Establishing Capital Market and Regulating Tax Policies in Turkish Wine Industry

The assignment content discusses the market entry strategy for Turkish Industry, particularly in the wine industry. It highlights that international companies need to implement a business plan for the Turkish wine industry and market. The key management issues identified are corruption and high tax, which can lead to unfair competition among wine suppliers. Additionally, there is a lack of skilled labor due to internal migration and low English literacy rate, making it challenging to set up operations in Turkey.

WINE INDUSTRY OF TURKEY
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Table of Contents
1. Introduction..............................................................................................................................3
Part 1: Extended Version of Porter’s National Diamond................................................................5
A. Factor conditions...............................................................................................................6
B. Demand Conditions...........................................................................................................8
C. Related and Supporting Industries........................................................................................10
D. Firm Strategy, Rivalry.....................................................................................................12
E. Role of Government..............................................................................................................13
F. Role of Chance......................................................................................................................14
Part 2: FDI.....................................................................................................................................15
Advantages of FDI as Mode of Entry........................................................................................16
Disadvantages of FDI as Mode of Entry...................................................................................17
Market entry strategy for Turkish Industry...............................................................................21
Part 3: Management issues............................................................................................................22
1. Corruption and High Tax....................................................................................................22
2. Lack of skilled labour.........................................................................................................23
2. References..............................................................................................................................24

1. Introduction
Turkey is a fast growing country with the fifth largest vineyard area in the world after France,
Spain, Italy and China. The Caucasus region is seen to play a pivotal role in the wine making and
its history and is considered as the world’s earliest wine-producing regions. The Turkish industry
presents a plethora of cheap and high quality imported wines as it enjoys the best climate for
viticulture. Initially the process of viticulture was aimed towards table grapes and gradually the
focus shifted to the winemaking. From 2003 to 2012, the number of registered producers of
“fermented alcoholic beverages” have increased from 47 to whooping 157 and the total wine
production increased from 287,000 litres to 20,906,762 litres from 2005 to 2009 (THE DARK
MARKET OF TURKEY, 2016).
In spite of such advantages, the Turkish wine industry is not developed yet and cannot entirely
be associated with the winemaking area and neither be called a wine country. The paper aims to
study the wine industry of Turkey and to critically analyse the industry using various theoretical
models and frameworks along with outlining the viability of operating and investing in the

Turkish Wine industry. Further the export value of wine has seen an inclination from 2010 to
2010 from 7.36 million dollars to 8.75 million dollars in 2011 (WINE SECTOR IN TURKEY,
2014).

Part 1: Extended Version of Porter’s National Diamond
Porter’s Diamond Negative points Positive points
Factor conditions Workforce shortage
Seasonal labour
Migration among labour
from rural to urban
lack of qualified technical
winery personnel
Highly skilled workforce
Abundance of raw materials
Large vineyard
Favourable climate
80 varieties of wine produced
Demand conditions Steady growth in
international markets
Less aggressive market in
terms of competition
Low purchasing power of
consumers.
Growth in local market
Local market size
Increased interest in wines and
vintage wines
Related and supporting
industries
High demand of HORECA Hotel, restaurants and Catering
industry (HORECA)
Suppliers of packaging material,
Chain stores

Collaboration with scientific
research institutions in R&D,
Increased demand for table grapes
Firm strategy and
rivalry
Information flow to people
using websites
Production of affordable
high quality products
Expenditure on R&D,
Continuous innovation,
Affordable high quality products
Role of government Lack of governmental
attention to viticulture
Lack of state policy
regarding the sector
Lack of coordination
between the governmental
and civic institutions
High special consumption
tax (SCT)
Development of a ‘Vineyards of
Thrace Route’ with the support of a
local government agency along with
Bulgaria and Greece
Role of chance Exchange rate movements
and the slowdown in the
economy
Surges in global market
A. Factor conditions
Turkey has a strong and rich resource base which supports its wine industry. With one of the
largest vineyard in the world, there is an abundance of raw material in the country for wine
industry. The fertile geographical area for the production of grapes has presented Turkey with a

