RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/W/37
17 April 1998
(98-1548)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM TURKEY
The following communication, dated 9 April 1998, has been received from the Permanent
Mission of Turkey with the request that it be circulated to Members.
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I. INTRODUCTION
Turkey is submitting its communication under agenda item (b), "the Economic Relationship
between Trade and Investment", with reference to Turkey's experiences regarding national investment
policies.
One of the major policy decisions of Turkey at the beginning of the 1980s was the adoption of
an open and flexible foreign investment policy.  This was in line with the general outward-oriented
development policy of the country.  Since then, this foreign investment policy has been consolidatedwith proper legislation.  In the meantime, there were  changes in the global patterns of trade and FDI
which brought out the interlinkages between them.  These changes also had impacts on the growth
and development of national economies.  In a world economy where TNCs decide on their investment
and trade strategies simultaneously rather than preferring only one of the methods to penetrate into a
national market, it is not easy to discover all facets of these interlinkages and their implications onboth home and host country economies.
II. EVOLUTION OF FDI REGIME IN TURKEY
During the period from the early 1960s to the mid-1970s, the Turkish economy recorded high
growth rates.  This was achieved by an almost unin terrupted investment drive, in line with an inward-
looking import-substituting strategy formulated through five-year development plans and annual
programmes.  These policies were justified on the grounds that the two-gap model was relevant
because of the insufficiency of domestic savings and foreign exchange and their adverse affects oninvestments and growth.
The investment drive was financed partly by an increase in domestic, especially private
savings, and partly by remittances of the migrant Turkish workers in the Western European countries.
When the inward-looking industrialization process faced bottlenecks, these policies came under
scrutiny in the mid-1970s.  The import-substitution strategy had created a highly protected industry.It was heavily dependent on imports of raw materials, intermediate goods and equipment.  The
petroleum shock  of 1973-1974 increased the petroleum import bill sharply.  On the other hand, the
upward trend in remittances was reversed.  The rising current account deficits were financed by
recourse to foreign exchange reserves and to a great extent by short-term borrowing.WT/WGTI/W/37
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In the 1960s and the 1970s, foreign trade and foreign capital movements as well as the market
for financial assets and agricultural and other commodities were subject, to a considerable extent, to
government intervention.  The fixed exchange rate regime ruled throughout the period together with
import restrictions, import licenses, rules for the allocation of import quotas and multiple exchange
rates for different types of exports.
All economic sectors were open to FDI since the mid-1950s;  but, in practice, there were
legislative and administrative restrictions such as controls over transferability of profits.  Such
restrictions, together with economic and political turbulence in the late 1970s, did not make Turkey
very attractive for foreign investors.
January 1980 witnessed a series of far-reaching changes and measures.  A stabilization and
liberalization programme was adopted.  It was an outward-looking market-oriented approach aimed at
the liberalization of the economy.
Since the early 1980s, the promotion of foreign direct and equity investment has been
increasingly recognized as an important policy ob jective.  It has been recognized that foreign
investment can strengthen the balance of payments position;  it can augment opportunities for
employment;  and it can serve as an important channel for transfer of technology.
The main characteristics of the 1980 economic stabilization and liberalization programme
regarding FDI were as follows:
- Build-Operate-Transfer (BOT) Model was introduced in order to meet investment
needs of the economy.
- Foreign Capital Encouragement Law was amended mainly to prepare a more liberal
legal environment for foreign capital.
- Incentives, which are usually in the form of tax exemptions to encourage export and
exchange earnings were put into effect equally for domestic and foreign investors.
Turkey no longer had discriminative policies against foreign investors.
- Two new important elements were thus included in the FDI policy of Turkey in the
post-1980s:
- impact of outward-oriented industrialization policy;- enlarged scope of national treatment principle providing foreign investors
with general investment incentives.
III. LEGAL FRAMEWORK OF FDI IN TURKEY
A. National
Turkey's basic legal framework for foreign investment is law No. 6224 of 1954 concerning
the Encouragement of Foreign Capital.  It aims to stimulate and safeguard domestic and foreign
investment in order to promote growth and de velopment.  The legislation governing foreign
investment in Turkey was further revised in July and August 1995 respectively.WT/WGTI/W/37
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The main principles of the current FDI legislation in Turkey are the following:
- Non-discrimination/national treatment:
- same rights and obligations for foreign and national investors;
- no limitation in access to the sectors of the economy.
