In a column a year later, I drew attention to the significant IFDI slowdown and discussed the potential major negative external and domestic factors that could end the IFDI surge (“The Sustainability of Turkey's Inward Foreign Direct Investment Surge,” March 3, 2008). Unfortunately, both the domestic and foreign forces behind the surge have since either weakened or vanished. With the spread of several negative external and domestic factors, the surge has turned into a slump.
Data released last week by the General Directorate of Foreign Investment of the Treasury Undersecretariat show that the IFDI slump continues. According to the table below, the IFDI surge, which started in 2004, reached its peak and slowed down in 2007. Its slump in 2008 accelerated this year. After declining by 19 percent in 2008, the total net IFDI shrank by 57 percent in the first half of this year. The monthly data for the first half of the year also indicate a downward trend. The International Investors Association (YASED) has already lowered its IFDI target for 2009 below $10 billion.
Here are the 10 major reasons for Turkey's IFDI slump.
(1) Turkey had been fortunate to ride the upward global foreign direct investment (FDI) trends since 2004, which reflected the favorable high growth-low inflation conditions around the world. With the outbreak of the global financial crisis in 2007 and the economic crisis in 2008, FDI outflows from leading source countries plummeted as major multinational companies cut back on both domestic and foreign investments.
Cross-border mergers and acquisitions were particularly hard hit. Recent reports from the Organization for Economic Cooperation and Development (OECD) and the United Nations Conference on Trade and Development (UNCTAD) show that, like international trade, global FDI, after reaching a peak in 2007, went into a severe slump in 2008, which has engulfed Turkey as a host country.
OECD FDI inflows dropped by 35 percent and FDI outflows by 19 percent in 2008. OECD preliminary data for 2009 indicate that the slump accelerated in the first quarter of 2009, with FDI inflows falling by 50 percent and FDI outflows by 40 percent from the fourth quarter of 2008. The slump could have been far worse. Fortunately, according to a recent UNCTAD survey, most G-20 countries have not only refrained from restricting inward and outward FDI; they have liberalized their FDI regimes significantly.
(2) The global financial crisis made it increasingly difficult for many companies to get external financing for their foreign and domestic investments.
(3) Turkey's prospects for EU membership became dimmer as opposition within the EU increased and support within Turkey decreased.
(4) Turkey's attractiveness as a host country for sovereign wealth funds, especially from Arab countries, did not materialize to the extent required to compensate for the lower IFDI from developed countries, especially from the EU.
(5) In the international rankings by the World Bank, Turkey's business and investment climate did not improve rapidly enough relative to many other countries that compete globally for IFDI.
(6) The initial active and effective promotion of IFDI by the Justice and Development Party (AK Party) government, notwithstanding energetic Investment Support and Promotion Agency (ISPAT) efforts, began to wane. This was revealed by the dormancy of the Coordination Council for the Improvement of Investment Environment in Turkey -- a high-level public-private partnership to help improve the overall investment environment for both domestic and foreign investors -- and the failure of the Investment Advisory Council of Turkey -- a group of top-level executives of major multinational companies that convened to advise the government on removing administrative barriers to IFDI and improving Turkey's image as an attractive host country -- to meet this year after holding five well-publicized annual meetings during 2004-2008 under the chairmanship of Prime Minister Recep Tayyip Erdoğan and issuing widely disseminated annual progress reports.
(7) Turkey's rate of economic growth began to decelerate before turning negative in the midst of the worsening global recession.
(8) The pace of economic reforms slowed down as the AK Party government's focus shifted to other matters in its second term in office.
(9) The opposition in Turkey to IFDI increased even among the ideologically moderate segments of the media because of its concentration, through foreign takeovers, in the financial services sector.
(10) Even without such opposition, the scope of further IFDI in the financial services sector narrowed as the list of attractive acquisition targets became shorter.
As for the rebound from the global FDI slump, according to UNCTAD's “World Investment Prospects Survey 2009-2011,” recovery is expected to begin slowly in 2010 and accelerate in 2011, based on 241 responses received during February-May from the executives of the world's major non-financial multinational corporations.
Turkey, which ranked globally as the 15th most attractive host country in the previous survey, having risen from the 22nd rank two years earlier, now ranks among the 30th most attractive. China, which has also suffered from the FDI slump, ranked first in the last three surveys.
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