Potential of Turkey for Foreign Investments: External Environmental Factors, Trade Policies and Barriers

This report discusses the external environmental factors prevailing in Turkey for foreign investments, including political, economic, social and technological factors. It also discusses the trade policies and barriers in the country and provides recommendations to enhance the inflow of foreign investments. The report is relevant for courses related to international business and economics.

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Executive summary
The aim of this report is to discuss about the potentiality of Turkey in relation to the foreign
investments. This report discussed about the external environmental factors of Turkey that will
be faced by the investing business organizations. In addition, the existing trend of the foreign
direct investments in Turkey is also being discussed in this report. The existing trade barriers and
policies of Turkey are also being critically analyzed in this report. In accordance to the identified
issues and shortcomings, this report discussed a few recommended steps that will help Turkey to
be a more attractive country in terms of attracting foreign direct investments.

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Table of Contents
Introduction......................................................................................................................................3
Country overview............................................................................................................................4
External environmental factors in Turkey.......................................................................................4
Political factors............................................................................................................................4
Economic factors.........................................................................................................................7
Social factors...............................................................................................................................8
Technological factors...................................................................................................................9
National resources of Turkey.........................................................................................................11
Foreign currency and exchange.....................................................................................................13
Trade policies and barriers in Turkey............................................................................................14
Existing level of foreign direct investment....................................................................................15
Recommendations..........................................................................................................................16
Conclusion.....................................................................................................................................17
Reference.......................................................................................................................................18

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Introduction
The current business scenario poses diverse opportunities as well as challenges for the
business organizations. The major opportunity for them is the increase in the market size while
the major challenge is the increase in the number of competitors. In accordance to tap these
opportunities and overcome the challenges, various initiatives are being inherited by the
contemporary business organizations. One of those strategies is the foreign investments. In the
recent time, rate of foreign investments is rapidly increasing worldwide (Salacuse 2017). This is
mainly due to the reason that initiation of foreign direct investments is having benefits for both
the investing organizations and the host country.
Foreign investments help the business organizations to enter in the new countries and tap
the new market there. Thus, their limited market opportunities in the home country get increased.
On the other hand, host countries attracting foreign investments are having the advantages of
economy growth, increase in foreign reserves and employment opportunities (Gholipour, Al-
mulali and Mohammed 2014). However, for the business organizations, there are various factors
that should be considered by the business organizations before investing in foreign countries.
Some of these factors are the external business environment in the target country, resources
available, current investment trend and trade policies and barriers.
In the current time, more countries are initiating different policies and practices in order
to attract more foreign investments. Among these countries, Turkey is one of leading countries,
which is offering extensive business opportunities for the investors. Moreover, the strategic
location of Turkey is also helping them in having foreign investments. This report will discuss
about the external business organizations prevailing in Turkey in the current time. In addition,

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natural resources that are available in Turkey will also be discussed. This report will discuss
about the existing trend of foreign investments along with the trade policies and barriers in the
country. In accordance to these, recommended steps will be discussed for Turkey to enhance
their inflow of foreign investments.
Country overview
Turkey situated in the Eurasian region bordered with Syria, Armenia and Georgia on the
Eastern side, Black sea on the northern side, Bulgaria on the western side and Mediterranean Sea
on the southern side. Turkey is strategically located with European region on one side and Asian
countries on other. Thus, they are having effective connectivity with both the regions. Turkey is
having parliamentary republic type of government along with having general assembly. Turkey
is having rich cultural heritage way to the early 13th century. In the present time, the strategic
relationship of them with other major economies and international bodies also helps them to have
favorable image in the global market. Currently, Turkey is ranked as 17th country in the world in
terms of nominal gross domestic product. According to the reports, Turkey is the 28th ranked
country in terms of exporting and 21st in terms of importing goods (Onis and Kutlay 2013).
These factors along with favorable political environment in the country are helping Turkey to
have positive image in gaining more foreign investments in the country (Kus 2014).
External environmental factors in Turkey
Political factors
As stated earlier, Turkey is having democratic republic type of political system in place.
Thus, diversity is maintained in the political scenario of the country. In addition, the recent move
of the government on liberalization is also creating favorable political environment for the

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business organizations. Turkey is the member of European Union and in accordance to the policy
of European Union, Turkey also follows liberal trade rules and regulations. Therefore,
organizations investing in Turley will have the advantage of having liberal business environment
and it will ensure that they can freely import and export their business processes and practices.
Moreover, according to the reports, the initiation of the custom union agreement further helped
to enhance the free flow of global trade in the country.
Figure: 1
Problematic areas in doing business in Turkey
Source: (Www3.weforum.org 2018)
However, in terms of the political environment in the county, there are few challenges
also that are to be faced in doing business in Turkey. According to the World Economic Forum,
one of the major challenges in doing business in Turkey is instability in implementing policy.

