Turkey experienced strong economic growth on the back of the many positive economic and banking reforms it implemented between 2002 and 2007, and it weathered the global economic crisis of 2008-2009 better than most countries, establishing itself as a relatively stable emerging market with a promising trajectory of reforms and a strong banking system. However, over the last several years, economic and democratic reforms have stalled and by some measures, regressed. GDP growth was 2.6 percent in 2018 as the economy entered a recession in the second half of the year. Challenged by the continuing currency crisis, particularly in the first half of 2019, the Turkish economy grew by only 0.9 percent in 2019. Turkey’s expansionist monetary policy and spending of over USD 100 billion in central bank foreign reserves caused Turkey’s economy to grow by 1.8 percent in 2020 despite the pandemic, though high inflation and persistently high unemployment have been exacerbated. This year growth is expected to be around 3.5 percent with significant downside risks.
Despite recent growth, the government’s economic policymaking remains opaque, erratic, and politicized, contributing to long-term and sometimes acute lira depreciation. Inflation in 2020 was 14.6 percent and unemployment 13.2 percent, though the labor force participation rate dropped significantly as well.
The government’s push to require manufacturing and data localization in many sectors and the introduction of a 7.5 percent digital services tax in 2020 have negatively impacted foreign investment into the country. Other issues of import include tax reform and the decreasing independence of the judiciary and the Central Bank. Turkey hosts 3.6 million Syrian refugees, which creates an additional economic burden on the country as the government provides them services such as education and healthcare.
Recent laws targeting the Information and Communication Technology (ICT) sector have increased regulations on data, social media platforms, online marketing, online broadcasting, tax collection, and payment platforms. In particular, ICT and other companies report Government of Turkey (GOT) pressure to localize data, which it views as a precursor to greater GOT access to user information and source code. Law #6493 on Payment and Security Systems, Payment Services and e-money Institutions, also requires financial institutions to establish servers in Turkey in order to localize data. The Turkish Banking Regulation and Supervision Agency (BDDK) is the authority that issues business licenses as long as companies 1) localize their IT systems in Turkey, and 2) keep the original data, not copies, in Turkey. Regulations on data localization, internet content, and taxation/licensing have resulted in the departure of several U.S. tech companies from the Turkish market, and has chilled investment by other possible entrants to the e-commerce and e-payments sectors. The laws potentially affect all companies that collect private user data, such as payment information provided online for a consumer purchase.
The opacity and inconsistency of government economic decision making, and concerns about the government’s commitment to the rule of law, have led to historically low levels of foreign direct investment (FDI). While there are still an estimated 1,700 U.S. businesses active in Turkey, many with long-standing ties to the country, the share of American activity is relatively low given the size of the Turkish economy. Increased protectionist measures add to the challenges of investing in Turkey, which saw 2019-2020 investment flows from the world drop by 3.5 percent, although investment flows from the United States increased by 135 percent.
Turkey’s investment climate is positively influenced by its favorable demographics and prime geographical position, providing access to multiple regional markets. Turkey is an island of relative stability in a turbulent region, making it a popular hub for regional operations. Turkey has a relatively educated work force, well-developed infrastructure, and a consumption-based economy.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2020||86 of 180||https://www.transparency.org/cpi2019|
|World Bank’s Doing Business Report||2020||33 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2020||51 of 131||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2019||3,333||https://www.bea.gov/sites/default/files/2020-07/dici0720_0.pdf|
|World Bank GNI per capita||2019||9,690||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Turkey acknowledges that it needs to attract significant new foreign direct investment (FDI) to meet its ambitious development goals. As a result, Turkey has one of the most liberal legal regimes for FDI among Organization for Economic Cooperation and Development (OECD) members. According to the Central Bank of Turkey’s balance of payments data, Turkey attracted a total of USD 5.67 billion of FDI in 2020, almost USD 200 million down from USD 5.87 billion in 2019. This figure is the lowest FDI figure for Turkey in the last 16 years, and likely reflects a need to improve enforcement of international trade rules, ensure the transparency and timely execution of judicial awards, increase engagement with foreign investors on policy issues, and to implement consistent monetary and fiscal economic policies to promote strong, sustainable, and balanced growth. Turkey also needs to take other political measures to increase stability and predictability for investors. A stable banking sector, tight fiscal controls, efforts to reduce the size of the informal economy, increased labor market flexibility, improved labor skills, and continued privatization of state-owned enterprises would, if pursued, have the potential to improve the investment environment in Turkey.
