In this column, I conclude the discussion of the causes of the inward FDI surge, first by concentrating on the favorable global FDI environment, from which Turkey has benefited significantly, and then by asking whether the causes of the inward FDI surge will prove to be long-lasting enough to sustain the surge throughout this decade.
Turkey was fortunate to benefit significantly in its inward FDI surge from the favorable global FDI trends, with global FDI inflows rising by 29 percent to $916 billion in 2005, after a 27 percent increase in 2004. The current global FDI surge has been driven especially by the rising cross-border mergers and acquisitions (M&As), in terms both the number and the value of deals, as in the late 1990s (see the two charts below). In the first half of 2006, cross-border M&As increased by 39 percent compared to the same period in 2005.
In the cross-border M&As surge, services, especially finance, telecommunications and real estate, accounted for the major share, with the share of manufacturing declining sharply. This has also been the case in Turkey, with the financial services, especially banking, accounting for the bulk of the M&As, which in turn has accounted for the bulk of the FDI inflows. Another important factor behind Turkey’s inward FDI surge is that it started from a very small base of inward FDI stock, relative to Turkey’s potential, after the country had been either ignored or avoided by foreign direct investors for many decades.
Although the global FDI surge is expected to continue through 2007, the recent rising instability in global financial markets and in geopolitical tensions could dampen that surge by increasing risk aversion and depressing stock prices worldwide. This concern is exacerbated by the fact that, unlike in the late 1990s, private equity and hedge funds, which have much shorter time horizons than publicly-owned multinational corporations, have been spurring the recent surge in cross-border M&As. FDI inflows financed by these funds share many undesirable features of foreign portfolio investment inflows that are susceptible to sudden withdrawals with negative destabilizing effects on the host countries. Any global economic slow-down, possibly triggered by a US recession, would also have an adverse effect on world-wide FDI flows, as in the past.
Besides the uncertain future of global FDI flows, the rising political uncertainty in Turkey, facing the back-to-back presidential and parliamentary elections in May and November, may slow down its inward FDI surge in the rest of the year. If the parliamentary elections result in the necessity to form a coalition government, even under the leadership of the AK Party, the political and economic stability, most crucial to the sustainability of the inward FDI surge, could be lost. The additional institutional and legislative reforms that are required to make Turkey a much more attractive host country could be blocked by the emboldened opponents of inward FDI. In conclusion, Turkey’s recent inward FDI surge should not be taken for granted as its sustainability depends on whether its domestic and foreign causes, analyzed in this and the previous two columns, remain effective in the rest of the decade.