rooted vinery culture. There are around 1100 types of grape being produced in Turkey with only
selected 34 varieties being used for wine production (Azabagaoglu, M.O., Akyol, A. and Ozay,
A., 2006).
Due to large abundance of raw materials and favourable climate, the 1/3 of the entire grape
production is used for preparation of wine. The table given below presents the overall area under
vines from 2000 to 2013 along with depicting the decrease or increase in area (THE DARK
MARKET OF TURKEY, 2016)
Furthermore, the workforce is highly skilled and are effective in handling the whole wine
making process. They can be considered as an asset to the whole wine making industry of
Turkey. However, the industry is seen to face storage of workforce due to internal migration of
the rural people to the urban areas in last few decades. This decreased the number of workforce
working in the vineyards. Adding to that, various wineries have seasonal labour who are situated
in rural areas where there is a lack of specialist workforce. Due to presence of seasonal labour,
there is high probability of uncertainty in the work process. Interestingly, the country lacks the
presence of qualified technical winery personnel to keep a check on the quality of the product
from time to time. There were over 80 wineries (in 2004) in the country accounting for the total

of 80 percent of the domestic production which included leaders like kavaklidere, May, Doluca,
yazgan, sevilen, Turasan, and Pamukkale. Mostly people also produce local grape variety wine
like Merlot, Cabernet, and Chardonnay. (Azabagaoglu, M.O., Akyol, A. and Ozay, A., 2006)
Therefore, the factor condition analysis of the wine industry of Turkey indicates that the country
has abundant natural resources, skilled labour force with appropriate geographical area but there
is a need to encourage winemaking in fertile land of Turkey so as to improve the salary and daily
income of the individual rural inhabitants.
B. Demand Conditions
The domestic market of the country is considered as a principal key for most of the wine
producers. With the increase in the wine consumption in the country, the people are seen to have
inculcated a wide interest in the vintage and normal wines leading to growth of the local market.
This has impacted in the increment in the size of the domestic market. With the slow expansion
of wine market in the country, there is a probability of upcoming varieties and better quality of
wine can be expected. If done properly, the Turkish wine industry can experience a tremendous
growth in the international markets. It has been found that the wines appealing to the local
customers of the Turkey are the ones that feature native varietals apart the international ones
making it a new wine destination. Further the increased interest in vintage wines has led to
increase European buyers for the country.
The wine industry has been steadily emerging in the international market but fails to follow the
footstep of its contemporaries like Spain and Italy (Insel, B., 2014). The traditional wine makers
and completion to the Turkish market are seen to have a global presence and rivalry worldwide
whereas Turkey is not where in the list of wine exporters to the world. This can be depicted by
the graph presented below:

This might be because of less aggressive nature of the market in terms of competition while
pursuing their interest of switching from raisin to the wine production market. Consequently the
per capita win consumption in Turkey is seen to be very less as compared to the traditional wine
producing countries (Insel, B., 2014). This has been depicted using the diagram given below:

Therefore, the demand condition analysis of the wine industry of Turkey indicates that there is a
need to develop new vineyards and follow some dynamic commercial activities and strategies in
order to improve the market share (Felzensztein 2002). Further the wine industry has to take the
marketing and marketing strategy into special consideration so as to achieve high success in the
international market.
C. Related and Supporting Industries
Porter reflected that the related and supported industries are beneficial in related and supporting
industries. This is essential in providing competitive edge to the industry by coordinating and
working in a relationship with the suppliers and stakeholders of the industry.

