Over the past two decades, Turkey has benefitted from an economic model based on manufacturing and integration with global value chains. Now the upper-middle-income country of 84.3 million people is setting its sights on more knowledge-intensive activities.

Building on its diverse base of domestic and foreign companies – in sectors such as automotive, aviation, textiles and fast-moving consumer goods – the government is positioning Turkey as a technology, innovation and advanced production hub.

“Our priority is to focus on projects which are the first of their kind in Turkey and even the globe,” says Burak Dağlıoğlu, president of the Investment Office of the Presidency of the Republic of Turkey. 

The country’s latest foreign direct investment (FDI) strategy, published in June 2021, aims to boost employment, digital transformation and sustainability practices. Its main goal is to increase Turkey’s share of annual global FDI flows from about 1% today to 1.5% by 2023. Based on 2020 figures by Unctad, that would equate to $15bn in FDI inflows per year, almost twice as much as Turkey attracted in 2020. 

But even with a clear roadmap to attract higher value-added investment, including incentives tailored for research and development (R&D) and technology-intensive projects, investors are cautious.

Amid a challenging external environment and uncertain macroeconomic policy, experts say reforms focused on the knowledge economy are needed to ensure Turkey capitalises on its youthful population and long-term growth potential. 

Short-term jitters 

Recent macroeconomic instability has marred Turkey’s business and investment climate. A major concern among investors is the volatility of the Turkish lira. As of December 1, the lira had depreciated by more than 45% against the US-dollar, year-to-date, thus consolidating the currency’s downward spiral. Ten years ago, $1 would buy less than Tl1; today it buys about Tl13. 

“While a weaker currency gives an advantage to export-oriented companies, for import-driven industries, pricing and assessing the demand is not easy,” says Hakan Göl, a partner at Deloitte Consulting in Turkey.

For a country that historically tends to import more than it exports, inflation is a natural consequence of the lira’s depreciation. In October, consumer price inflation in Turkey reached 19.89%, up from 14.97% at the beginning of 2021, according to central bank figures. 

Even though the lira’s depreciation has created acquisition opportunities for foreign strategic investors, monetary conditions are creating difficulties for new investments and financing.

The central bank cut benchmark interest rates to 15% on November 19, the third rate cut in 2021, going against conventional economic thinking that monetary policy should be tightened to curb price rises.

Yusuf Varli, an associate economics professor at Ibn Haldun University in Turkey’s commercial capital Istanbul, says that this unorthodox policy is “intentional” as growth has been prioritised over price stability. 

This is reflected in official numbers. Turkey’s gross domestic product (GDP) rose by 21.7% in the second quarter of 2021, the fastest rate in more than two decades. In 2020, Turkey was among only two G20 economies to record GDP growth, according to OECD figures.

While Turkey’s short-term growth focus has come at the expense of macroeconomic stability, experts believe its favourable long-term fundamentals, including a relatively young and growing population, strategic location and vibrant manufacturing sector, position the country well for knowledge-intensive investment.

Turkey’s population has a median average age of 32.7, against an EU median age of 43.9, according to Turkstat and Eurostat. In particular, the country has 15.4% of its population aged between 15 and 24 years old, according to Turkstat. This is above the EU average of 10.6%.

“Like any fast-growing economy with a young population, if you iron out certain glitches, Turkey is extremely attractive for innovative-type activities,” says Roger Kelly, a regional economist covering Turkey at the European Bank of Reconstruction and Development.

R&D incentives

Despite Turkey’s dependence on imports of intermediate goods and hi-tech consumer products, executives are bullish on the country’s potential for innovation and R&D.

“Turkey offers a highly favourable business context for investments in hi-tech clusters,” says Fatih Kemal Ebiçlioğlu, the president of the consumer durable goods arm of Turkey’s largest industrial conglomerate Koç Holding. 

Generous tax incentives for R&D activities in Turkey’s 73 active technoparks, as well as grants for R&D projects from the Scientific and Technological Research Council of Turkey, have attracted multinationals too.

Swedish telecoms specialist Ericsson has three R&D centres at technoparks based at universities in Istanbul, Ankara and İzmir. The company employs 650 engineers in Turkey working in areas such as network protocols, security and 5G.

Isil Yalcin, the head of Ericsson Turkey, says that while the brain drain and competition for tech talent between companies in Turkey is a challenge, there is a collaborative environment around universities.

“The research ecosystem is ready to do more in Turkey,” she adds, citing that Ericsson has already undertaken more than 160 R&D projects in the country. These projects include several funded by EU initiatives such as Horizon and Eureka.

Life sciences is another industry in which companies are utilising research funding in Turkey, albeit with challenges related to dependency on imported raw materials.

Elsewhere, innovation is underway to modernise Turkey’s established industries. At Fark Labs, an innovation and start-up hub in Istanbul run by Turkish automotive supplier Farplas, researchers and entrepreneurs are working on electrification and other mobility solutions. 

Entrepreneurship thrives

Amid the difficult operating environment of recent years, Turkey’s entrepreneurial ecosystem has flourished, with more ambitious Turks founding and joining start-ups.

A prominent success story is e-commerce marketplace Trendyol, which raised $1.5bn on a valuation of $16.5bn in August 2021, making it Turkey’s first decacorn, or start-up valued above $10bn. 

Trendyol Group president Çağlayan Çetin says that Turkey is now in the “global league of tech developing countries” with several smart new companies that are competing globally.

These include Istanbul-based Getir, which pioneered the fast grocery delivery model and has expanded into several new markets, and mobile gaming unicorn Dream Games. 

“The tech industry is Turkey’s shining star right now,” says Barış Özistek, a serial tech entrepreneur turned investor at Boğaziçi Ventures, which backs early stage start-ups. 

Strategic position

Given its domestic market of 84.3 million people, membership of the EU customs union and location between Africa, the Middle East and Europe, Turkey is hoping to attract companies restructuring their supply chains in the post-pandemic era. 

Amid Covid-19 and economic disruption, however, FDI inflows to Turkey fell to $7.9bn in 2020, down by 15% from 2019, according to Unctad figures. Yet with educational and financial reforms in line with the knowledge economy, the country is well-positioned to turn the tide.

“Turkey certainly has the right fundamentals and strategies to be an extremely attractive destination for FDI,” says Mr Kelly. “The key challenge is putting these strategies into practice.”

In association with Investment Office of the Presidency of the Republic of Turkey. Writing and editing were carried out independently by fDi Intelligence.

This article was first published in the December 2021/January 2022 edition of fDi Intelligence magazine.