIS STATE FOR EB/IFD/OIA TREASURY FOR OASIA DEPT PLEASE PASS USTR FAS FOR ITP/THORBURN USDOC FOR ITA/MAC/DDEFALCO E.O. 12958: N/A TAGS: EINV KTDB EFIN TU SUBJECT: 2003 INVESTMENT CLIMATE STATEMENT FOR TURKEY - PART IV Ref: STATE 128494 The following is the last of four cables transmitting the 2003 Investment Climate Statement for Turkey: ¶14. LABOR The Turkish labor force numbers around 20.2 million persons, with nearly 35 percent employed in agriculture. The official unemployment rate was 12.3 percent in the first quarter of 2003. Students are required to complete eight years of schooling and to remain in school until they are 15 years old. Turkey has an abundance of unskilled and semi- skilled labor. However, there is a shortage of qualified workers for highly automated high-tech industries. Individual high-tech firms, both local and foreign-owned, have generally conducted their own training programs for such job categories. Vocational training schools for some commercial and industrial skills exist in Turkey at the high school level. Apprenticeship programs, both formal and informal, remain in place, although they are dying out in some traditional occupations. Turkey's labor force has a reputation for being hardworking, productive and dependable. Labor-management relations have been generally good in recent years. Employers are obliged by law to negotiate in good faith with unions that have been certified as bargaining agents. Strikes are usually of short duration and almost always peaceful. Since 1980 Turkey has faced criticism by the International Labor Organization (ILO), particularly for shortcomings in enforcement of ILO Convention 98 (right to organize and collective bargaining). In 2003, Parliament approved a Job Security Bill, which aims to ensure consultation between employers and labor groups in some areas while providing employers with greater flexibility in laying off staff. The 1995 and 2001 constitutional amendments reduced restrictions on the right to strike to a certain degree and civil servants (defined broadly as all employees of the central government ministries, including teachers) are allowed to form trade unions and to engage in limited collective negotiations, but are prohibited from striking. A recent amendment to Free Zones Law No. 3218 rescinds the prohibition against the right to strike in these zones. The GOT and the civil service unions will begin negotiations on a new two-year contract. ¶15. FOREIGN TRADE ZONES/FREE PORTS Since passage of the Turkish law on free zones in 1985, 21 zones have been established. The zones are open to a wide range of activity, including manufacturing, storage, packaging, trading, banking, and insurance. Foreign products enter and leave the free zones without payment of any customs or duties. Income generated in the zones is exempt from corporate and individual income taxation and from the value-added tax, but firms are required to make social security contributions for their employees. Additionally, standardization regulations in Turkey do not apply to the activities in the free zones, unless the products are imported into Turkey. In contrast to most other free zones, sales to the Turkish domestic market are allowed. Goods and revenues transported from the zones into Turkey are subject to all relevant import regulations. There are no restrictions on foreign firms operations in the free zones. Indeed, the operator of one of Turkey's most successful free zones located in Izmir is an American firm. ¶16. FOREIGN DIRECT INVESTMENT STATISTICS According to Turkish Treasury data, as of November 2002, there are 6,311 foreign firms invested and are operating in Turkey. The Turkish government has provided permits for foreign capital since 1980 amounting to USD 34.0 billion, and aggregate actual inflows reached USD 15.7 billion. In 2002, EU countries accounted for 63.6 percent of authorized new foreign investment, OECD countries accounted for 90.4 percent, and Islamic countries for 2.6 percent. Over the past two decades, France (16.6 percent) has been the top source of foreign investment, followed by the Netherlands ( 15.7 percent),Germany (12.7 percent) and the U.S. (11.6 percent) (Note: these figures are based on the amount of authorized investment, not on actual capital inflows). Because of the absence of a bilateral tax treaty until 1998, much U.S.-origin capital was invested in Turkey through third-country subsidiaries. By unofficial estimates the U.S. may be the largest source of foreign investment in Turkey. In 2002, about 58.0 percent of authorized foreign investment took place in services, 39.8 percent in manufacturing, and about 2.2 percent in mining and agriculture combined. The sub-sectors with the greatest amount of authorized foreign investment include banking (10.3 percent);; trade ( 11.4 percent); food, beverage and tobacco processing ( 11.9 percent); and insurance (7.7 percent). Between 1980 and November 2002, 45.0 percent of actual capital inflows were invested in services, 52.0 percent in manufacturing, 2.0 percent in agriculture, and 1.0 percent in mining. The food industry, trade and finance sectors received the highest share of increased foreign direct investment permits in 2002. FDI Inflow by Years (million USD) Year Actual Inflow/GDP No firms Inflow (Cumulative) 1980-1988 1,172 1989 663 0.80 1,525 1990 684 0.67 1,856 1991 907 0.69 2,123 1992 911 0.78 2,330 1993 746 0.56 2,554 1994 636 0.64 2,830 1995 934 0.66 3,163 1996 914 0.53 3,582 1997 852 0.54 4,068 1998 953 0.49 4,533 1999 813 0.41 4,950 2000 1,707 0.85 5,328 2001 3,288 2.21 5,841 2002(*) 569 0.48 6,311 TOTAL 15,749 6,311 Source: General Directorate of Foreign Investment; (*) January through November 2002. FDI Inflow by Source Country (1999-2002/ million USD) Country Cumulative Value Share (percent) Italy 1,968 30.9 Netherlands 962 15.1 U.S.A. 793 12.4 United Kingdom 647 10.1 Germany 514 8.1 Bahrain 323 5.1 Japan 267 4.2 France 263 4.1 Switzerland 104 1.6 Belgium-Luxemburg 25 0.4 Spain 23 0.4 Others 488 7.7 Total 6,377 100.0 Turkey's External Investment by Country (As of December 2002) Country Amount Share (USD millions) Netherlands 1,868.2 30.9 United Kingdom 523.1 8.9 Germany 532.7 8.8 Luxembourg 245.8 4.1 Russia 163.7 2.7 Azerbaijan 741.8 12.3 Kazakhstan 431.5 7.1 United States 192.6 3.2 Romania 122.7 2.0 Others 1,218.6 20.1 6,040.8 100.0 Source: General Directorate of Banking and Foreign Exchange, Treasury Major foreign investors Turkey's largest foreign investors include Telecom Italia, Renault, Toyota, Fiat, Castrol, Enron Power, Citibank, Pirelli Tire, Unilever, RJR Nabisco, Philip Morris, United Defense, Honda, Hyundai, Bosch, Siemens, DaimlerChrysler, Chase Manhattan, AEG, Bridgestone-Firestone, Cargill, Novartis, Coca Cola, Colgate-Palmolive, General Electric, General Motors-Opel, ITT, Ford Motor Co., Lockheed Martin, Gillette, Goodyear, Hilton International, Aventis, McDonald's, Nestle, Mobil, Pepsi, Pfizer, Procter and Gamble, InterGen, Abbot Laboratories, Aria and Shell. Pearson