Most sectors open to Turkish private investment are also open to foreign participation and investment. All investors, regardless of nationality, face similar challenges: excessive bureaucracy, a slow judicial system, relatively high and inconsistently applied taxes, and frequent changes in the legal and regulatory environment. Structural reforms that would create a more transparent, equal, fair, and modern investment and business environment remain stalled. Venture capital and angel investing are still relatively new in Turkey.
Turkey does not screen, review, or approve FDI specifically. However, the government has established regulatory and supervisory authorities to regulate different types of markets. Important regulators in Turkey include the Competition Authority; Energy Market Regulation Authority; Banking Regulation and Supervision Authority; Information and Communication Technologies Authority; Tobacco, Tobacco Products and Alcoholic Beverages Market Regulation Board; Privatization Administration; Public Procurement Authority; Radio and Television Supreme Council; and Public Oversight, Accounting and Auditing Standards Authority. Some of the aforementioned authorities screen as needed without discrimination, primarily for tax audits. Screening mechanisms are executed to maintain fair competition and for other economic benefits. If an investment fails a review, possible outcomes can vary from a notice to remedy, which allows for a specific period of time to correct the problem, to penalty fees. The Turkish judicial system allows for appeals of any administrative decision, including tax courts that deal with tax disputes.
Limits on Foreign Control and Right to Private Ownership and Establishment
There are no general limits on foreign ownership or control. However, there is increasing pressure in some sectors for foreign investors to partner with local companies and transfer technology, and some discriminatory barriers to foreign entrants, on the basis of “anti-competitive practices,” especially in the information and communication technology (ICT) sector or pharmaceuticals. In many areas Turkey’s regulatory environment is business-friendly. Investors can establish a business in Turkey irrespective of nationality or place of residence. There are no sector-specific restrictions that discriminate against foreign investor access, which are prohibited by World Trade Organization (WTO) Regulations.
Other Investment Policy Reviews
The OECD published an Environmental Performance Review for Turkey in February 2019, noting the country was the fastest growing among OECD members. Turkey’s most recent investment policy review through the World Trade Organization (WTO) was conducted in March 2016. Turkey has cooperated with the World Bank to produce several reports on the general investment climate that can be found at: http://www.worldbank.org/en/country/turkey/research.
The Presidency of the Republic of Turkey Investment Office is the official organization for promoting Turkey’s investment opportunities to the global business community and assisting investors before, during, and after their entry into Turkey. Its website is clear and easy to use, with information about legislation and company establishment. (http://www.invest.gov.tr/en-US/investmentguide/investorsguide/Pages/EstablishingABusinessInTR.aspx). The website is also where foreigners can register their businesses.
The conditions for foreign investors setting up a business and transferring shares are the same as those applied to local investors. International investors may establish any form of company set out in the Turkish Commercial Code (TCC), which offers a corporate governance approach that meets international standards, fosters private equity and public offering activities, creates transparency in managing operations, and aligns the Turkish business environment with EU legislation as well as with the EU accession process.
Turkey defines micro, small, and medium-sized enterprises according to Decision No. 2018/11828 of the Official Gazette dated June 2, 2018:
- Micro-sized enterprises: fewer than 10 employees and less than or equal to 3 million Turkish lira in net annual sales or financial statement.
