Turkish firms’ investment abroad on the rise; is this good or bad?

In the 1990’s, a foreign country or institution showing interest in Turkey’s southeast was received with suspicion by the state. These were seen as modern “Lawrence of Arabia” initiatives to provoke Kurds in the south of the country.

I was pleasantly surprised to hear that one of the priority areas of the European Bank of Reconstruction and Development (EBRD), which began its activities in Turkey in 2009, was lending on the SMEs, particularly in the southeast. The EBRD in fact opened its third office in Gaziantep last year. The relative stability acquired, especially with the peace process, seems to have encouraged the EBRD to step up its activities in the region.

In Turkey’s tremendously polarized atmosphere where political tension is always high, one tends to slide easily into pessimism and miss the big picture. One expects foreign observers to be more objective.

The EBRD’s outgoing country director for Turkey, Michael Davey, does not hide the fact that political developments in the last two years have had a negative effect on Turkey’s image. But what I call Turkey’s schizophrenic atmosphere has not succeeded in making Davey a pessimist. Maybe he is an eternal optimist. But this is how he explained to me last week why he was optimistic about Turkey:

“This is a diversified country in terms of who owns assets.” He underlined the existence of old but also new elites. As long as politics are diversified (in his words, while 50 percent voted for the current government, the other 50 percent did not) and the holders of influence are diversified, then there is reason to be optimistic.

The diversification in the business community has been a good sign in terms of Turkey’s democratization process.

Yet how are we to evaluate the tendency among Turkish investors to go abroad?

Since 2012, Turks have been consistently increasing their outward direct investment (ODI). This trend coincides with a decrease in foreign direct investment (FDI) in Turkey. As a result, in 2014 more than half of the money that came to Turkey as FDI went out of the country as ODI.

“We also have been observing that more and more Turkish business people are investing outside of Turkey,” a European diplomat told me. The diplomat’s answer to the above question was mixed. “On the one hand, this shows the globalization of the Turkish business people. But we also feel it is also politically motivated.”

A lot of people believe that the case against Bank Asya, which is believed to be close to the Gülen movement, which is now the number-one enemy of the government, was politically motivated. There is a general conviction that tax fines are used as political punishment tools. We used to hear business people telling us in private, “The moment we say something slightly critical, we end up getting tax officers in our doors.” Nowadays you can hardly find a business person to voice their critical views openly.

The analysis of Güven Sak, the head of the Economic Policy Research Foundation of Turkey, is more on the pessimistic side. “The fact that FDI decreases while ODI is on the rise shows the investment environment inside the country is problematic,” he wrote recently in his blog. Second, he believes the outward investment is done in a rather hasty and unprepared way. Third, he underlines the fact that Turkish companies’ 2015 plans show the trend for outward investment will continue.

We will know better in a few years’ time whether increasing ODI is a good or bad omen. There is always a reason to be an optimist about Turkey, just as there is always a reason to believe this country will always fall short of reaching its full potential.