MORE THAN MEETS THE EVIL EYE

Business Practices and Constraints of SMEs in Turkey

Sarah Willis-Ertür Jennie Vader CONTENTS

About 4 Credits 5

Executive Summary 6 Introduction 10

Ambiguous Position in the Global Market 12 SME’s Could Decide Turkey’s Future 15

Methodology 16

Participant and Region Selection 18 Challenges and Limitations 19

Stakeholders in the Turkish SME Landscape 20 Findings and Analysis 24

Strategy and Planning 26 Human Capital 30 Financing 38 Competitiveness 48

Conclusion 54

Appendix 1: Interview List 56 Appendix 2: SME Offerings by Major Turkish Banks 58 Appendix 3: Endnotes 62 Appendix 4: Bibliography 64 Acknowledgments 67

2 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 3 ABOUT CREDITS

The Institute IBGC-MasterCard Authors Research Assistants for Business in the Fellowship Sarah Willis-Ertür Jennie Vader Mert Özer Global Context Abid Emre Koruk Since 2009, the Institute for Business in the Sarah Willis-Ertür worked for over four Jennie Vader has a bachelor’s degree Global Context at The Fletcher School and years in Germany and Turkey for private from Colorado College in International MasterCard’s Center for Inclusive Growth sector and nonprofit organizations. She Political Economy and a master’s degree have collaborated to pioneer new models and has a bachelor’s degree from the from The Fletcher School of Law and Advisory Team experiential learning in international business University of Minnesota-Duluth in Diplomacy at Tufts University, where she Faculty Advisor through collaborative research projects. German Studies and International focused on the Design, Monitoring, and The Fletcher School’s Institute for Business Studies. Most recently, she completed Evaluation of International development Kim Wilson in the Global Context (IBGC) was founded The IBGC-MasterCard Research Fellowship her master’s at The Fletcher School of programs. She also has experience in Institute of Business in the Global Context in recognition of the need for a new in Inclusive Growth offers the unique Law and Diplomacy at Tufts University, macroeconomic analysis, particularly in approach to the study of international opportunity to engage exceptional Master’s where she concentrated on development Eastern Europe and Central Asia, and Editor business and capital markets—one that candidates in cutting-edge research in economics and market-based previously lived for over a year in prepares global business leaders with frontier markets, on issues related to inclusive Jamilah Welch approaches to human and economic Kazakhstan. Jennie now works at Project essential “contextual intelligence.” growth and business. This program supports Institute of Business in the Global Context research innovation, allowing students to development. Sarah currently works as Concern International as an Associate Through four core activities—research, push beyond the scope of traditional market an International Associate on the Technical Advisor for the organization’s dialogue, education, and lab—the Institute research by engaging high-touch, in-field Mediterranean team at the Clinton Women Empowered initiative. provides an interdisciplinary lens through methods to uncover important aspects of Global Initiative in New York City. which global markets and the underlying industry or economic development in the drivers of change can be understood. IBGC’s emerging and frontier economies. Inclusive Growth Initiative aims to explore the potential trade-offs and innovations This report is the result of this innovative needed to disrupt classical business and collaboration. economic frameworks and create truly sustainable prosperity for individuals, communities, and private enterprise.

MasterCard Center for Inclusive Growth

The MasterCard Center for Inclusive Growth was created to foster collaborative relationships between academia, governments, nonprofits, the social design community, and the private sector. Through the advancement of research and strategic philanthropic investments, the Center will support and enable those historically excluded from financial services and serve as a catalyst for change.

4 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 5 As Turkey continues to define itself as an Turkish SMEs have the potential to make in-depth interviews with participating emerging market, negotiating its position significant contributions to gross SMEs and 15 interviews with expert between Europe and the Middle East, domestic product (GDP), to create jobs stakeholders and financial service EXECUTIVE SMEs will prove to be a very important for an underutilized and growing labor providers illuminated the following key and strategic sector. force, and to nudge Turkey’s current insights: categorization as an efficiency-driven Having built its current growth story on economy toward the next stage as an An overall lack of strategy and domestic consumption and portfolio innovation-driven economy. However, in planning preclude many SMEs from SUMMARY investment, Turkey has yet to sufficiently order for SMEs to play a greater role in thriving. leverage its prolific SME segment for the Turkish economy, some key future growth. This issue is now Despite various motivations for starting constraints need to be overcome. incredibly significant, as recently elected or running a business, owners and Turkey has a window of opportunity to facilitate progress and President Recep Tayyip Erdogan and his While financial service providers and managers lacked formal business plans ruling Justice and Development Party public organizations have placed a and/or well-devised strategies to help growth in established small and medium-sized enterprises (AKP) have established ambitious goals greater emphasis on providing achieve business goals. Moreover, the aimed at dramatically improving Turkey’s specialized products and services to the family-run nature of many SMEs means (SMEs) and leverage their success to propel Turkey’s economy. position in the global economy by the SME segment, businesses still face most owners and managers do not have Republic’s 100th Anniversary in 2023. significant constraints in accessing the necessary training or expertise to With these goals in place, Turkey has a finance, effectively utilizing human make strategic decisions in human window of opportunity to facilitate capital, and enhancing competitiveness. capital and financial management, progress and growth in established further inhibiting them from Thus, these challenges prevent the SMEs and leverage their success to professionalizing. existing “solutions” from truly unlocking propel Turkey’s economy. the potential of SMEs to fuel Turkey’s The overall lack of strategy and planning economic growth. More than 30 implies a failure to properly allocate

6 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 7 resources in terms of reaching target being perceived as high-risk investments A variety of private and public sector customers, hiring qualified human and contributing to a distrustful solutions may help to push Turkey up capital, and preparing for future relationship, ultimately harming both the global value chain and towards its challenges and opportunities, among banks and businesses. 2023 goals. other things. In order to effectively Moreover, cash flow management was A necessary prerequisite for leveraging expand or enter new markets, Turkish another commonly cited challenge for the full potential of Turkish SMEs is to SMEs will need to increase knowledge business owners and managers who improve professionalism, especially in about and use of business plans and struggle to collect payments and to deal managers and owners. For its part, the strategies. with the system of long check maturities. public sector can diminish institutional Increased access to capital, particularly barriers obstructing cash flow, in The supply of qualified human capital to long term financing, could help SMEs addition to continuing, enhancing, and and the ability for SMEs to attract invest in expansion and enhanced increasing awareness of public SME talented employees is a significant competitiveness, but access to capital support institutions such as the state challenge. will not likely improve until there are employment agency and the credit 72% of respondents cited finding or some gains in professionalization – thus, bureau. Financial service providers can hiring employees as one of their greatest financing alone will not be the magic provide more guidance and transparency challenges and many reported a gap bullet to SME success. to SMEs, potentially by expanding the between the skill levels currently role of relationship managers (RM), available in the workforce and their Increased self-awareness about a among other things. employment needs. given SME’s position in the market, in Similarly, experienced business owners addition to increased knowledge about Overall, business owners complained can mobilize forces to serve as “SME how to export to new markets and slightly more frequently about their Ambassadors”, acting as role models invest in R&D and market research will ability to find skilled workers than with helping others tap into foreign markets, help SMEs thrive. unskilled workers. Well-placed, qualified create business plans, expand their talent will be an important step in The majority of participants spoke businesses, and more. Lastly, SMEs moving Turkish SMEs to the next level. vaguely about their competitors and themselves can increase the autonomy, For Turkey, this will primarily necessitate their own position in the market and very professional development, and career a convergence of the education system few businesses reported investing in any paths for employees to attract top talent with employer needs. Additionally, more market research or R&D for innovation. and also consider hiring accountants and coordinated efforts to find and place financial advisors. These and more On the other hand, SMEs currently employees are needed, and re- solutions will be expounded upon in the contribute to 58% of Turkey’s exports conceptualized retention strategies Findings and Analysis section. and a significant proportion of this should orient the focus towards sample were interested in expanding increased employee autonomy and their role in international markets. Thus, improved working environments. there is great potential to increase the competitiveness of Turkish SMEs in Capital is indeed available in the order to move Turkey up the global value market, but gaining access to that chain and into more international capital is highly costly. markets. Business owners reported prohibitive loan terms, such as high interest rates and strict collateral requirements. A mismatch exists between bank and SME expectations, resulting in SMEs

8 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 9 Turkey, as an emerging market, benefits While there are existing public and from a prolific SME segment, but has private initiatives aimed at assisting the thus far based its growth story primarily SME segment, the relatively small part INTRODUCTION on a steady level of domestic SMEs have played in Turkey’s growth consumption and portfolio investment. story indicates that they may be missing the mark. If leveraged successfully, SMEs have the Small and medium-sized enterprises (SMEs) are most potential to make huge contributions to Public organizations, motivated by the Turkey’s economy by increasing GDP, potential of SMEs to fuel Turkey’s commonly referred to as engines of economic growth creating jobs for its underutilized and economic growth, and financial service growing labor force, and mitigating providers, attracted to SMEs as a growing as they create jobs, increase productivity, and foster income distribution differences. SMEs customer segment, have both placed a 1 could even nudge Turkey’s current greater emphasis on providing specialized innovation and forward thinking. categorization as an efficiency-driven products and services to SMEs. However, economy toward the next stage as an businesses still face significant challenges innovation-driven economy. in accessing finance, effectively finding and utilizing human capital, and Thus, our motivating research question enhancing competitiveness. Beyond was: What public- and private-sector simply offering more financial products to driven solutions exist or would need to SMEs, increasing the capacity of business exist to stimulate the growth of key SME owners to effectively utilize financing, segments in Turkey? To answer this manage human capital, and invest in question, we took a fresh look at the research and innovation may be required. challenges SMEs face, hoping to enable both public and private players to unlock the full potential of this segment.

10 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 11 AMBIGUOUS POSITION IN 2013 GDP SECTORS WITH GROWTH HIGHEST SHARE THE GLOBAL MARKET 4.0% OF GDP CURRENT Turkey faces a variety of internal and Also, since violence has erupted in Iraq, tier of emerging market powerhouses, $65b ACCOUNT external challenges which complicate its Turkish exports to the country—its also referred to as MIST countries. 58.4% strategic position as an emerging market second-largest foreign market—have Foreign investors are attracted to these and compromise the ability of Turkish dropped by 30%.3 Considering Iraq and countries as they each contribute over 7.9% of GDP DEFICIT SMEs to thrive. Syria have been the destination for more 1% to nominal global GDP, have SERVICES than 7% of the exports from Turkey, this experienced rapid economic growth, and is quite a blow to the existing current support a large domestic market EXPORTS 26.3% of GDP Erdogan’s Victory account deficit. powered by a young population. First, Recep Tayyip Erdogan declared Turkey in particular boasts a tight fiscal 31.5% of GDP IMPORTS victory on August 10, 2014 in Turkey’s policy, low public debt, and enjoys close 26.9% Deficit first-ever direct presidential election, trade linkages to the EU, Middle East, and turning his 12-year stint as prime Third, Turkey’s current account deficit is Russia. Moreover, with its EU customs TOP 5 GERMANY minister into another five years as leader unsustainably high, due primarily to a agreement, low labor costs, and weak INDUSTRY of both the Justice and Development reliance on foreign natural resources. exchange rate, Turkey has become a IMPORT CHINA, RUSSIA, Party (AKP) and the country. While Moreover, the country has a low hotspot for multinational corporations Erdogan garnered nearly 52% of the household savings rate of around 12%. seeking a market to produce intermediary ORIGINS ITALY, USA goods and is a major center for final 9.2% 5.9% votes in the presidential election, his Both contribute to higher pressure on 6 AGRICULTURE CONSTRUCTION vision for Turkey and many of the the nation to finance its growth through production in the automotive sector. reforms passed in recent years have foreign capital inflows. An over­ GERMANY TOP 5 deeply divided the country. dependence on those inflows is an unsustainable and risky growth model IRAQ, IRAN, EXPORT His policy-making and the controversial which could thwart Turkey’s ambitious handling of political issues have sparked $12.918m goals.4 UK, UAE DESTINATIONS large protests over issues such as rising political Islamism, suppression of Furthermore, being dependent on foreign FOREIGN DIRECT political opposition, and censorship over capital means that Turkey also depends free media. This domestic instability on foreign investors’ confidence. In TOP FIVE IMPORTS INVESTMENT places particular stress on businesses as particular, Erdogan’s aversion to high they attempt to make plans in the face of interest rates and the oft-criticized MINERAL FUEL OIL, MACHINES, political uncertainty. independence of the central bank could PRECIOUS STONES AND METALS, put Turkey in a vulnerable position. Certain structural weaknesses such as IRON, STEEL, PLASTICS Regional Instability an overregulated labor market, high 9-10% minimum wages, a large informal sector, Second, regional instability also low female participation rate, and a contributes to the uncertainty of the relatively weak education system TOP FIVE EXPORTS Turkish economy. The ongoing civil war significantly impact SMEs.5 INFLATION in Syria has damaged both political and KNITTED AND NON-KNITTED Despite these significant challenges, economic relationships between the CLOTHING, FRUITS, IRON AND STEEL Turkey is still well positioned as an countries. In addition, as of August 2014, RATE emerging market in today’s global PRODUCTS, SALT, SULFUR STONES Turkey is hosting more than 800,000 economy. With its growing population Syrian refugees and another 150,000 and strategic geopolitical location, people fleeing the recent Islamic State Turkey is often compared to Mexico, (IS) occupations arrived in late- Indonesia, and South Korea – the next September 2014.2

