Report No. 54123-TR

TURKEY Investment Climate Assessment

From Crisis to Private Sector Led Growth

May 2010

Europe and Central Asia Region

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53= USD 1.CURRENCY EQUIVALENTS Currency Unit – New Turkish Lira (TL) EXCHANGE RATE May 12.00 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 – December 31 Vice President : Philippe H. 2010 TL 1. Le Houerou Country Director : Ulrich Zachau Sector Director : Fernando Montes-Negret Gerardo Corrochano Sector Manager : Lalit Raina Task Manager : Donato De Rosa .

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ACRONYMS AND ABBREVIATIONS ABGS ABİGEM ACTAL BILGE BRSA CBRT CC CEDPL2 CGF CIF CMB CPRR DA D&Q DB ECA EFCAS EIF ES EU EURADA FDI FOB FX GDP GERD GoT GOV GVA GVC IAC ICA ICS ICT IFRS IIPR ISE ISO ISPAT JASME KADIM KKB Secretariat General for EU Affairs EU Turkish Business Centers Dutch Advisory Board on Administrative Burden Computerized Customs Activity Banking Regulation and Supervision Agency Central Bank of Turkey Commercial Code Second Competitiveness and Employment Development Policy Loan Credit Guarantee Fund Cost. Insurance & Freight Capital Markets Board Japanese Council for the Promotion of Regulatory Reform Development Agency Design and Quality Doing Business Europe and Central Asia Enterprise Financial Crisis Assessment Survey European Investment Fund Enterprise Survey European Union European Association of Regional Development Agencies Foreign Direct Investment Free on Board Foreign Exchange Gross Domestic Product Gross Expenditures on R&D Government of Turkey Governance Gross Value Added Global Value Chains Investment Advisory Council of Turkey Investment Climate Assessment Investment Climate Survey Information and Communication Technologies International Financial Reporting Standards Intellectual and Industrial Property Rights Istanbul Stock Exchange International Organization for Standardization Investment Support and Promotion Agency of Turkey Japan Finance Corporation for Small and Medium Enterprises Struggle against Unregistered Employment Project Credit Bureau of Turkey .

and long-term Multinational Corporation National Productivity Center Medium Term Program Networks and Innovation Survey National Plan for Adoption of the Acquis Non-Performing Loans National Steering Committee Organization for Economic and Cooperation Development Ordinary Least Squares Organized Industrial Zones Product Market Regulation Research and Development Regulatory Impact Analysis Small Business Administration Standard Cost Model Standard Industrial Classification Small and Medium Enterprise State Planning Organization Turkish Accounting Standards Board Merchants and Artisans Confederation of Turkey Total Factor Productivity Turkish Financial Reporting Standards Union of Chambers and Commodity Exchanges of Turkey Small and Medium Industry Owners and Managers Foundation of Turkey Turkish Patent Institute Turkish Studies Institute Scientific and Technological Research Council of Turkey Turkish Accreditation Agency Turkish Statistical Institute United States Patent and Trademark Office Tax Offices Automation Project World Development Indicators World Federation of Exchanges World Intellectual Property Organization Coordination Council for the Improvement of the Investment Environment .KOSGEB KSS MAS MEKSA MEP MLT MNC MPM MTP NIS NPAA NPL NSC OECD OLS OSB PMR R&D RIA SBA SCM SIC SME SPO TASB TESK TFP TFRS TOBB TOSYOV TPI TSI TUBITAK TÜRKAK TURKSTAT USPTO VEDOP WDI WFE WIPO YOİKK Small and Medium Enterprises Development Organization Small Industrial Estates Manufacturing Advisory Services Training and Small Industry Support Foundation of Turkey Manufacturing Extension Partnership Medium.

