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Foreign investment in Turkey is rising, but not the type it needs

In the past five years, 24,000 new foreign companies have set up shop in Turkey, but due to a lack of confidence they have avoided industrial production.

Every year, the Istanbul Chamber of Industry lists the biggest 500 industrial companies of the country based on sales of products they manufacture. The latest such list, called the ISO-500, was released at the beginning of June.

In 2009, there were 153 foreign companies on the list, but in 2015 this number dropped to 125. This means that the proportion of foreign companies on the ISO-500 went down from one-third in 2009 to a quarter in 2015.

This report is somewhat confusing because meanwhile, the number of foreign companies in Turkey has been booming. In the 56 years between 1954 and the end of 2010, 25,000 foreign companies established a presence in Turkey, but by the end of March 2016 this number reached 49,095.

This figure means 24,000 foreign companies have opened branches in Turkey over the past five years. But the decline in the number of large companies indicates that production capacity has not simultaneously increased because most of the new companies are small- and medium-size operations. Data from the Ministry of Economy suggests that foreigners are mostly engaging in marketing and trading instead of production. Today, 17,905 foreign companies operate in wholesale and retail commerce. Next are 7,948 companies operating in the real estate sector. The production industry claims the smallest segment at 6,308 companies.

These numbers may help explain why the number of foreign companies on the ISO-500 is decreasing. Only about 8% of about 49,000 companies are in manufacturing. Nearly 82% of foreigners are active in nonproduction fields.

Mehmet Donen, a former minister of industry and commerce, told Al-Monitor, “Companies set up in Turkey in recent years are generally of Middle East origin and small. Those coming from Iraq and Syria deal in commerce. Meanwhile, major companies producing industrial goods are leaving Turkey. There are three reasons: They don’t trust the legal system in Turkey. The second is polarization and growing tensions in the country. The third is terror. Not only foreigners but also local major companies are leaving the country.”

Of the foreign companies in Turkey, 20,918 are of European Union origin. Among the EU countries, Germany leads the list with 6,602 companies followed by Britain with 2,933, the Netherlands with 2,610 and Italy with 1,321.

Non-EU European countries have 4,783 companies operating in Turkey. Following Europe, the next region is the Middle East, with 15,417 companies that include the recent influx of Syrian companies. North American companies from the United States and Canada number 1,976. Of them, 1,647 are American. African countries have 1,743 companies in Turkey. In Asia, China has 772 and South Korea has 283.

But an assessment based on the number of companies may be misleading. The amount of capital these countries have invested in Turkey paints a different picture. For example, between 2002 and 2016, the country that brought in the most foreign capital is the Netherlands with $21,354 billion. The United States is the second-largest importer of capital with $10,798 billion, and Austria is third with $9,590 billion.

Some of the other countries in the top 20 direct investors are Britain with $8,719 billion, Luxembourg with $8,662 billion, Azerbaijan with $4,231 billion, the United Arab Emirates with $4,136 billion, Saudi Arabia with $1,944 million, Lebanon with $1,134 billion and Qatar with $1,131 billion.

Thus, not only is the number of foreign companies increasing, the amount of foreign investments is also growing. But why is the number of major foreign companies involved in production declining? According to Donen, the reason is the incoming foreign investments are generally "hot money" and not used in industrial production.

The Turkish government is also concerned with the changing types of foreign investments. A new incentive package is being prepared to encourage foreigners to establish financially stronger industrial facilities. These incentives, which include tax breaks, are expected to be introduced soon.

Whether foreign or local, investors' top priority is confidence. No matter how many incentives are offered, if the future is uncertain it may be difficult to attract any investment at all.

The tendency of foreigners in recent months to slow down their investments but engage in stock market transactions is a sure sign that the government first has to overcome the loss of confidence before introducing an incentives package.