Inspiring Turkish policymakers on best investment practices worldwide
YASED FDI Summit, 8 November 2005
Deputy Chairman, Forum Istanbul
The primary objective of this session: learning from international practices World investment trends and needs Turkey – “a miracle-in-the-waiting”? How to attract and maximise benefits of FDI for development? Key messages and lessons for policy makers
Investment, development and geopolitics
Today all countries are racing with each other to attract “quality” foreign investment in an increasingly competitive environment. Yet there should be no illusion: FDI is not a panacea or a primary source for solving the developmental problems. It should be seen as a valuable supplement to levels of domestically provided fixed capital and other external finance rather. The patterns of FDI are constantly changing; so should the government policies to respond to the new environment and expectations. Geopolitics, trade and regional integration play a crucial role in addition to sound fundamentals of an enabling environment.
Example: World energy investment,
Trends and Recent Developments in Foreign Direct Investment
Trends and recent developments…
FDI peaked in 2000, with $1.4 billion, but declined over the past four years to $ 648 billion. FDI growth last year reflected increased flows to developing countries as well as to South-East Europe and the CIS. The US - the largest recipient in 2004, ahead of the United Kingdom and China as well as Luxembourg - the top FDI recipients in 2003. Estimated 70,000 multinationals in the world, with at least 690,000 foreign affiliates. Cross-border M&As – key modes of global FDI since the late 1980s – started to pick up following three years of decline. Developing country multinationals (China, India, Brazil, Malaysia, Singapore, South Africa) are on 6 the rise.
Trends and recent developments…
The macroeconomic performance of the high-growth Asian economies vs the sluggish economic growth in continental Europe. ….the weakening US dollar. Recent changes in trade architecture, including China‟s WTO accession and the multi-fibre agreement, further encouraged FDI. FDI seeks not only competitive production costs but also access to a buoyant client base. Large amounts of cross-border transactions In the utilities sector, energy production and distribution was the target of several large cross-border takeovers in 2004 and 2005.
The growing role of non-OECD investors
China and India will, within our lifetime, become the two largest national economies in the world by most measures. Inward FDI into the Chinese economy keeps hitting new records. India is also on an increasing trend. Russian inward direct investment improved further to reach $11.7 billion in 2004. South America - a rebound in inward direct investment. MENA – still less than 1 percent of global FDI but investing abroad.
What investors expect?
Accessibility to larger markets, integration to the world economy. Availability of adequate infrastructure to allow business transactions to take place. Simplified investment approval processes. Enforcement of the rule of law, i.e. private property protection, and patent recognition. Accountable and consistent administrations. Sound and transparent economic and financial management. A healthy and adequately skilled workforce and strong local partners.
How do countries attract and maximise benefits of FDI?
Investment reforms are not achieved overnight, and investors will no doubt be willing to live with some impediments if profitable opportunities exist. But in the long run, a suitable enabling environment is the best guarantor of investment. There is not a single success story in attracting and making best use of the FDI. Governments can do little to influence geography, natural resource endowments or even market size except in the long run, all of which affect investor perceptions, …but they do shape the policy and regulatory environment which is at the heart of investor concerns.
Incentives or “beauty contest”?
No longer sufficient for a country simply to liberalize restrictions on FD; nor offering tax benefits and other incentives Sound fundamentals rather than direct incentives are clearly the key to attracting FDI In some circumstances, incentives may serve either as a supplement to an already attractive enabling environment or as a compensation for proven market imperfections that cannot be otherwise addressed Although the “carrot” of incentives is often seen as an improvement over the “stick” of restrictions, the use of incentives nevertheless entails certain risks In Southeast Asia, various estimates of the revenue costs of incentives range from 0.7 per cent of GDP in Vietnam to 1.7 per cent in Malaysia
Do incentives really work?
Proponents: they are the efficient manifestations of competitive markets, or alternatively, are „second-best‟ government interventions. Opponents: they divert public funds away from necessary activities and introduce market distortions. Insufficient monitoring and transparency of incentive schemes. Increasing use of discretionary, as opposed to rules-based policies leads to arbitrariness, opacity and discrimination between enterprises. In more extreme cases - a scope for corruption. Too many incompatible targets: an “old” focus on export promotion may coincide with a “new” strategic-sector orientation.
How do the countries manage to attract FDI?
The analogy is a love relationship: FDI should often be competed for, “seduced” and “won” Investment promotion agencies can help to build a country‟s image, attract the attention of prospective investors and strategically target certain types of foreign investors, but policies matter Governments can do little to influence geography, endowments or even market size, but they do shape the policy and regulatory environment There is not a single success story in 13 attracting and making best use of the FDI.
Turkey: “a miracle-in-waiting”
Despite the fact that a number of barriers to investment still remain, prospects for increased FDI flows are certainly looking up. A population of 72 million – third-largest in Europe after Russia and Germany, with 45% under 25. Its domestic market has a great potential for growth and unique location gives it access to Europe, Central Asia and the Middle East. More than 6,000 foreign companies have invested in Turkey. Yet, its performance is far from satisfactory - only $20.7bn in FDI between 1954 to 2004. It is still difficult to claim in fairness that today‟s Turkey is a friendly place to invest, but anticipated EU accession will dramatically change the investment environment and attitudes. The government wants to attract $15bn of foreign investment over the next three years. How?
How does Turkey compare?
Kiyoshi Mori, Director, JETRO
discuss how Japanese government and private sector have been organised to attract inward FDI and send outward FDI; elaborate on what he considers to be the critical factors for investment/development agencies in attracting FDI and supporting companies to invest abroad; conclude with why Japanese investors have preferred Turkey and lessons to be drawn by Turkish political/business leaders from the Japanese example.
Rudolf A. Müller, Switzerland
the "secrets" of how the Swiss companies perform as foreign investors; institutional framework behind them; importance of public and corporate governance in inwards and outward investment; and good practices that Turkish political/business leaders bear in mind in light of the Swiss example.
Mohammed Asfour, Jordan
FDI outlook in MENA region; Relative success stories in the region with a particular focus on Dubai Development and Investment Authority, Jordan Investment Board and GAFI (Egypt); Suggestions for attracting MENA investment and organising successful IPA practices for Turkey.
José Ramón Ferrandis, Spain
Spain's impressive FDI performance after EU accession; Inward and outward investments and investor targeting strategies; and lessons for Turkey, which is viewed as the "Spain of 1980s".
Charles Kovacs, Hungary
Combined perspective (with his three hats on as Hungarian practitioner, BIAC representative and UNCTAD counsellor) on why investors decide to invest in a host country, Functions of an ideal IPA as an effective bridge between the investor and the government, Turkey‟s investment future in view of its anticipated EU accession over the next decade and geographical, demographic, economic, and strategic assets.
Key messages to policy-makers
Turkey is doing very well now thanks to privatisation and the euphoria and changes coming out of the EU negotiations. However, this is really the high point, unless the momentum for structural reforms is maintained, along with maintenance of political stability and secularism. Major remaining barriers: bureaucratic opposition to reforms; dispute resolution and the implementation of legislation; tax-related issues; corruption; and protection of intellectual property. Need to move towards high value added, employmentgenerating “quality” investments and see FDI as part of a broader development/competitiveness strategy. Facilitator role, level playing field, transparency, partnership with private sector, and respect the sanctity of contracts. Learn from international good practices and respect the rules of the game. Bear in mind geopolitical context and implications.