where it greatly benefited from discussions with local stakeholders. Başak Ünal and Can Gürlek (Undersecretariat of Treasury team). Cemile Hacıbeyoğlu. Ayşe Seda Aroymak. Indispensable contribution and insight came from İbrahim H. the team received helpful comments and suggestions from Mark Roland Thomas. Undersecretary of Treasury. Murat Şeker. Erkan Erdil. The report was undertaken under the guidance of Ulrich Zachau. Murat Uçer. Fernando Montes-Negret. Delia Rodrigo. Federica Saliola. Gerardo Corrochano. Selma Karaman. Serenay Usta. Steen Byskov. Kamer Karakurum-Özdemir. Preliminary and intermediate findings of the report were presented to YOİKK Steering Committee meetings on June 11 and November 13 2009. Intermediate findings were presented to various stakeholders in a series of roundtables held in November 2009. In addition. Raif Can. Andres Federico Martinez. Berrin Bingöl. İrem Güçeri. Mahesh Uttamchandani and Anthony Ody. Gönül Bakır Kartal. recognition is extended to all YOİKK member institutions. Manuel de Orte. Gamze Özdurgutlu. Paulo Correa. Willem van Eeghen and Stefka Slavova (World Bank) and Rauf Gönenç (OECD) were peer reviewers for the report. Deputy Undersecretary of Treasury. In addition to the Treasury team. Carlos Piñerúa. The World Bank team was led by Donato De Rosa and included Dragana Pajovic. Muammer Kömürcüoğlu. . Alvaro Escribano. Zeynep Lalik.Investment Climate Assessment i ACKNOWLEDGMENTS This report was prepared in close cooperation with the YOİKK Secretariat. Cihan Yalcin. The World Bank team also performed field visits to Izmir and Adana. Bahar Konak. Cristobal Ridao-Cano. Jorge Peña. Mehmet Dündar. Jesko Hentschel. Mediha Ağar. Jean-Louis Racine. Cavit Dağdaş. Barış Dinçer. Çanakcı. Özge Dumlupınar. Lalit Raina and Keiko Sato. Murat Alıcı.

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Investment Climate Assessment iii Investment Climate Assessment TABLE OF CONTENTS .

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Investment Climate Assessment v .

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plus a more active Credit Guarantee Fund. A second priority is to increase Turkish SMEs’ competitiveness by enhancing their ability to adopt and use knowledge. A special aspect of the report is its focus on Turkey’s small and medium scale enterprise (SME) sector. with unemployment reaching 14 percent in 2009. to provide a comprehensive and up-to-date description of the investment climate facing Turkish firms of all size classes. global conditions have taken their toll on the Turkish business sector. especially SMEs. Existing policies and regulations may impact SMEs more than either micro or large firms. broad-based growth that incorporates SMEs and is more evenly distributed across the country. but administrative procedures still impose a high “time tax” on firms. Turkey’s recent important steps in establishing institutions and mechanisms for regulatory reform could be made more effective by refining their strategic vision. With a competitive global environment expected in the post-crisis period. obstacles that constrain SMEs’ growth. actions to improve the regulatory framework need to be sustained to reduce incentives for firms to remain informal. The local business and institutional environment combines with country-wide features to determine firms’ incentives to adopt innovative modes of production and organization. and enhancing consultation with the private sector. Existing government programs aimed at increasing the operational capabilities and absorptive capacity of SMEs could be improved at the local level in line with international best practice. export competitiveness and employment creation. should help ease lending to SMEs. mainly financial. including the impact of government regulations and recent reforms. unlike SMEs in comparator countries. supplemented by other sources. Enhancing banks’ ability to assess borrowers’ creditworthiness. An important feature of the analysis is extensive use of data from comparable countries to benchmark Turkey’s performance. Sustained encouragement of firm-level innovation would also have positive effects on enterprise performance. Business registration has been simplified. . Beyond description. A third priority is to further reform and strengthen the regulatory capacity of the government. thus preventing the largest portion of the enterprise sector from reaping scale economies. has been negatively affected by the crisis. Continued commitment to business environment reforms will help support a sustainable recovery. the report seeks to identify key priority areas where further policy reform and institutional development could help strengthen Turkish firms’ performance in such areas as productivity.Investment Climate Assessment vii EXECUTIVE SUMMARY This Investment Climate Assessment draws on the analysis of firm-level survey data collected during April 2008-January 2009. The availability of credit to the corporate sector. Access to finance appears to be the single most important constraint to SME growth. Sustainable growth in the post-crisis environment will require continuation of reforms aimed at promoting healthy business sector development. The establishment of Development Agencies (DAs) offers an opportunity to ease investment climate constraints through actions at the local level. SMEs grow more slowly than micro or large firms in Turkey. A first key priority is to alleviate the.7 percent. Building on recent reforms. Analysis of Turkish production networks indicates that the absorptive capacity of local suppliers is key for successful participation in global markets. improving horizontal and vertical coordination. Diffusion of the sources of growth beyond firms that are already sufficiently competitive to be direct exporters (and beyond already-successful manufacturing poles) will increase Turkey’s resilience to future external shocks in global demand and ensure that the productive base of Turkish manufacturing is more evenly distributed geographically. A healthy SME sector could improve employment opportunities and promote regional development. Improved availability of skilled labor will be crucial for improving productivity. Turkey’s economy contracted by 4. Since late-2007. the report identifies three priority areas to help the economy achieve sustainable.