12 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 13 SME FACT SHEET SME’S COULD DECIDE TURKEY’S FUTURE Turkey officially uses the European SMEs account for 81% of total SMEs come in last in terms of Commission standards for differentiating employment, 62% of investments, growth rates, as compared to rapidly business sizes between micro 59% of total value added and 56% of growing microenterprises and top enterprises, SMEs, and large firms, yet exports (a steep increase from around corporate firms. each commercial bank has a unique SME 10% in 2004). segmentation. These definitions are The average SME in Turkey has been based on number of employees and in business for 16 years. annual net sales revenue.

Turkey has approximately 3.5 million Type of Enterprise Number of Employees Annual Revenue SMEs and about 3,000 large firms. 98.5% of all businesses are micro- Micro 1 – 9 < 1 million TL enterprises, 0.9% are small, %0.5 are Small 10 –49 < 5 million TL medium, and 0.1% are large enterprises. Medium 50 – 250 < 25 million TL

GENDER AVERAGE HUMAN GAP 29.6 DEVELOPMENT 120th AGE YEARS INDEX OUT OF PRIMARY To propel Turkey even further, the Having recognized the potential SMEs 69th governing AK Party has established a set have to help Turkey realize its own 136 EDUCATION 23.5% of lofty goals aimed at making Turkey goals, while also acknowledging the COUNTRIES OUT OF one of the world’s 10 largest economies current constraints that many SMEs SECONDARY by 2023. This feat would require at least face, this research aims to identify a 6-8% annual growth rate – an solutions which can have a positive EDUCATION objective which has not been achieved impact on those businesses and, in turn, 17.7% 7 since 2011. on Turkey’s economy. 77 TERTIARY Turkey can use the 2023 goals as an The report is organized in the following MILLION 187 opportunity to more effectively leverage way: the Methodology section (page 16) POPULATION EDUCATION 9.4% COUNTRIES its SME segment and to allow these describes the key SME segments we businesses to play a greater role in the studied; the Key Stakeholders section country’s growth story. For example, (page 20) identifies existing private and Erdogan envisions an ambitious increase public actors which have been “Erdogan and the government have put a very high priority on taking Turkey from in annual Turkish exports from the current established to support SMEs. Then, the $151 billion to $500 billion and SMEs are Findings and Analysis section (page 24) the world’s 17th largest economy to the 10th largest by 2023, the 100th anniversary of important actors in increasing exports. examines the current formal and informal practices of SMEs, their the Republic. The growth of the SME market is an essential component to this. While Turkish SMEs already account for greatest needs and constraints, and 60% of Turkey’s total exports8, - Arthur Scully, CEME Senior Fellow at The Fletcher School, Tufts University highlights potential solutions. increasing their contribution will push Turkey closer to its goals.

14 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 15 Upon our arrival in Turkey, we conducted • Semi-structured interviews with the • Key informant interviews with preliminary key informant interviews with business owner (85% of SME experts working in the financial experts on the Turkish economy and interviews), or with a manager when service industry and/or SME space. METHODOLOGY SMEs in Turkey, and also representatives the owner was unavailable. These Interviews generally lasted an hour. from financial service providers, including interviews gave us access to basic • Observations, including touring commercial banks and factoring and business indicators, the business’ organized industrial zones, factories, leasing companies. These conversations, development, and their future goals, and businesses. We began with a comprehensive literature review of the in addition to the literature review, helped strategies, and most challenging establish the parameters for choosing constraints. After allowing the Turkish economy, which allowed us to assess the role businesses to participate in the study and participant to express their own of SMEs in Turkey’s growth story and to understand the guided our decision to focus on three concerns and thoughts, the questions constraint categories (access to finance, were narrowed to the three themes constraints SMEs face in emerging markets. human resources, and competitiveness) identified from the literature review during interviews. and key informant interviews: access to capital, human resources, and Over the course of the in-country study, elements of competitiveness. we used the following qualitative Interviews lasted between an hour research techniques: and two hours and were conducted in whichever language the participant was most comfortable (Turkish or English), and sometimes a combination of both.

16 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 17 PARTICIPANT AND REGION CHALLENGES AND SELECTION LIMITATIONS

Due to the semi-structured nature of the interviews, each participant was not BLACK SEA REGION interviewed for the same amount of time, nor were they all asked the same MARMARA questions. The original research agenda EAST ANATOLIA incorporated repeat visits to each CENTRAL ANATOLIA business so that trust could be built and AEGEAN more in-depth discussions established. However, due to the time constraints on SOUTHEAST ANATOLIA both businesses and research team, repeat visits were arranged only with particular participants based on their MEDITERRANEAN REGION willingness to meet. This proved limiting because, as certain trends emerged and Since the research sought to discover more clearly explained the goal of the some information needed clarification, the practices and growth potential of research and established a time to meet the research could have been enriched businesses taking on a certain level of the business’ owner or a manager. 56 with repeat visits. professionalization, and since asking Average number of employees We focused on two regions within Additionally, the findings presented in businesses for their annual revenues was of the sample. Turkey: the Marmara and Southeastern this report are limited to the veracity of difficult and inconsistent, participants region. These two geographic areas were participant answers. Factors that may were selected based on employee chosen to provide a rich comparison of 12 years have affected interviewee answers were: numbers. Thus, eligible businesses business practices and constraints as Average number of years misunderstood questions, open offices needed to have between 10 and 250 they represent very different participating businesses had that may have led to self-censored employees. socioeconomic and cultural been open. answers, and distrust of the research Moreover, this research focused on characteristics. aims.9 Finally, due to the small size and SMEs who had been established for at Breakdown of sample: potential selection bias10, the information In the Marmara region, SMEs were least three years, as opposed to start-up gathered cannot be generalized to all interviewed in the cities of Istanbul, • 9% operating for 1-3 years businesses. Turkish SMEs but rather can help Edirne, and Gemlik. In the Southeastern • 18% operating 4-9 years illuminate trends and areas for Lastly, the literature and key informant region, all interviews were conducted in • 15% operating 10-14 years improvement in Turkey. interviews pointed to some strategic Gaziantep. • 21% 15-20 years sectors to explore, namely • 37% over 20 years manufacturing, automotive, textiles, Percentages of sample from construction, and food services. Thus, each sector: the size, duration, and sector were used as criteria for determining which • Manufacturing 24% businesses to enroll in the study. • Construction 24% • Textile 15% Potential SMEs were found through • Food 9% personal networks and key informants, in • Other 27% addition to snowball sampling from (includes automotive, participating SMEs. Businesses were first entertainment, advertising, approached by the existing contact and, paper products, catering, if they were willing to participate, we housing, and furniture)

18 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 19 This section offers an overview of the provide customized financial services major players who provide services and and capacity building to SMEs. products to SMEs in Turkey. An These banks are expected to play a STAKEHOLDERS understanding of these actors is pertinent major role in the growth and to our findings and analysis in the development of the economy through subsequent sections due to their capacity mobilization and deployment of in offering existing solutions and in ways financial resources. See Appendix 2 for they could potentially improve their IN THE an extensive list of services banks services to further aid SME development. supposedly offer SMEs, as well The Turkish government, in addition to as evidence of a segmentation- financial service providers, has increased based approach to providing these TURKISH SME financial and non-financial services to products and services.11 SMEs since the mid-1990s, resulting in a complex web of public and private support institutions.

Among the spectrum of institutions, LANDSCAPE commercial banks today play a much larger role in providing a variety of offerings to SMEs than they have in the past. Nearly all 49 banks, including public, private, and international banks, operating in Turkey have established dedicated SME departments or units to

20 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 21 Compulsory Organizations Voluntary Organizations Along with the commercial banks, Approximately 18% of the sample Additionally, some businesses international finance institutions (IFIs), participated in supporting organizations complained of nepotism as detailed government agencies, local and associations such as the local in the authors' note below. administrations, and occupational Chamber of Commerce, voluntary The Union of Chambers and Commodity Exchanges of Interest Based Associations It is difficult to determine whether these organizations intervene in the credit associations such as the Association for Turkey (TOBB) organizations have a positive effect on • Appeal to business owners with similar world-views markets via tools such as credit Fasteners, Industrialists and Businessmen, Turkish SMEs due to the lack of publicly • Highest legal entity in Turkey representing the private guarantee, interest subsidy, and the Poultry Meat Producer and Breeders • Conducts research, forms views, develops projects and available information regarding the sector, with 365 members in the form of local chambers regulative subsidies. Of the many Association, etc., and KOSGEB. When activities in the context of accelerating international actual reach government and of commerce, industry, maritime commerce and organizations that provide this type of asked which sponsored activities the integration and interaction as well as regional and local independent organizations. Still, many commodity exchanges; represents 1.3 million businesses support to SMEs, the most prominent business participated in, there were a development; liaises with the government, other states, participants mentioned the desire to domestic actors include KOSGEB, Exim wide variety of answers, including • Aims at ensuring unity and solidarity between chambers international organizations through the media and other have representatives from these various Bank, and regional development attending seminars, yearly meetings, and and commodity exchanges, enhancing development of the means institutions visit their business to provide agencies. These actors compliment the expos, in addition to receiving information professions in conformance with the general interest, specific advice. Some topics that • Examples: Turkish Industry and Business Association work of EU actors, including the via bulletins, emails, and daily SMS facilitating professional works of members, and preserving businesses mentioned as desirable are (TUSIAD) and Independent Industrialists and European Investment Fund and European messages. Three businesses reported professional discipline and ethics how to prepare a business plan, how to Businessmen’s Association (MUSIAD) Bank for Reconstruction and that they had received support in get into exporting, what specific Development (EBRD).12 advocating for or changing laws management tools are available, how to pertaining to their sector. Assembly of Export Associations (TiM) Sectoral/Regional Associations Aside from the professional organizations conduct a market analysis, etc. required for technical fields, all businesses • Established in 1993, the umbrella organization of • Express current sectoral problems to government Overall, participants’ opinions on these who wish to be legal entities must exporting firms has around 52,000 members and authorities, collaborate with other NGOs, get media organizations’ effectiveness were register with TOBB. Beyond that, Author’s Note represents 26 local unions of exporters support to solve sectoral problems, inform members mixed, with 45% of participants businesses can opt-in to the voluntary about upcoming regulations, organize and/or attend reporting being satisfied with the We noted a high correlation between • Determines the issues related to exporting, conducts organizations, and most have at least foreign and domestic seminars organizations they have worked with the positive comments, particularly improvement studies, liaises between exporters and the registered with a sectoral/regional and 36% expressing dissatisfaction. about the local Chambers of highest competent authorities • Examples: Poultry Meat Producer and Breeders association and KOSGEB. Voluntary Commerce, and some social Association; the Direct Marketing Association organizations are not limited and any Interestingly, a greater proportion of group of three or so like-minded dissatisfied businesses were located in connection between the business businesses can start one and then claim the Marmara region, while far more owner and an official at the Chamber. In some cases, the participant had Professional Associations Small and Medium Enterprises Development Organization to represent the interests of other satisfied businesses were located in previously been in a leadership (KOSGEB) and other public development organizations businesses, even lobbying the Gaziantep. However, in Gaziantep, there • Associations of all professionals who have graduated government at times. The chart to the left was also a higher percentage of position at the supporting from the same faculty or department; 33 such • Government-sponsored organizations describes some of the most important businesses who had not even heard of organization and in others, the associations exist participant openly spoke about a • KOSGEB’s mission is to increase SMEs’ share in economic organizations and associations—both specific programs offered by these close friendship with someone at the • Help provide technical and scientific studies, preparing and social development by offering quality service and compulsory and voluntary—who support supporting organizations. These findings organization. These participants standard contracts like licensing and training of future support towards developing SMEs’ power of competition SMEs through a variety of services and may be a result of the general attitude of were also those who seemed to professionals; also collaborate with other professional and spreading the culture of entrepreneurship membership benefits. independence and self-reliance benefit significantly from the associations and public authorities characteristic of Gaziantep businesses. • Other organizations like the Thrace or Silk Road Despite the plethora of organizations programming offered. Other • Example: Union of Chambers of Engineers and Architects Development Agencies enhance collaboration between available, a stakeholder explained the While positive comments mostly participants insinuated that one’s public sector, private sector and NGOs to dissolve regional system of support organizations as focused on the actual service being social capital is an important inequality, to aid development, and to mobilize regional ineffective, saying Turkey suffers from provided, such as the R&D support they determinant to whether a business dynamics and human resources “institutional inflation.” Indeed, most received, wages paid for educated receives support. businesses simply stated their registration employers, low interest loans acquired, with these institutions almost like they etc., the negative complaints centered were obligatory tasks to check off when on cumbersome processes and difficulty starting their business, even if they never contacting the organization. KOSGEB in participated or benefited from their particular was pointed out as one of the services. most bureaucratic and difficult organizations to work with.13

