VII. INVESTMENT CLIMATE A1. OPENNESS TO FOREIGN INVESTMENT Turkey has a liberal investment regime in which foreign investments receive national treatment. Almost all areas which are open to the Turkish private sector, are open to foreign participation and investment. Treasury screens foreign investments but we are not aware of any foreign investment proposals that have been denied. Screening mechanisms are routine and non-discriminatory. They do not serve as an impediment to investment, limit competition or protect domestic interests. All rights, exemptions and privileges granted to national capital and business are available under the same conditions to foreign capital and business working in the same field. Apart from the aviation, maritime transportation, insurance and broadcasting areas, where the equity participation ratio of foreign shareholders is limited to 49 percent, there are no major sectors in which foreign investors do not receive national treatment or MFN treatment. The Turkish government privatizes state economic enterprises by block sale, public offering, or a combination of both. Foreign investors can participate in privatization in all cases. The Turkish government has been making block sales to foreign firms since 1986 in the cement, iron and steel, appliances, automotive, telecommunications, and airline industries. Foreign investors receive national treatment in privatization programs, too. They are allowed to participate in privatization programs from the initial stage onwards. There is no discrimination against foreign investors at any stage of investment. Turkey grants all rights, incentives, exemptions and privileges available to national capital and business to foreign business and capital. U.S. and foreign firms can participate in government financed and/or subsidized research and development programs on a national treatment basis. There are no discriminatory or excessively onerous visa, residence, or work requirements for employment of foreigners. There is no limitation for assigning expatriates as managers and technical staff. Turkey provides investment incentives which include subsidized credit facilities, and exemptions on corporate and value-added tax, customs fees, and duties. Investment incentives are clearly specified in regulations. The size of investment incentive depends upon location, sector, and value of the investment. Investment incentives are greater in "priority" (less developed) regions, and eligibility depends on a minimum value (approximately $500,000 for most investments, $100,000 for investments in priority regions) and minimum equity requirement (between 30-60 percent). (For further information please contact: General Directorate of Foreign Investment, Ismet Inonu Bulvari, Emek, 06510 Ankara, Turkey. Tel: (90) 312- 212 8914, fax: (90) 312 - 212 8916) Turkey has a rather liberal foreign trade regime. There are no discriminatory or preferential export policies and import policies affecting foreign investors. A2. CONVERSION AND TRANSFER POLICIES Turkish law guarantees the free transfer of profits, fees and royalties, and repatriation of capital in event of liquidation or sale. This guarantee is reflected in Turkey's bilateral investment treaty with the United States, which mandates unrestricted and prompt transfer in a freely usable currency at a legal market clearing rate for all funds related to an investment. There is no difficulty in obtaining foreign exchange. There are no limitations on the inflow or outflow of funds for remittances. A3. EXPROPRIATION AND COMPENSATION Under the bilateral investment treaty with the United States (codifying existing Turkish law), expropriation can only occur in accordance with international law and due process. It must be for public purpose and nondiscriminatory. Compensation must be reasonably prompt, adequate and effective. Under the U.S.-Turkey bilateral investment treaty, investors have full access to the local court system and the ability to take the host government directly to third party international binding arbitration to settle investment disputes. There is also a provision for state- to-state dispute settlement. As a practical matter, the Turkish government occasionally expropriates private property for public works or for state enterprise industrial projects. The Turkish government agency expropriating the property negotiates and proposes a purchase price. If the owner of the property does not agree with the proposed price, he can go to court to challenge the expropriation or ask for more compensation. A4. DISPUTE SETTLEMENT We are not aware of any major investment disputes, including outstanding expropriation/nationalization cases since 1990. The only investment dispute in recent memory involving a U.S. firm involves a failed attempt by the municipal authorities in Iskenderun to expropriate facilities owned by Macandrews and Forbes, a Camden, New Jersey firm. The firm's beach-front property had