in part driven by large capital inflows. the availability of skilled labor and innovation. Aggregate productivity in Turkey appears to have increased since 2005. Turkey’s economy had been thriving. Analysis of survey data confirms a significant association between the quality of the investment climate and performance in areas like productivity. Prior to the global economic crisis. A survey carried out by the World Bank in the summer of 2009 shows that most enterprises experienced a sharp contraction in sales. Since late-2007. Following the 2001 banking crisis associated with a sharp recession and a restructuring of the financial sector. job creation. with unemployment estimated to have increased to 14 percent in 2009. An important engine of growth was private investment. According to a survey conducted between April 2008 and January 2009. Figure 1: Top Five Investment Climate Obstacles Source: Turkey ES 2008 3. Almost half of the firms surveyed (46 percent) reported restructuring their liabilities. 2. Since 2008. while onethird delayed payments to tax authorities and suppliers. with larger firms appearing to benefit . adverse changes in global conditions have taken their toll on Turkey’s previously booming economy and business sector. with falls in external demand and international capital flows – and associated declines in domestic demand and credit availability. though. the external economic environment has deteriorated markedly. The corporate sector. Tough global conditions heighten the need to attack constraints to firms’ productivity and growth.viii Investment Climate Assessment OVERVIEW AND POLICY OPTIONS 1. access to finance and corporate governance. has been hard hit by the slowdown in global demand. driven by improved allocation of resources towards firms with higher productivity. Productivity analysis shows that almost one-third of variation in the performance of the business sector in Turkey is explained by investment climate factors. export competitiveness and attractiveness for foreign investment. The regulatory environment is the area of the investment climate with the largest relative contribution to productivity. Turkish firms cite a number of external constraints to their own performance. This has widened the gap between low and high productivity establishments. with reported declines between 2008 and 2009 in the region of 40 percent. which contributed to a trebling of private sector Gross Fixed Capital Formation between 2002 and 2008. in particular. a majority of Turkish firms see themselves as held back by problems with access to finance (some 26 percent of firms cited this as their single most important constraint). Tax rates (18 percent) and political instability (18 percent) rank second and third. while other important factors are competition from the informal sector and an inadequately educated workforce (15 and 9 percent respectively). Turkey’s economy is expected to contract by 6 percent. Turkish GDP growth averaged nearly 7 percent per annum between 2002 and 2007. Other relevant investment climate areas include infrastructure bottlenecks.

at least in part. Turkey has made significant reforms in some areas of the regulatory climate. Inefficient regulations also provide incentives for firms to remain partially informal. These improvements between 2005 and 2008 can. Problems for Turkish firms posed by tax rates and tax administration seem to have declined in importance since 2005. Even after the improvement. but red tape still imposes significant costs on businesses. recent Turkish reforms have reduced the time it takes to register a business from 13 required steps in 2004. associated with lower levels of productivity. the number of compulsory certificates required and the time necessary to obtain them. According to Doing Business 2010. Manufacturing firms interviewed in the 2008 enterprise survey reported that the time it takes to acquire an operating license had decreased from 66 days in 2005 to 62 days in 2008. 4. The share of enterprises identifying tax rates as a major or very severe constraint decreased from 81 percent in 2005 to 50 percent in 2008. as well as time consuming customs procedures for imports. Some of these include formal bureaucratic requirements. be ascribed to tax reforms introduced since 2006. including easing business registration. . such as the number of inspections to which businesses are subjected.Investment Climate Assessment ix from the more positive aspects of the investment climate and smaller and less productive firms bearing the costs of its less positive features. Notable among the reforms are the introduction of a new corporate tax code. Tax administration. down to six steps in 2009. Burdensome regulatory requirements constitute fertile breeding ground for the negative consequences of corruption. viewed as a major constraint by 59 percent of manufacturing firms in 2005. at least partly reflecting the impact of recent reforms. with a draft act currently being evaluated by the Prime Minister’s Office and expected to be adopted in the National Assembly in early 2010. On another front. The Government has made progress towards facilitating the process of business registration. from being the largest obstacle in 2005. 5. to where a relatively low 18 percent of firms in 2008 perceived tax rates as the single most relevant impediment to business operations. the relative importance of tax rates in a ranking of obstacles has dropped. as it is exemplified by the negative association between productivity and informal payments to obtain power supply or a contract with the government. The Government has initiated e-Judicial Registrations and Online Company Registration procedures. Figure 2: Share of firms facing informal competition Source: Turkey ES 2008 6. had dropped to 19 percent by 2008. despite the lower tax rates introduced with recent reforms and the fall in the headline measure of informality – from 53 percent to 44 percent between 2004 and 2008 – the share of surveyed firms complaining about informal competition increased from 44 percent in 2005 to 52 percent in 2008. Analysis of survey data indicates that firm-level productivity in Turkey is negatively associated with a number of features of the regulatory environment. the reduction of corporate income tax from 30 to 20 percent. Firms that are subject to competition from informal establishments are. and lower taxation on interest. in turn. When examining firms’ perceptions.