22 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 23 Now, with the image of Turkey’s overall health and longevity of an SME. economic and political landscape, in Professionalization, or a lack thereof, is addition to the key actors involved in an important theme that ripples FINDINGS AND supporting Turkish SMEs, we can begin throughout our findings. to understand the main challenges that Detailed summaries of our most businesses face and what types of significant findings can be found in each solutions may help them overcome sub-section. These findings are meant to those challenges. ANALYSIS highlight opportunities and to introduce Interviews with business owners and important considerations for financial managers largely reinforced what the service providers and public actors alike. literature review and key informant Author’s Notes and other boxes provide Strategy and planning interviews indicated: the main additional information regarding how constraints of SMEs in Turkey fall into current solutions can be improved upon, Human capital three categories: access to finance, and statements based on observations human capital, and enhancing and informal conversations. Finally, the Financing competitiveness. ideas found in the potential solutions Competitiveness Thus, this section mostly discusses boxes were developed as a result of our these constraints and the existing own analysis and directly relate to the solutions intended to lessen them, as SME challenges we have identified. The well as potential new solutions. solutions presented are by no means However, first, we begin with the basics exhaustive; rather, they are meant to of how businesses emerge in Turkey and provide a starting point for further why professionalization matters for the development and study.

24 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 25 STRATEGY AND PLANNING

Considering only 10% of already established businesses in Turkey last How Participating SMEs Got Started longer than 3.5 years14, it is important to understand the most common impetus for starting a business and what inhibits an SME from professionalizing. 18% Most participating businesses PASSED DOWN FROM THE demonstrated an overall lack of OWNER’S FATHER formal strategy or planning and a lack of necessary skills or financial OWNER STARTED WORKING IN THE SECTOR AT resources to conduct due diligence 57% AN EARLY AGE before entering a market. 25% This could imply a failure to properly OWNER SPONTANEOUSLY allocate resources in terms of reaching ENTERED THE SECTOR target customers, hiring qualified human capital, and preparing for future challenges and opportunities, among other things. In order to effectively expand or enter new markets, SMEs will in a multitude of ways, which was necessarily need to be informed of all need to increase knowledge about and demonstrated by the in-depth interviews decisions. One manager expressed the use of business plans and strategies. and has also been widely discussed in the urgency surrounding this problem: “It’s Despite the various reasons participants literature and by Turkish experts. unclear what will happen when the Patron gave as their impetus to start or run their Participating businesses, not only lacked doesn’t show up or dies. The boss makes all business, the vast majority of the SMEs most of the characteristics comprising a the decisions. If he’s not there, what is the were family-owned, a fact which had professionalized company, but were decision-making mechanism?” (Sales and significant impact on the extent to which generally very strongly managed by a Marketing Manager at Manufacturing their business had professionalized. Patron or family patriarch. Upwards of Business, Istanbul). 90% of Turkish SMEs are family Based on our time spent in the country, businesses which often means power to we suspect that the reluctance to make any decision is almost always Family-Run relinquish control likely stems from consolidated with the Patron or his sons.15 historic insecurity, cultural The family-run nature of many Turkish A business run by a Patron is categorized underpinnings, and also limited available SMEs impedes professionalization and in stark contrast to a more westernized resources. Given that nearly 60% of the progress. The family-run nature of many SMEs means most owners and governance style where decisions are businesses interviewed have been managers lack the necessary training and/or expertise to make In the context of this research, made through a hierarchical system of operating for over 15 years, those characteristics representing boards, executives, mid-level, and businesses have also seen two global strategic decisions in human capital and financial management, professionalization include established low-level management. The family is economic crises that have left a lasting decision-making mechanisms, a usually reluctant to hire professional impression on Turkey’s economy. governance structure, well-educated managers and even if they do, the inhibiting a business from becoming professionalized. Additionally, Turkey simply has a less leaders and managers, and utilization of decision-making authority always rests trusting population. In an OECD survey, market analysis and a business plan. with the family at the top. when asked “Generally speaking would Despite various motivations for starting or running a business, As is common in many emerging Only 15% of businesses reported having you say that most people can be trusted markets, the lack of professionalization an institutionalized decision-making or that you need to be very careful in most business owners lacked a strategic plan from day one. complicates the growth of Turkish SMEs structure where the boss does not dealing with people,” only about 24% of

26 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 27 interviewees in Turkey expressed trust in and was the lead decision maker as we Many businesses referenced a certain Lack of Clear Strategy others. As can be seen in the figure grew, of course we have some issues with turning point at which they would be below, this was considerably below the trust” (Owner of Furniture Business, Edirne). forced to professionalize, although Most businesses lacked a business OECD average.16 pinpointing exactly what that juncture plan or clear strategy. Besides trust issues, some businesses would look like proved difficult. Some That, coupled with the fact that many of cited a lack of resources as the reason One area where the negative impacts of used a certain level of turnover as a point the participants in our study had they have not been able to an under-professionalized SME segment of reference while some suggested that invested everything they have into their professionalize. One relatively new became painfully clear is in the lack of professional managers would be needed business, helps explain why many business owner stated, “I am the R&D. I business plans or strategy. Of the after hiring a certain number of hesitate to place control into the hands am the owner and financial director, respondents asked, 53% stated that they employees. of another, particularly if they are not everything. Because our company isn’t too had created a business plan. family. As one participant explained, large…I am the only one in this company that Others simply had a phase of their However, based on the perplexed looks “Because I started the business from scratch, has enough experience. So I am everything” business in mind; for example, one in response to the question, and a lack of worked hard to get to where we are today, (Owner of Manufacturing Business, Gemlik). business owner stated, “We have an details surrounding these ostensible industrial engineer [outside the family] business plans, the extent to which working in the factory but we’re responsible these were thorough, official business Percentage of People Expressing a High for management. When we grow big plans was much less certain. In fact, only Level of Trust in Others enough, when we start producing aluminum one business showed us a physical ourselves, we’ll be forced to hire more business plan, which had been modeled 89 DENMARK employees outside the family and go after a KOSGEB business plan. 88 NORWAY corporate” (Owner of Manufacturing and 86 FINLAND Export Business, Gaziantep). Despite the lack of evidence indicating 84 SWEDEN creation or use of business plans, 73% of 80 NETHERLANDS Whether an SME feels forced to respondents could articulate business 74 SWITZERLAND professionalize through expansion, or goals, which included, among others, 71 ESTONIA simply resists the process all together, increasing capacity (33%), expanding 71 ISRAEL the lack of professionalization seen international business (27%), improving 69 NEW ZEALAND amongst Turkish SMEs tends to be their position in their sector (21%), and 69 UNITED KINGDOM written off as a side effect of an 69 BELGIUM simply surviving (12%). These goals underfinanced SME segment. 64 AUSTRALIA demonstrate that, for the most part, 62 SPAIN While this may be true, without participants aspired to grow and expand. 62 AUSTRALIA knowledge of business administration, They are not necessarily satisfied with 61 GERMANY SME owners and managers may not 61 JAPAN their current size and market share. 59 OECD understand or recognize the importance However, strategy and planning will be 56 FRANCE of professionalization, or of many other crucial to pushing Turkish SMEs and the 56 IRELAND components such as how to invest in the economy in general to the next level. 56 CZECH REPUBLIC business, what customer bases to target, After all, as one stakeholder put it, “If 53 SLOVENIA what strategies to employ when business owners think in terms of ‘as long 49 UNITED STATES expanding, etc. as I buy a home and go on vacation’, that’s 47 POLAND as far as they’ll grow” (Neslihan Tombul, 47 SLOVAK REPUBLIC This phenomenon will likely continue to Board Member of Turcas Petrol, Expert in 47 HUNGARY produce short-lived businesses and 46 KOREA prohibit many family-owned SMEs from Banking and Finance) 40 GREECE strategically placing human and financial 38 PORTUGAL resources to fulfill both short and long- 26 MEXICO term goals. 24 TURKEY 13 CHILE 13+ 24 + 26+38+40+46+47+47+47+49+53+56+56+56 59 61+61+62+62+64+69+69+69+71+72+74+80+84+86+88+89

28 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 29 HUMAN CAPITAL

This section highlights the most pressing concerns related to finding, hiring, and “Even though unemployment is quite high in Turkey, retaining employees. As one of the most frequently cited challenges to SMEs in trying to find the skilled person that really meets your general, participants were asked whether needs is an extreme challenge. What ends up they faced constraints in human capital, in addition to follow up questions about happening, is you find someone from the university and recruitment, training, and retention. you train them. This slows the whole process down.” Most of the businesses that reported - Branch Manager at Seker Bank, Gaziantep human capital as a primary constraint focused on the challenge of actually finding qualified employees. A qualified employee in this case means someone educated and/or trained for the level of Current Solution to Labor Shortages: work needed. Undocumented Workers