- Small-sized enterprises: fewer than 50 employees and less than or equal to 25 million Turkish lira in net annual sales or financial statement.
- Medium-sized enterprises: fewer than 250 employees and less than or equal to 125 million Turkish lira in net annual sales or financial statement.
The government promotes outward investment via investment promotion agencies and other platforms. It does not restrict domestic investors from investing abroad.
2. Bilateral Investment Agreements and Taxation Treaties
Since 1962, Turkey has negotiated and signed agreements for the reciprocal promotion and protection of investments. As of 2020, Turkey has 81 bilateral investment agreements in force with: Afghanistan, Albania, Argentina, Austria, Australia, Azerbaijan, Bahrain, Bangladesh, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, China, Croatia, Cuba, Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Finland, France, Georgia, Germany, Greece, Guatemala, Hungary, India, Indonesia, Iran, Israel, Italy, Japan, Jordan, Kazakhstan, Kosovo, Kuwait, Kyrgyzstan, Latvia, Lebanon, Libya, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Moldova, Mongolia, Mauritius, Morocco, Netherlands, Oman, Saudi Arabia, Pakistan, Philippines, Poland, Portugal, Qatar, Romania, Russia, Serbia, Senegal, Singapore, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Syria, Tajikistan, Tanzania, Thailand, Tunisia, Turkmenistan, United Arab Emirates, United Kingdom, United States, Ukraine, Uzbekistan, and Yemen.
Turkey has a bilateral taxation treaty with the United States.
10. Political and Security Environment
The period between 2015 and 2016 was one of the more violent in Turkey since the 1970s. However, since January 2017, Turkey has experienced historically low levels of violence even when compared to past periods of calm, and the country has greatly ramped up internal security measures. Turkey can experience politically-motivated violence, generally at the level of aggression against opposition politicians and political parties. In a more dramatic example, a July 2016 attempted coup resulted in the death of more than 240 people, and injured over 2,100 others. Since the July 2015 collapse of the cessation of hostilities between the government and the terrorist Kurdistan Workers’ Party (PKK), along with sister organizations like the Kurdistan Freedom Hawks (TAK), have regularly targeted security forces, with civilians often getting injured or killed, by PKK and TAK attacks. (Both the PKK and TAK have been designated as terrorist organizations by the United States.)
Other U.S.-designated terrorist organizations such as the Islamic State of Iraq and Greater Syria (ISIS) and the leftist Revolutionary People’s Liberation Party/Front (DHKP/C) are present in Turkey and have conducted attacks in 2013, 2015, 2016, and early 2017. The indigenous DHKP/C, for example, which was established in the 1970s and designated a terrorist organization by the U.S. in 1997, is responsible for several attacks against the U.S. Embassy in Ankara and the U.S. Consulate General Istanbul in recent years, including a suicide bombing at the embassy in 2013 that killed one local employee. The DHKP/C has stated its intention to commit further attacks against the United States, NATO, and Turkey. Still, widespread internal security measures, especially following the failed July 2016 coup attempt, seem to have hobbled its success. In addition, violent extremists associated with ISIS and other groups transited Turkey en route to Syria in the past, though increased scrutiny by government officials and a general emphasis on increased security has significantly curtailed this access route to Syria, especially when compared to the earlier years of the conflict.
There have been past instances of violence against religious missionaries and others perceived as proselytizing for a non-Islamic religion in Turkey, though none in recent years. On past occasions, perpetrators have threatened and assaulted Christian and Jewish individuals, groups, and places of worship, many of which receive specially-assigned police protection, both for institutions and leadership. Anti-Semitic discourse periodically features in both popular rhetoric and public media, and evangelizing activities by foreigners tend to be viewed suspiciously by the country’s security apparatus. Still, government officials also often point to religious minorities in Turkey positively, as a sign of the country’s diversity, and religious minority figures periodically meet with the country’s president and other senior members of national political leadership.