appreciated considerably since the facilities were established more than 100 years ago, but the authorities were willing to pay only a fraction of its real value. The courts decided in favor of Macandrews and Forbes in 1989. There are effective means for enforcing property and contractual rights in Turkey. There is no government interference in the court system. Turkey has a written and consistently applied commercial and bankruptcy law. Turkey is a member of the International Center for the Settlement of Investment Disputes (ICSID) -- also known as the Washington Convention -- and the New York Convention of 1958 on recognition and enforcement of foreign arbitrage awards. Turkey ratified the convention on Multinational Investment Guarantee Agency (MIGA) in 1987. By withdrawing its general derogation to "codes of liberalization of capital movements and invisible transactions (OECD codes)" capital movement and invisible transactions have been liberalized to a great extent. A5. PERFORMANCE REQUIREMENTS/INCENTIVES There are no performance requirements imposed as a condition for establishing, maintaining or expanding an investment. There are, however, some requirements for access to tax and investment incentives (refer to section A1 above). There are no requirements that nationals own shares in investments by foreigners, that the share of foreign equity be reduced over time, or that the investor transfer technology on certain terms. Investors need not purchase from local sources or export a certain percentage of output. Access to foreign exchange has no relation to exports. There are no government-imposed conditions on permission to invest, including location in specific geographical areas, specific percentage of local content -- for goods or services -- or local equity substitution for imports, export requirements or targets, employment of host country nationals, technology transfer, local financing, etc. The Turkish government does not request that investors disclose proprietary information, other than publicly available information, as part of the regulatory approval process. Enterprises with foreign capital must send their activity report, submitted to the general assembly of shareholders, auditor's report and balance sheets to the GDFI every year by May. A6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT Foreign and domestic private entities have the right to freely establish and own business enterprises and engage in all forms of remunerative activity except in sectors like aviation, maritime transportation, insurance and broadcasting where the equity participation ratio of foreign share holders is limited to 49 percent of an entity (in broadcasting 20 percent). Beyond these areas, private entities may freely establish, acquire, and dispose of interests in business enterprises. Competitive equality is the standard applied to private enterprises in competition with public enterprises with respect to access to markets, credit, and other business operations. A7. PROTECTION OF INTELLECTUAL PROPERTY Turkey needs to improve copyright and patent protection as well as institute greater penalties and enforcement of existing legislation. As a result of inadequate protection for intellectual property, the United States placed Turkey on the "priority watch list" in 1992, and in 1993 and 1994 under the "special 301" provision of the 1988 Trade Act. Turkey has given assurances it will modernize its intellectual property laws to conform with European Union standards, but progress on this issue has been slow. Under Turkish law, once the GATT Uruguay round agreement comes into force in 1995, its trade-related intellectual property rights provisions will take precedence over Turkish domestic legislation. Turkey is a member of the World Intellectual Property Organization. Copyrights: Turkey's copyright law ("Intellectual and Artistic Works Law") dates from 1951. Unauthorized copying and sale of U.S.-origin books, videos, sound recordings, and computer programs by local producers are widespread. The 1987 cinema, video, and music works law provided greater protection for some of these artistic works through a registration system. It has helped reduce piracy, but enforcement has been problematic and penalties are not harsh enough to act as a deterrent. The Turkish Government has submitted a revised version of the law to the National Assembly that would increase penalties, but as of June 1994 the Assembly had not passed it. In 1991 Turkey finally passed a law prohibiting computer software piracy. The government has drafted a new copyright law, but as of June 1994 Turkish government had not presented it to the National Assembly. Turkey is a member of the Berne Copyright Convention. Patents (product and process): Turkey's 1879 patent law does not provide protection for human or veterinary drugs or for the processes for making them. Nor are biological inventions, including plant varieties, patentable. Turkey's seed