Overall, business owners complained Participants reported that businesses are employing Syrian refugees and other slightly more frequently about their undocumented laborers as it brings the advantage of saving on social security ability to find skilled workers as they did payments and other labor costs. The temptation is likely increased due to an unskilled workers; although, even when influx of nearly one million Syrian refugees alone. Still, only a couple of pressed, the vast majority of business businesses we spoke to openly admitted to employing undocumented Syrian owners and managers struggled to workers: articulate any unique challenges “We are not content with our workers but we have felt relieved after started hiring Syrian associated with those different groups. refugees. Most of the sectors employ Syrian refugees. Hiring them is more appealing, Well-placed, qualified talent will be an when you consider the lower fees involved and no social insurance payment. The important step in moving Turkish SMEs government overlooks the current circumstance” (Owner of Textile Business, Istanbul). to the next level. For Turkey, this will “The factory environment is really dusty, the job is physically difficult. They don’t want to necessitate a convergence of the work here. It’s not only a salary issue. Sometimes we hire Syrian workers, but it’s illegal. 72% of respondents cited finding or hiring employees as one of education system with employer needs, Right now, we have 3-4 Syrians working who are talented and I will continue to work with more coordinated efforts to find and them”(Owner and Production Manager of Construction Materials Business, Gaziantep). their greatest challenges. However, the vast majority of those place employees, and re-conceptualized retention strategies focused on were comments from Gaziantep. increased employee autonomy and employed nor in education or training Despite what appears to be a large pool improved working environments. (NEET) is 35%, which is the highest rate of potential employees, 72% of SME Participants reported a gap between the skill levels currently among OECD countries.17 This means respondents still cited finding or hiring there is a significant number of youth employees as one of their greatest available in the workforce and their employment needs. This Finding Talent who are not employed, nor enrolled in challenges. Interviews revealed that the school. majority of businesses use informal Finding and hiring qualified employees recruitment strategies, such as shortage appears to exist for both skilled and unskilled workers. With such a significant number of is the first challenge. leveraging personal networks and asking people out of work, we did not expect current employees to find new workers. With an official unemployment rate of business owners to report such Many respondents struggle to recruit, retain, and fully utilize 8.8%, there are approximately 2,551,000 difficulties finding employees. On top These strategies were most common in people in Turkey who are currently of that, the significant influx of people Edirne and Gaziantep, but were least talented human capital, often as a result of the family-run nature unemployed. An even more revealing fleeing regional conflicts has also prominent in SMEs located in Istanbul, of the business. statistic shows that Turkey’s rate of increased the number of people seeking where businesses were more likely to people aged 15-29 who are neither employment. use formal channels such as an online

30 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 31 POTENTIAL SOLUTIONS

site like Kariyer.net, newspaper supposed labor shortages of low-skill ISKUR can act as a supplementary employers value and desire tangible value their country’s most talented advertisements, or hiring agencies. workers. solution to in-house training and skills that could be better emphasized in people—regardless of their sex—will be vocational schools. vocational schools, colleges, and training the ones most likely to thrive. Those businesses were also more likely Commonly referred to as “4+4+4”, the programs. to look at resumes for a candidate’s education legislation now extends Part of the government’s vocational However, this proposed solution is not education and number of years of compulsory education to 12 years. One training plan is ISKUR, the Turkish Increased usage of ISKUR and other job likely to materialize without experience. Over a quarter of the business owner explained his theory on Employment Agency which provides search sites such as Kariyer.net would complications. Currently, a large majority participants in Gaziantep reported using labor shortages: “In the past, people vocational training and other help match employees and employers. of women exit the formal sector and are the Turkish Labor Agency’s (ISKUR) started working through apprenticeship employment support services in order to However, this is conditional on hired for lower wages without job employment service, while no after graduating from primary school, at the upgrade the skills of job seekers and help employers actually using services like insurance and social security. businesses reported using that service in age of 12. But now, people start working them find productive employment. In ISKUR to find employees, which should Institutional barriers such as a lack of the Marmara region. after graduating from high school, at the 2012, ISKUR trained 464,000 people, not be taken as a given considering the child and elderly care services mean age of 18 or 19. We have either unqualified most of whom had less work experience perceived high labor costs in terms of women, even highly educated ones, are The use of informal recruitment workers or engineers. No workers in the and were more educated than the minimum wage and benefits. not able to utilize their skills and strategies, while congruent with the middle, no technicians” (Owner of average job seeker. participate in the workforce.27 culture of leveraging social networks, is Manufacturing Business, Gaziantep). Women can help narrow the skills gap most likely putting additional strain on One of the SMEs interviewed had Traditional gender roles and norms tend and expand the talent pool. SMEs as they could be focusing Just short of 30% of the participants participated in an ISKUR program: “We to act as barriers for females, which may recruitment efforts on different expressed a need for workers with the collaborated with ISKUR, the employment The female labor participation rate be reason that SMEs in manufacturing strategies, regions, or demographics necessary technical knowledge to play a agency, in terms of giving technical (FLPR) in Turkey sits at a mere 29% as have less than 14% female participation supervisory role and/or to perform highly education to 20 trainees. They arranged a compared to the OCED average of 61%, in their full-time workforce. These specialized tasks. Other qualities sought 3-month long training period. But we implying a massive missed opportunity. cultural barriers negatively affect the Matching Skill Sets after in a skilled worker were foreign needed at least 1-year long program. The Including more women in the workforce FLPR in more conservative areas, where languages or management skills. agency required us to hire at least 50% of is not simply about advancing human a women’s role is traditionally fulfilled at A mismatch exists between the skill Speaking English is an increasingly the trainees. We hired 19 out of 20” (Owner rights—it just makes economic sense. home, as a mother, wife, and caretaker. sets of potential workers and the needs important skill, given the growing of Food Production Business, Gaziantep). While increasing the number of working Targeted efforts to increase the FLPR are of SMEs. amounts of exports and partnerships women may decrease wages in the short most needed in the conservative Also, approximately 45% of the with foreign companies. term24, increasing the already low FLPR Southeastern region—where only 18% of When labor shortages were discussed, businesses specifically mentioned would also provide a significant boost in full-time workers are female despite the they were in relation to both skilled and A small number of businesses did point in-house training programs. The duration real GDP per capita. According to the high prevalence of SMEs in the region.28 unskilled workers. Approximately 25% out that they struggled most with mid- of training programs varied widely, from Economic Policy Research Foundation of of the participants struggled to find even level managers – those with the Author’s Note two weeks to a year to even five years. Yet, rallying support for such targeted Turkey (TEPAV), if the AK party reaches unskilled laborers. Recent legislation technical skills of the specific sector who Overall, the duration depended on efforts may prove to be difficult. Uproar its goal of a 38% FLPR by 2023, GDP per introduced by the AK Party may be could also manage less skilled Out of 33 SME participants, we only whether the employee needs following President Erdogan’s remarks capita will grow by 5.6%. Furthermore, if perceived as exacerbating these employees. According to a report spoke with two women, both rudimentary skills to complete his/her on this issue suggest further the FLPR reaches 50%, real GDP per managers in their respective job or whether he/she needs higher-level complications for this proposed solution. capita growth could soar by 12-17.5%.25 businesses. Although we were told skills to be considered a ‘master’. While Erdogan stated at a conference, “you “SMEs aren’t the most sought-after employers. It’s that more women are starting to own the vast majority of businesses did not Both public and private actors should cannot bring women and men into equal businesses, we could not manage to offer any particular opinion about having provide additional support to women positions. That is against nature, because hard to attract the talent as SMEs are always in interview any of them. to train new employees, some pointed who aspire to work in order to increase their nature is different.”29 out important challenges. the available labor supply. Since 87% of financial trouble. The talent prefers to join Moreover, we specifically asked Erdogan and his ruling AK Party seem to girls have a secondary-level education some business owners whether the Both interviews with SME participants be in disagreement with the basic corporations, banks, and tech companies. The future and 32% have attended vocational and family patriarch ever passed the and supporting evidence such as a principles of gender equality – both at technical schools,26 women have the career opportunities are not clear in SMEs and the business on to daughters as well as World Bank evaluation of ISKUR’s home and in the workforce. This implies ability to help fill the gap of skilled and or instead of sons. Very few vocational training programs indicate inadequate government-led attention to business plans are pretty simple.” mid-level employees. SME owners in interviewees responded affirmatively, that the skills taught to potential and support for the introduction of more Turkey operate in an increasingly diverse - Head of SME Department at ING Bank and we found no concrete examples employees need to be adjusted to the women into the workforce. business environment. The SMEs who of that practice. needs of employers. Specifically, Turkish

32 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 33 published by one of Turkey’s largest number of standards required for Additionally, Turkey’s workforce is wage is, and for example if it is 2000 TL, holdings, the education system at large We have high quality people for Turkey’s standards vocational competence in order to meet young, which can imply a growing you offer him 2500 TL” (Owner of does not generate graduates capable of world standards and to continue incentive intolerance of discrimination, resistance Construction Business, Gaziantep). mid-level positions. despite low wages. They work here because maybe they programs to increase employment among to tight systems of control, and less Just over 30% of respondents believed women and the disabled.23 loyalty to one employer. While Turkey provides free education, love the company, they are comfortable, feel safe. They other conditions were the reason with almost universal enrollment at the are high quality people, but work here for personal On the other hand, the younger employees chose to stay, the most primary level, the country’s standardized population has fewer skills and common of which was the general work test scores indicate that the education reasons even though they work for lower wages. Talent Retention experience to use as leverage in hiring environment, including a friendly boss, system is still relatively weak.18 Moreover, processes and wage negotiations. This working with nice people, and the Beyond hiring, SMEs struggle to retain only approximately 30% of adults aged Employees stay for a long time. Emotions persuade context is important for SMEs to existence of new machines. Other and fully leverage talented employees. 25-64 have earned the equivalent of a them to stay. Not the money – we don’t have the understand when managing their conditions stated included reasonable high school degree, which is dramatically While Turkey’s unemployment rate has employees. working hours and professional lower than the OECD average of 75%.19 money to persuade them! We have hope. been increasing slightly since mid-2012, development. Approximately 25% of respondents said it is still at its lowest rate since 2001. The working age population with less - Sales and Marketing Manager at Manufacturing they use wages to retain employees. From a potential employee’s perspective, This implies a relatively tight labor force than a basic education accounts for However, those business owners and a business’ level of professionalization Business, Istanbul where employers face steeper most of the jobless and informal managers whose only stated strategy for may also be an important condition competition for talented employees – a workers. keeping employees was through their when deciding where to work. As fact that was confirmed in participant wage, were more likely to complain mentioned in the Strategy and Planning While the previously discussed lack of interviews. are not enough students graduating from 49.7% of enterprises do not see about their inability to keep workers. section, most SMEs are strongly formal recruitment strategies may be them, particularly compared to the graduates of vocational high schools On the one hand, this empowers managed by Patrons, which is not contributing to the difficulties in locating Stealing qualified workers was also number of those graduating from qualified for needs of the business world.21 employees who can put greater necessarily a positive trait for workers, overly theoretical degree mentioned: “It is impossible to find an university. demands on employers for increased prospective employees. programs, with insufficient focus on 71.3% of these graduates of vocational available experienced worker. You must find wages, more benefits, and improved practical skills, were often cited as a A couple of business owners pointed out high schools quit their education paths them from your competitors. You ask the As one general manager of a pump workplace conditions. reason for the skills gap. Specifically, that there are either not enough schools right after high school, implying a large worker you would like to hire how much his manufacturing business explained, participants focused more on the or not enough students choosing to volume of workers who will not obtain perceived ineffective vocational school attend them. For example, one business further training and do not necessarily system. owner stated, “We need more vocational match the needs of many SMEs. schools. I hire people from vocational Turkey’s education system consists The study hypothesized that the schools that are more qualified than people of both a university track and a problem results from poor physical POTENTIAL SOLUTIONS who are foreign educated who don’t fulfill vocational track, including vocational infrastructure due to low investment our requirements. Vocational schools should and technical high schools and colleges. (approximately 20% of the education supply businesses with human capital. Clearly delineated career paths and both for educated employees and also communication with employees. Out of the 10,955 formal education high budget), and from a lack of satisfactory Now there is not enough supply from more flexibility may help retain talent. for those employees who start as Moreover, work-life balance initiatives schools, 58% of them are vocational collaboration between vocational vocational schools, but too much from the apprentices. If an SME could initiate an are becoming more prominent in and technical high schools and they schools and enterprises.22 Progress towards hiring professional university” (Owner of Textile institutionalized system of upward retaining talented employees; these may teach approximately 50% of secondary managers and establishing a Manufacturing Business, Gaziantep). Some of the AK Party’s 2023 goals are mobility, they may have an easier time include flexible working hours, time off, students in the country. Following decentralized governing structure will Several other respondents unsatisfied explicitly geared towards solving this recruiting and retaining talent while also and childcare facilities.30 secondary school, students may contribute to overall better management with the vocational education system problem of lack of vocational skills. They mitigating some trust issues as the choose to attend a two-year vocational of human capital, particularly if people Finally, SMEs should consider their claimed that graduates were not of high have promised to allocate approximately employee would be trained by their own college which prepares students for trained in business administration and employer brand. By identifying their enough quality. 1.5 billion Turkish lira (6.6 million USD) hand and be well integrated into the advanced technical and vocational management are hired and given differentiator and then communicating and to give vocational training to family business. positions through both theory and These findings are supported by a survey responsibility in the business. or leveraging the brand through core 400,000 unemployed people each year. practice.20 conducted by the Union of Labor of SME owners and managers should also messages and appropriate language, Additionally, Turkish SMEs may be Education and Science, which concluded Additionally, their Vision for 2023 work to allow employees to use their they can create a reputation which will in Half of the respondents that mentioned better able to recruit talent if they that despite the increasing number of document pledges to increase the talents and should demonstrate stable turn help attract quality employees. vocational schools believed that there provide and emphasize career paths graduates from vocational high schools, leadership qualities such as effective

