The surge in foreign capital inflows has been tremendous in the recent years, particularly since 2003 (see figure). In this development there are both push and as well as pull factors. Among the pull factors, recent structural changes, improvements in macroeconomic fundamentals such as budget deficit, inflation, public debt indicators; high growth performance; some other measures which are taken to improve investment climate in the country are noteworthy. In addition to these, Turkey’s risk-earning profile, as compared to some other emerging market economies, has also offered competitive returns and big opportunities to the foreigners. Obviously, Turkey’s EU full membership agenda has been at the top of the list.
On the other hand, among the push factors, the Golden age of the capitalism since 2002 provided a fertile ground for foreign capital outflows from the developed countries. To remind you, before the Asian crisis global foreign capital flows reached almost $1.5 trillion, which had declined to $500 billion soon after the Asian and Russian crises. It seems that since 2002, global capital outflows are to reach once again to this historical level. Moreover, reel and high growth performance of the Asian countries, particularly China, as a major engine of growth in the globe, proved the major role in the rise of new hopes and expectations.
As a matter of fact, Turkey has been lucky to carry out many required reforms soon after the crisis in the sense that Turkey was ready to such an exceptional period in the world economic system. Thereby, Turkey successfully financed the saving-investment gap, which is fluctuating around 7-8 percent of the Turkish GDP recently.
Let me come to the main theme of the article today. Although the magnitude of foreign capital in Turkey has been sky rocketing for the last four-five years, there is an increasing worry throughout the country about the quality of it. As of today, we can make the following broad observations on the quality of foreign capital:
(1) The share of short-term capital (hot money/ portfolio investment) is relatively declining. However, FDI and other long-term capital inflows are increasing. This underlines that the quality of investment environment is changing from short-term earnings to long-term oriented investments.
(2) The share of foreign capital which does not create debt burden in the finance of current account deficits is increasing. In other words, the quality of CAD finance is improving rapidly.
(3) Currently the majority of FDI takes in the form of mergers and acquisitions rather than green field investment. However, it is not yet easier to determine whether it is good or bad. It is a matter of continuity and time horizon.
(4) An overwhelming majority of those investments has taken place in financial sector. The share of foreign capital in finance sector has reached almost fifty percent. Financial sector is a strategic industry. Therefore, at least for the mental conform of the society in general, there should be an upper limit there. We should also note here that, even in the USA, the so-called sacred land of market forces, there have been several symbolic measures since the September Eleven attacks, which are preventing the free and fair access of foreign capital from China, Russia and even from some small Arabic countries- almost under the control the USA.
(5) Employment creation capacity of FDI inflows is not yet satisfactory.
(6) However, FDI in Turkey helped increasing competitive environment and also positively contributed to the rise in productivity.
(7) As it is observed from the given table, recently the share of manufacturing industry in total FDI is significantly rising. Stars of the recent investments sectors are coal, refined petroleum products and nuclear fuel products; chemical products; nonmetallic mineral products; electric, Gas and Water.
As a last word, it could be expected that with the continued improvement in investment environment such as more competitive input prices such as energy; motivating tax structure such as employment; more flexible labor market conditions; efficient and effective bureaucratic environment, rise in human capital, particularly in technical education; integrated and well-developed infrastructure; continued stability and high growth performance with sound macroeconomic fundamentals, then foreign capital would evolve into new investment fields and contribute the employment and export performance of the country.
This or that way, it seems that we need a well-thought foreign investment strategy in Turkey.
