The AK Party government has proven through its actions that its pro-FDI stance is not just rhetoric aimed at pleasing the IMF and the World Bank for short-term benefits. In this column, I will discuss those actions, consisting of several crucial legislative and institutional reforms affecting FDI directly and indirectly. In my next column, I will conclude with a discussion of the causes of the inward FDI surge, asking whether those causes will prove to be long-lasting to sustain the surge throughout this decade. In terms of reforms affecting inward FDI directly, the enactment of Law 4875, in June 2003, to replace the supposedly “liberal” but vague as well as obsolete Law 6224, dating to 1954, was a crucial step forward. Law 4875 for Foreign Direct Investments:
defines FDI according to current international practice,
replaces the old FDI approval and screening system with a notification and registration system,
bans nationalization without fair compensation,
guarantees national treatment to foreign investors,
does not restrict FDI in any sectors,
does not impose any performance requirements,
eliminates the old minimum capital limit for new FDI projects,
grants foreign investors full convertibility in transferring their capital and earnings,
allows foreign investors to own property without any restrictions, and
recognizes foreign investors’ right to international arbitration.
The recent creation of the Turkish Investment Support and Promotion Agency (TISPA), under Law 5523, enacted last July, was another crucial step forward in Turkey’s active promotion of inward FDI. Establishing TISPA has been a controversial, drawn out process, due primarily to the resistance of the Turkish bureaucracy in allowing the private sector to play a significant role. The AK Party government is to be commended for overcoming that resistance (see my column Marketing Turkey).
As part of its active approach in attracting FDI, the AK Party government formed an Investment Advisory Council (IAC), consisting of top-level executives of major multinational corporations. The IAC has been holding, since March 2004, regular summits with top government officials, including Prime Minister Erdogan himself, to provide direct inputs for efforts to improve Turkey’s investment climate through the Coordination Council for the Improvement of the Investment Environment (YOIKK).
Based on the new Corporate Income Tax Law 5520 enacted last June, the AK Party government has cut the corporate income tax rate from 30 to 20 percent and simplified the tax regime, as an indirect measure to attract FDI, reflecting its awareness of the intense international tax competition. The AK Party government’s efforts to enact a new Commercial Code, harmonized with the EU, which would help improve the FDI environment, has been unfortunately blocked by the opposition in the Parliament.
The AK Party government has been more aggressive and effective than any previous government in its privatization program, which has finally begun to play a significant role in attracting FDI, following the successful examples of Eastern and Central European countries in the 1990s. The privatization of Turk Telekom through FDI is the most noteworthy success of the government in this area.
Last but not least, the AK Party government has pushed hard for Turkey’s EU membership, taking an important step toward that objective with the start of the accession negotiations in October 2005. Although those negotiations have recently met obstacles on issues concerning Cyprus, they are still on track. As had been the case in Spain and Portugal prior to their EU accession in 1986, the prospect of EU membership has been a powerful cause of Turkey’s recent inward FDI surge.