34 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 35 “The best for professionals is to work for a Patron-style management often a paycheck consistently and on time, company without a Patron. I’ve worked in precludes a sense of autonomy in and it presents the possibility of a future those companies and it’s nice because you decision-making. Studies show that, career path. don’t know the Patron, there is no Patron, even more than wages, being given Non-family employees may feel trapped everyone is an employee in the end, even the responsibility and being trusted to in SMEs because there is no upward general manager. So you’re more complete work at one’s skill level mobility; they are concerned about their comfortable. The general manager and the contributes significantly to an career path and where a job will take chairman of the board are all working for the employee’s job satisfaction. them. Given the tight labor market, company” (Sales and Marketing Manager at A commonly held perception of Turkish employees have their pick of jobs, so Manufacturing Business, Istanbul). business owners is that “they don’t trust salaries themselves will not be a Another manager explained how the other people to actually manage to the sustainable way to keep workers. There company retained talent: extent that they can. They don’t want to have to be other incentives to stay. take on the risk and lose control” (Portfolio “…even though we are a family-owned Manager at Yapi Kredi Leasing). This company, the workers don’t feel it because attitude affects management style as our boss is only in contact with top people reportedly manage by seeing— management and he doesn’t get into by walking around their factory, or even details. It is like a big company and has a using video cameras. corporate culture. We are also open in terms of costs, communication. Nothing is Professionalism is also important for hidden from our employees or partners” managing human capital because it (Deputy General Manager at Printing and provides a sense of stability both in Stationary Business, Istanbul). greater confidence that one will receive

36 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 37 FINANCING

This section describes SMEs’ challenges 100,000 adults.32 Banks are increasingly Discussions surrounding this topic with financing their business, from loaning more money to SMEs. Compared circled around a few pain points, start-up capital to operational expenses to other OECD countries, such as Chile, namely: prohibitively high interest rates, and long term investment financing. The France, Korea, Russia, and Switzerland, difficulty finding sufficient collateral, literature indicates that both the Turkey experienced the greatest and misperceptions between SMEs availability of funds offered to SMEs and expansion in SME lending over 2010- and banks. the ability of SMEs to actually access 2011. The share of overall SME loans has Of the participants who described those funds present challenges to increased from a mere 4% in 2004 to access to capital as one of their greatest business owners. 37.5% in 2012.33 challenges, 42% specifically cited high In Turkey, however, there is an While the largest proportion of total interest rates as the problem. A public abundance of capital technically business loans continues to be allocated website called The Bodrum Bulletin available to businesses; the main to low-risk corporate borrowers, the shows the interest rates of 14 main challenges reported by SME owners and growth of lending to consumers and banks, none of which were above 9.6% managers were in accessing the capital SMEs has outpaced other categories as of the end of August 2014.35 and in managing cash flow. Interestingly, since early 2010.34 When asked, participants generally business owners and financial service However, despite the increasing loan reported that current rates range from providers disagree about the root causes allocation to SMEs and the heightened around 10-15%. The discrepancy is not of those challenges – the former blaming attention on SMEs from government overall that shocking since the interest barriers mostly related to the banks, and organizations, 42% of SMEs interviewed rates from The Bodrum Bulletin are the latter pointing to lack of professional described access to capital as one of those advertised by the banks management of most businesses’ their most severe constraints. themselves and the actual assignment of accounts and finances.

The implications of these findings are Abundant capital is indeed available in the market, but actually two-fold: (1) increased access to capital, Growth of SME Loans particularly to long term financing, could accessing that capital is the main problem faced by businesses help SMEs grow and expand, and invest 60 in R&D to enhance competitiveness, who reported prohibitive borrowing conditions, such as high but (2) access to capital will not likely 50 improve until there are some gains in interest rates and strict collateral requirements. professionalization – thus, financing 40 alone will not be the magic bullet to SME success. SMEs are perceived as high-risk investments, particularly due to 30 a lack of transparency. 20 Access to Capital

Business owners are banked and banks 10 A mismatch exists between bank and SME expectations, fueling have money, but access to capital is a distrust and ultimately harming both banks and businesses. common complaint. 0 Banking penetration is high in Turkey, -10 with 58% of the population having an Cash flow management is also a challenge for business owners account at a formal financial institution.31 ITALY CHILE KOREA SERBIA UNITED STATES FRANCE Of the Rapid Growth Markets (RGM), TURKEY CANADA SLOVENIA UNITED KINGDOM HUNGARY who struggle to collect payments and to deal with the system of THAILAND Turkey has the highest ratio of branches PORTUGAL long check maturities. to people, with 18.3 branches per SWITZERLAND 2009 2010 2011 Source: National Scoreboards

38 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 39 interest rates to businesses includes an client’s history with the bank and usage individual risk assessment. “Interest rates are maybe not as high as the past of other banks, and a client’s knowledge of and experience in a particular industry Strict collateral requirements were the decades, but compared to current profit margins, are just a few components of the risk second most cited barrier to accessing evaluation process. Several financial capital. Despite having a credit limit at a it is really high. Your profit margin is 10%, service providers said that businesses particular bank, 27% of respondents you pay 50% of this to interest.” often failed to provide coherent invoices stated that a lack of appropriate and transaction histories which are collateral held them back from accessing - Owner of Textile Manufacturing Business, Gaziantep essential for banks to trust them as capital. Interestingly, collateral borrowers. This most likely stems from a requirements are actually more lack of knowledgeable financial demanding for medium-sized interest rates. Since mid-2013, the applications are accepted by the KGF professionals working in most SMEs, an enterprises in Turkey. borrowing costs for Turkish business equity, further proving the barriers to issue covered more thoroughly in the 38 These firms typically have to provide owners have increased, and according to access to credit in the Turkish market. previous sections. more collateral as a percentage of loan Moody’s, this spike in interest rates Memzuç and KKB The financial documents provided to value than small firms (104% for significantly affects SMEs and their 37 banks also cause concern as it is widely Memzuç: Owned and operated by the central bank of Turkey, Memzuç is a credit medium-sized enterprises versus 83% ability to take new loans. Risk Perception known that most Turkish businesses do bureau whereby financial institutions report monthly and gather information on for small and large firms, respectively36). Of the many institutions that intervene The lack of professionalism and not accurately represent all of their a client’s credit history. Reported information includes: In terms of specific collateral types, in the credit markets (see Key transparency increase (perceived) transactions. A representative at Finans banks were reported to demand physical Stakeholders in the Turkish SME • Transaction history and payment performance of firm and its partner(s) risk of SMEs. Bank explained, “Most businesses have two assets in the form of real estate, such as • Balance sheet and income statements, if they exist Landscape section on page 20) the sets of financial metrics, official and land or homes, whereas businesses were • Market intelligence and references Credit Guarantee Fund (KGF) is a tool Financial service providers find lending unofficial. Maybe 80% of annual turnover is most often prepared to use their • Sector and date of establishment that played a prominent role in our to the SME segment risky. This is in part unofficial. That’s why banks can’t see machinery, factories, or personal assets interviews with financial service due to the fact that only 10% of already anything and why some SMEs are Credit Bureau (KKB): Turkey’s first Credit Bureau, Kredi Kayıt Bürosu was as collateral. providers and SMEs alike, yet none of established businesses in Turkey last unbanked—they can’t prove they’re doing a founded on 1995 in partnership with 11 leading banks in the sector. KKB is longer than 3.5 years.39 The high rate of One Istanbul business owner described the participating SMEs had actually business. They are relying on family or widely used in allocation, monitoring and collection processes for credit risk failure adds to the risk that financial his experience with non-flexible benefited from this public intervention. personal loans.” This practice further management of the banks and other financial institutions. service providers must bear when collateral requirements: “We were able to The KGF, in addition to Turkish complicates a financial service providers’ working with SMEs. “Being small comes get loans with good terms but as an SME institutions like KOSGEB, and The ability to accurately evaluate the with the risk of bankruptcy,” said a financial who puts all of the money we earn back as Turkish Tradesman and Craftsmen Credit creditworthiness of potential SME service provider in Istanbul, “Because the gathering systems, Memzuç and the Banks and Businesses an investment, it is kind of risky. Banks are and Guarantee Cooperatives’ Union clients. scale and production capacity of SMEs are Credit Bureau (KKB), are outlined in the so powerful in those situations. So, we tell (TESKOMB), provide credit guarantee There is a discordant relationship lower than larger counterparts, the risk of Yet, from an SMEs’ perspective, the loan box above. From the financial service them: We don’t have any savings because for SMEs to get access to credit in the between banks and businesses. bankruptcy is much higher for them.” application processes can seem opaque providers’ perspective, these systems are we are reinvesting it in our company. Should domestic market, therefore addressing and cumbersome; as one construction seen as a new era in risk management. In Banks and their SME customers suffer we instead buy more homes to use as the common complaint that collateral However, there are also micro level chemicals producer said, “I’ve had overall fact, each customer available in KKB greatly from a lack of understanding and collateral or reinvest it in our company?” requirements prohibit SME access to indicators which increase an individual negative experiences with banks. Other database is queried 10 times a year on mutually understood expectations. First, (Owner of Entertainment Business, capital. SME’s risk and, in turn, their interest rate than high interest rates, whenever we used average, allowing banks to make more businesses understand banks’ value Istanbul). and collateral requirements. As a 41 However, the KGF has yet to fully bank loans in the past, we’ve had to jump accurate decisions about their clients. proposition quite differently than banks representative of ING Bank explained, The issue of interest rates and collateral address the issue of collateral through so many hoops” (Owner of themselves. Most banks, based on assigning the terms of a loan is an art, Prior to 2012, the KKB was only available is a common one in emerging markets as constraints, as banks are hesitant to Construction Chemical Manufacturing interviews and also their websites, and pricing depends on a unique to corporations, but is now open to banks balance the huge potential of participate due to bureaucratic delays in Business, Istanbul). promote non-financial services as a combination of criteria that gives a bank individual consumers. According to the lending to SMEs while also considering the payments of guarantees and overall unique value-add to SMEs, as well as a an estimated likelihood of default. In order to deal with the lack of EBRD, however, the KKB still remains a their accompanying default risk. Turkey’s key strategy to differentiate from cost issues. Only 52% of banks in Turkey transparency, two systems were put into work in progress, as it presents a number sovereign risk profile, as highlighted in competitors.43 accept KGF guarantees, and only 33% of Criteria such as company and client place to help gather intelligence on of inefficiencies in terms of processes, the introduction, results in overall higher assets, the duration of a company, a potential clients.40 These intelligence- data quality, and consumer protection.42

