Turkey eyes more FDI from Japan with Economic Cooperation Agreement
by Onur Kanan
ISTANBULMar 28, 2015 - 12:00 am GMT+3
by Onur Kanan
Mar 28, 2015 12:00 am
Bilateral economic relations between Japan and Turkey have been developing recently, especially in terms of investments, Daily Sabah spoke to the FDI hunter to get most detailed information
The President of the Investment Support and Promotion Agency of Turkey (ISPAT) İlker Aycı was Daily Sabah's guest this week and we discussed the recent developments between Turkey and Japan regarding foreign direct investments.n Daily Sabah: Turkeymanaged to attract the attention of investors from the Far East with its young and dynamic population along with its geopolitical position. What do you think about investments coming from the Far East, especially from Japan?
Turkey is an investment center that managed to attract the attention of not only European investors, but also the emerging Gulf countries, Far East and Southeast Asian countries with its strong economic structure and potential as well as its young and dynamic population and geostrategic location.
Some of the most remarkable countries here include Japan, Singapore, South Korea, Kuwait and Russia. However, we would like to mention Japan in particular. Japan is an exporter of high value-added and technology-intensive products and has a serious surplus in its current account. The country is a net foreign direct investment (FDI) exporter with an annual average of over $100 billion.
Unfortunately, Turkey's share in Japanese FDI is below expectations. While we are making efforts to enlarge Turkey's share of FDI coming from Japan, we are also doing our best to attract high-value-added investments that will enable the transfer of technology to Turkey. However, the institutions of the two countries remain working in order to double the level of bilateral trade volume, which is about $4 billion, and also to increase cooperation between Turkey and Japan.
DS: In 2013, Turkey attracted $483 million of FDI from Japan. After the memorandum of understanding was signed between the Prime Ministry Investment Support and Promotion Agency of Turkey (ISPAT) and the Japan External Trade Organization (JETRO) in January 2014 for the promotion of FDI to Turkey from Japan, what kind of changes took place in investment volumes? Also, what kind of incentives and studies does ISPAT offer to Japan in order to increase investment volumes?
İA: FDI to Turkey from Japan has totaled $1.3 billion in the last five years. However, as I mentioned earlier, Japan is a net exporter of FDI and we have long-standing relationships with Japan. During our president's official visit in Japan in 2014 within the framework of the 90th anniversary of Turkey-Japan diplomatic relations, a memorandum of understanding was signed between ISPAT and JETRO. We hope that there will be an increase in the FDI of Japan to Turkey in the coming period as a result of this memorandum of understanding.
In addition, our agency continues its promotional activities in Japan continuously. The most recent example to these activities is the 14th seminar held in the last three years, which was realized by our agency and the Bank of Tokyo Mitsubishi in close cooperation. Our investment environment and opportunities are well-described in this seminar. The seminar was held in Tokyo on Feb. 27 with the participation of Finance Minister Mehmet Şimşek where he addressed the more than 300 investors at the seminar.
We also held nearly 10 investment seminars in Japan in 2014. In addition to these seminars, business trips are organized to Turkey to introduce the investment opportunities. Also, the promotional activities that are realized in Turkey for Japanese investors and reception of the Japanese delegation are ongoing. In this context, a business trip with the participation of officials from 15 Japanese companies was held for the second time in October 2014 jointly by our agency and JETRO. During the trip, companies in organized industrial zones and free trade zones in Istanbul, İzmir and Manisa were visited.
DS: What are the Turkish sectors that Japanese investors are mostly interested in?
Japanese investors are mostly interested in the automotive, automotive supply, chemicals, petro-chemicals, food and beverage and tobacco products sectors.
DS: What are the details of the economic cooperation agreement (EPA) between Turkey and Japan?
The negotiations for the EPA between Turkey and Japan are ongoing. According to the updates from the Economy Ministry, the agreement will be an EPA that is more comprehensive than a free trade agreement (FTA).
Planning meetings have been made and it is decided that the agreement will cover all items including trade of goods and services and investments. The negotiations are planned to start in late 2015 and are expected to be finalized within two years.
