Turkey: The Impact Of Competition Law On Foreign Direct Investments

Last Updated: 10 October 2007
Article by Arif Esin

The liberalization trend inclined by the globalization process has necessitated the worldwide harmonization of two major dynamics: Intellectual and Industrial Property Rights and Competition Law.

As a result of the Uruguay Round, the developed countries accepted to diminish gradually the customs duties vis-à-vis the developing countries. In return, the developing countries undertook to put into effect intellectual and industrial property rights and competition law for the purpose of sustaining a liberal market economy.

In the beginning of 2000s, the customs duties for industrial products are determined to be completely eliminated and unfair competition practices are to be precluded through national competition rules in domestic markets and through anti-dumping and anti-subsidy regulations concerning unfair competition in importation in foreign markets.

Turkey has rapidly and successfully harmonized its regulations concerning intellectual property rights and unfair competition in importation. The same success was also in the retarded harmonization of the competition law.

The application of intellectual property rights and the introduction of competition law in Turkey, are the results of international obligations regarding WTO Agreement and Customs Union Decision.

In fact, the articles 32, 33 and 41 of the Decision of the Association Council No. 1/95 of 6 March 1995 provide competition rules to be applied for the proper functioning of the Customs Union. These articles are actually identical with the articles 85, 86 and 90 of the Treaty.

Furthermore, Turkey has accepted the effectiveness of the case-law constituted by the Institutions of the EC pursuant to the article 39(2)(a) of the Decision of the Association Council No. 1/95. Thus the cases of EC Court of Justice have been adopted to the national legislation.

In addition, Turkey has been obliged to adopt the new arrangements of EC concerning the competition rules to its legislation within one year.

Accordingly, Turkey put into effect the Act on the Protection of Competition No. 4054 as of December 7, 1994. However, the appointment of the Members of the Competition Authority have been realized on March 5th, 1997 and the Competition Authority started functioning on the date of March 7, 1997.

The Competition Authority has administrative and financial independence. In other words, no any political and administrative organ, body, or person can order or give directives to affect the final decisions of the Authority. Thus, the Authority is independent in carrying out its tasks.

The Competition Authority, by a rapid structuring, has established the Competition Board, employed experts and published three Regulations and four Notifications. The Competition Authority is completing its arrangements in order to commence functioning actively in November, 1997.

The Act on the Protection of Competition No. 4054 prohibits the agreements, decisions and concerned practices between undertakings which have as their object or effect the prevention, restriction or distortion of competition, the abuse of dominant position and the unlawful mergers and acquisitions.

The Act on the Protection of Competition No. 4054 includes three fundamental prohibitions:

The first fundamental prohibition; is the agreements, decisions and concerted practices of the undertakings, which cause the prevention, distortion or restriction of competition. Such practices and decisions are in particular:

  • Fixing purchase or selling prices or forming the trading conditions concerning purchase and sales;
  • Sharing the markets or sharing and controlling the sources and elements of the markets;
  • Control the quantities of supply or demand;
  • Preventing the new competitors in the market or impeding the activities of the already existing competitors;
  • Applying dissimilar conditions to equivalent transactions with other trading parties;
  • Maintaining purchase or resale conditions.

The second fundamental prohibition, is the abuse of dominant position in the whole market for goods and services or in a substantial part of it.

Such abuses may, in particular, consist of:

  • Preventing the new competitors in the market or impeding the activities of already existing competitors;
  • Applying dissimilar conditions to equivalent transactions with other trading parties;
  • Maintaining purchase or resale conditions;
  • Distorting competition in a market by means of taking financial, technological and commercial advantages of dominant position in another market;
  • Restriction of production, marketing or technical development.

The third fundamental prohibition, is the mergers and acquisitions, which would create or strengthen the dominant position of one or more undertakings in the market or in a substantial part of it.

The primary fact at this point is; the requirement of notifying the mergers and acquisitions to the Competition Authority where the combined market share of the undertakings concerned exceeds 25% or where their combined aggregate turnover is more than 10 billion TL.