a variation is notable by firm size.x Investment Climate Assessment though.6 days. The time tax is largest for medium and large enterprises (32 percent and 34 percent respectively). the time to obtain building permits varies significantly between Turkish cities. the large regional variations observed for licenses. Figure 3: The ‘time tax’ Source: Turkey ES 2008 7. There is no clear framework for streamlining administrative procedures for businesses. with SMEs spending nearly twice the time as large firms dealing with construction permits (60 versus 32 days). The average time all employees in a company spend with inspections per year is 6. This said. Additionally. Firms with a higher share of staff with university education tend to show higher productivity. A specific area of improvement has been in the cost and time invested in construction of business premises. 9. When examining the time that each firm spends on inspections. are frequently responsible for implementing regulations that are established at the central level. More broadly. each responsible for different business areas. 10. according to econometric analysis. Turkish firms were able to shorten their average site development time by 44 days between 2005 and 2009. This is well below the OECD average of 69 percent and . Additionally. which puts Turkey ahead of several comparator economies. The survey results are similar when firms are asked about the number of inspections taking place in their organization: the average annual frequency of inspectors’ visits has diminished from 4 in 2005 to 2 in 2008. Better availability of skilled labor would help improve Turkish firms’ productivity. and operating licenses are issued by various Ministries. when having to comply with procedures established locally without prior agreement at the central level. this is still higher than in comparator countries. often lacking adequate capacity. whereas managers in small firms report spending 23 percent of their time dealing with red tape. Survey results show that larger firms are in a better position to afford skilled staff with university education. compliance with administrative procedures remains problematic for business operation. permits and inspections are a consequence of the fact that municipalities. In general. Business inspections appear to be somewhat less burdensome in Turkey than in comparator countries. with firms in Istanbul seeming to struggle with construction permits more than firms located elsewhere. from 9 to 27 percent. medium size firms seem to be more affected. in overall terms the perceived ‘time tax’ – the share of management time spent dealing with government regulation – appears to have increased sharply since 2005. 8. regional comparisons show significant variations in inspection times and duration. This institutional setup tends to create a burden for businesses and individuals. OECD data show that 26 percent of the Turkish adult population holds secondary education diplomas. Additionally. Education levels in Turkey lag behind other OECD countries. According to the Doing Business’ measure of the time involved in building a warehouse.