registration, control and certification law does not ban unauthorized propagation of foreign firms' proprietary seed. The patent term in Turkey is only 15 years from the date of filing. The government presented new draft patent legislation to Parliament in 1993, but as of June 1994 it was still under consideration. The draft legislation contains a four-year delay before pharmaceuticals would be covered, as well as compulsory licensing provisions which would limit the economic value of a patent in many cases. Turkey is a member of the Paris Patent Convention. Trademarks: counterfeiting of foreign trademarked products, such as jeans, perfumes, film, and spare car parts, is widespread. Trademark lawyers generally believe that the relevant laws are adequate, but that the criminal justice system, overwhelmed by far more serious crimes, is not willing to devote the effort necessary to prosecute offenders. Counterfeiters are generally small operations rather than large companies. Trade secrets: there is currently no Turkish law specifically protecting trade secrets. A8. REGULATORY SYSTEM: LAWS AND PROCEDURES The Turkish Government has adopted a transparent policy and effective laws to foster competition and normally follows competitive bidding procedures. Occasionally, the Turkish government agencies make direct orders to firms or state economic enterprises if the quantity is small. Some tenders are only open to domestic firms, while large tenders which require foreign finance, technology and service imports are made internationally. A law on the prevention of unfair competition came into force in 1989 which protects industry against unfair competition due to dumped or subsidized imports. Turkish foreign investment legislation does not allow companies special privileges or to become monopolies. There are tax, labor, health and safety, and other laws and policies to avoid distortions or impediments to the efficient mobilization and allocation of investment. Bureaucratic procedures are, in general, streamlined and transparent. The Turkish government has substantially reformed these laws since 1980. To avoid the risk of "double" taxation on U.S. firms (in both the United States and Turkey), the two governments are currently negotiating a treaty for the avoidance of double taxation. Numerous double taxation treaties are also in effect with other countries. Turkish social law is also transparent. All employees must be insured by the government's social security organization. Both employees and employers are subject to social security premiums in Turkey (except expatriates employed by a non-resident employer for a limited duration on condition that they are insured abroad). Under Turkish labor law, most workers have the right to associate freely and form representative unions. Turkish government bars military personnel, teachers, police and civil servants (broadly defined as anyone directly employed by central government ministries and certain state economic enterprise employees) from organizing unions, but constitutional amendments granting all categories of employees the right to form unions and expanding the right to strike were submitted to Parliament in late 1992 (refer to section D below). An arbitration board settles disputes in cases where strikes are forbidden. The Turkish Government has established a 'one stop' agency, the General Directorate of Foreign Investment (GDFI) within the Undersecretariat of Foreign Trade, to deal with issues related to foreign investments. Sometimes it can be time consuming to get things done, depending on the type of investment. Turkish government assistance is basically limited to the point at which a company is formed--then the firm is treated as a local company. Companies with foreign partners/parents often do not feel as free to operate in Turkey's "liberal" environment as do wholly local firms. The National Assembly recently passed new BOT (Build-Operate- Transfer) legislation which allows foreign firms to participate in some of the state investment projects which require advanced technology and/or large amounts of financing on a Build-Operate- Transfer basis. Projects include construction of bridges, dams, tunnels, motorways, railways, sea ports and airports for civilian usage, irrigation, potable-water and sewerage systems, waste water treatment plants, factories, energy production and transmission, mining, telecommunications and similar plants. A9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENTS Turkish capital markets are open to the free flow of financial resources for investment. Credit is allocated on market terms, and is available to any qualified borrower. Foreign and domestic companies have the same access to the local credit market. The private sector has access to a variety of credit instruments. Foreign investors have access to Turkey's developing capital markets, primarily the Istanbul Stock Exchange, but most credit still comes from direct borrowing. The Istanbul Stock Exchange has not grown to the point where it can support the country's capital needs. Legal, regulatory, and accounting systems are transparent and consistent with international norms. There is an effective regulatory system established to encourage and facilitate portfolio investment. Portfolio investment in Turkey is fully open to foreign investors. 