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Thus, it proves the ineffectiveness of the governmental system in Turkey. Moreover, another
major political risk to be faced by the investing organization is the increased risk of terrorism.
Figure: 2
Terrorism index of Turkey
Source: (Tradingeconomics.com 2018)
According to the above report, rate of terrorism is increasing at a rapid pace and it is
growing by years. Thus, the investing organizations will face the threat of terrorism in doing
business in Turkey.

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Economic factors
Figure: 3
GDP growth trend of Turkey
Source: (Tradingeconomics.com 2018)
Currently, Turkey is having economy growth rate of 1.8 percent. As per the reports,
Turkey is facing low growth rate in the recent time compared to their highest growth rate of 5.60
percent in 2002. However, the positive factor is that, growth rate of Turkey will stay positive in
the coming years till 2020. Thus, the business organizations will have positive economical
factors in operating in Turkey. However, according to the above figure, the current growth rate
of Turkey is better what they had in late 2017. Thus, it showing positive trend in the current
time. In addition, one of the major benefits that will be gained by the investing organizations in
Turkey is the favorable government budget balance. According to the reports of World
Economic Forum, Turkey is ranked at 54 in terms of government budget balance. Thus, the

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budget deficit is less and it will have positive impact on the operating business organizations
there by having favorable business infrastructure.
In addition, the major economic alliances of Turkey with regulatory authorities such as
International Monetary Fund also help them to ease the access to finances. Moreover, with the
increase in the foreign investments, Turkey is also witnessing economy growth in the recent
time. According to the reports of World Economic Forum, Turkey is ranked at 68 in terms of
country credit rating. This can be concluded that the business organizations investing in Turkey
will face fewer risks in relation to their risk of investments.
Social factors
Turkey is having favorable social environment in the country. This is mainly due to the
reason that young population constitutes the major portion of the total population of Turkey.
Figure: 4

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Population demography of Turkey
Source: (Indexmundi.com 2018)
According to the above figure, Turkey is majorly having younger population. It will be a
huge opportunity for the business organizations operating in this country. This is due to the
reason that the younger will be the younger population, the more will be the available human
resources for the business organizations along with having more market demand for the newer
offerings. In terms of market size, Turkey stands at 13 that denote positive market opportunities
for the business organizations. Moreover, due to the geographical presence of Turkey in the
Eurasian region, the socio-cultural scenario of Turkey is highly and heavily influenced by both
western and eastern cultures. Thus, the business organizations operating in Turkey will have
truly globalized social structure in place.
Moreover, with the increase in population and per capita income in the country, the
market demand in Turkey is also witnessing growth. This will also pose opportunities for the
business organizations. However, one of the major social challenges that will be faced by the
investors in Turkey is the quality of the education and training in the country. As per the reports,
Turkey is having the ranking of 101 in terms of education system, which is quite lower compare
to global standards. Thus, the investors in Turkey will have the issue of selecting eligible human
resources.
Technological factors
Turkey is witnessing huge growth in technological development. This is mainly due to
the increase in foreign investments in different sectors in the country. Communication

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technologies are the major portion of technological advancements in the country. It is reported
that information and communication marker Turkey is estimated at US$ 32.4 billion.
Figure: 5
ICT market of Turkey
Source: (Invest.gov.tr 2018)
Thus, it can be concluded that the investing business organizations will have the
advantages of having favorable technological environment and infrastructure in the country.
According to the report by Global Competitive Index, Turkey is ranked at 57 in terms of
availability of latest technologies. The ranking is relatively favorable for the business
organizations. However, in terms of the technological environment also, there will be fewer
challenges for the business organizations. One of the major challenges will be the lower amount

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of investment in research and development compared to some other major countries. Thus, it
may have negative impact for the business organizations in the long run.
National resources of Turkey
Prior to investing in Turkey, it is important to determine the availability of the resources
that will help in gaining competitive advantages. One of the major sources of gaining
competitive advantages in Turkey is their geographic locations. This is due to the reason that
Turkey is the gateway for the Asian businesses in entering the European countries and it acts
same for western organizations to enter the eastern regions. Thus, the investing organizations in
Turkey will have the opportunity to tap both the regions simultaneously. Another source of
competitive advantages in doing business in Turkey is mineral reserves. One of the major
minerals available in the country is gold. It is estimated that Turkey is having more than 23
million ounces. Thus, this will help in enhancing the national economy and increase the market
potentiality (Atilgan and Azapagic 2015).
Another major resource for the businesses operating in Turkey is the lower cost of human
resources. According to the reports, Turkey is having fourth largest labor force among the
countries in the European regions. The availability of the human resources will be more in
Turkey compared to some other countries. This also reflects on the lower cost of labor in the
country.

