Is It Possible to Attract FDI in Turkey’s Less Developed Regions?

Nowadays, most countries have created agencies to promote their regions and attract Foreign Direct Investment (FDI). Leaving aside the issue of whether FDI is good or bad for economies, it is clear that FDI is one of the key elements in the globalization process, contributing importantly to international economic integration.

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By Arzu Karaarslan /Mardin
Dağ Medya Economy Writer
https://twitter.com/ArzuKaraarslan

In this article I will examine the FDI inflows to the TRC3 Region, one of the less developed regions in Turkey.  My purpose will be to highlight which factors contribute to it attracting far less FDI compared to other Turkish regions, and to examine what is being done in TRC3 and other poor regions to catch up with the rest of Turkey.   The article answers the question: What can be done in these laggards to attract more FDI?

Economists usually split the factors which affect FDI inflows into two categories: global push factors and country- specific pull factors. The country-specific pull factors are grouped under three  main categories: 1) Economic Fundamentals such as GDP growth, inflation; 2) Ease of Doing Business such as costs of starting a business, accounting and disclosure requirements, costs of terrorism and crime, tax burden, legal infrastructure,  restrictions on international capital flows, restrictions on international trade, quality and structure of labor force; and finally 3) Infrastructure including financial and physical infrastructure. Global push factors also could be listed as; 1) Growth in Capital Exporting Countries, 2) International Liquidity and 3) Risk Environment.

Global push factors, specifically in the form of greater international liquidity, is an important source of the large increase in the amount of FDI to Turkey. FDI inflows increased by a factor of four over the last ten years. FDI inflows, which were 3.4 Million $ in 2001,  increased to 12.4 Million $ in 2012.  This large increase has not been distributed evenly across Turkish Regions. Figure 1 shows the distribution of FDI inflows across Turkish regions. As can be seen, there are huge disparities among regions in the amount of FDI inflows. Istanbul is the region that receives most of this inflow, representing 44% of the total. In contrast, the TRC3 Region received less than 1%.

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Unequal FDI across Turkish regions is not a consequence of promotion policies. Instead, it is the result of differences in geography, demography, market size, institutional capacity and infrastructure. Geography, location and infrastructure importantly influence the cost of transporting goods into and out of a location. Mountainous regions with few roads and bridges tend to be poorer and characterized by low tech traditional industries due to the high cost of moving goods and services. Political instability at the regional level as well as security is another key factor that affects economic development including FDI flows. Other factors that contribute to FDI attraction are skills and education of workers.  Often, the skills of workers are not those needed by potential entrepreneurs.  Additionally, differences in institutions particularly as they affect the amount of bureaucratic red tape to start up a business have been found to be critical in understanding differences.

So what ails TRC3?  Why is the amount of FDI in it so far below the national average? TRC3 is one of Turkey’s youngest regions with 65 percent of its population being less than 25 years in age.  In terms of location, TRC3 has the advantage of bordering both Iraq and Syria.  For this reason, its volume of international trade is quiet large.  However, this advantage is more than offset by its lack of human and physical capital.  TRC3 ranks poorly compared to other regions in both human capital and physical capital measures.  According to the Socio- Economic Development Index computed by the Ministry of Development, Batman is ranked 70th, Mardin 74th, Siirt 77th, Şırnak 78th out of 81 cities in the 2011 report. The Socio- Economic Development Index contains 61 indicators that cover demography, education, health, employment, competition, innovative capacity, financial capacity, life quality, and accessibility.

Even though the conditions are not competitive enough there are things that can be done to attract FDI in the poor regions. Poor regions usually have an inherent advantage in being less developed in that labor costs tend to be lower there, attracting labor intensive industries to be set up production facilities. However, for this to happen a secure environment with a politically stable government that provides the necessary physical infrastructure and education system and that does not impose unjustified constrains on entrepreneurs is what is needed at the regional level in Turkey. This is the challenge for the TCR3 region and other poor regions in the country.

 

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