according to analysis of the 2008 survey of Turkish enterprises. These concerns may resurface as a major constraint for sustainable recovery. Figure 4: Education of workforce as an obstacle Source: Enterprise Surveys 2008 11. The 2008 survey found firms in Turkey less likely to regard labor regulations as a serious obstacle than they had been in 2005. Some 24 percent of manufacturing businesses reported offering training to their employees in 2005. as the inflexibility of labor regulations is still mentioned by enterprises in face to face interviews as the overarching constraint facing firm operation and growth. Turkey’s rate of labor force participation.Investment Climate Assessment xi the EU19 average of 70 percent. The employment rate for women is particularly low. is low by international standards and has decreased somewhat since 2005. Graduates with tertiary education in Turkey are also scarce. The share of Turkish firms offering formal training to their employees has increased slightly.g. and this number had risen to 29 percent three years later. Only 29 percent enroll in higher education in Turkey.3 percent and 65. however. at less than 50 percent. Turkey’s score on this indicator appears to have improved substantially vis-à-vis the average for the Europe and Central Asia region. probably an effect of the timing of the survey. more immediate issues – e. and the entry rate to higher education programs (tertiary education) is low by international standards. 14. Firms that had re-organized production processes .3 percent respectively. far below the OECD and EU-15 averages of 61. This places Turkey around 20 percentage points below OECD and EU-15 averages. standing at 26. The 2008 Enterprise Survey shows that on average only 16 percent of production employees and four percent of non-production employees are female. Enterprises with exporting activities are also more active in offering training to workers. While firms’ perceptions in the 2008 survey might have been influenced by labor reforms initiated in early-2008.7 percent in 2007. Turkish firms that invest in Research and Development (R&D) tend to show higher productivity levels. Productivity and exports would benefit from policies encouraging innovation. compared to a 56 percent average in the OECD countries. Although this is an improvement from the 33 percent in 2005. Nearly a quarter of Turkish firms rate the education and skills levels of the workforce as a “major” or “very severe” constraint on operations and growth (See Figure). the high rate still requires the attention of policymakers and shows that measures need to be taken to better coordinate labor supply with the demands in the business sector. The survey results require cautious interpretation. The share of large firms offering training is three times higher than that among small businesses. loss of market share requiring downsizing or problems with access to finance – thus decreasing the perceived relative importance of labor regulations. 13. it is also possible that the timing of the survey (from April 2008 to January 2009) found business more preoccupied with other. 12.

This puts Turkey ahead of other middle-income countries. with more than 13. Figure 5: Share of firms with R&D spending Sources: Enterprise Surveys 17. compared to 0.xii Investment Climate Assessment to take advantage of outsourcing were also found to be more productive. The Government has also stepped up initiatives to raise awareness of ICT among citizens and businesses. Turkey still lags behind other middle income countries and the OECD. the expansion of ICT in public services has received a boost. This performance compares relatively well to that of other economies. reaching 0. 16. Analysis from 2008 indicates that higher productivity was related to several variables representing financial soundness (e. Turkey’s application of international quality standards (ISO 9001) has shown remarkable improvement over the past decade. Employment. Certifications among small firms lag far behind medium and large companies: about 55 percent of large firms hold a quality certification. Finally. Further support is planned for enterprises in their use of ICT. According to a recent study by the Banks Association of Turkey. firms with a higher share of sales paid for before delivery. such as Brazil (26 percent). Turkey’s total investment in R&D has nearly doubled over the past ten years.200 certificates issued by the end of 2008. according to the .29 percent in 2007. The Government has taken steps to encourage the use of ICT. Bulgaria (20 percent) and Poland (17 percent). 19. Turkish firms with good access to finance tend to show higher productivity. especially SMEs. Credit availability to firms. there is a significantly positive correlation between variables reflecting innovation (such as quality certification and the use of ICT) and the probability of exporting. compared to 246 percent for emerging market economies and a global average of 421 percent. Turkey’s financial sector is relatively small by comparative standards. This is also reflected in the relative high number of Turkish firms (23 percent) that perform R&D expenditures (See Figure). exports and FDI are all positively associated with innovation at the firm level. which presented an average of 2.Nonetheless.g. the ratio of financial assets to GDP in 2007 was 150 percent in Turkey. as well as increased competition in the electronic communication sector. Econometric analysis also points to a positive association between employment levels and the use of ICT in communication with customers and suppliers. Firm surveys in 2008 found 30 percent of Turkish firms reporting having an internationally recognized quality certification.71 percent for Turkey in the same year. Firms with quality certifications are also more likely to have a larger workforce.. 18. With the implementation of the e-Transformation Turkey Project. and firms with the ability to finance a higher proportion of fixed assets purchases with internal funds).73 percent of GDP in 2008. 15. has suffered during the crisis. which is three times the share of small firms. This said.