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Figure: 6
Availability of human resources in Turkey
Source: (Istanbulhouseinvestment.com 2018)
Figure: 7
Labor cost of Turkey
Source: (Istanbulhouseinvestment.com 2018)

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Foreign currency and exchange
Currently, the valuation of Turkish currency stands at 1 Turkish Lira equals to 0.25 US$.
However, it is reported that the valuation of Turkish currency is constantly decreasing in the
recent time compared to the US dollars. However, it will have favorable impact on import trend
and negative impact on the export trend.
Figure: 8
Trend of valuation of Turkish currency
Source: (Intellinews.com 2018)

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Figure: 9
Trend of foreign reserves of Turkey
Source: (Tradingeconomics.com 2018)
According to the above figure, foreign reserves of Turkey are steadily increasing after the
dip in 2016. Thus, the business organizations investing in Turkey will have the favorable
government budget balance.
Trade policies and barriers in Turkey
Turkey is having Foreign Investment Law 2003, which acts as the umbrella for all the
foreign investments related activities. It is reported that Turkey is having different schemes and
incentives for the foreign investors (Kee, Neagu and Nicita 2013). They are having technology
development zones and organized industrial zones in order to provide added benefits in relation
to the business infrastructure and tax incentives. It is reported that incentive schemes of Turkey
are further classified in general investment incentives, regional investment incentives, large scale

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investment incentives and strategic investment incentives (Togan 2015). The major objectives of
providing incentives are to develop the under develop regions and recover the current account
deficit. Incentives offered in Turkey include vat exemption, customs duty exemption and
reduction in taxation.
However, there are few challenges being faced by the investing organizations in doing
their business in Turkey due to some barriers. One of the major barriers is the inconsistent
policies of the government. Another major trade barrier is the complex requirements of
documents and regulations. Complexities in the documentation process also lead to the increase
in time consumption in the entire process (Bown and Crowley 2013). Another major barrier for
the foreign investments in Turkey is restrictions in investing in a few sectors. Some of these
sectors are broadcasting, aviation, and real estate and education services.
Existing level of foreign direct investment
Figure: 10

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Trend of inflow of FDI in Turkey
Source: (Invest.gov.tr 2018)
Turkey is one of the leading countries in attracting foreign direct investments in the
country. This is mainly due to the reasons discussed above. According to the reports, Turkey had
US$ 12.3 billion as per 2016. However, according to the above figure, the rate of inflow of
foreign direct investment is fluctuating in nature. Amount of foreign investments was more in
2015, which came down in 2016. It is also being reported that industrial and manufacturing
sectors attracted the major part of the foreign investments in the country. Service sector is
another area that attracted huge foreign investments.
Recommendations
 It is recommended that Turkey should initiate Euro as their primary currency. This is due
to the reason that accepting Euro as the primary currency will reduce the vulnerability of
domestic currency of Turkey. Euro is the only currency other than the Chinese yean that
can compete with Dollar. Thus, having Euro as the primary currency will help Turkey to
increase their exchange valuation in the international business. Moreover, initiation of the
Euro as the primary currency will also make sure that Turkey will have more favorable
trade process with other European countries. Free trade will further get enhanced with
this.
 It is also being recommended that Turkey should initiate the single window policies in
permitting the foreign direct investments. This is due to the reason that, in the earlier
section, it is identified complexities in implementing the policies and documentation are
the major barrier for the business organizations. Thus, initiation of the single window

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channel for activities in relation to the foreign direct investments will help in meeting the
requirements and expectations of the business organizations.
 It is also recommended that Turkey should lift the restrictions from the sectors such as
real estate, aviation and education sector in order to have more foreign investments in
these sectors. In addition, the more will be the availability of the sectors for investments,
the more will be the attractiveness of Turkey in the global business scenario. This will
open up the opportunities for the domestic business sector of the country.
Conclusion
Thus, it can be concluded that Turkey is having vast natural resources and different
comparative advantages that helps them in attracting foreign investments in the country. In
addition, this report also discussed about the different external environmental factors that will be
faced by the investing organizations in Turkey. Some of the issues and barriers are being
identified for the business organizations in operating in Turkey along with identification of the
major opportunities for them. It is concluded that strategic geographical location of Turkey is the
major advantage for the business organizations. On the other hand, the major barrier that will be
faced by the business organizations in Turkey will be the complexities in regulations and
documentation of the government. In accordance to these issues, some of the recommended steps
are being identified and discussed in this report.

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