1993 saw a boom in the amount of foreign capital entering Turkey, both in portfolio investment and consolidated loans made to Turkish banks. In January 1994, however, a sharp decline in the value of the Turkish Lira and extreme volatility in Turkey's financial markets led to capital flight in the first months of the year. On April 5, the government announced an austerity package designed to correct macroeconomic imbalances, and by June normalcy had returned to the financial markets. The Government of Turkey plans to open a gold exchange in Istanbul in September,1994. Turkish citizens hold large quantities of gold as a hedge against inflation. The Turkish government hopes to securitize the country's gold stock and make Istanbul an international center for gold trading and processing. The Turkish government is considering further opening of the financial services, accountancy and insurance sectors as part of Turkey's Uruguay round GATT services offer. Turkey's five largest banks accounted for approximately 50 percent of the banking sector's total assets. These five large banks, three of which are state banks, held assets totalling 489 trillion Turkish lira (about $33 billion) at the end of 1993. In April 1994, the Turkish Treasury ordered the closing of three small, private banks. Due to the difficult economic situation which existed at that time, these banks faced a severe liquidity shortage. From 1987 onwards, the Central Bank's exchange rate policy had emphasized a "strong lira". Consequently, the lira was devalued at a rate much lower than inflation. High real returns on Turkish lira financial instruments encouraged banks to borrow externally and convert foreign exchange credits to Turkish lira. The banks held an open position of as much as $5 billion at year end 1993. A sharp decline in the value of the lira in the first four months of 1994 has devoured 1993 profits and placed many smaller commercial banks in a difficult position. In April 1994 the Government of Turkey announced that it would guarantee all bank deposits in commercial as well as state banks, in order to end a "quiet" run on banks and restore confidence in the banking sector. Early statistics indicated that in the first week of May, 22 trillion Turkish lira ($700 million) flowed back into the banking sector. In 1994, bank profits will decline considerably from 1993 and there will be a trend towards consolidation in the banking sector as small, weak banks forge new alliances with stronger banks or are subsumed by them. We are not aware of any "cross-shareholding" and "stable shareholder" arrangements used by private firms to restrict foreign investment through mergers and acquisitions. Very few companies have more than 50 percent of their shares listed on the stock exchange, and therefore, hostile takeovers are in most cases not possible. Most companies are owned by families and are not open to the public. However, many companies are willing to form joint ventures with foreign companies. There are no laws or regulations specifically authorizing private firms to adopt articles of incorporation which limit or prohibit foreign investment. There are, however, some regulations limiting participation or control in some fields such as broadcasting. There are no private sector or government efforts to restrict foreign participation in industry standards-setting consortia or organizations. There are no other practices by private firms to restrict foreign investment, participation, or control in domestic enterprises. A10. POLITICAL VIOLENCE For the last ten years, urban and rural acts of terrorism throughout Turkey have caused injury and loss of life to government officials and civilians, including some foreign tourists. Most incidents have occurred in eastern Turkey. In 1993, one terrorist group, the Kurdistan Workers' Party (PKK), began to target tourist sites and tourist-oriented facilities in western Turkey in an effort to inflict economic harm on Turkey by discouraging tourism. Some terrorist groups have also targeted the personnel and property of organizations with official and commercial ties to the United States. B. BILATERAL INVESTMENT AGREEMENTS Since 1985, Turkey has been negotiating and signing agreements for reciprocal promotion and protection of investments with various countries. As of may 1993, Turkey has signed or initiated bilateral investment protection and promotion agreements with 26 countries. Eleven of these agreements are now in force with the United States, Germany, Holland, Belgium- Luxembourg, Denmark, Austria, Switzerland, Japan, Tunisia, Kuwait, and Bangladesh. Negotiations with a number of other countries are continuing. Turkey's bilateral investment treaty with the United States came into effect on May 18, 1990. C. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS The Overseas Private Investment Corporation (OPIC) offers its full range of programs in Turkey, including political risk insurance for U.S. investors under its bilateral agreement between the U.S. and Turkey. OPIC is also active in financing private investment projects implemented by U.S. investors in Turkey. In 1987, Turkey became a member of the Multinational Investment Guarantee Agency (MIGA). D. LABOR The Turkish labor force numbers about 20.8 million persons, with approximately 47 percent employed in agriculture. With an official national unemployment rate of 7.6 percent (but probably significantly higher, especially in urban areas, due to discouraged workers leaving the labor force), and the minimum school-leaving age raised from 11 to 14 only in the past two years, Turkey has an abundance of unskilled and semi-skilled labor. However, there is a shortage of qualified workers for highly automated, high-tech industries. Individual high-tech firms, both local and foreign-owned, have generally conducted their own training programs for such job categories. Vocational training schools do not yet exist in Turkey, and traditional apprenticeship programs--formal and informal--remain the norm. Labor-management relations are generally good. Employers are obliged by law to negotiate in good faith with unions that have been certified as bargaining agents. Strikes are usually of short duration and almost always peaceful. The incidence of strikes decreased markedly in 1993 (50 percent lower than in 1992). Since the 1980 military coup Turkey has faced criticism in the International Labor Organization (ILO), particularly for shortcomings in enforcement of ILO convention 98 (right to organize and collective bargaining). Current labor law prohibits "civil servants" (defined broadly as all employees of the central government ministries, including teachers) from forming trade unions. The current government is working with the Turkish National Assembly to pass legislation which will permit civil servants the legal right to unionize. At issue is whether this can be done within the framework of the current constitution, and to what extent civil servants will have the right to strike and collective bargaining. In 1992, the Turkish National Assembly ratified seven ILO Conventions, including no. 158 (Termination of Employment at the Initiation of of the Employer), no. 87 (Freedom of Association) and no. 151 (Right to Organize in the Public Sector). E. FOREIGN TRADE ZONES/FREE PORTS There are five Free Trade Zones (FTZ)--Mersin, Antalya, Aegean, Istanbul and Trabzon--in Turkey. These free zones are completely tax free and foreign-owned firms have the same investment opportunities and treatment as host country entities. Trade between FTZ's and Turkey is treated as foreign trade. The goods brought into the free zones can be sold to Turkey with or without processing. There are no limitations on the proportion of foreign capital participation within the FTZ. Foreign-owned firms can benefit from a number of incentives such as tax (including income tax on salaries of persons working within the FTZ), duties and toll exemptions and export treatment of Turkish origin inputs, etc., both at the investment and production stages. (For further information please contact: General Directorate of Free Trade Zones, Undersecretariat for Foreign Trade, Inonu Bulvari, Emek, Ankara. Tel: (90) 312 - 212 8909, fax: (90) 312 - 212 89 06) F. CAPITAL OUTFLOW POLICY Turkish citizens wishing to establish a company, a branch office, or take part in a joint venture may freely transfer capital abroad below $5 million without permission. Export of capital above $5 million must be approved by the Undersecretariat of Treasury. Applications for transfer of over $150 million must be submitted to the Council of Ministers after preliminary consideration by the Treasury. Turkish foreign direct investments in other countries as of December 31, 1993 (please note that the figures may not be reliable because most Turkish businessmen tend to move money in amounts less than $5 million): Capital Outflow (USD millions) ----------------------------------------------------------------- COUNTRY OF CUMULATIVE DESTINATION 1991 1992 1993 TOTAL ----------------------------------------------------------------- U.K. 6.5 N/A 7.41 38.1 GERMANY 33.0 36.3 10.3 124.1 C.I.S. 0.3 27.7 76.0 113.5 UNITED STATES 0.6 3.1 3.2 87.5 LUXEMBOURG N/A 10.3 5.0 40.8 NETHERLANDS N/A 10.7 10.7 29.9 SWITZERLAND N/A 2.0 5.3 26.2 AUSTRIA N/A N/A 1.1 20.3 FRANCE 3.8 0.6 3.8 19.8 OTHERS(1) 3.7 4.3 9.9 17.7 ----------------------------------------------------------------- TOTAL 47.9 94.9 132.7 659.9(2) (1): Includes capital outflow to free trade zones as well as to all