Benchmarking foreign direct investment in Turkey (1)

It 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 technological spillovers. It can generate many other benefits. But these benefits do not accrue automatically. Furthermore, FDI can also have costs, such as restricting domestic competition and discouraging local entrepreneurship. The type and extent of the net benefits relative to the amount of FDI, dependent largely on host-country policies, are more important than the absolute amount of the FDI.

There is a huge amount of literature on the benefits and costs of inward FDI (IFDI), but the United Nations Conference on Trade and Development's (UNCTAD) authoritative World Investment Report (WIR) is the only source that provides internationally comparable data and analysis. Published annually since 1991 as one of UNCTAD's flagship publications, the WIR covers each year the latest global and regional trends and policy developments in FDI and analyzes a special FDI-related topic.

The 2012 report (WIR12), published this month and subtitled “Towards a New Generation of Investment Policies,” unveils UNCTAD's “Investment Policy Framework for Sustainable Development.” This framework consists of: (i) Core principles for investment policymaking; (ii) Guidelines for national investment policies; (iii) Options for designing and using international investment agreements, such as bilateral investment treaties. It reflects host countries' and UNCTAD's increasing concerns about the environmental and social impacts of FDI.

According to the 236-page WIR12, although global FDI flows in 2011, growing 16 percent, reached $1.5 trillion and surpassing the 2005–2007 pre-financial crisis average level, they remained 23 percent below their 2007 peak. Also, their recovery is projected to taper off at $1.6 trillion in 2012 as the world economy and financial system face growing risks, especially from the eurozone crisis. Assuming no worldwide macroeconomic shocks, WIR12 expects global FDI flows to rise steadily to $1.8 trillion in 2013 and $1.9 trillion in 2014.

Turkey's performance in attracting FDI in 2011 was remarkable. Its IFDI surged 76 percent to $15.87 billion, driven by a more than threefold increase in cross-border mergers and acquisitions sales, concentrated in the banking and energy sectors. During January-May, according to the Turkish Ministry of Economy data, FDI inflows totaled $6.45 billion, 11 percent higher than the total during January-May 2011. The International Investors Association (YASED) expects total inflows in 2012 to exceed $16 billion (Today's Zaman, July 23). But we have to view, using global benchmarks, this short-term performance in the context of Turkey's medium- and long-term performances in attracting FDI.

Turkey's FDI inflows, after surging in 2005 and peaking at $22 billion in 2007, plummeted during the 2008-2009 global economic crisis in tandem with global FDI trends (see my columns “Can Turkey's inward foreign direct investment resurge?” (1) and (2), May 3 and 4, 2010). Although they began to recover quickly after the crisis, they were in 2011 still 28 percent below their 2007 peak (see my columns “Recovery of Turkey's FDI accelerates” (1) and (2), May 17 and 24).

According to Table 1, based on UNCTAD data, during 2005-2007, Turkey's FDI inflows as percentages of gross fixed capital formation were higher than the averages for developing countries as well as the world, reflecting Turkey's IFDI surge during 2005-2007. After falling sharply during 2009-2010, they rose in 2011 to a level between the averages for developing countries and the world.

According to Table 2, Turkey's IFDI stocks, as percentages of GDP, approached, as a result of the IFDI surge, the averages for developing countries and the world, but remained below those averages. That reflects Turkey's late start a decade ago in deciding to welcome and promote IFDI, after decades of ambivalence, bordering on hostility.

Next week I will review Turkey's FDI Attraction Index, FDI Potential Index and FDI Contribution Index from WIR12 to shed light on Turkey's global rankings in its IFDI potential and attraction, and its effectiveness in benefiting from IFDI.