The Effects Of Foreign Investments On Turkey


Turkey is among the most robust and fast-growing economies in the world. It thrives greatly on foreign investments. Being the target of both European and United States investors, as well as some investors across from the Middle East, it offers the right place for investments (Douglass & O’ Neil, 2008, par. 1). Turkey is rated the 16th largest economy in the world and also ranked sixth in Europe. This is according to a report that was conducted in 2008 by the Turkish investment support and promotion agency. These are indications of flourishing investment ground. This paper will attempt to study the source, type, and effects of foreign investments in turkey.

Turkey’s economic Background

Turkey is a fast emerging country with a booming economy, its nominal gross domestic product is ranked 17th in the world, and it’s one of the founding members of various major economic forums like the G-20 economies (Korkmarz, 2008, pp. 8-47). Before the year 1983, it had a tight government regulation on budgeting in its first six decades. In addition, it also exercised strict measures on direct foreign investment and had firm limitations on privatization.

Foreign currency flow was also restricted thereby limiting foreign trade. This worked negatively on their economic development and slowed down their growth as an economic powerhouse. On realization, Turkish Prime minister Ozal started numerous reforms in the economic sector of the country, among which were to shift from the initial statist approach to a more market-oriented model. This gave rise to a surge in the private sector investments and opened the course for foreign investment.

These reforms could not have come at a better time, rapid growth was instantly experienced, but this spurring development was slowed by the sharp recession that followed in the years 1994, 1999 and again in 2001. This slowed growth and was mainly accelerated by the great earthquake of the time, its average GDP growth was slowed to just 4% per annum till the year 2003. various factors during this period worsened their efforts to improve the economy as corruption caught up with the administration, leading to a very weak banking segment.

Other factors that spurred slow economic growth during this time were inadequate fiscal reforms which increased the deficits of the public sector and volatility in the microeconomic segment. These events slowed Turkey’s push for a developed state. Their economic resurgence started as late as 2002 when major economic reforms were once again implemented by the then finance minister Dervis.

Inflation came down to single digits boosting investor confidence, This opened up its market to foreign investments, lowering the unemployment rate, with the growth rate surging to higher average rates of 7.4% between 2002 and 2007. Turkey’s economy became among the fastest growing economies in that period and was again slowed by the global economic recession of 2009. Turkey remains a developing state despite its fine location. This state resulted mainly due to corruption, inflations, and the volatility caused by the past economic crunch that faced them.

Effects of foreign investments

Foreign investment has made a massive impact on the Turkish economy, the surge that has scaled its economy to the top twenty in the world can attest to this. It has had both positive and negative attributes to the country. Among the positives are: the stimulation of the economic activity due to the circulation of money in the market; this has been a major boost for the economy as more money penetrates the market. Improved investment in the market was followed by a fall in the unemployment rate; this improved the living standards in the country with more people able to access the basic needs as well as invest, thereby improving its GDP to its prestigious rank as among the G-20 economies.

Turkey is located between the connection of two continents Europe and Asia. Its location has been central to its development as a hub for investment. They have highly-skilled, relatively competitive labor. The country currently hosts over 18000 foreign investment firms due to the incentives given to them by the Turkish government. European firms led by Germany dominate the investment companies (Turkish Embassy, 2008, par. 1-4).

It has a population of 70 million, mainly consisting of young people with over 24 million working citizens, it is also a hub of foreign languages, and most business people speak the business languages such as English among others (Turkish Commercial Investment, 2009, pp.1).

The investments improved the infrastructure of the country setting stage for its high growth rate witnessed over the years. The increase in Foreign Direct investment gave Turkey power in the international realm. This can be seen in their strength as the co-founders of the major economic summits like the G-20 summit. Improved structures also improved access to the countries major sites, most of which being tourism attraction centers. Its inclusion in the European Union was a major step and an impact of the government’s market-based approach that allowed foreign direct investment (Lall & Streeten, 1977, pp. 1-6).