40 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 41 POTENTIAL SOLUTIONS

However, SME clients do not choose Business owners, particularly in the city of businesses also fear what they call Financial service providers and SMEs SME owners could benefit from a 4.SME Solution banks based on these non-financial Edirne, claimed to shop around each “callbacks,” in which a bank will demand should work together for better access in heightened role of the RM, including As part of the professionalization process, services, but rather price is the top season and employ a variety of strategies that a business immediately repay its the long term. more guidance on the loan application SMEs should consider hiring experienced consideration. Surprisingly, when asked to obtain more favorable interest rates. debt. “The banks often threaten us to return process and how to effectively monitor Banks should develop more innovative accountants and also financial advisors. whether they had heard of non-financial the money we have borrowed. When they and predict their future cash flows. Whether the strategies involved shifting ways of profitably lending to SMEs, while While SMEs in Turkey often hire service offerings from banks, almost give you a credit call, you must pay back the SMEs, in turn, will be better equipped to money from account to account to look the SMEs should also strive to make accountants to do internal audits and none of the business owners had heard loan in full. This equates to a business going tackle the loan application process, less vulnerable, or simply using fast themselves more attractive to banks by provide basic advice, more often than not, of nor taken advantage of non-financial bankrupt” (Owner of Construction Chemical access a wider spectrum of financial decision-making and timing to avoid improving their record keeping, financial these positions are blended with a finance services offered by banks. Manufacturing Business, Istanbul). tools, and quite possibly, do a better job paying higher interest rates, SME owners acumen, and level of professionalization. department and thus, important of representing themselves as a lower Whereas banks portray themselves as were aware of their overall inferior This distrust was more pronounced in Through our research, including individual roles become blurred. risk customer to banks. allies looking for the best ways to position vis-à-vis banks and, hence found the southeast; while accessing capital conversations and discussions with each By opening separate finance and maximize SME success, over a quarter clever techniques to increase their power. seemed equally challenging for stakeholder group, we have devised four (27%) of respondents discussed a lack businesses in the Marmara region as in 2. Financial Service Provider Solution accounting departments, and recruiting Additionally, the lack of trust and level of potential solutions to narrow the of trust in financial service providers as a the Southeastern region, there was a professional managers, an SME has the manipulation means that most financing gap: Banks can do more to ensure transparent major constraint. Online advertisements, noticeable difference in the sources of potential to significantly boost its businesses use many banks, sometimes application processes and credit TV commercials, and billboards across funding used and the attitudes towards financial performance. playing their offers against each other. 1. Financial Service Provider Solution assessment. For example, banks could Turkey proclaim that banks are open for using banks. To cover operational costs provide details on how a potential client Out of 33 businesses interviewed, not The role of relationship manager (RM), the business of SMEs; yet, conversations and business investments, 100% of all will be evaluated based on specific loan one business admitted to pledging an already established channel of direct with business owners generally revealed criteria, how credit history will impact a allegiance to one individual bank. communication and knowledge sharing an overall lack of confidence in a Author’s Note bank’s decisions, and provide feedback between banks and SMEs, should be financial service provider’s ability to More commonly, businesses worked on all loan evaluations. With the new enhanced to provide a greater breadth of deliver the most appropriate services with at least two banks, and sometimes Based on evidence of an overly generation of SME-owners becoming services tailored to individual business with fair conditions. utilized up to 10 banks; this tendency for distrustful society (see OECD survey more tech-savvy, these examples could SMEs to have a multi-bank portfolio is in on page 28) and comments made to needs. Consequently, 12% of SMEs interviewed eventually be put in place via online stark contrast to banks’ preferences us by family-owned business owners actually admit to manipulating their Considering the various degrees of systems that allow for direct feedback. where long-term and loyal relationships in Gaziantep (approximately 60% of financial statements and loan professionalization, the potential value with customers are prioritized. the regional sample), we hypothesize applications to get the best deal possible; that an RM brings cannot be approached 3. Public Institution Solution Furthermore, it implies that banks will that family-owned businesses are this implies deliberate undermining of as “one size fits all”. RMs must be nimble need to work harder to sell a full range of less likely to accept outside financial Local chambers of trade and commerce banks’ risk assessment processes and of and be able to provide the necessary products to their SME customers. help (i.e. sources that are not could institute a program using role the transparency supposedly created by guidance based on the financial and associated with family). models from local business Memzuç and the KKB. business acumen of that particular SME In addition to the trust issues discussed communities; a role we coined “SME owner. in the Strategy and Planning section, This may be due to an overall lack of ambassadors.” This solution manifested trust in the banks, conservative According to a recent study on SME itself through interviews with SMEs, who values present in the region, and an banking done by Accenture, an RM’s often cited a lack of existing mentorship. “Erdog˘an and the government have put a very high overall fear of rapid business growth. style is also important and nuanced.44 SMEs ambassadors could be As established in the Strategy and Some SMEs may value an RM who businessmen or women, who have been priority on taking Turkey from the world's 17th largest Planning section, expansion and “knows them personally”, while others successful in either accessing outside economy to the 10th largest by 2023, the 100th growth generally lead to a business may prefer simply a “transactional RM”, public or private supports, have voluntarily or involuntarily who knows the products well and can navigated foreign export markets, have a anniversary of the Republic. The growth of the SME professionalizing. This process of execute on their behalf. number of years of experience in a professionalizing entails giving up a market is an essential component to this. particular industry or sector, among certain portion of control over the other attributes. - Arthur Sculley, CEME Senior Fellow at The Fletcher business – a reality that did not seem to bode well with the Patrons we School, Tufts University spoke to in Gaziantep.

42 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 43 participants in and around Istanbul of credit, cash management products, Despite no references to this form of payments, thereby potentially balancing reported primarily utilizing loans, SME consultants, free trainings, payment in the literature review, post- out their own cash flow problem. Current Solution: Factoring Companies Fill A Gap whereas 78% of respondents in investment products, etc. Many of the dated checks are, unlike in other Furthermore, 27% of participants stated Gaziantep reported primarily using participants could greatly benefit from countries, legal, widely used, and • Due to the large volume of post-dated checks in Turkey ($150 billion annually), that simply collecting accounts receivable retained profits. those types of services which begs the represent a large constraint to an SME’s factoring companies have positioned themselves to work with SME customers is a significant challenge. The owner of a question: are the services actually overall financial health.45 In other parts of financing small ticket receivables. Although 63% of Gaziantep participants construction business in Gaziantep stated, accessible and how can utilization of the world, checks are a means of payment also utilize bank loans in combination with “The biggest problem is collecting receivables • Factoring firms finance more than50,000 SMEs in Turkey each year. In recent them increase? that can be readily cashed at any retained profits and personal funds, their when trading in Turkey. It is not guaranteed years, factoring companies have increased their market share among non-bank moment, yet in Turkey in 2011 alone, $150 attitudes towards borrowing, as Despite misunderstandings between that you are going to collect your money from financial institutions partly becausethey have been successful in providing billion in post-dated checks were issued. highlighted by one participant, were often SMEs and banks, the two parties do your customers. With the average maturity in quick and practical solutions to SMEs’ funding requirements. negative: “I started the business with 40 kilos agree on one point; high interest rates A pump manufacturer described the checks being around four months, business is “Banks want to expand into SME credit business just because it’s more profitable than of pistachios and I made it just fine. Why take and collateral requirements present common practice of checks with long harder for sellers.” Business owners other credits. However, banks, for years, have not been really successful at doing so… the small profits that we earn just to give it significant challenges for businesses. In maturities and the role factoring plays in reportedly wait for up to three months to Banks are not as flexible as factoring companies when it comes to SME financing. They back to the banks?” (Anonymous Participant). order for progress to be made toward SME financing:“Customers give us checks receive payment in some sectors, which, are not quick enough when it comes to reducing the credit limit of businesses that are alleviating these constraints, bilateral and we use those to make money from with a long maturity added on to it, means Although many businesses voiced strong slowing down. One other reason is that there is increasing competition in SME banking, changes will need to be made. those credits...The checks usually mature that there is a potential financing gap of opinions against using banks, virtually all which has resulted in reduced credit insurance time. One advantage of factoring after four months. Then, we have an over a year. 21% of participants of the businesses still used them. This, at Serving SMEs effectively is central to the businesses over banks is that they can give out loans much faster than banks” agreement with banks or private companies complained of this financing gap. least in part, is due to the fact that in success of banks across Turkey; these and if you give the checks to them, they give “In addition to the banking industry in Turkey, factoring companies have also started order to even have the potential of taking customers constitute a valuable segment Moreover, bounced checks present a you the money, but of course they keep some playing a more crucial role in financing SMEs. As a result, the factoring industry has out a loan, a business must first have a which is also a key driver of economic problem and recent legislation has of it. It’s like factoring, but with a check, grown rapidly especially in the past 5 years. The factoring industry concentrates mainly on credit limit set with a bank. Another growth. For SMEs, better representing actually softened the penalty for bad instead of your accounts receivable. Turks SMEs and micro-level businesses that are not capable of tapping resources at banks.” frequently used non-loan service is their business to financial service checks. Contrary to former legislation, the don’t trust the invoice, so they factor on selling checks to the banks before they providers can lead to a smoother issuers of bounced checks will only be - Arda Tunca, CFO of Eko Factoring, Istanbul checks” (Manager at Manufacturing mature. Still, with a more positive and application process, more appropriate subject to an administrative fine rather Business, Istanbul) trusting relationship, businesses, loan terms, and reduce the necessity of than imprisonment. particularly in the southeast, may be intervention by outside actors. Clearly, factoring plays a rather large role, The lack of strict punishment can in turn Factoring Receivables and Use of Bank Loans more apt to utilize more bank services. especially considering factoring cause default cascades in check payment companies outnumber banks and leasing 14,000,000 The literature generally highlights lack of systems. In fact, according to Interbank companies in Turkey, and total factoring knowledge about financial services as Cash Flow Clearing House’s data, the ratio and receivables outnumber total bank loans. 12,000,000 one of the main barriers to SMEs’ access volume of bounced checks doubled in Cash flow management is weakened to capital, primarily due to the fact that Without prompting, just over a quarter of 2012 compared to 2011. By the end of by post-dated checks. 10,000,000 many business owners have no training respondents said they accept checks as a 2013, the value of bounced checks was 46 in administration, finance, accounting, Access to capital, primarily through bank form of payment and nearly the same around USD 6.2 million. 8,000,000 and human resources. loans, was clearly a challenge for the amount, 24% of SME owners, reported A representative from Turkey Economic participating SMEs and it is on the top of actually selling these checks to banks or In the current study’s sample, only 6% of Bank (TEB) described the new legislation 6,000,000 their minds; however, another topic which factoring companies. SME owners had an MBA and few as detrimental to the financial system, as was usually brought up simultaneously others had formal training in those Participants stated that the use of long there has been a decrease in the amount 4,000,000 was restricted cash flow due primarily to categories, but the participating business maturities, in addition to the difficulty in of trust afforded to checks: “[The new extended check maturities, but also due owners were well informed on a limited collecting accounts receivables, leads to law] means that people stopped caring 2,000,000 to difficulty collecting payments and long spectrum of financial services offered by inadequate cash flow, which in turn about whether they were writing good payment periods. Based on discussions banks, such as loans, credit cards, and compromises their sustainability by checks. This is a problem for the banks as 0 with interviewees, long check maturities 2006 2007 2008 2009 2010 factoring and leasing services. denying them the revenue stream needed well because we take some of these checks are sometimes the reason SMEs use – or to grow. It is important to note, however, as collateral for loans. We don’t know which TOTAL ASSETS SHAREHOLDERS EQUITY They do not, however, know the full overuse – short-term loans to cover daily that the participating SMEs themselves check to accept and which ones not to FACTORING RECEIVABLES NET PROFIT / LOSS range of services available such as lines operational expenses. are likely use checks to make their own accept. This means quite a bit of overhead SHAREHOLDERS EQUITY Source: BRSA and it slows down the financial system.”

