What should Turkey do to attract more FDI?

Let’s start with the good news: Turkey has become the 20th most popular destination for foreign direct investment (FDI) inflow in 2015, rising two spots from last year. The country saw an FDI inflow worth $16.5 billion in 2015, a 36 percent increase from the previous year, according to the latest World Investment Report 2016 by the United Nations Conference on Trade and Development (UNCTAD), announced by the International Investors Association (YASED) on June 21. 

There are, however, some problematic sides to the quality of the FDI inflow into Turkey.

Some 26 percent of the overall $16.5 billion FDI came from real estate acquisitions by foreigners, as only the same amount of money entered the country through the manufacturing sector, according to data. It is good for Turkey to lure investments by selling more property to foreigners, but more should be done to increase the share of the production sector in the FDI inflow into the country in order to maintain sustainable growth. 

Inflows to Turkey, the largest recipient in Western Asia, were mainly boosted by a surge in cross-border mergers and acquisitions, according to the UNCTAD report. Such investments came from one country in particular, as investors from Qatar accounted for a high share of cross-border M&A sales into Turkey in 2015. Turkey should seek ways to diversify its source markets.  

Turkey’s share in the global FDI flow has stagnated for years at 1 percent. The country lured record high FDI in 2007 at around $22 billion, followed by $19.8 billion in FDI in 2008. These years were characterized by an intensive reform agenda. 

Turkey should cling to its European Union membership target in a bid to boost foreign investors’ trust and increase its FDI flow share of 1 percent, the vice chair of the International Investors Association (YASED) said in an interview with Doğan News Agency. 

“The EU legislation process should speed up. More chapters should be opened. Today, even though we have not entered the EU, if our judicial and legal frameworks are set in accordance with the EU via these chapters, international investors’ trust in Turkey will increase,” said YASED vice chair Tankut Turnaoğlu.

In this vein, Turkey should return to the reform agenda. It should refrain from issuing any regulations that are likely to negatively affect investors’ trust in the country’s economic climate or its predictability, like the recent draft bill expanding the legal shield for - and giving broader authority to - boards of trustees appointed to companies. 

Fortunately, the parliamentary commission declined to extend the crime definition in the draft law, following harsh criticism from opposition parties and leading business associations. 

But the recent bill is still highly questionable. It notes that any lawsuits against a board of trustees appointed to a company, for the losses of the seized company, can be opened against the state but not against the trustees. The existing law stipulates that seized companies can demand compensation from the trustees for their losses.

Turkey needs to return to the path of making structural reforms in the economy and judicial system in order to be able to attract more FDI.