Incentives in Turkey's Technology Development

UNCLAS SECTION 01 OF 02 ANKARA 003381

SIPDIS

DEPT FOR EB, OES AND EUR/SE
TREASURY FOR INTERNATIONAL AFFAIRS - MILLS AND ADKINS
USDOC/ITA/MAC/DAVID DEFALCO
DEPT PASS EXIM FOR MARGARET KOSTIC

SENSITIVE

E.O. 12958: N/A
TAGS: EINV EIND EFIN TSPL TU EUN
SUBJECT: Incentives in Turkey's Technology Development
Zones


1. (SBU) Summary: As a part of its efforts to attract
foreign investment and promote high technology development,
the GOT has given a variety of incentives to companies and
individuals working in Technology Development Zones. These
zones have had some success in attracting foreign
entrepreneurs and spurring exports. While apparently on a
much smaller scale than those given to special industrial
zones (septel),the tax advantages given to these zones are
an example of Turkey's predilection for dispensing
incentives for special objectives, rather than implementing
more painful structural reforms in the business climate.
End Summary.


2. (U) Turkey's Technology Development Zones (TDZ) Law was
enacted in June 2001 to "promote technology-intensive
production through cooperation among universities, research
organizations and private entities, to provide jobs for
qualified personnel and to attract foreign direct investment
to Turkey." The law has been amended since then to expand
the coverage of the incentives for investments made in these
zones. Econoff and Econ Specialist met with the TDZ
Department Head at the Ministry of Industry and Commerce
(MOI),on April 5 to learn more about incentives available
to those investing in these zones.

Economic Incentives Offered in the Zones
--------------


3. (U) According to the law, the TDZs can be established
within universities or as techno-parks, such as those
already operational in the Gebze and Eskisehir organized
industrial zones (OIZs). MOI and other agencies (including
the Turkish Scientific and Technical Research Council -
TUBITAK, the State Planning Office, the Public Works
Ministry and others) form a committee which reviews TDZ
applications. Our MOI contact told us the GOT gives
priority to projects with the greatest potential for
commercialization in manufacturing.


4. (U) The GOT provides the following incentives to
investors in TDZs:

-- MOI provides a grant to the management of the TDZ to
establish necessary infrastructure, including for
construction of management's building. MOI may also provide
funds to management for the procurement of land for the TDZ.

-- Business revenue from research and development (R&D)
activities and from software will be exempt from the value
added tax, income tax and corporate taxes until 2013. The
salaries of the personnel working on these areas will also
be exempt from all taxes, except social security
contributions.

-- TDZ management is exempt from income and corporate taxes.

-- Academics are able to conduct research in TDZs and
commercialize their innovations. Academics can establish an
enterprise or a partnership with an existing enterprise in
the TDZs for such purposes.


5. (U) MOI told us that there are currently 17 techno-parks,
of which 9 are actively functioning, with 400 companies
employing over 2,000 research personnel. A total of USD 60
million worth of high tech products were exported from the
TDZs in 2004. The majority of these exports were defense
industry products and software. The GOT aims to attract
more FDI with these zones, and our interlocutor cited the 49
percent share of Tefen, an Israeli company associated with
entrepreneur Stef Wertheimer, in the Gebze OIZ techno-park
as an example of the concept's ability to attract foreign
investment. He added that the European Investment Bank also
provided a loan to support various TDZs in Turkey. He also
stressed the importance the GOT attaches to technological
enhancement, which was clearly reflected in the high
research and development budget allocation this year. MOI
was cooperating with the TUBITAK, which coordinates the
GOT's research allocations, to develop more projects in the
TDZs.


6. (U) Econoff thanked MOI for the briefing, and, in
closing, stressed the very positive role that strong
intellectual property protection can play in encouraging
foreign direct investment and technological progress.

Western Mediterranean Technology Zone
--------------


7. (U) Environmental Specialist met with representatives of
BATEK, the West Mediterranean Technology Zone established
last year. BATEK claims success in attracting the interest
of Russian IT sector and in establishing close relations
with firms in Uzbekistan, Israel, Bulgaria and Sweden. The
representatives maintained that they planned to take
advantage of the European Union 6th Framework Program for
Research and Technological Development and direct and
indirect support from KOSGEB (the GOT committee for small
and medium-sized enterprise promotion) and TUBITAK.
However, BATEK representatives said they were having
difficulty finding seed capital. BATEK, which is located at
the Akdeniz University in the agriculturally-rich and
diverse Antalya region, intends to focus on the agriculture,
medicine and biotechnology sectors.


8. (SBU) Comment: TDZs should help compensate for
historically low Turkish research spending, and may
counterbalance the GOT's traditional bias in favor of
encouraging low- and medium-technology manufacturing.
Bringing together academics and businesspersons in such
zones is bound to generate commercially relevant research.
However, deploying incentives for these zones creates
economic distortions and unfair competition with firms
outside them, a point the IMF has made repeatedly to the
GOT. It is also no substitute for taking sometimes
politically painful steps to improve the business climate
such as strengthening protection of intellectual property
rights and reining in unfair competition by capturing more
of the shadow economy.
Edelman