TURKEY FDI: GROWING BUT GREENFIELD LAGS

UNCLAS SECTION 01 OF 03 ANKARA 006734

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV BEXP KIPR TU
SUBJECT: TURKEY FDI: GROWING BUT GREENFIELD LAGS

REF: A) ANKARA 5625 B) ISTANBUL 2095


1. Summary: (SBU) Foreign direct investment (FDI) in Turkey has
increased dramatically in the last two years, but greenfield
investment still lags far behind. Analysts cite the need for
judicial reform, Turkey's large informal economy, high employment
taxes and costs, the large indirect tax burden, the need for
educational reform, weaker protection of IPR, and a perceived
judicial and regulatory bias for domestic companies as factors
holding back Greenfield investment. Turkey has made a number of
improvements and is pursuing several structural reforms to address
these deterrents to investment. High levels of FDI, including
job-creating and technology-transferring greenfield investments, are
necessary if Turkey is going to achieve the high investment rates
that will be needed over the next decade for living standards to
catch-up and converge with EU levels. End summary.

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FDI INCREASING DRAMATICALLY BUT GREENFIELD LAGGING
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2. (SBU) Foreign direct investment (FDI) in Turkey continues to
increase dramatically. In stark contrast to cumulative investment
of only $17 billion for the previous fifteen years, Turkey received
a total of $9.7 billion in FDI inflows in 2005 alone. This trend has
continued in 2006, with $15.3 billion in inflows in the first ten
months. Political stability, economic growth and reductions in
bureaucratic red tape are the main attractors of new investment.
Analysts cite Turkey's much lower inflation rate, recently-acquired
EU accession country status, attractive demographics and
opportunities in particular sectors, such as banking, telecoms and
retail, as well as the abolition of investment screening in 2003.
Turkey's privatization program also created opportunities for
foreign direct investors, notably the $6.5 billion privatization of
the state telecoms company, Turk Telekom.


3. (SBU) But very little of this new FDI (only $1.7 billion in
2005) has come in the form of investment in new plant and equipment,
as most goes to privatizations and mergers and acquisitions. This
lack of greenfield investment is of increasing concern to economists
and government officials, who fear the economy is missing out on the
job creation and technology transfer that comes with it. Economy
Minister Babacan and other senior officials are aware of this
deficiency and say they hope to attract more greenfield investment,
especially in growing sectors like energy and information
technology.

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INVESTMENT-STIMULATING REFORMS PROPOSED
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4. (SBU) Several factors account for the small amount of Greenfield
investment in Turkey: an inefficient judicial system, a large
unrecorded economy, high employment taxes and costs, a large
indirect tax burden (such as taxes on telecom, fuel, and electricity
consumption),and a need for educational reforms to spur research
and innovation. In response to the need for judicial reforms, the
GOT has proposed or is in the process of implementing a number of
measures that it hopes will improve the speed and reliability of
judicial administration. These include an e-justice initiative that
should significantly speed the processing of commercial cases.
Another improvement is ongoing training, with EU support, for judges
and prosecutors to familiarize them with modern commercial issues
such as IPR protection. In addition to this training, the EU, the
World Bank, and the U.S. are supporting improved access to justice
for foreign investors, including legal aid and Alternative Dispute
Resolution mechanisms. The GOT has also proposed the creation of an
intermediary level of regional appeals courts and is building new
courthouses to ease overcrowding.


5. (SBU) The government also plans to reform Turkey's antiquated
Commercial Code, which was created in 1957. The new Code aims to
simplify rules for company formation (which will ease shareholder
and capital requirements),simplify merger procedures, provide
clearer definition of responsibilities of Boards of Directors,
create independent audit requirements, and link Turkish accounting
standards to International Accounting Standards.


6. (SBU) In order to truly attract FDI, Turkey must tackle the
persistent problem of its informal economy. Currently,
approximately 53 percent of Turkey's workforce is in the informal
economy, creating unfair competition for those companies that choose
to follow the rules and register their workers. At a recent OECD
Global Conference on Investment (ref B),Turkey World Bank Country
Director, Andrew Vorkink called this phenomenon "the cancer of the
informal economy." In his opinion, the only way for Turkey to bring
more companies and workers into the formal economy is through fiscal
reforms that incentivize companies to register their workers. The
Bank is currently in consultations with the government on a package

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of labor market reforms, including reducing high payroll taxes and
severance costs. These reforms would result in attracting more
Greenfield investment by evening the playing field between foreign
and domestic firms.