Foreign Direct investment also caused alarm in Turkey, Circulation of money in the market caused instability in inflation in the market. Foreign investors had government incentives that threatened the local investor’s competitive advantage. This led to protests which continue. Turkey’s economy currently depends so much on the industry which has turned into a risk as was seen during the 2009 global recession which adversely affected it; anything that directly affects the industry puts a heavy blow on the country’s economy.

Foreign investments in Turkey

After the introduction of the legal framework which was implemented for foreign direct investments in 2003, more room was created for them to expand their market in Turkey. The incentives provided for freedom of potential investors to finance their businesses fair treatment as the domestic firms (Erdal & Tatoglu, 2002, pp. 3). Their investments were also protected from expropriation and this improved the investor confidence, further legal reforms that were made included the free transfer of their net profits, interest, dividends among all that were related to the management and agreements of the businesses, This was vital in allowing for free movement of capital, and all the financial facilitators of the investments.

Offshore investors could own companies in the country and get their dividends and profits respectively with the adoption of these reforms. Another important reform that led to foreign direct investment was the reforms on access to the property in Turkey. Before the year 2003 when these reforms were made, foreigners were not allowed to invest or access real estate in the country, this made it very difficult for industrialization as most companies, and multinational firms needed the security of their location. This was made possible by the government’s resolve to grant foreign investors the right to own properties (Ergan, 2010, pp.1).

Solution of disputes was also made easier for the foreigners since they could access international arbitration courts. Resolution of disputes could be done by private law firms upon agreement between the affected parties; this gave legal confidence to the investors who could face the challenges with more assurance of legal security of their investments. Even resolutions between the administration and foreign investors could be solved in this manner (Tatoglu & Glaister, 1998, pp. 68).

Value assessment was also allowed in the new reforms which meant that stocks could be used as well as bonds in value assessment as tools for investment. Lastly, the government through the respective ministry granted other nationals the opportunities to work in Turkey as long as they qualified. This brought new expertise into the country with varied skills that improved the productivity of the country. All these reforms were essential in stimulating foreign investment in Turkey as foreigners moved fast to take advantage of the right environment created by the government t improve its economic base (Ergan, 2010, pp.1).

This made it very clear to the foreign investors that Turkey had opened its doors wide for investment. Further incentives given by the government to the foreign investors included exceptions from paying the corporate tax for those companies in free zones; these free zones were also regulated by the government. There was also exemption from income tax for those who worked in those zones (Price Water House Coopers, 2006, pp. 16-18); this incentive also attracted cheaper labor which would, in turn, maximize profits for the investors. Because export services and commodities were exempted from the value-added tax, the free zones were given incentives as well to encourage investors. Another exemption was customs tax and other operations in the free zones (Ergan, 2010, pp.1).

Developing parts of the country were granted incentives like an exception from insurance premiums and income tax given to those investing in such regions. Turkey made its structures conformed to those of the European states as it prepared to be ushered into European Union. These were very positive reforms that attracted numerous foreign investors in turkey (Ergan, 2010, pp.1).

Type of in investments

Among the main investments in Turkey consist of Real estate and property owners (Sayek, 2007, pp. 110); this is because there are many global investors in holiday homes due to the vibrant tourism industry in the country. Even though there were restrictions on where to invest, records show that by 2008, more than 78103 foreigners owned about 63085 personal properties in Turkey. These were mostly owned by the Greek citizens, the Germans as well as the British, the other foreign owners of properties in Turkey were the Syrians (Fatih &Fethiye, 2008, pp. 1). Foreign firms in Turkey have invested in making it their regional headquarters. These companies include Coca Cola, Microsoft among others. It acts as a link between the other markets and the European Union.

More foreign cash has targeted Turkey’s emerging sectors, apart from the traditionally known European and United States investors, more recently there has been a great interest from the Middle East which has focused much on the property and real estates. These targets have presently been diversified in other sectors of growth, they include the Banking sector’s equity which is owned in half by foreigners, Investments have also been focused on Healthcare services with the highly developing middle class in the country; this has led to the acquisition of pharmaceuticals, hospitals which are private and health insurance and caused a major jostle for the highly promising health sector.