With the huge production of grapes in the country, a large section is supported by the table
grapes. Therefore, the wine industry is seen to profit due to the increased demands of the table
grapes. This has a major support for the wine making industry. Further a continuous and integral
collaboration among the wine industry and with R&D department has helped in enhancing the
taste flavour of the wines and related drinks.
One of the most contributing industry to the wine industry of Turkey is the hotels, restaurants
and catering (HORECA) industry. It is one of the most critical sector for development and
distribution of the wine industry in Turkey as the Turkish people enjoy outside entertainment as
compared to their home. This sector alone caters for around 20 to 25 million of tourists on the
annual basis (Gumus, S.G. and Gumus, A.H., 2008). Additionally the sectors like chain stores,
departmental store along with packaging material and their suppliers contribute to the wine
sector of the company. However, with the change in taste trends among the people and tourists
have led to increased demand of HORECA industry and enterprise towards the wine industry.
A vast majority of restaurant and hotel chains buy their wines from the specialist distributors but
the small sized places in the same enterprise buy from tradition retail channels and wholesalers
or from supermarkets. Due to upcoming of more hotels and restaurants, the demands for different
wines is seen to increase. This is seen to raise difficulties among the wine marketers and is
perceived to be one of the greatest marketing problem. Additionally the increased demands from
the chain stores also added to the problem. The country is also seen to face issues related to the
supplying of unregistered products by some of the firms in the market place, leading to other
problems in the wine industry and its markets (Ay, H.M., 2008).

D. Firm Strategy, Rivalry
The firm strategy, structure and rivalry as a whole is seen to have a considerable impact on the
competitiveness of the wine businesses in Turkey. With a continuous expenditure on the R&D
for enhancing the flavour of the wine, the Turkish wine industry is to have a plethora of taste
flavour in their wines and other drinks. The contribution of intense research and development on
the tasting flavour of wine and wine making artistry has provided an edge to the industry.
Therefore the industry has a firm strategy of continuous innovation. Innovation provides a firm
strategy in supporting the management performance. The local suppliers also provide high
quality wine on a cheaper rate so as to provide a competitive edge to their products in the fiercely
competitive local market and acts as an enhancing factor in the local market. The affordability of
high quality products in the competitive market presents an edge (Sakarya, A.O., 2011).
Therefore the industry at the local level produces a high quality wine but at the affordable price.
Additionally, the local and global distributors have created their website so as to provide people
with the detailed information on the products that they offer. The complete and complied
information of the wines and beers are attached with the respective wine and are displayed on
their website. This helps the people to compare the prices and quality of the product being
offered to them. And the enterprises are able to flow the information regarding their products
using their websites and has also helped in making a global presence in a small proportion.
Therefore adoption of technology and innovation helps the industry to become more competitive
and providing an edge to the wine industry of the Turkey (Giuliani, E., Morrison, A. and
Rabellotti, R. eds., 2011). The smaller enterprise can gain by providing crucial and interesting
facts about their products whereas the higher companies can use this platform for improving their
brand name and quality of the product. This process will be highly beneficial for enhancing
consumer loyalty and for increasing the number of suppliers in the market. Additionally, the

major profit using the online platform is greater efficiency and effective communication with
customers so as to gain commercial benefits.
E. Role of Government
The Turkish government is seen to be highly ignorant towards the wine industry. Due to lack of
support and cooperation from the Turkish government and relevant governmental institutions the
wine industry of Turkey is seen to hold back the development of the wine industry. The
government of Turkey is further seen to promote unfair competition due to their ignorance.
There is a lack of coordination among the civic institutions and governmental institutions, lack of
state policies in the particular industrial sector of the country. The country lacks the procedure
for adequate inspection of the market place (Gumus, S.G. and Gumus, A.H., 2008).
The wine industry in Turkey high not at all regulated with ineffective lobby strategies between
the agencies and government departments. There is lack of support of government on matters
related to empowerment and transformation, export and trading, labour relations impacting the
highly market oriented wine industry of the country. Further the Turkish government is unable to
provide sufficient regulatory, support or certification service to the potential dynamic wine
industry of the Turkey.
Additionally, the implementation of the special consumption tax or SCT has added to the market
issues. Initially, the SCT was proposed to be around 48.7 percent for the tax rate on fresh grape
wine and a tax rate of over 212 percent was imposed on the sparkling wine. Incidentally, the rate
was seen to increase from 63.3 % special consumption tax (SCT) on fresh grapes and a
whopping 275.6 percent on sparkling wine with 18 percent of VAT (Value-Added Tax). Due to
high taxes, the share of unregistered economy is seen to increase in the wine sector (Uygur, E.,
2010). The country is seen to impose highest amount of tax on their wine sales in Europe and has