7. (SBU) A recent OECD report stated that Turkey's overall
corporate governance outlook is positive because the authorities
have already adopted, or are introducing, high quality corporate
governance standards (including audit standards) and because
transparency has improved significantly. The report cautions,
however, that it is important for Turkey to improve further in the
areas of control and disclosure of related party transactions and
self-dealing, the protection of minority shareholders, and the role
of the board in overseeing not only management but also controlling
shareholders.

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NEW ORGANIZATIONS PUSHING FOR IMPROVED INVESTMENT
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8. (SBU) Multinational companies operating in Turkey also point to
Turkey's less than stellar track record for protecting International
Property Rights (IPR) as a deterrent to new Greenfield investment.
In response to continuing concerns about trademark violating
products currently in the Turkish market or transiting through
Turkey, 13 Turkish and multinational companies, including Nestle and
Pfizer, have begun cooperating in the "Trademark Protection
Counterfeiting Initiative." The group advertises the cost of fakes
and is pushing for a new law protecting brands. They estimate that
the total value of the fake market in Turkey is approximately $2.6
billion.


9. (SBU) Until recently, Turkey also lacked a central point of
contact from which interested foreign investors could receive
information and assistance in establishing a business. In response
to this, the GOT recently created a new "Investment Promotion
Agency" within the Prime Minister's Office. The agency's main
objectives will be to "handhold" new investors throughout the
establishment process and solve problems that arise after
establishment. It will advocate within the government for reforms
that promote investment, and it will also work to raise public
awareness of the benefits of investment. Turkey's Treasury
Undersecretariat has also developed a user friendly investment
website that provides users with information about investing in
Turkey (including detailed regional information) and links to the
various agencies from whom potential investors will need to receive
information.

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NORMAL PROGRESS OR BEHIND THE CURVE?
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10. (SBU) Economic officers from the Ankara's diplomatic corps
discussed Turkey's economic future at a recent working lunch. They
asked Memduh Akcay, Director General for Foreign Economic Relations
at the Treasury Undersecretariat, why Turkey has not seen more
Greenfield investment. Akcay argued that Turkey is following the
pattern of most developing nations and that it is normal to see
mergers and acquisitions come first in a stabilizing market,
followed by true Greenfield investment as the economy matures.
Christian Keller, Deputy IMF representative in Ankara, agreed with
Akcay and expressed the IMF's pleasure with the recent increase in
investment inflows to Turkey.

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WHY SO LITTLE GREENFIELD INVESTMENT?
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12. (SBU) Comment: While Turkey's overall investment climate is
improving, the government cannot relax reform efforts if it hopes to
attract substantial greenfield investment to Turkey. Turkey needs
such investment to create jobs for its unemployed and underemployed
workforce and to ease the hardships created by recent losses
experienced in the textile and agricultural sectors. The hardships
faced by such Greenfield investors as Cargill (ref A),and
continuing IPR issues could also discourage U.S. investors from
giving Turkey serious consideration as a viable place to invest. In
addition, while technical reforms are crucial, a change in the
overall system to reform Turkey's educational system (in order to
prepare workers for high-tech jobs) and stymie the problematic
informal economy is needed to attract foreign companies to Turkey.


13. (SBU) Comment cont'd: The track record of foreign
multinationals in all but a few cases preferring to enter the market
by partnering with a local blue chip suggests foreign companies are
yet to be convinced they will get a fair shake from Turkey's
judiciary or other authorities. It is clear that a core group of
government and private-sector officials are working to implement the
changes needed to realize the administration's goals of increased

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investment. What is also clear, however, is that Turkey's
traditional distrust of foreign companies, desire to protect its
domestic markets, bureaucratic and nontransparent judicial system
and inability to reduce its informal sector have discouraged foreign
investors from coming here. The government has made positive steps,
but it must continue to do so in order to attract the 8-10% annual
investment rates that the World Bank and others estimate are
necessary to raise per capita income and keep it operating as a
player in the global economy. End comment.
Wilson