DS: Let's talk about FDI in general. Is FDI to Turkey today high enough to meet the savings deficit? Are the expectations and the actual investments overlapping?
Before answering your question, I think it would be appropriate to examine the statistics regarding the development of Turkey's balance of payments and FDI in Turkey in the last 12 years and its changing structure, particularly after 2011. 2014 was a year both for Turkey's economy and the world economy in which the developments in terms of growth, employment and international trade volume were often been on the agenda.
The slowdown in domestic demand and decline in imports on the back of the contraction in oil prices as well as market and product diversification policies and the increase in exports arising from competitive exchange rates have altogether resulted in a significant reduction in our current account deficit in 2014, which fell to $ 45.8 billion. While there has been a significant improvement in our current account deficit compared to previous years, FDI in Turkey has been continuing steadily since 2011. The sum of net direct investments in Turkey for 2014 was $12.53 billion and had continued its increasing trend.
The largest portion of FDI was for industrial sectors in 2014. Here, the largest share also belongs to manufacturing and energy. When looking at the sources of FDI in Turkey in 2014, the Netherlands and the U.K. export more than $ 1billion of FDI to Turkey.
As we all know, Turkey is a developing country that does not have adequate domestic savings. For this reason, there is a current account deficit that should be financed and international credit rating agencies criticize Turkey mostly because of this. Although when considered together with its economic size and solid financial structure, Turkey's current account deficit is sustainable, hence the country wants to reduce the vulnerability here in the medium term. Turkey basically pursues two goals, to increase domestic savings and reduce the country's economy dependency on imports.
Although the sectorial distribution of FDI was more stable from 2011 to 2014 compared to 2002 to 2010, the diversification in FDI sources is continuing. While the largest exporter of FDI from 2002 to 2010 was the European region with 75 percent, this share in overall FDI decreased to 68 percent during 2011 to 2014. Especially the increase in investments coming from Asia and the Gulf countries is a main reason of this change.
As a result we can easily say that Turkey is making arrangements with the right strategy and interagency coordination to increase its domestic savings and also planning and implementing moves to reduce its current account deficit. However, areas of usage and the diversified resources of FDI will have critical importance for Turkey to reach the above-mentioned two important targets in the medium-term of increasing savings and reducing the current account deficit. At this point, we believe that the expectations and realizations of foreign direct investments overlap each other.
DS: What do you think about how FDI investors will be affected by the fluctuations in exchange rates?
We can say that unlike the investment portfolio, the pass-through effect of exchange rates and interest rates on FDI is much lower. There is certainly the overall effect of interest rate and exchange rate levels on physical investments and these factors affect the amount of FDI. However, more obvious factors in the decision-making process of FDI investors are the political and economic stability of the country, confidence in the legal system, geostrategic position, advantages provided to investors and much more. Depending on both the impression we have gained in our meetings with investors and also as mentioned in academic studies, the trust for the future of that country and positive expectations are prior factors for investors while making their direct investment decisions.
We can say that short-term changes such as fluctuations in exchange rates would not be influential on international investors' investment decisions and that Turkey will keep on attracting FDI in a stable manner as the country has a success story and is investor-friendly. Data from January 2015 also supports our view on this fact. The amount of FDI in January 2015 marked an increase of 43.6 percent compared to the same month of the previous year, surging to $1.8 billion. Capital investments increased by 80 percent and reached $1.5 billion, which is the most striking point here.
DS: To what extent is FDI coming from Europe and European companies operating in Turkey affected by the economic problems in Europe?
Even though Europe is experiencing various economic problems, we can say that Turkey will be one of the most popular investment destinations for European investors. We believe that the profitable operations of European companies in Turkey will strongly support their operations at their headquarters. Indeed, during the 2008 and 2009 global financial crisis, while many European-based banks were experiencing serious problems in their countries, their profitability in Turkey, which has a strong banking system, had supported their operations in their management centers. We can say that a similar situation will also occur in this period. And even the problem of failure to grow continues in Europe and in the global economy, we think that Turkey has made progress, will not encounter any problems in attracting FDI and FDI will continue coming to Turkey in a stable manner.