This kind of mergers and acquisitions are prohibited to the extent they restrict competition and create dominant position. In addition, the mergers and acquisitions realized after the effectiveness of the Act are to be notified to the Competition Authority.

In spite of these fundamental prohibitions, the Act on the Protection of Competition No. 4054 provides exemption to certain categories of agreements, decisions and concerted practices having the effect of restricting competition in the form of:

  • block exemptions;
  • individual exemptions;
  • exemption via negative clearance provided that it aims to contribute to promoting technical or economic progress in the production or distribution of goods or providing services and allow consumers a fair share of the resulting benefits. But this does not bring any prejudice to the right of withdrawal of exemption or negative clearance.

On the other hand, the Act provides no exemption for the prohibition regarding the abuse of dominant position.

The categories of agreements and practices under the scope of block exemptions are related to:

  • exclusive distribution (Notification No: 1997/3);
  • exclusive purchasing (Notification No: 1997/4);
  • technology transfer;
  • selective distribution for motor vehicles;
  • specialization;
  • research and development;
  • franchising;
  • maritime transport services;
  • air services;
  • insurance sector.

The agreements including provisions which do not exceed the limits prescribed by the Block Exemption Notifications shall be exempted from the application of prohibitions within the meaning of Article 4 of the Act.

On the other hand, for the agreements including provisions restricting competition which exceed beyond the limits prescribed by the Block Exemption Notifications, individual exemption or negative clearance may be requested, if the agreement has or will have the effect of engendering economic and technological improvement in production/distribution for the benefit of the consumers.

However, it is not possible to request individual exemption or negative clearance for the prohibition concerning the abuse of dominant position.

Consequently, the OECD studies demonstrate that the economies, which conform to the conditions mentioned so far and which are refined from imperfect competition, register a 15% rate of GDP growth.

As to the impact of the Competition Law on foreign direct investments in Turkey, the FDI will be affected to the same level as the Turkish undertakings, since our legislation does not permit any national discrimination. In other words, according to the Act on the Protection of Competition, every undertaking is subject to same treatment.

On the other hand, when the economic effects of the FDI with regard to competition rules are evaluated, it can be concluded that there are two different types of foreign direct investments in Turkey.

I classify them as good and bad natured foreign direct investments.

The reason for the entrance of foreign direct investment to the Turkish market, which arrived before the transition period of export-led liberal economy system and in the period when import substitution policy was in effect, is evident: engaging in production with low technology oriented to domestic market which is protected by customs borders and in which protection of human rights is inadequate.

Correspondingly, most of the foreign firms have objected the idea of elimination or reduction of some customs duties during the negotiations of the Customs Union as some of the Turkish firms. The firms, who hold this approach, are today uncomfortable with the functioning of the Competition Law.

Nevertheless, there also exists good natured foreign firms in Turkey which have expanded extensively in the market. This party operates by relying on the quality standards in production, produces goods oriented both to exportation and domestic market and extends the scope of Turkish industry to international competition.

As a matter of fact, this party has supported Turkey's prospective objectives during the Customs Union negotiation. Hence, they played a significant role in the result of the negotiations. Accordingly, today they support and wait for the proper functioning of the Competition Law.

From the media, we may detect the applications of some of the foreign firms distorting competition as some of the domestic firms. There exists firms which employ certain actions incompatible with law concerning market sharing, boycotts for provision of goods or services, etc. The other foreign firms are also discomforted by these illegitimate applications.

More significantly, if necessary measures for these unfair applications are not taken, new foreign direct investments in Turkey will be prevented. Just as black money shoots good money, unfair competition excludes fair competition from the market.

Fortunately, it is clear that the Competition Authority is powerful and assured to eliminate unfair competition applications from the market.

From now on, Competition Law and Competition Authority is the guaranty for the execution of liberal market economy.

Today, the foreign investments favor entering the markets where parliamentary democracy and liberal market economy are in force. And, these firms plan long-term investments in these countries. If long-term foreign direct investments are to be encouraged, both domestic and foreign firms shall accept the superiority of Competition Law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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