1. Eshan Mehta Mehta 1
20131950
INTL 313
Professor Öniş
3029 Words
Multinational Corporations-State Relations in the Turkish Emerging Market
Emerging markets are becoming the driver in global growth; they give investors
the opportunity to cash in on today as well as the foreseeable future. According to the
International Monetary Fund (IMF), emerging economies are expected to grow at a rate
three to four times faster than already established economies such as the United States.
Long-term investments in emerging markets have outperformed the advanced economies
for the last 18 years (Forbes). The trend is likely to continue as people in the developing
countries earn more, and spend more. They are especially favorable to multinational
corporations (MNCs), which produce added value in their own country as well as in the
emerging market they manufacture goods to sell in.
MNCs play a large role by affecting international markets in production and trade,
monetary and finance, security, and knowledge and technology structures. By competing
in regional and global markets, they allocate risk in international trade and allow
collective ownership through share issuing that epitomizes the concept of globalization.
The goal of MNCs is to acquire capital where it is cheapest and produce where they get
the highest rate of return. The number of MNCs and their efficiencies in the world
increase parallel with the globalization process. In 2000, there were over 30,000 in the
world; today, there are an estimated 80,000 with over 800,000 foreign affiliates (Globex).
The top 500 MNCs account for nearly 70 percent of the worldwide trade and employ
over 82 million workers (Pearson). Due to this global reach MNCs span over, they are

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controversial in the sense of power they possess which makes it difficult for nation-states
to regulate. Their foreign direct investment (FDI) is highly sought after by national
governments seeking jobs, technology, and the resources for economic growth.
Compared with short-term credits and portfolio investments, FDI is a much more stable
option that is resilient to changes in an economic environment. Therefore, the main
question is what can countries do to attract more of inward FDI?
With such a vast amount of emerging markets to choose from, targeting the right
one to build the proper investment portfolio takes in-depth research and analysis. MNCs
take into consideration specific factors and theories that will benefit them in FDI ranging
from social and political stability within a country, skilled labor force available, product
cycling, and appropriability. Each factor has its own benefit, but also can play a role into
how the others are affected.
Social and political stability refers to the quality of an institutional environment,
and is the risk that the returns to investment may suffer as a result of low institutional
quality and political instability (IDE). The sunk costs that go into researching the stability
of an institution are well worth it because they reduce the uncertainty and lack of
knowledge associated with a country. If a country has a balanced framework, the
association between the MNC and government can be a smooth process instead of one
that comes with high risk. In an extremely poor institutional environment, one with high
political risk, MNCs may suspect that the host country’s government might appropriate
some of the returns on FDI or even implement enforced nationalization. Political
institutions need to be efficient or else they can also increase operational costs for a
MNC. For example, delays in areas dealing with obtaining permits can greatly increase

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production costs, and common forms of corruption by taking bribes to speed up import
export licenses, tax assessments, exchange controls, and police protection can make it
difficult to conduct business (IDE).
As the scale of MNC projects becomes increasingly larger, more technologically
driven, and more complex, there is an intensifying demand for a highly skilled, highly
educated, and highly experienced workforce to carry out these projects. In emerging
markets, labor shortages are often non-existent. Without sufficient skilled labor, the risk
of an adverse health, safety, or environmental incident increases substantially. Skill
shortages can constrain the expansion of production in the short-term, and limit the
possibility of diversifying industrial structure in the long-term. Expatriating employees is
a method used to help get projects off the ground and running, but is not a sustainable or
cost-efficient option to satisfy all labor demands. Thus, a MNCs’ success in an emerging
market will depend upon its ability to solve its labor constraints (RM).
MNCs do not make sense in highly competitive markets where they are just
another product or service that does not offer any other substantial benefit to the
consumer. According to Raymond Vernon’s two-stage product cycle theory, if a firm
possesses some particular knowledge or advantage, they can compensate for other
disadvantages. In stage one, the MNC has to identify a need within a high-income
country that can be satisfied with a technologically sophisticated product. This could be a
mobile phone that provides better communication service than its competitors. Once the
product is identified, developed, and marketed, stage two can be carried out. The product
is now marketed and exported to other countries with similar incomes and living
standards. FDI is implemented and the product technology becomes standardized to the