highest amount of tax in Europe in terms of GDP. Whereas in case of imports, around 50 percent
of customs tax is seen to be imposed on the goods from EFTA and EU. The country is seen to
charge a predetermine tax on the basis of origin of wines that have to be imported. However,
recently a local government agency has developed a programme called ‘Vineyards of Thrace
Route’ along with Greece and Bulgaria (Freedomhouse.org, 2016).
F. Role of Chance
The chance events can have a small but strong impact in the industry and its circumstances and
are seen to be usually from the outside power of the firm. But they are highly critical in creating
opportunities and discontinuities and allow shifts in the nature of the wine industry allowing
competitive performance. However, these events or occurrences are also seen to nullify the
advantages that were achieved by the previous competitors or industry itself. They also have the
capability of creating the potential for supplanting the new firm for achieving competitive edge.
The chance events do not determine any factor of competitive advantage and also include the
factors which are outside the control of the government or industry. But they do play a critical
role in terms of providing competitive advantage to the industry thereby altering all the other
conditions and impacting the country.
The major factors that can affect the wine industry of Turkey include the slowdown in the
Turkish economy or the exchange rate movements. Turkey would not be able to control the
exchange rate explicitly as it solely depends on the demand and supply which exists in the
foreign exchange market. The Turkish currency is seen to be depreciated as compared to the
other European nations and might lead to creating problems and issues in the marketing of wine
industry. Therefore we can estimate that the chance factors play act as the most constraining
factor that can hamper the competitive performance (Rossi, M.M. and Leigh, M.D., 2002). The

factors of exchange rate and the global economic or political developments were seen to be most
constraining in impacting the wine industry of the country.
Part 2: FDI
Turkey has the fifth largest country in terms of vineyard area after France, Spain, Italy and
China. The country has seen a gradual growth in its wine industry but lacks the same growth as
its contemporaries who have a tremendous international growth.

The Foreign Direct Investment (FDI) in Turkey in 2015 is to have increased from 16800 USD
million. From 2003 to 2015, the Foreign Direct Investment (FDI), it averaged from 12750.62
USD Million. It reached a high of 22046.00 USD Million in 2007 and saw of low of 1800.00
USD Million in 2003.
FDA inflow has increased from USD 12,523 to USD 16,957 from 2015 to 2016. In 2007, FDI
averaged around USD 22,000 and reached its all-time high in 2013.
Advantages of FDI as Mode of Entry
FDI as a mode of entry is highly beneficial as it provides a larger control over every single
foreign operations and offers a good protection for the FSAs in the firm. A better understating of
the host market is provided using this mode of entry. This is highly easier and a quick manner for
adaptation of the market product so as to respond quickly as per the changes being performed in
the market (Coskun, R., 2001). Transfer of technology and expertise is seen to take place with
ease in form of capital input varieties that are not provided using the financial investment or the
trading investment.

This strategy will help the company to obtain highly skilled employees in the market place and
will also help in gaining intelligence which is currently being held by the people. Furthermore,
the companies are able to take an advantage of the cheaper labour this strategy will help the wine
industry of Turkey to prosper and become highly competitive in nature.
Disadvantages of FDI as Mode of Entry
Foreign Direct Investment (FDI) is a high-cost route which requires a personnel as well as
financial commitment. This mode of entry has high exposure to the economic and political risks
whereas the problems towards management of a subsidiary was seen to be at a distance. Turkey,
in order to increase their overall inward investment in every aspect, need to focus on establishing
capital market and their proper functioning, regulating their tax policies, focus on improvement
in the governance within their own enterprise and finally on improving their wine yard by
investing considerably in it (Tatoglu, E. and Glaister, K.W., 1998). If all these steps are
followed, then the investments can increase along with the capital inflows.
FDI laws in Turkey are provided as given below:

Market entry strategy for Turkish Industry
The Turkish wine industry has a high potential for international companies however, it is
imperative for the foreign companies to conduct a detailed research in the market for identifying
the business strategies. The international companies need to implement a business plan for
Turkish wine industry and Turkish market.