3 percent of total value added and 25 percent of bank credit (indeed. compared to both micro and large firms. the development of a more productive and more outward-oriented SME sector is a crucial development challenge for Turkey. Between December 2006 and November 2009. A first key priority is to alleviate the. obstacles that constrain the growth of Turkish SMEs. 57 percent of Turkish firms had access to a loan. Share of firms with loans Source: Enterprise Surveys 20. 57. followed by micro (26 percent). Non-performing loans SMEs rose from below 4 percent in the middle of 2008 to almost 8 percent. given data limitations and the size of the informal sector. Nonetheless. Actions in three priority areas will support broader-based growth that incorporates SMEs and is better distributed geographically. A healthy SME sector can not only provide increased employment opportunities for a rapidly increasing workforce and promote regional development. 44. which was only about half the rate of growth in other (non-SME) corporate credit. for which bank finance accounts for 47 percent of total investment funding. 25-30 percent of total exports. Collateral requirements appear particularly onerous for SMEs.6 percent of total investments. The credit crunch following the global financial crisis has affected lending to the SME sector. SME credit growth started to decelerate as early as the beginning of 2008. mainly financial. 22. Turkish SMEs grow more slowly than other firms. amounting to 100 percent of loan value for small firms and 91 percent for medium firms. cumulative growth in SME credit amounted to some 35 percent. Turkish firms rely more on bank loans for investment financing (38 percent) than do firms in other countries. Starting in late 2007. Figure 6. 21. with medium-sized firms appearing to be particularly affected (34 percent). with employment growth 16 percent lower than micro firms and 5 percent . the contribution of SMEs to the economy may well be somewhat underestimated).4 percent of employment. which compares fairly well to other middle income economies (see Figure). Analysis of firm dynamics indicates that small (11-50 employees ) and. While growth in total banking sector credit remained relatively high until the escalation of the global crisis in late 2008. medium firms (51-250 employees) grow more slowly than all other size categories. SMEs’ share in total credit declined by about 5 percentage points to just over 20 percent. the opposite of international experience. especially. Difficult access to finance prevents the largest element in the Turkish enterprise sector from reaping scale economies. This is especially true for medium-sized firms. SMEs account for 79.Investment Climate Assessment xiii 2008 enterprise survey. while SMEs’ share in total corporate credit dropped from about 52 percent to some 44 percent. firms of all size categories perceive access to finance as their single most severe obstacle. small (24 percent) and large firms (19 percent). but is also crucial to increasing the resilience of the economy to future external shocks. Given SMEs’ scale. The share of loan applications that is rejected is also substantially higher for SMEs (17 percent) compared to large firms (12 percent).

Turkey needs to open up the sources of growth beyond firms that are already sufficiently competitive to be direct exporters (and beyond already-successful manufacturing poles). since 1994. A second priority is to enhance SMEs’ ability to adopt and use knowledge. According to econometric analysis. be a priority. 26. Success in this effort will increase the resilience of the Turkish . one percent more usage of external finance for investment is related with 0. This is especially true for medium-sized firms. Access to the sources of higher efficiency needs to be extended to a wider share of firms. with only 11 percent of the guarantee fund being used by medium-sized firms. on average. hence. Figure 7: Growth rates (percent) of Turkish SMEs relative to SMEs in other countries (2004-2007) Source: Turkey ES 2008 23. This might indicate that SMEs in Turkey face barriers to their expansion that force them to remain at a smaller – and suboptimal – scale of operations. plus targeted interventions to ease collateral requirements. 24. with 60 percent in Turkey being more than 16 years old. the bulk of credit guarantees provided by the CGF has benefited micro and small enterprises. compared to 20 percent in the EU-10. older. This is contrary to what is observed in comparator countries. Such measures would include (i) encouraging the expansion of coverage of existing credit bureaus. with Treasury involvement for a period of two years. In fact.xiv Investment Climate Assessment lower than large firms. Enhancing the role of the Credit Guarantee Fund (CGF) may also help improve SMEs’ credit access. By contrast. The CGF has played an important role in facilitating SMEs’ access to credit by easing collateral requirements (especially since its recapitalization in 2007). is a positive initiative that expands the capacity of the CGF to serve the financing needs of SMEs following the credit crunch in the aftermath of the crisis. where SMEs grow faster than large firms. The slower growth of Turkish SMEs suggests that existing policies and regulations may have more distortionary effects for SMEs than for either micro or large firms. Problems with access to finance seem to be the most important constraint to the growth of SMEs. The association of a loan or a line of credit with employment growth is even stronger and is estimated to have an effect on employment growth of 33 percent. Furthermore its scope could be enhanced to better target the needs of medium-sized firms. Structural measures to enhance the ability of banks to assess the creditworthiness of SME borrowers appear necessary to help SMEs to tap into bank credit. 25. the Credit Registry of the Central Bank and the Credit Bureau of Turkey (KKB). Considering ways to make the new CGF scheme more active would.3 percent higher employment growth. could help ease financial constraints to SME growth. and (ii) accelerating the adoption of the new Commercial Code. The new CGF model. the demographics of Turkey’s large firms are in line with values in other countries. Improved ability on the part of banks to assess borrowers’ creditworthiness. It seems likely that SMEs have neither the capacity of large firms nor the flexibility of micro firms to cope with the effects of these policies. in order to enable SMEs to benefit from a simplified set of financial reporting standards. Comparison with other countries also shows that SMEs in Turkey are.