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point where it may be produced more efficiently in a newly industrialized country. The
product is developed where technology is abundant and incomes are high. The MNC can
then expand to other high-income countries, and FDI will follow as firms race to compete
in the larger market (Pearson).
The appropriability theory by Richard Caves, explains why product cycle firms
would rather invest abroad rather than licensing production to locals firms and taking on
local partners. According to the theory, these MNCs have too much to lose if they were to
enter into a partnership or licensing agreements with foreign firms, especially if they have
an intangible asset such as a trademark or patent. MNCs fear that their intangible assets
could be stolen, copied, or “appropriated” by competition. The threat of loss of ownership
of the technology or business practice will be higher in emerging markets where
intellectual property rights may not be well defined (LBS). Therefore, MNCs must retain
full control of the process by entering markets through creating wholly owned
subsidiaries. MNCs will often enter emerging markets through either a Greenfield project
or a joint venture. A Greenfield project is where a parent company starts a new venture in
a foreign country by constructing new operational facilities from the ground up. A joint
venture is a business agreement for a finite time in which the parties agree to develop a
new entity and new assets by funding equity. They exercise control over the enterprise
and consequently share revenues, expenses, and assets (Investopedia). By engaging in
FDI instead of forming licensing agreements, MNCs are taking a defensive measure
(Pearson).
Emerging markets are a high risk, high reward area for investors, and selecting
the correct one is vital to the success of a MNC. Thanks to the liberalization of

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developing markets and privatization of state economic enterprises after the end of the
Cold War, the flow of FDI since the 1990s has increased exponentially, and is no longer
limited to large emerging markets like the BRIC economies (Brazil, Russia, India, China)
(TurkishWeekly). Therefore, it is crucial to recognize other potential markets for
investment. There is one economy in particular though which has maintained consistently
high growth and return rates for investors, and continues to have a favorable future ahead.
Turkey has been an attractive emerging market for FDI by MNCs over the past
decade. Aware of its growing potential, Turkey has implemented a set of structural
reforms to enhance the competitiveness of its economy, boost flexibility of the labor
market, and eliminate investing sensitivities (TNE). Since 2001, the Turkish government,
which considers FDI to be the cornerstone of the country’s economic development, has
significantly improved the investment environment through rationalizing regulation,
monetary reforms, and new legislations. The Turkish government is working closely with
the private sector to enhance the competitiveness of the investment environment, and to
generate solutions to the administrative barriers encountered by investors in all phases of
the investment process, including the operating period (TNE). In 2003, an FDI Law,
offering foreign investors legal guarantees by treating them equally with local investors,
was enacted. MNCs were given incentives and offered different options, which according
to The Republic of Turkey Prime Ministry Investment Support and Promotion Agency
(ISPAT) are:
• Bilateral Agreements for the Promotion and Protection of Investments - To
establish a favorable environment for economic cooperation between contracting
parties by defining legal standards of treatment for investors and their investments

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within the boundaries of the countries concerned. The aim of these agreements is
to increase the flow of capital between the contracting parties, while ensuring a
stable investment environment.
• Double Taxation Prevention Treaties - This enables tax paid in one of two
countries to be offset against tax payable in the other, thus preventing double
taxation.
• Social Security Agreements - These agreements with 22 countries make it easier
for expatriates to move between countries. The number of these countries will
increase in line with the increased sources of FDI.
• Customs Union and Free Trade Agreements - The agreement with 22 countries
allows trade between Turkey and the European Union (EU), creating a free trade
area in which the countries agree to eliminate tariffs, quotas, and preferences on
most goods and services traded between them.
These laws aim to increase investment in less-developed regions and to boost production
and investment for high-import-dependent intermediate goods. The ISPAT also goes
even further to provide investors with better free-of-charge services by providing market
information and analyses, industry overviews and comprehensive sector reports, site
selection, coordination with the relevant governmental institutions, and facilitating legal
procedures and applications, such as establishing business operations, incentive
applications, obtaining licenses, and work or residence permits (TNE). Thanks to these
reforms, Turkey has developed a strong financial sector and attracted growing confidence
in their economy, which has boasted FDI of $123 billion from 2003 – 2012, and an
average GDP growth rate of 5.2 percent since 2002 (OECD).

