Competition, Enterprise and Industry in Turkey

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The Republic of Turkey is a Eurasian country which has become highly integrated with the West. After the fall of the Ottoman Empire, Mustafa Kemal Ataterk’s leadership triggered a very rapid modernization which resulted in the present status of Turkey, and today Turkey is considered to be a developed country with growing economy.

Since the start of Turkey’s EU accession negotiations, it has gone through a number of structural changes (privatization is one of them), and has stepped on the way of a strong and stable growth. In 2005 – after years of low level foreign investment- Turkey managed to attract foreign direct investment worth 8.5 billion USD. Today, Turkey is actually one of the fastest growing economies in the World.

Turkey has long been attempting to join the European Union. After signing the Association Agreement in 1963, finally the Helsinki European Council pronounced Turkey as a candidate country in 1999 and the Accession Negotiations started in 2005. There has also been a customs union between Turkey and the EU since 1995.

The European Union is mostly welcoming towards the country, however, as any other Member State before being able to join the European Union, Turkey is also required to fulfill strict criteria.

In the following pages, I would like to describe the improvement Turkey has achieved in the fields of competition, entrepreneurship and industry.

Background to carry out trading with the European Union

Market Forces

First of all, the most important factor to analyze from the European Union’s point of view is connected to market forces. Ideally, demand and supply should determine all market movements, however, in Turkey, this is not exactly the case.

In theory, the government of Turkey has declared its independence from regulatory agencies, but in practice, there are still some areas where prices are set. A good example to demonstrate this is the fact that the government did not allow global changes affect the prices and consumption level of energy in Turkey before the Parliamentary elections last year. Energy prices are frozen in Turkey, despite of significant increases in global prices. Price liberalization is always desired in the European Union and of course in other well- developed countries.

Another issue connected to market forces is the question of privatization. The process of privatization reached its peak in 2006 in Turkey, when as many as 87 privatization deals were carried out. After 2006, the process somehow slowed down, but has not reached an end yet. There have been two major companies privatized last year, and these two companies were Halkbank (through initial public offering) and Petkim (petrochemicals). Tender processes have already started for electricity distribution assets, but privatization has been postponed by the government. Air transport, energy and banking sectors are still waiting to be privatized. To sum up, Turkey has some considerable work to do in this area.

Market Entry and Exit

Entering the market in Turkey with a new business is actually quite easy. It only takes an average of 9 days to open a business, and it is one of the shortest periods of registration in the world. Even though registration fees are high, more than 700 euros, there are still an average of 100.000 new businesses opened every year in the Republic of Turkey. This data is impressive, but on the other hand, market exit is not very easy in this country. A business to be closed takes a long time and is very expensive as well. Insolvency procedures take about 6 years.

It is important to state that most of the legal framework of market economy do exist in Turkey, but there is still some improvement to be done considering the removal of market exit barriers.

Legal System

Turkey has established all the necessary laws and regulations needed to trade with the European Union and also to become a Member State. However, the country has major problems with implementing laws and contracts, and implementation also takes a relatively long time. Furthermore, the legal system and insufficiencies regarding the training of lawyers and judicial personnel often makes it difficult for foreign investors to operate in Turkey.

To be fair, we have to mention the fact that there has actually been a major progress in modernizing the legislation of business. Even though most of these reforms were triggered by Turkey’s attempt to accede to the EU, they are still considered to be significant and if the country stays on this right way, these attempts will surely make the area more and more attractive in the eyes of foreign investors.

EU- prospects for Turkey

Existence of capital

Since 2005, capital flows in Turkey have become stronger and more rapidly growing. In 2006 private gross fixed capital formation grew by more than 30% and private capital formation was about 17% of the nominal GDP that year. About 85% of this was investment in equities and 14% were real estate purchases. Most of the equity investments were in financial services, communication, retail and wholesale trade and chemicals, decreasing respectively.