44 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 45 POTENTIAL SOLUTIONS

Carefully choosing customers – It is clear that there is no one silver bullet through improving the functionality of to solve the issue of post-dated checks, the Credit Bureau – can help SMEs unless the government outlaws the use of overcome some cash flow issues them all together. It is also clear that the current legislation further exacerbates the In light of Turkey’s unique post-dated problem as it implies impunity for bad check system and the difficulty SMEs checks and fails to protect SME owners face when collecting accounts from the vulnerabilities of bounced receivable, some participants found checks and engrained cultural practices creative ways around this issue. When of check writing. asked if the new trade law prompted him to be more careful about selecting his What can be done, and is currently a customers, a Gaziantep business owner work in progress, is improving the responded that he simply could not find functionality and usage of the existing customers if he demanded collateral or Credit Bureau (KKB) database for a guarantee from them. His alternative individual consumers and firms alike. strategy, rather, was to incentivize (see page 41 for additional details). The alternative payments by offering ability for SMEs to select customers and discounts for cash payments. suppliers based on a standardized credit score would revolutionize the way Another business owner in Gaziantep Turkey does business, and in a sense, give went as far as reducing payment businesses the power to filter negligent installments, demanding different forms suppliers and customers. Much like in of payment, and even requesting developed economies, where anyone payments in advance. Other businesses can access their own credit score, the have adapted by simply choosing their adoption time of a similarly functioning customers based on certain criteria, such system in Turkey makes this a long- as credit history of a client or how term solution. “honest” they seem.

However, a business must have enough power – that is, demand for the good or service and lack of competition – to be able to choose customers, adjust the payment period, or require collateral. As one manager said, “We can pick our customers. We work with firms that can pay us in cash and are honest to us. We reject ones that can’t pay in cash. In other markets, SMEs don’t have the luxury we enjoy since the market conditions differ... They have no option but to sell in any form of payments their customers demand. Consequently, they face issues with financing” (Manufacturing Business, Gaziantep).

46 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 47 COMPETITIVENESS

As this report aspires to uncover what with other businesses. A slight majority This lack of concern for competition may SMEs need to thrive in order to help of the SMEs interviewed (55%) imply that a lack of knowledge or drive Turkey’s economy, it was important immediately mentioned competition, capacity in conducting market research to discover not only the most frequently while approximately 40% of them and formulating a strategy. These cited constraints, but also the elements brought up ways in which they weaknesses are likely a result of the which indicate where Turkish SMEs collaborate with other businesses; in previously discussed lack of stand in the domestic and global value some cases, businesses also professionalization in the SME segment. chain and how they can increase their collaborated with their competitors. European competition was, for the most competitiveness. There were some significant regional part, a concern of businesses in Istanbul, differences, with unfair competition While this section is not necessarily a although some Gaziantep SMEs also featuring more prominently in the comprehensive representation of SME mentioned it. European competitors Marmara Region and a perception of competitiveness, it does offer insights were particularly seen as having more being at the top of their sector being a into the participants’ perceived market resources – human capital, R&D more common belief in Gaziantep. position, their exporting goals, and their investment, and physical space – which investment in R&D and market research. 21% of participants expressed a lack of present a sizable challenge to many real concern about domestic Turkish SMEs. The majority of participants spoke quite competition. Out of those participants, vaguely about their competitors and The flattening world, connected 71% simply felt that their market their own position in the market, constantly by technology may also be a position was so strong that they did not demonstrating how a lack of knowledge challenge for Turkish businesses, worry about much competition, while and training in business management especially if they lack brand recognition; the remainder were more concerned can ripple out to many parts of Turkish as one owner said, “…there is global about competition from abroad than SMEs. Moreover, very few businesses competition. In one project, there is a domestic competitors. reported investing in any market research or R&D for innovation.

These two activities have been “European companies are our biggest competitors. Of Many respondents placed a strong emphasis on competition demonstrated to be important factors course, local companies are our competitors in certain contributing to a business’ when asked how they interacted with other SMEs in their competitiveness and will need to be markets, but we are most afraid of the European enhanced for Turkish SMEs to thrive, competition because they have big opportunities to kill sectors. The value proposition many SMEs see themselves particularly if they are to help Turkey move up the global value chain by us. We are competing against global brands here in offering is honest, quality work which creates loyal customers. producing higher-end products, and to aid in increasing exports to $500 billion Turkey now – German and French companies. We are of exports by 2023. A significant proportion of our sample was interested in competing with Grundfos, one of the biggest pump companies in the world with more than 60 people here expanding their role in international markets. Competitive Spirit in Turkey. They have money, technology, and educated Many respondents emphasized people like engineers, research centers in Europe...and Investment in market research and R&D will need to significantly competition over collaboration. we are here. We have 5 people.” improve in order to make many SMEs competitive enough In order to find out where SMEs perceived and positioned themselves - Sales and Marketing Manager at Manufacturing to move Turkey up the global value chain and to thrive in within their sector, they were asked a Business, Istanbul broad question about how they interact international markets.

48 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 49 Main Export Markets of Participating SMEs whereby Turkey is focused on brands, marketing, and sales plans, and rivals on its main exports – cars and diversifying its regional partners instead are in fact reaching the market on their textiles – will necessitate a greater effort of relying so heavily on Europe. own. “This is growing day by day, and these from Turkey’s SMEs to remain companies are pushing for new markets,” competitive on the world market. However, regional instability hampers he said. the ability to export to neighboring Part of Turkey’s plan for improving EUROPEAN UNION: 7 countries such as Iraq and Syria. Today, Turkey has reached a very cooperation, innovation, and economies TURKISH NATIONS: 11 Moreover, trade to Europe and the important position with increasing of scale, is its clustering policy, initiated accompanying regulations and standards medium-tech industries, but the 2023 in 2007, which established small have in some ways helped to increase vision will require a new paradigm, industrial estates and organized the quality produced in Turkey, which particularly concerning exports. This industrial zones throughout the makes it overall more competitive. implies a necessary jump for many SMEs country.49 In Gaziantep, we were able that simply support European firms to repeatedly visit two of the five TURKEY For SMEs and other aspiring exporters, through the production of intermediate organized industrial sites which housed the Secretary General of TiM predicts a goods to graduate to the next level of manufacturing and carpet businesses. bright future: “The current economic developing national brands. 18% of participants reported sharing environment is very different from the past; MIDDLE EAST: 12 products, processes, or even customers Turkey used to have an economic crisis The Secretary General continued: with other SMEs in their sector. every seven years! Just the survivors were “Following this push for higher quality able to export.” products, Turkey now needs to unlock the The collaboration, at least partially UNTIED STATES: 3 NORTH AFRICA: 5 excess capacity within manufacturing inspired by their proximity to similar Now, he explained, Turkish exporters sectors and the only way to move forward is businesses, primarily resulted in have evolved into two distinct groups. through innovation, design, and branding.” business owners and managers being First, the firms who work with European comfortable with walking a fine line brands in almost all sectors. Second, the Furthermore, Turkey’s relatively high between cooperation and competition company from US or from Europe. It is easy now has a positive image as a fast and Global Trade companies who produce their own labor costs and pressure from Asian for a customer to find a company – they just trustworthy business. Other SMEs don’t like amongst other firms. have to Google it” (Manufacturing us.” SMEs, particularly in Gaziantep, Business, Gemlik). aspire to expand global trade. Turkey’s focus on quality products served For 27% of participants, their primary it well in the past decade, particularly Currently, SMEs account for around 48 market positioning strategy was superb after establishing the customs union 60% of total exports and many of the customer relations, a fact congruent with with the EU in 1996. Even now, Turkey’s participants in this study expressed a POTENTIAL SOLUTIONS Turkey’s culture of strong social international branding strategy is desire to enter new international networks and hospitality. This strategy TURQUALITY which is an accreditation markets. 27% of respondents mentioned places great value on making existing, system initiated by, among others, the either entering the international market Financial service providers should SME segment. Under the assumption an example of industrial cluster-based long-term customers happy and relying Ministry of Economy, Turkish Exporter’s or increasing existing international leverage clusters to increase that customers have similar demand in client segmentation. By separating its on them to spread your reputation. Assembly (TiM). business as one of their goals. An penetration of financial and non- one specific industry, the existing customers by industry and business overwhelming majority (78%) of those financial services . clustering of SMEs can enable financial linkages, the bank was able to tailor its Factors contributing to positive relations It is a project designed to elevate the respondents were located in Gaziantep. service providers to target specific services to the specific needs of a cluster. included providing high quality products, brands of certain companies to the level Turkey’s existing clustering policy regional industries by financing the timely delivery of goods and/or services, of international standards and to create Among a handful of other countries, provides a platform for banks to leverage Services offered included checking supply chain of a company, better and a trusting relationship. The awareness of Turkish brands.47 At the nearly half of respondents expressed as they segment the SME market. As accounts, transition, banking services, understanding a particular industry’s Gaziantep construction business, same time, according to the Secretary interest in increasing their export evidenced by the SME Services Offered cash management services, and trade barriers to international trade, or even Yukseller, stated, “There are huge General of TiM, Turkey will now shift its volumes to the Middle East and to Turkic by Major Turkish Banks chart earlier in services which equated to a major developing B2B (Business to Business) competitors in the region that can easily national focus more towards increasing nations such as Azerbaijan, this report, most banks develop a increase in their total SME client base, platforms for a given cluster. penetrate our customer base. We have the quantity of Turkish goods in the Turkmenistan, and Kazakhstan. These multivariate segmentation strategy to only 5% of which were lending clients.50 always kept our word and finished our international market by turning domestic interests align with current Prime widen their SME client base and In an International Finance Corporation projects on time. Other companies give surplus into exports. Minister Ahmet Davutoglu “zero ultimately earn greater profits from the (IFC) case study, the Indian bank ICICI is promises that cannot be kept. Our company problems with neighbors” policy,

50 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 51 For example, competitors may buy raw The report also found that Turkey is way through. I don’t pay for market materials in bulk together, pass on benefiting from the EU budget through research but I keep up with newspapers and smaller projects or delegate intermediate programs like the 7th Framework look at some statistics.” tasks to smaller firms. However, the Program for Research and Development. Indeed, it may just be that the most clustering policy, at least in our sample, Surprisingly, Turkey’s research and resourceful and ambitious SMEs tap into did not appear to necessarily inspire innovation system is weaker than the EU the programs and funds available for innovation. Only one Gaziantep business average in many areas except in the innovations of all types. An increasingly reported working with a competitor on percentage of SMEs introducing professionalized business culture, along R&D projects and another lamented the marketing or organizational innovations with improvements in resource fact that he could not rally his colleagues and in public expenditure on R&D.51 allocation and management, may be in a similar direction. Moreover, key industries such as precursors to many SMEs investing in manufacturing and construction are elements such as R&D and market moving towards more research intensive research which will enhance their Research + Development activities as shown by increases in the competitiveness. level of R&D expenditure as a percentage There was no clear definition of R&D of value added. and market research amongst SMEs. This macro-level information provided Potential Solution: Although some evidence was collected by the EC study demonstrates significant Market Research on whether businesses engaged in market differences to what was found in research and R&D, the results are One potential opportunity that can be interviews with SME participants. Thus, inconclusive due to significant amounts of expanded upon is for professional taking into account sample size missing data and widely varied under- associations to assist with market limitations, an increase in knowledge and standings of what those two terms mean. research or to create specific funds for awareness of existing programs, in SMEs in their sector to conduct R&D. For example, when asked if the business addition to expanding the reach of those allocates funds for market research, programs would likely increase One owner mentioned that his several interviewees began talking about participation. association, the Direct Marketing their marketing techniques such as Association (DPID), provides him with However, for the majority of SME advertisements and sales teams. From pertinent information to help inform participants, the solution will not only be the confusion and overall lack of concrete his decision-making: “We don’t allocate increasing knowledge and funds for answers for both market research and funds for market research. DPID does market research and R&D; significant R&D, it is clear that there is a lot of yearly studies that contain information attitude change will be necessary for potential for growth in these categories. about customer profiles, members’ some SMEs to even see the value in revenues, etc. Through this, we can better Currently, the government runs a series of these activities. This is closely related to understand our position in the sector” R&D and innovation programs, which the finding that a large portion of SMEs include technology development zones, believe their market position to be so (Owner of Public Relations and university-business collaboration, R&D strong as to render competition Advertising Business, Istanbul centers, tax incentive schemes, R&D irrelevant. For example, a chicken farm cooperation projects, and more. In fact, a owner in Gaziantep stated, “No, we have recent report issued by the European no marketing problems, our customers are Commission (EC) found that Turkey loyal. Our demand and supply is also nearly shows strengths in key technologies and in the same, so no problem.” high-tech and medium-tech contributions Likewise, a construction business owner to the trade balance, in addition to a in Edirne stated, “No. We don’t do R&D growing commitment to investing in either. I just close my eyes and bulldoze my science, technology, and innovation.