Part 3: Management issues
The key management issues that must be taken into high consideration before starting operations
in the Wine industry of Turkey are:
1. Corruption and High Tax
Corruption is seen to be one of the major factor in private and public sector of Turkey. Due to
high corruption, there is unfair competition among the wine suppliers. In 2013, a mass protest
was seen owing to numerous corruption allegations against the Turkish government. And the
government was seen to crackdown the judges and police officers who were eventually voicing
these accusations. The corrupt activity which include attempted corruption, active and passive
bribery, money laundering, bribing a foreign official and office abuse are included in the
Criminal Code of the country (Beyerle, S. and Hassan, A., 2009). But it is seen that the anti-
corruption laws are not effective and in turn are poorly enforced along with all the anti-
corruption authorities being highly ineffective. Various companies are seen to facilitate gifts and
payments that are illegal and are not encountered frequently. Further, it is seen that the outlets
and enterprise which are critical towards the government’s attitudes, are subjected to increased
tax or fine (Freedom House, 2014).
Within past year, around 11 percent of citizens are seen to have paid money or gifts to the tax
officials. Due to lack of government support, more than one third of the economy of Turkey is
unregistered, which has resulted in a big loss in the annual tax revenue. The major wine industry
enterprises are seen to state that the tax systems are majorly due to the extreme political approach
of Turkish government. Further the government is also seen to increase special consumption tax
(SCT). With the sudden increase in the special consumption tax (SCT), the sales in wine industry
were seen to be reduced hugely and supported the engagement of the unregistered sales.

2. Lack of skilled labour
With the internal migration from rural to urban areas, there is a considerable reduction in the
number of skilled labour force in the market (Gumus, S.G. and Gumus, A.H., 2008). Further, the
employees are not paid well which has aggravated the issue. The lack of experienced labour has
to be dealt with strategic offers and techniques to lure the labours in order to increase the
competitiveness in the market. Further, the labours are seen to have low English literacy rate
which might lead to worsen the situation and a cordial relationship cannot be formed with these
labour. The setting up of the operations required a cordial relationship among the people and
therefore efforts have to be placed in order to hire skilled and experienced labour. The company
should additionally hire a quality inspection personnel in their firm or enterprise so as to check
the quality of the product as the lack of quality inspection personnel is a major issue in Turkey.

2. References
Ay, H.M., 2008. Unregistered Employment in Turkey. Lex ET Scientia Int'l J., 15, p.366.
Azabagaoglu, M.O., Akyol, A. and Ozay, A., 2006. Examining the Turkish wine industry:
marketing effectiveness and recommendations for increasing its competitive performance. New
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Beyerle, S. and Hassan, A., 2009. Popular resistance against corruption in Turkey and Egypt.
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Coskun, R., 2001. Determinants of direct foreign investment in Turkey. European Business
Review, 13(4), pp.221-227.
Felzensztein, C., 2002. Approaches to global branding: the Chilean wine industry and the UK
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Giuliani, E., Morrison, A. and Rabellotti, R. eds., 2011. Innovation and technological catch-up:
The changing geography of wine production. Edward Elgar Publishing.
Gumus, S.G. and Gumus, A.H., 2008. The wine sector in Turkey: survey on 42
wineries. Bulgarian Journal of Agricultural Science, 14(6), pp.549-556.
Insel, B., 2014. The evolving global wine market. Business Economics, 49(1), pp.46-58.
Rossi, M.M. and Leigh, M.D., 2002. Exchange rate pass-through in Turkey(No. 2-204).
International Monetary Fund.
Sakarya, A.O., 2011. Wine Choice Before The New Year: A Discriminant Analysis
Approach. Journal of Business Case Studies (JBCS), 2(4), pp.47-54.
Tatoglu, E. and Glaister, K.W., 1998. An analysis of motives for western FDI in
Turkey. International Business Review, 7(2), pp.203-230.

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