Turkey is supposed to invest more capital in the sectors of infrastructure and energy. Because of missing sources, there has not been any major investment in infrastructure for years. On the other hand, constantly growing energy consumption and no improvement in energy providing facilities also creates some considerable problems. (Notice: I have experienced this situation personally several times- electricity goes off every day at the most unexpected times.)

State influences on competitiveness

Unfortunately we have to state that in the past few years, Turkey has been undermining its own competitiveness. The reasons are very simple and could be solved by making some plans of eliminating these situations. Competitiveness of the economy is affected by the absence of supportive policies and a transparent monitoring of state aid. On the other hand, Competition Authority plays a major role in the business life of Turkey, and it is generally appreciated by market participants. Privatization process keeps on strengthening the power of the office.

Although the new legislation has not been fully established yet, accounting standards were upgraded and transparency in the corporate sector developed too.

Trade with the EU

The European Union is still the largest trading partner of Turkey, although its importance declined during the past years. Exports destined to the EU decreased by 0.7% from 2006 to 2007 and imports from the EU declined by 1.2%- the reason for this phenomenon is very simple: because of the growing consumption of energy Turkey had to import more and more energy than before- imported exclusively from non- EU countries.

In 2006, the per capita income in Turkey only reached 30% of the EU member states of 2007.

Relevant Policies

Competition Policy

The most important policy regarding competition is the anti- trust policy, which is implemented in all developed and developing countries.

In Turkey, it is the duty of the Competition Authority to supervise the area of anti- trust. The authority established some important rules regarding this question. The method of calculating market shares was defined, which is a very important step because right now in Turkey any companies over 40% market share may not benefit from the exemption placed on vertical agreements.

The importance of the Competition Authority can easily described by numbers and numerical data. In 2006, the authority had to deal with 108 cases of anti- competitive behavior, 186 merger and acquisition cases and 33 cases of negative clearances. The CA finally imposed a total of 26.9 million YTL fines. In the first half of 2007, the CA decided upon 92 merger notifications and 75 anticompetitive behavior issues.

Turkey has also recently adopted the guideline for regulatory impact analysis. This placed an obligation on all public authorities to analyze any laws and regulations that would have an impact on competition. Horizontal cooperation agreements do not have any framework regarding analysis.

Enterprise and Industrial Policy

In the recent years, Turkey made considerable efforts regarding the enterprise and industrial policy principles. The high number of documents they have prepared is already consistent to the EU enterprise and industrial policy.

The most important body of this issue is called the Investment Support and Promotion Agency and according to the relevant numbers, they have been doing a good job so far. Foreign direct inflows to Turkey increased by 105%, reaching 15.2 billion euros in 2006 and 8.8 billion euros in the first half of 2007.

Although the numbers do show a good picture, some considerable work is still required. The most problematic area is the potential for unfair treatment of minority shareholders.

Turkey has definitely made some progress recently if we consider the enterprise and industrial policy instruments. KOSGEB (Public administration for the development and support of small and medium- sized enterprises) adopted some new budget regulations. The public management and control law had already stated some principles, with which the regulation brought the budget of KOSGEB in line. Turkey also intends to participate in the new Competitiveness and Innovation Programme.

Sector policies also show some advanced progress. The tourism strategy action plan was accepted for the period of 2007- 2013 by the High Planning Council.

Conclusion- future actions should be done

Although Turkey did improve their investment environment by adopting some legal changes, there is still more considerable work to be done in order to be able to reach their desired objective: to accede to the European Union.

First of all, a clear strategy needs to be introduced. The objectives of this strategy have to be sustaining political and economical stability, simplifying the currently complicated tax system, providing a stable and non- discriminatory environment, fostering privatization and fighting against corruption.

Secondly, they have to restructure the Improvement of the Investment Environment Coordination Council. Reorganizing this organ will provide the state with higher chances of attracting foreign investments and improving investment conditions, which is ultimately their goal after all.

Lastly, they have to perform constant investment promotions. It is the Investment Promotion Agency through which Turkey has to explain its attractiveness to foreign investors.

If Turkey follows these three major steps, in some years time it will definitely get closer to its main objective: to be a Member State in the European Union.

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