other countries. (2): Total (cumulative) capital outflow from turkey. Source: General Directorate of Banking and Foreign Exchange, UTFT. Outward FDI as a Percentage of Turkish GDP ----------------------------------------------------------------- OUTWARD FDI/GDP YEAR (percent) OUTWARD FDI (USD Millions) ----------------------------------------------------------------- TO 1985 212.2 -- 1990 172.5 0.11 1991 47.9 0.03 1992 94.9 0.06 1993 132.7 0.08 ----------------------------------------------------------------- Source: General Directorate of Banking and Foreign Exchange, Treasury, and State Institute of Statistics (SIS). G. FOREIGN DIRECT INVESTMENT STATISTICS According to statistics provided by the GDFI, as of April 30, 1994 there were 2614 foreign firms which have invested and are operating in Turkey. Total authorized capital was $12,945 million and actual inflows reached $6,765 million (as of January 30, 1994). European Union (EU) countries accounted for about 60 percent of cumulative foreign investment, OECD countries accounted for 90 percent. France and the Netherlands are the top sources of foreign investment, followed by the United States. About 65 percent of foreign investment was in manufacturing, 31.8 percent in services, 2 percent in agriculture and 1.2 percent in mining. Of the foregoing, some of the larger subsectors include financial services (10.43 percent), hotel services (9.28 percent), banking (8.98 percent), vehicle production (7.47 percent), food processing (7.07 percent), tobacco products (6.04 percent) and electronics (4.61 percent). Total Cumulative Foreign Direct Investment in Turkey by Country of Origin as of April 30, 1994 ----------------------------------------------------------------- COUNTRY NUMBER PERCENTAGE OF OF FIRMS TOTAL FOREIGN CAPITAL ----------------------------------------------------------------- FRANCE 140 19.69 NETHERLANDS 123 13.72 UNITED STATES 191 12.31 SWITZERLAND 147 10.53 GERMANY 470 8.77 UNITED KINGDOM 192 6.93 ITALY 100 6.41 JAPAN 37 5.43 SAUDI ARABIA 58 2.04 CANADA 12 1.96 JERSEY ISLAND 2 1.30 LUXEMBOURG 22 .87 OTHERS 1,120 10.04 ----------------------------------------------------------------- TOTAL 2,614 100.00 Source: General Directorate of Foreign Investment, (GDFI), UFT. Estimated FDI Stock as of Percentage of Turkish GDP by Country, as of April 1994 ----------------------------------------------------------------- COUNTRY FDI STOCK/GDP ----------------------------------------------------------------- FRANCE 2.28 NETHERLANDS 1.59 UNITED STATES 1.42 SWITZERLAND 1.22 GERMANY 1.01 UNITED KINGDOM 0.80 ITALY 0.74 JAPAN 0.63 SAUDI ARABIA 0.60 CANADA 0.23 ----------------------------------------------------------------- SOURCE: General Directorate of Foreign Investment (GDFI), and the State Institute of Statistics (SIS). Foreign Direct Investment by Years (Million, USD) ----------------------------------------------------------------- FDI PERMISSIONS REALIZATIONS NO. OF YEAR CUMULATIVE ANNUAL ANNUAL FIRMS TO 1988 3,229 ----- ----- ----- 1989 4,791 1,512 855 1,525 1990 6,652 1,861 1,005 1,856 1991 8,619 1,967 1,041 2,123 1992 10,439 1,820 1,242 2,330 1993 12,710 2,271 1,016 2,554 1994 (A) 12,945 (A) 463 (B) 23 2,614 ----------------------------------------------------------------- (A): As of end of April, 1994 (B): As of end of January, 1994 Source: General Directorate of Foreign Investment (GDFI), and the State Planning Organization (SPO) Annual FDI Flow as a Percentage of Turkish GDP ----------------------------------------------------------------- FDI FLOW FDI YEAR (USD, Million) FLOW/GDP (Pct) ----------------------------------------------------------------- Up to 1988 3,229 ----- 1989 855 0.79 1990 1,005 0.67 1991 1,041 0.69 1992 1,242 0.78 1993 1,016 0.60 1994 (A) 23 N/A ----------------------------------------------------------------- (A): As of end of January, 1994 Source: General Directorate of Foreign Investment (GDFI), and the State Planning Organization (SPO). H. MAJOR FOREIGN INVESTORS To date, many well-known multinational companies have invested in Turkey including: American Express, Citibank, Chase Manhattan Bank, Chemical Bank, Bankers' Trust, Banco Di Roma, Dresdner Bank, First National Bank of Boston, Irving Trust, P.B. International Bank, Saudi American Bank, AEG, Alcatel, Bayer, Bell Telephone, BMC, Bosch, BP, Bridgestone, Cargill, Castrol, Ciba-Geigy, Ciment Francais, Club Mediterrane, Coca Cola, Colgate-Palmolive, Conrad, Daimler-Benz, Du Pont De Nemours, Fiat, FMC, General Electric, General Motors, Henkel, ITT, Ford Motor Co., Lockheed, Gillette, Goodyear, Hilton International, Hoechst, Honda, Toyota, International Harvester, Kumagai Gumi, Man, Mannesman, McDonald's, Nestle, Mitsui, Mobil, Nabisco, Philips, Philip Morris, Northern Telecom, Pepsi, Pfizer, Pirelli, Procter and Gamble, Ralston Purina, Renault, R.J.R. Nabisco, Hoffman-Laroche, Sandoz, Shell, Siemens, Singer, Thyssen, Tuborg, Uniliver, Uniroyal, Volvo and Voyager.