since a large number of operating licenses are awarded at the local level. encourage innovative behavior. in order not to crowd out private providers. The local business and institutional environment combines with country-wide features to determine firms’ incentives to adopt and use innovative modes of production and organization. on its part. Following international best practices. achieving EU harmonization has been a key driver of reform and Turkey has partially embraced the EU Better Regulation agenda in a number of areas. Turkey has taken important steps to improve the regulatory environment. The ease of access to bank finance is. conditional on the development of the local banking sector. and have become the core of manufacturing and exporting activities. enacting legal reforms conducive to simplification of the legal framework. The availability of a research base at the local level can. As a result. 28. Local conditions also influence the effect that the regulatory environment has on firm operations. the liberalization of the Turkish economy has offered new opportunities related to the general rise in trade in intermediate goods and in international capital mobility. and introducing. The largest government program is offered by the Small and Medium Scale Enterprises Development Organization (KOSGEB). For instance. especially SMEs. especially SMEs – i. Integration into global trade and investment flows has been accompanied by a significant spatial transformation of the Turkish economy. (ii) ensuring that the services on offer are not already available on market terms to SMEs. (iv) expanding the scope of support schemes beyond micro firms to better cater to the needs of larger SMEs. Specifically. (iii) rationalizing the services on offer to create a single entry-point which could help SMEs better understand their business needs and opportunities. The availability of a skilled workforce is also highly dependent on the quality of the local higher education and vocational training. These new centers are the so-called “Anatolian Tigers. together with a more efficient regulatory environment and easier access to finance for investment. the effects in terms of knowledge transfer of linkages between globally connected firms and local suppliers may vary widely depending on local conditions. with the objective of increasing their operational capabilities and absorptive capacity. a number of regulatory tools to improve the quality of regulations.” Clusters of industries have formed in various parts of the country. 27. the government has activated a number of instruments to foster the ability of SMEs to participate in global markets. As a result. Several governmental and non-governmental organizations provide support to firms. while the Union of Chambers and Commodity Exchanges of Turkey (TOBB) also provides such services to its associates. the availability of technical skills and capacity “to handle technology” is conducive to more knowledge-intensive value chain arrangements. A third priority is to further reform and strengthen the regulatory capacity of the government. scope exists to improve local-level programs aimed at increasing the operational capabilities and absorptive capacity of SMEs. with specialization in both traditional and more technologically advanced sectors. through pilot projects. the government could aim at reforming existing support programs by: (i) advancing the implementation of a flexible and decentralized management model to better serve the needs of SMEs on a local level. . characterized by the emergence of a number of new industrial agglomerations far from the earlier manufacturing regions. In addition to wider investment climate reforms. as well as on personal contacts that may facilitate relational lending practices. It will also ensure that the productive base of Turkish manufacturing is more evenly distributed across Turkish regions. Analysis of Turkish production networks indicates that the absorptive capacity of local suppliers. 29. SMEs in the manufacturing sector have been encouraged to locate in appropriately planned “small industrial estates” (KSS) and “organized industrial zones” (OSB) that can ease investment climate constraints by providing a number of advantages in terms of infrastructure services and regulation of business activity.e. for example. their ability to adopt and use knowledge – is key for successful participation in global markets. In this process. if contacts exist between firms and local research organizations.Investment Climate Assessment xv economy to future shocks in global demand. Since the 1980s. The Government has paid particular attention to establishing institutions and mechanisms for regulatory reform. In response to these developments. The rationale of several such interventions has been to remove obstacles to the competitiveness of SMEs related to the business environment.

