2024: Doing Business In Turkey

Doing Business in Turkey

1. What is the current business climate in your jurisdiction including major political, economic and/or legal activities on the horizon in your country that could have a big impact on businesses?

The world is going through a very volatile period these days, and Turkey is located right in the middle of everything. As we write these lines, there are two active wars in Turkey's very close vicinity. To the north, the war between Russia and Ukraine has settled into an unfortunate slow burn, with constant fighting but little to no material changes in position. To the south, the conflict between Hamas and Israel creates precarious circumstances that may spread to the broader region with the slightest spark.

These wars are likely to disrupt long-established patterns of business and give rise to new opportunities. Turkey has elected to remain noncommittal in the war between Russia and Ukraine, and thereby found itself as one of Russia's main outlets to the world, given the ever-tightening sanctions imposed on Russia by the West. The developing war in the Middle East may also lead to such dramatic changes, though as yet it is uncertain where Turkey may end up in a similarly polarized world.

Internally, Turkey is now facing a more stable outlook, politically speaking. The elections of 2023 were the most serious challenge to date against President Erdoğan's rule, but he prevailed in the end and secured himself another five years at the helm. The municipal elections coming up in 2024 will be another significant test against his rule—municipal elections are a bellwether for national politics in Turkey, and strong national candidates establish themselves through strong performances at the municipal level, much like Erdoğan himself did when he was the Mayor of Istanbul in the late 1990s. Even though presidential politics have calmed for the time being, there is always another election to look forward to.

That all may sound like bad news, but to an optimistic reader, uncertainty can also signal opportunity. Turkey has the potential to turn any volatile predicament into an opportunity, given its strategic geographic location, young and well-educated population, relatively cheap labor, and favorable exchange rates. That is an inviting combination for foreign investors who are looking to expand into new jurisdictions.

And it looks like Turkey is now doing its part to tame the volatility of its circumstances. Turkey has been roundly criticized in the recent past for its unorthodox macroeconomic policies, insistently lowering interest rates in the face of rising inflation. Turkey, in fact, remained committed to that policy for a long while leading up to the presidential elections but abruptly reversed course after the spring of 2023. There is now a trend towards interest rate normalization, and forecasters expect this to bolster confidence in the economy and to stabilize the currency. That should lead to steady economic growth in the medium to long term.

2. From what countries do you see the most inbound investment? What about outbound?

According to data provided by the International Investors Association, inbound investment from the EU has made up the overwhelming majority of Turkey's inbound capital investment, both in the recent months (69% in 2023 through August) and over the course of the past twenty years (59% between 2002 and 2022). Dutch-registered entities have traditionally led the European investors, making up 16% of the FDI flowing into Turkey, but 2023 has been a bit of an anomaly, at least through August, in that Germany alone has staked a claim to 26% of the inbound capital. The share of East Asian investment into Turkey has also been on the rise recently, with Japan's share in the foreign direct investment received by Turkey reached 6% in the first eight months of 2023. This trend has also been acknowledged by the Presidency of the Republic of Turkey's Investment Office in its recent publications.

Turkey's outbound investment largely tracks its inbound investment, with EU countries drawing 42% of Turkey's outbound investment in the first eight months of 2023. In terms of individual countries, the United States has drawn 25% of Turkey's outbound investment, with the Netherlands coming in second at 20%, followed by the United Kingdom at 10% and the United Arab Emirates at 8%.

In our firm, we have experienced a number of shifts in our foreign clientele since 2018, including an increased number of foreign clients jumping from 38% of our total revenue in 2018 to 58% in 2020. This falls in line with the national trend of increased activity from foreign investors and the spike in market activity. Alongside the slow but steady increased interest in Turkey from Asian markets, the percentage of our foreign revenue from both China and Japan has increased over the last three years. Additionally, as suggested by Italy rising to the top of foreign investors interested in Turkey, our percentage of foreign revenue generated from Italian clients has also seen a slight rise. Other notable foreign clients that our firm conducts significant work with include the United States, France, Germany, the Netherlands, the United Kingdom, Switzerland, and Finland.

In terms of outbound investments, Turkey is historically a country that has focused on inbound investments. However, as the country has continued to grow, many Turkish investors began expanding their investments abroad, which at times included the relocation of a majority of a company's investments abroad by some of the leading holding entities in Turkey.

Our firm has played a significant role in helping Turkish investors active in the construction and mining sectors expand their business, create subsidiaries abroad, and invest in infrastructure projects throughout regions such as North Africa and the Central Asian Republics. Most recently, our firm has been helping a major Turkish logistics company with their investments in Uzbekistan.

3. In what industries/sectors are you seeing the most opportunity for foreign investment?

A significant portion of the capital flowing into Turkey has gone toward real estate acquisition (42% in 2023, from January through August). As for investment capital, the leading industries attracting foreign investment have been renewable energy, automotive, retail, technology, and construction.

There are a number of areas where we see opportunity for foreign investment, including areas where Turkey has always been an active market such as infrastructure investments, as well as relatively new areas such as technology, gaming, and e-commerce where Turkish start-ups have made global headlines for acquisitions made by global leaders in the sector.

Through the 2010s, Turkey experienced a massive jump in terms of infrastructure investments, and a substantial part of this financing was raised by foreign lending institutions. There have been a total of 18 airports, 20 hospitals, and 41 highways built over the past two decades utilizing private party funding, particularly through the Public Private Partnership method. Although investments are expected to slow down in the next few years, there are still a number of infrastructure projects lined up for tendering where development and financing by private parties is expected.

In terms of infrastructure investments, Turkey has also recently passed legislation as a testament to its intention to create a financing environment in line with the needs of the infrastructure sector. Accordingly, new legislation on project bonds was issued by the Capital Markets Board to allow access to less traditional financing methods to back up infrastructure projects in line with worldwide trends. There have also been steps to introduce a proper legal framework to govern the already popular crowdfunding transactions with a revision of the Capital Markets Law in 2020 which explicitly recognizes this form of financing. The Capital Markets Board issued a communique that sets the details to govern crowdfunding transactions in October 2021.

4. What advantages and pitfalls should others know about doing business in your country?

Some of the advantages for foreign investors doing business in Turkey include the investor-friendly investment environment. Specifically, there are a very limited number of sectors in which foreign investment restrictions exist. Turkey also has a very investor-friendly take on arbitration and enforcement lawsuits as the Turkish courts have significant experience with enforcing foreign awards in Turkey that has been ongoing for decades. The low value of the Turkish Lira and the affordable labor in the country are also factors that may be appealing to foreign investors.

When it comes to pitfalls, a challenge that sometimes perplexes foreign investors is that because of the dynamic legislative environment, the practice on the ground may sometimes evolve in a different way than what the legislative design may suggest in the abstract, and businesses may need to adapt to a slightly different way of doing business than they see in the books.

5. What is one cultural fact or custom about your country that others should know when doing business there?

Although the idea of corporate governance no longer represents a set of guiding principles or simply an aspiration but a strict set of rules to follow, personal connection is still an important part of doing business in Turkey. In addition to many publicly held entities, there are many family run companies which hold a leading position in many key sectors.

Turkish business people attribute a great level of importance to personal connections with their business partners and building personal trust in addition to the legal trust achieved through contracts. Unlike in many other cultures, personal questions such as questions directly relating to family or children in Turkey are usually seen as a reflection of genuine interest and are often welcomed.

Sources

Originally published 27 March, 2024

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.

2024: Doing Business In Turkey

Contributor

Doing Business in Turkey

Sources

International Law

Contributor

Turkey