Why do investors pick Brazil over Turkey?

I was at a meeting in Beijing this week. The city had plenty of blue sky and light traffic. I was told authorities had arranged this in order to fix their image before the APEC meetings. They barred cars to prevent creating traffic, closed down factories and gave public employees a holiday. For a short time, China created a nicer version of Beijing. Here is a country that really wants to create a good impression.

So you can understand why I took it seriously when a Brazilian friend asked me a question about long-term investments. He said “it feels as though Brazil is getting more than its fair share of direct investments when compared to Turkey. Could it be the impact of geopolitics?” Does having civil wars to the north and south, neighbors like the Islamic State of Iraq and the Levant (ISIL), Iran and Russia, make Turkey a lousy destination for your money? Apparently, that’s what people think of when they think of Turkey. When people think of Brazil, beaches or colorful birds in the rain forest come to mind. It made me wonder whether I had thought enough about the real cost that the conflicts in Iraq and Syria have put our region through.

Let’s say you’re an investor. As a person following the news, would you like to make a long-term bet on Turkey? Keep in mind, you are not testing the waters, you are building things and planting your capital in a foreign country to collect its fruit in the future. Could that be the reason why there are no global value chains passing through Turkey? This is something we should start thinking about at once.

Let’s look at a few figures. In 2013, Brazil attracted around $80 billion of net foreign direct investment (FDI). Turkey received only around $12.8 billion in that same year, meaning that Brazil got around 6.55 times more than Turkey. Of course, Brazil’s economy is roughly twice Turkey’s size, but if you take size into account, Brazil still received three times the FDI Turkey did. That is a striking discrepancy. Add this to the fact that in the World Bank’s new 2015 Doing Business Rankings, Turkey is ranked 55th, whereas our Latin American friends are 120th among 189 countries. To make things worse, Brazil is ranked 167 out of 189 in the “Starting a Business” sub-index. So why did Brazil receive much more FDI inflow despite their worse placement in the doing-business rankings? Is my Brazilian friend right? Is this about location?

It might be. Brazil received nine times the investment Turkey did in 2000. Then, for a short time around 2005, investment flows to Brazil were only 1.5 times those to Turkey. The two countries were almost on equal footing for a while. Both had suffered financial crises around the turn of the century. With President Lula da Silva coming to power in Brazil and Recep Tayyip Erdoğan in Turkey, markets rewarded the ensuing stability. But now, its southern border tips the scales away from Turkey.

Economists like to scoff at things they cannot quantify, but geopolitics might be more relevant to economics than commonly thought. That’s why I think ISIL’s