an essential condition for DAs to be able to perform their tasks will be the existence of internal Government regulations recognizing their formal role vis-à-vis central and local government. coherent and comprehensive strategy for regulatory reform (country-wide and including all components of a regulatory system). is currently in the process of making Development Agencies operational. Second. with the goal of having 26 DAs that will cover the entire country. capacity building across the administration remains a crucial element for success. with the objective of minimizing the risk of capture by local interests. Fourth. with the existing YOİKK platform offering a good starting point. thus directly affecting business operation. Looking ahead. the FDI promotion function via Investment Support Offices could be carried out in close coordination with ISPAT. This creates difficulties when it comes to establishing priorities and taking the lead for reform. through the State Planning Organization. there is a need for support at the highest political level that is translated into a clear. the different responsibilities allocated to institutions are not always linked towards a single regulatory reform strategy. and it often also results in overlapping responsibilities within and across levels of government that make implementation cumbersome. The Coordination Council for the Improvement of the Investment Environment (YOİKK) has become a key structure where the private sector makes contributions to the process of improving the investment climate. 31. the national FDI promotion agency. coordination among different institutions and of different initiatives with similar objectives could be improved. improved horizontal and vertical coordination among levels of government. DAs could act as information points for businesses. Even short of radical reform of responsibilities for the issuance of licenses and permits. The Government. a number of steps are necessary. In order for regulatory reform to produce substantial effects on the regulatory burden experienced by the business sector. DAs are potentially well placed to be an interface between business and government. they could act as “one-window” shops. such as KOSGEB and TÜBITAK. The Council conducts its agenda with the help of 12 Technical Committees working on specific issues with participation of both public and private institutions. Building on recent progress. consultation with private sector stakeholders should be mandatory and institutionalized. DAs could perform a useful facilitator role between issuing agencies and firms. Additionally. 30. First. First. regulatory reform could aim at a clearer strategic vision. as already intended by the Government. Second. DAs could perform a number of useful functions. in close cooperation with TOBB as well as with Government agencies. Third. However.xvi Investment Climate Assessment Turkey has established solid pillars of a regulatory system that have the potential to develop into a “whole-ofgovernment” approach to regulatory management and reform. The objective would be to rationalize financial and non-financial support initiatives – especially for SMEs who normally face high information costs – available at the local level. Third. . there is a need to link regulatory reform to clear and measurable economic targets and objectives in the medium and long term. Complementing other reforms. Efforts in different directions to train officials in the use of modern regulatory tools testify to the need to dedicate resources to this goal. and enhanced consultation with the private sector. provided that they can preserve a light organizational structure and remain at arm’s length from the government. Fifth. the establishment of Development Agencies (DA) could offer an opportunity to ease investment climate constraints by providing an interface for businesses at the local level.

etc. • Expand the reach of support programs beyond micro-enterprises. • Ensure that the services on offer are not already available on market Increase the “absorptive capacity” of SMEs at the local level terms to SMEs in order not to crowd out private providers of such services. • Make consultation with stakeholders compulsory for the preparation of new and amended laws and regulations. possibly in cooperation with DAs. • Strengthen government. in order to help SMEs better understand their business needs and opportunities. • Continue implementation of Regulatory Impact Analysis (RIA). with Investment Support Offices acting in close coordination with ISPAT. without radical reform of competences for the issuance of licenses and permits. • Improve coordination mechanisms inside the administration when preparing laws and regulations. • Strengthen the institutionalization of regulatory reform by creating a single oversight body for regulatory reform in the Prime Minister’s office. expand its reach. • Map current regulatory reform initiatives in a single strategic document setting priorities and sequencing of reforms. Development Agencies (DAs) could serve as • “one-window” shops. to better serve the needs of larger SMEs. • Advance the implementation of a flexible and decentralized management model for SME support programs. Ease constraints on the ability of SMEs to grow in size and generate employment • Accelerate adoption of the new Commercial Code in order to enable SMEs to benefit from a simplified set of financial reporting standards. and allow it to better reach the medium-sized firm segment. such as TOBB. such as KOSGEB and TÜBITAK. in close cooperation with business associations with a local presence. targets and review criteria for lower levels of regulation to improve the business environment. • Create a single entry-point for the various SME support programs. coordination and cooperation among levels of Improve access to information on regulatory requirements and government support programs .Investment Climate Assessment xvii Summary of Policy Objectives and Options Objectives Options • Encourage the expansion of coverage of existing credit bureaus. as well as with Government agencies. • FDI promotion. • Consider ways to make the new CGF scheme more active. • Use existing e-government strategies to support regulatory reform and simplification efforts. • information point for businesses. • Design a comprehensive administrative simplification strategy Improve the regulatory environment for businesses with clear objectives. • Strengthen YOİKK’s role to improve the business environment and advocate for regulatory reform.