Another type of investment that has attracted the foreign fraternity is the energy sector. This has made use of home-made expertise in renewable energy especially wind power which has a massive potential of being the largest in Europe, added to its environment conservation prospects. In this sector, there is a lot to be scrambled for, with the government’s planned privatization of pipeline projects, and the power generation companies including renewable energy. With such promising prospects in the offing, more is yet to be seen with the international community shaping up for more investments in this sector.

The overall improvement in the domestic market and infrastructure has brought more industries to Turkey. Global multinational companies have held joint ventures in other emerging sectors of the Turkish economy; these have targeted the consumer goods, with the increased domestic market, insurance sector, electronics, and telecommunication sectors. The energy sector has especially helped in the relationship between Turkey and Russia.

It emerges that Russia increasingly gets demand for their Gas from the west and the Middle East (Basar & Tosunoglu, 2006, 116-117). In essence, Turkey will play a big role in the distribution of the oil, and such is its importance (Douglass & O’ Neil, 2008, par. 2-6). In summary, the investments in Turkey steadily run by foreign investors include Tourism sectors, Trade and retail store sectors, energy; which is still expanding, Telecommunications, Property management among others (Turkish American Chamber of Commerce, 2006, pp. 161).

Advantages and disadvantages of foreign investments

Foreign investments have numerous advantages, whenever foreign investment is channeled into a country there is a shift in production capacity and quality, increased investment stimulates more production and efficiency as more capital base is established. Variety is also achieved, the market can easily respond to the demand and taste of both domestic and international markets. This is advantageous to the country as there is an increased tax return and employment to the domestic workforce. Foreign investment is a factor of production and helps in the control of prices as there is little or no monopoly, quality products are given at competitive prices.

It improves the infrastructural development of a country as the new investments must be channeled to their use. The overall planning and growth of the recipient country are improved (Organisation for Economic Co-operation and Development (OECD), 2002, pp. 133).

Exports and import activities are increased; this improves the country’s economy since there is more foreign exchange and tax earned. The general development of the country is also accelerated as there is technology exchange and human capacity development. Foreign investments spur good international relations which in effect gives the country the global say, union, and security among other direct and indirect injections to the economy (Erdal & Tatoglu, 2000, par. 324).

Foreign investments also have some effects on a country, among the disadvantages include: Increased competitive advantage over the local firms who expect to get more incentives that the foreign firms to thrive better. Slightly increased inflation is another effect of foreign investments since more money circulates in the market; this has a considerable effect on the public. Another effect is the overdependence on foreign investments which may slow growth in case the targeted sector is directly affected (Mody, 2007, pp. 45). Other changes that face foreign investments are devaluation which may occur to the face value of the developing country’s currency, and loss of foreign currency due to increased volatility of the currency (Ilter, 2008, pp. 1).


Turkey as has been given was slow in its growth before 1983, this was mainly attributed to the government fiscal policies and economic model used at the time The model approach was not aimed at marketing and greatly slowed their performance. Upon the implementation of reforms that allowed foreign investments (Institute of International Economics, 2002, pp. 19), incentives, and the market-based model, it took off, and although it has had various problems, it can be said that the change in reforms has generally improved the balance and economic base of Turkey. No wonder they are close to joining the European Union.


Turkey is a developing state at the very top and this has mainly come due to its reforms in economic policies, unique location that is accessible to the global regions, and a fairly stable political climate. The main kind of foreign investments in Turkey is in the: banking, energy, property, and telecommunication sectors. Foreign investment has been a major boost to Turkey’s economy, although it has also had its effects on inflation and competition. Turkey’s welfare has generally improved as a result of the economic reforms and the foreign investments which have changed its outlook to a world-class state. However, more is desired to achieve the goal of developed state.

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