- No limitation in equity participation ratios.
- Free transfer of profits, fees, royalties and repatriation of capital.
B. International
Multilateral arrangements
Turkey is a signatory of the "OECD Code of  Liberalization of Capital Movements".  The
signatory countries agree not to place any restrictions on the inflow of foreign capital within the
framework of the cited Code.
Turkey is also one of the parties in the "OECD National Treatment Instrument" according to
which, foreign and national investors operating in the country are required to be treated equally.
Turkey is a party to the "Convention on the Settlement of Investment Disputes between States
and Nationals of Other States" (ICSID Conv ention) under the aegis of the World Bank.
Turkey signed the United Nations Convention on the recognition and enforcement of foreign
arbitral awards (New York Convention).
Turkey is participating in the negotiations on a Multilateral Agreement on Investment (MAI)
under the aegis of OECD.
Bilateral agreements
Turkey concluded 29 bilateral investment agreements.  They are currently in force.
Negotiations or ratification procedures continue for 32 others.
IV. REFLECTIONS OF LIBERALIZATION MEASURES ON FDI FIGURES
Liberalization measures taken since the beginning of the last decade have generated
increasing amounts of FDI inflows.  While, in the 1970s, net FDI inflows averaged about
US$52 million per annum, the average in the 1980s was about US$243 million and it has reached
US$988 million in the 1990s.
The highest share in the value of the stock of authorized foreign investment belongs to the EU
countries, which is 61 per cent.  The other OECD countries namely, the United States, Switzerland,
Canada and Japan have a share of 25 per cent.
The bulk (56 per cent) of the foreign investment  stock in Turkey is concentrated in the
manufacturing sector.  The services sector's share is 41 per cent in the total stock of authorized foreign
investment.  The share of agro-industry and mining is only three per cent.WT/WGTI/W/37
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Although substantial progress has been achieved since the last two decades thanks to the
liberalization measures, they are still not commensu rate with the potentials of the Turkish economy.
In addition to the liberal environment that is now available for FDI,
- abundance of skilled labour,
- relatively low wages,
- rapid growth of domestic demand, and- geographical proximity to the western markets and to Central Asia and the Middle
East,
make the Turkish market even more attractive for FDI for the immediate future.
V. TRADE AND FDI
The existing data concerning the foreign affiliates trade (FAT) for Turkey is not
comprehensive and detailed.  The limited statistical information may not reflect the actual
contribution of FDI to the Turkish economy.  Due to the limited scope and range of indicators they donot constitute a good basis to discuss the linkag es between trade and the FDI inflows for Turkey.
However, the available statistics give some idea on the role of the FDI in national economy.
The annual survey of the Largest 500 (L500) firms in 1996, conducted by the Istanbul
Chamber of Industry is a useful source in this respect.
Among the L500 firms, which are ranked according to the amount of their annual sales,
114 firms are foreign capital firms.  Of the total amount of annual sales of the L500, 23.4 per cent
belongs to foreign capital firms.  The percentage of the foreign capital firms within the value-added
generated by the L500 stands at 21.2 per cent.
The exports of L500 constituted 13.3 per cent of total Turkish exports in 1996 of which
foreign capital firms' share accounted for 30.2 per cent.  This is an indication that foreign capital firmsin Turkey are also export-oriented.
Foreign capital firms' share in the creation of employment in the economy stood at a ratio of
16.7 per cent.
VI. CONCLUDING REMARKS
The above considerations provide valid reasons for a closer look at the nature of the linkages
between FDI and trade.  In a world economy where independent formulation of FDI and trade policies
have now become obsolete (as the results of two sets of separate policies may not always fully support
one another) a better understanding of the relationship between trade and FDI can contribute to the
formulation of national policies in these mutually supportive areas.
Turkey, on its part, initiated studies to establish a comprehensive database in this field.
However, experts are still dealing with methodological  problems.  Thus, at the moment, an analysis of
linkages between trade and FDI flows in the case of Turkey will be an insufficient one and such an
analysis  will be based on observations rather than empirical data.WT/WGTI/W/37
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Turkey believes that further discussions at this platform on the issue of the relationship
between trade and FDI with all it s facets, and ongoing studies of both the WTO Secretariat and other
international institutions, will be functional in designing economic policies which will make a
maximum contribution to the development of national economies in the years to come.
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