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Along with the government providing incentive for FDI, Turkey is home to a
young and dynamic population. Out of the 76 million, the labor force is 27 million;
ranking fourth in largest labor force in relation to EU countries, and the median age is 28
years (ISPAT). This means in within 25 years, there will still be five workers for every
person of pensionable age in Turkey, while competitors such as Japan and Germany will
have less than two (EY). Turkey’s educational youth population, which averages higher
in skilled labor force, qualified engineers, competent senior managers, and strong work
ethic than the rest of the BRIC nations, is a prime reason they have attracted so much FDI
(JOI). Not to mention, the average hourly cost of labor is very attractive at $2.98 in 2009
and forecasted to grow to only $4.23 by the end of 2014 (ISPAT).
However, one of the most important aspects of the Turkish FDI environment is its
location between the crossroads of Europe, Asia, and the Middle East, allowing it access
to over 1.5 billion customers (EY). These markets have a combined value of over $25
trillion and are no more than a three-hour flight away from Istanbul (EY). Since signing a
customs union agreement with the EU in 1995, Turkey has had a trade surplus of over
$37 billion in goods and FDI over $101 billion from the EU (ECT). Without this
agreement, today’s Turkish exports would be 7.2 percent lower (WorldBank). Turkey’s
FDI from Asia and the Middle East only continue to grow and has almost tripled since
2010 to over $2.3 trillion (ISPAT). According to Ernst and Young’s 2013 Turkey
Attractiveness survey, 20 percent of investors see Turkey as the global leader in
manufacturing, 30 percent see it as the leader in international exports, and 44 percent of
investors see Turkey as the future leader as a global and regional hub for operations.

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One MNC in particular that has achieved great success in Turkey is The Coca-
Cola Company, which entered the Turkish market in 1964 through a Greenfield project.
They established a two-fold operation in order to target Turkish consumers. First, by
introducing them to the idea of happiness and Coca-Cola by using the “Happiness
Truck”, which visited Turkish provinces, giving away surprise presents, such as soccer
balls, violets, beach balls, wigs, and stuffed polar bears, to 4,000 people at random
locations (IBA). The second method was to expose consumers to the history of Coca-
Cola by showcasing objects and artwork that revealed the history of the brand’s past and
present, reflecting various lifestyles from the end of the 1800s to the present (IBA).
Since then, Coca-Cola has established its regional headquarters in Istanbul from
where it manages operations in 94 countries under the name Coca-Cola İçecek (CCI), and
is home to the MNCs Eurasia and African business unit. By opening a regional hub, this
reduces transport costs and allows CCI to retain more profit. CCI is the sixth largest
bottler in the Coca-Cola system in terms of sales volume (EY). Its core business is to
produce, sell, and distribute a variety of sparkling and still beverages of The Coca-Cola
Company. CCI owns 99.96 percent of the shares of Coca-Cola Satış ve Dağıtım A.Ş.,
which sells and distributes The Coca-Cola Company products in Turkey. CCI has eight
bottling plants throughout Turkey in Çorlu, Bursa, İzmir, Ankara, Mersin, Elazığ,
Sapanca, Köyceğiz (CCITR). In Turkey alone, CCI has invested over $700 million since
2006, employs over 3,000 people, and indirectly created over 30,000 jobs (EY). It has
increased revenue since 2011 by 21 percent to over $1.95 billion (CCITR).
The added benefit of CCI operating in Turkey is that The Coca-Cola Company is
already a major MNC, but is also a huge role player in the concept of globalization. It

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links Turkey to attract FDI in the 10 major Asian and Middle Eastern markets it supplies.
Turkey has given CCI great reason to remain and has even gone as far to list it on the
Istanbul Stock Exchange (ISE) in 2006, which shows confidence to domestic and
international investors interested in Turkey. It also led to the initial public offering to
increase eleven fold (IPSAT).
CCI’s President of international operations, Hüseyin M. Akın, believes
“History, proximity, and connectivity make Turkey an ideal management hub for those
investing in the region.”
His reasoning behind this belief is attributed to Turkey’s stable economic growth; a
young, dynamic, well-educated, and multicultural population; a strong industrial and
service culture; and access to multiple markets are among the positive macroeconomic
indicators that will keep investors focused on Turkey for many years to come (EY).
International investors do have their doubts about the Turkish economy though.
Due to recent political instability, the Turkish Lira (TL) hit an all time low in January
2014. However, since then, the TL has rallied 5.7 percent, bonds have been down the
most among developing nations since the Turkish municipal elections in March 2014,
and the trade deficit has widened (Bloomberg). This vast improvement shows that
although there is risk in the Turkish economy, the central bank will do what it needs to in
order to keep FDI alive and well. The Turkish government has set ambitious but feasible
goals to achieve by 2023, including becoming one of the top 10 economies in the world.
These goals rely heavily on attracting more FDI and credit agencies, such as Moody’s,
still deem Turkey as a stable investment climate with a predicted upward future rating
(Moody’s). Turkey’s future as an attractive emerging market for FDI remains bright

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thanks to its stable relationship with ISPAT and MNCs, its globally strategic location,
already established MNCs, and young and dynamic growing workforce. Turkey is
moving in the right direction, and is implementing the right motives to gain a strong edge
in global competition.

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