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January 05, 2012, Thursday

Prospects for Turkey’s inward foreign direct investment resurgence

Foreign direct investment (FDI) can provide a host country with important macroeconomic benefits, by financing the current account deficit and creating employment, and microeconomic benefits, by transferring new technology and creating spillovers.

Turkey, whose inward FDI (IFDI) surged during 2004-2007, was fortunate to ride the upward global FDI trend, which reflected the favorable high growth-low inflation conditions around the world. But with the outbreak of the global financial and economic crisis, FDI outflows from leading source-countries plummeted as major multinational companies cut back on both domestic and foreign investments. Turkey's IFDI, after peaking in 2007, slowed down in 2008, and slumped in 2009, closely following the trend of global FDI flows. After starting to recover in 2010, along with global FDI flows, it rose by 84 percent during January-October 2011 relative to the same period in 2010, reaching $11.5 billion, according to the latest data (International Direct Investment Data Bulletin -- December 2011) from the Ministry of Economy.

What are the prospects for Turkey's IFDI to resurge? As always, they depend on both external and domestic factors. For an external perspective on those prospects, based on foreign investors' perceptions and intentions, we can refer to the global management consulting firm A.T. Kearney's 2012 FDI Confidence Index -- Cautious Investors Feed a Tentative Recovery. The index, released last month, gauges -- based on a survey during July-October 2011 of more than 200 senior executives of major multinational companies from 27 countries and 17 industries -- the effect of political, economic and regulatory changes on the FDI plans of those companies.

The index, introduced in 1998, has been issued recently every other year. Since its inception, the top 10 most attractive FDI destinations have regularly received at least half of the global brick-and-mortar FDI inflows in the year following the survey. According to the 2012 index, the prospects for a near-term recovery in global FDI are still precarious. The modest optimism of the last two years among investors could easily turn into deep pessimism in the face of shaky economic recovery in developed countries. The lingering sovereign debt and banking crisis in the eurozone, feared as a potential trigger of yet another global financial crisis, and the continuing economic uncertainty in the US, caused by the federal fiscal deadlock, are investors' major concerns.

A still uncertain global FDI recovery is likely to favor host-countries -- mostly emerging markets (EMs), which already receive, thanks to their consumer-market size and growth, more than half of global FDI flows, increasingly from other EMs. They also comprise more than half of the index's top 25 countries. In the top 10, China, India and Brazil, as major EMs, capture the top three positions, followed by the US, Germany, Australia, Singapore, the UK, Indonesia and Malaysia. China has occupied the top spot since 2002, when it displaced the US. (But the US, still the major market for most multinationals, received more FDI than China in 2010, according to the UNCTAD's 2011 World Investment Report.) In the top 25, compared to 2010, China, India and Brazil earned the most positive outlooks from the survey respondents, whereas the US, the UK, Japan and Spain receive the most negative outlooks.

Turkey appeared in the A.T. Kearney FDI Confidence Index's top 25 for the first time, ranked 23rd, in 2001. It dropped out of the top 25 in 2002 but returned, ranked 24th, in 2003. In 2005, it ranked 13th after jumping from the 29th position in 2004. But it could not maintain that relatively high position, ranking 20th in 2007 and 23rd in 2010. In the 2012 index, it is back in the 13th position, after Russia and before Vietnam. Compared to 2010, although 8 percent of the respondents have a more negative outlook on Turkey, 23 percent have a more positive outlook.

A.T. Kearney notes that during the first half of 2011 more than 90 percent of Turkey's IFDI originated from the EU for which Turkey, besides being a growing consumer market, is an important production base. Although Turkey's economic stability is vulnerable to a new global financial crisis, investors are optimistic about improvements in its laws, regulations and intellectual property rights. As strong evidence for Turkey's importance as a platform for international growth, A.T. Kearney singles out last October's $1.9 billion asset swap between Anadolu Efes and SABMiller to form a regional beer producer with combined sales of $3.5 billion. Although SABMiller found Turkey's domestic market growth potential attractive, it was more interested in Turkey as an opening to Eastern Europe, Central Asia and the Middle East. Several other major IFDI project announcements published in Today's Zaman last month provide additional evidence for Turkey's rising profile for foreign investors.

Although foreign investors' perceptions of and intentions for Turkey, based on A.T. Kearney's 2012 FDI Confidence Index, are highly auspicious for a resurgence of IFDI, much depends on domestic factors. Those domestic factors include both economic and political stability, without which Turkey cannot be an attractive host-country for foreign investors.

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