Interview: M Rifat Hisarcıklıoğlu

What can be done to attract more foreign direct investment (FDI) into capital projects and productive sectors of the economy?

M RIFAT HİSARCIKLIOĞLU: The business climate in Turkey has become more conducive to investment since the successful implementation of the structural adjustment programme. I believe that Turkey, as one of the fastest growing countries in the world, offers many opportunities in sectors such as pharmaceuticals, tourism, banking, housing, energy and the agro-food industry. However, there is still room for improvement. To sustain the rapid inflow of FDI to the economy, Turkey should reduce long judicial delays to bring them in line with international standards, eliminate rigidities and ambiguities in labour market taxation, strengthen the regulatory framework and further improve the quality of infrastructure. Taking these steps would not only increase FDI inflows to the country, they would also help Turkey to meet its objective of becoming one of the top 10 largest economies in the world by 2023.

In what way would higher levels of FDI benefit Turkey in terms of technology transfer and human capital development opportunities?

HİSARCIKLIOĞLU: High levels of FDI create an environment that introduces new opportunities for Turkish and foreign firms to work together and learn from each other. First, domestic companies that supply foreign companies are often required to comply with higher quality standards, which contributes to improving their overall production process.

Second, the presence of foreign companies in Turkey is beneficial in that it creates a more competitive environment, which helps Turkish businesses to evolve. Because foreign companies generally boast higher productivity levels, domestic companies have to invest more in technology and innovation to keep pace with a more competitive working environment.

Finally, FDI contributes to Turkey’s human capital development. Evidence shows that foreign companies invest more in training and have more sophisticated management styles. As they change employers or start their own business, employees that were trained in foreign companies spread their know-how and contribute to the overall improvement of management practices. In this respect, labour mobility is an important channel for economic development.

How can Turkey create a foundation for a more knowledge-oriented economy? Can this help to escape the so-called middle income trap?

HİSARCIKLIOĞLU: In a way, the middle income trap is the middle technology trap. The inability to move towards a more knowledge-oriented economy and falling into a middle income trap are two sides of the same coin. Human capital development is key, and for that reason, reforming the educational system is important. To start, more emphasis should be placed on sciences and engineering, in order to train more researchers capable of innovating. We should also increase collaboration between academic institutions and the private sector to stimulate innovation. Turkey’s 2023 target to raise the share of research and development expenditures in GDP to 3%, up from 0.84% in 2010, indicates Turkey’s commitment to becoming an innovation-driven economy.

Escaping the middle income trap is not only about innovation, however. Structural reforms also need to be implemented to support this transformation. More efficient industrial policies, an improved taxation system, a more flexible labour market and more efficient agricultural policies are all important elements of a comprehensive development strategy.

Last but not least, Turkey should also adopt a new constitution, which would improve the quality of governance. In this respect, TOBB worked closely with the Parliamentary Commission on a project designed to provide a basis upon which to forge a new social contract, via the organisation of constitutional conventions across the country. This is a good first step.