52 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 53 Currently, microenterprises make up the The public sector can implement policies SMEs themselves can play a greater role largest proportion of Turkey’s economy diminishing institutional barriers, such as in their own story. Experienced business and large enterprises generate the most mitigating long payment plans and owners can mobilize forces to act as CONCLUSION profits. But SMEs occupy important enabling debt collection, in addition to “SME Ambassadors”, acting as role spaces in manufacturing, textile, and continuing, enhancing, and increasing models helping others tap into foreign construction sectors and are increasing awareness of public SME support markets, create business plans, expand exports to international markets. programs. their businesses, and more. Lastly, considering the diverse business Turkey’s move from an efficiency-driven economy to an Furthermore, as a sector, they have the More of an emphasis should be placed environment SMEs operate in today, potential to make significant on improving government employment SMEs cannot afford to ignore half of innovation-driven economy, and to one of the world’s contributions to Turkey’s GDP while also agencies to not only foster and Turkey’s working-age population. SMEs creating jobs for an underutilized and incentivize formal recruitment strategies, should attempt to better integrate largest economies at that, will take improvements from growing labor force. Investing in SME but also to help align the current women into their formal workforce, as growth is a much more stable and mismatch that exists between what every type of enterprise. this strategy not only makes economic inclusive strategy than relying on foreign SMEs want – workers with a practical sense but will likely aid in securing their capital inflows and domestic skill set – and vocational graduates with future prosperity and competitiveness. consumption. an overly theoretical knowledge base. A combined and coordinated effort, One underlying change, which will be a The private sector can contribute in a along with its strong, aspirational vision, necessary prerequisite for leveraging the number of ways, through financial can propel Turkey into a more full potential of Turkish SMEs, is to service providers and also through competitive and lucrative global position. increase the overall level of consultants, which, if they can gain the Turkish SMEs simply need a boost to the professionalization, especially in trust of business owners, can offer next level. As one participant pointed managers and owners. Relinquishing guidance on all areas delineated in this out, “This is a country of a lot of control and increasing knowledge of report, and more. opportunities… If you do everything right— business administration will help usher Relationship managers (RM), who if you analyze competition right, if you in improvements in strategy and already have an established level of trust launch the right products at the right price planning; finding, hiring, and managing with SME clients and, equally, act as a and right place, if you give the right tools to human capital; organizing business direct channel of communication, can be the sales team and customers – then it accounts and finances; and investing in better leveraged to provide more value works” (Deputy General Manager of other important activities to enhance to SMEs seeking guidance. Banks can Printing and Stationary Business, Istanbul). competitiveness. also attempt to provide a more Of course, not all problems can be transparent and seamless process for solved by professionalization. SMEs can SMEs wishing to utilize the broad aspire to reach the next level through spectrum of financial tools offered. combined efforts between the public and private sectors.

54 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 55 APPENDIX 1: INTERVIEW LIST

SME Participants Financial Service Other Providers Stakeholders Cavit Alamut Oktay Karaman Metin Durak General Manager, Owner Owner Bulent Saraclar FINANSBANK Arif Torun ALSO Catering Elit Matbaa Form & Etiket Owners Liam Hardy SME and EEN Expert Gaziantep Kargo Seyit Ahmet Mehmet Boz Marketing Assistant Small and Medium Enterprises Owner Owner Murat Borin Development Organization Sulun Gurtin Senab Betaon Parke Boz Pa Tekstil Owner Communications Mustafa Ilbeyli Berrce Furniture Cengiz Israfil Ugur Sacir Project Director Burcu Koyuturk Owner Production Manager Murat Evyapan Republic of Turkey Prime Ministry Manager for Middle Size Fil Finance and NY Steakhouse Owner of Sadestone Manager Investment Support and Promotion Enterprise Marketing Edacan Construction Agency Cavit Duvan Talat Tuzlu Cemal Tevrizci Owner Mehmet Tuzlu Omer Can Bilecan Recept Zipkinkirt Assistant VP for SME Banking Duvanpen Yapi Marketi Owners Owner President MOST Metal My Office Edirne Chamber of Commerce Murat Demircan EKO FACTORING Guliz Yardimci Hakki Tutunculer Mehmet Catioglu Cemgiz Yukseltam Arda Tunca EU and Foreign Relations Managers Owner Owner CFO Alfen Machinery and Armature Flas Makina Ufuk Construction Edirne Chamber of Commerce Serkan Ozer Industry Inc. Eyup Bartik Ramazan Yuksel Ali Bozhuyuk Head of Credit Levent Baloglu Owner Owner President Gaziantep Chamber Owner Yukseller Tad Pilic TURKISH ECONOMIC BANK Balo Ticaret Tourism of Commerce Mehmet Calisici Nevzat Erkmen Turgut Boz Mustafa Mente Taner Onen Owner Owner SME Banking Senior Assistant General Secretary Sales Manager Caliskan Makina Merkur Hali-Gumussuyu General Manager and Deputy CEO Balo Ticaret Tourism Turkish Exporters’ Assembly Hikmet Okutucu Gokhan Gopuroglu Devrim Tavil Ali Sökmen Okan Biyik Owner Owner SME Banking Segment Mgt. and Economic Studies Owner Insaat Malzemesi ve Taahhut SHO Carpet Business & Development Director Kontek Muh. Economic Policy Research Siddik Kayabas Omer Gullu Foundation of Turkey (TEPAV) YAPI KREDI LEASING Yunus Kacar Owner Owner Owner Gunmak Baklavaci Gulluoglu Ugur Cem Bastimar Neslihan Tombul Parantez Tonitim Portfolio Manager, Sales Expert in Banking and Finance Ismail Ilimbey Four additional business owners Board Member Mustafa Aktas Feride Yucedag chose to remain anonymous ING BANK, TURKEY Turcas Petrol Owner Managers SARAC End. Urunleri Yapi Kimyasallar Gunmak Yucel Olcer Arthur Sculley Head of SME Department CEME Senior Fellow Berna Acar Ahmet Goksular Fletcher School, Tufts University Deputy General Manager Owner Erdogan Yilmaz Umur Gumusmekik Hali EVP of SME Banking Steven Koltai Managing Director SEKERBANK Koltai & Company Omer Cakir Gaziantep Branch Manager

56 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 57 APPENDIX 2: SME OFFERINGS BY MAJOR TURKISH BANKS

SME Segmentation Number of SME Customers Formal Financial Services % of Loan Portfolio Non-Financial Provided Allocated to SMEs Services Provided

Turkish Economy Bank (TEB) Micro: < 1m USD Approx. 155,000 • Cash Management 45.33% • TEB SME Academy Small: 1m to 10m USD • Loans with installments up to 3 years • SME Consultants Medium: 10m to 20m USD • Factoring and Leasing • TEB SME Club • TEB SME TV

Finansbank Micro & Small: <2mil TL annual revenue or 4.5% market share in SME banking • Cash management 25% • SME Central Total credit risk below 1mil TL • Investment Loans Under EIF • SME Cloud Medium: Between 2 to 20mil TL annual Guarantee revenue or Total credit risk below 10mil TL • Spot Loans • Revolving Line of Credit • Foreign Currency Loans

ING Bank <15 mil TL annual turnover Over 100,000 • Loans in collaboration with KGF, 32.6% • SME academy, offering free KOSGEB, Exim bank, EIB and trade “e-lessons”; working on online portal chambers to help bank clients find customers • Factoring and Leasing both domestically and abroad • Cash management

Yapi Kredi Bank SME Banking: <5m USD in annual revenue 911,000 • Commercial installment loans 13% (2009) • At least one SME RM in every retail Medium: 5- 20 mil TL annual revenue, 10% market share in SME banking • Revolving loans branch, including Remote Relationship total credit risk/banks below 10mil) • Flexible commercial accounts Managers (RRMs) in 9 different • POS and Merchant Services, regions of Turkey • Agricultural Banking Products • SME internet portal www.kobiline. • Cash management products com • Investment products • Brand and patent consultancy • Commercial credit cards services • Commercial purchasing cards leasing • Loans in collaboration with GAGF, EBRD, IFC, KOSGEB and KGF

Garanti Bank SME: <10m TL annual revenue • Loans 30% • KOSGEB Startup Support Package • Factoring and Leasing • SMEs Consultancy Call Center • Cash management • Entrepreneur Magazine • Credit cards • Rentals • Insurance and retirement investment • Informational guidelines for safety of • Garanti POS (direct loans from POS work place machines) • Revolving Credits

58 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 59 SME Segmentation Number of SME Customers Formal Financial Services % of Loan Portfolio Non-Financial Provided Allocated to SMEs Services Provided

AK Bank SME: < 30 m TL in annual turnover • Loans 40% (2007) • Improving Entrepreneurs Programme • Cash management • Global University Student • Credit cards Competition • Sector-based SMEs packages • Investment programs • Agreements with chambers and VESTEL distributors • Factoring and Leasing • Import-export advice

Is Bank SME: <250 employees and <40m TL • Loans 27.5% • SME consulting meetings annual revenue • Cash Management • SME Website • Leasing • SME Seminars • Company Credit Cards • Support Packages for Specific Sectors • Innovation Support • Credit Cards

Halk Bank (Public) Micro: <10 employees and 1 m TL net 369,414 • Loans 36% • Risk investigation reports income 13.5 % market share in SME banking • Insurance • Entrepreneurship Academy, Small: <50 employees and <5 m TL net • Leasing • Consultancy for M&A income • Cards Medium: <250 employees and <25 m TL • Cash management • Investment support

Vakif Bank (Public) • Loans 20.5% (2012) • 1400 SME account managers and • Sector-based credits over 100 support staff in regional • Cash management offices • Factoring and Leasing • Risk investigation reports • Insurance • Agreements with chambers • Import-export advice

Turkiye Finans (Islamic Bank) Micro: <500,000 TL 3.2% market share in SME banking (27.8% Commercial and Business cards 44% (2013) • KOSGEB and KGF cooperation SME: 500,000 to 15 m TL among participation banks) Leasing • Advice on various incentives and Profit-Loss Partnership grants FX indexed Loans • Agreements with trade chambers Insurance • 400+ staff dedicated to SME Cash Management customers

60 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 61 APPENDIX 3: ENDNOTES

1. Paul Vroonhof, Jan de Kok, Wim Verhoeven Niek Timmermans, Ton Kwaak Jacquenline Snijders, and Florieke Westhof. Do SMEs 26. "Vocational Education and Training in Turkey." Ankara, Turkey, The Republic of Turkey Ministry of Education, January 11, 2012. Create More and Better Jobs? The Netherlands: EIM Business & Policy Research, 2011. 27. ECEVİT, Y.(2009) “Türkiye’de Toplumsal Cinsiyet Eşitsizliği: Sorunlar, Öncelikler ve Çözüm Önerileri,” Yayın No. Tüsiad-T/2008-7/468, 2. The UN Refugee Agency (UNHCR). Syria Regional Refugee Response Inter-Agency Information Sharing Portal 2014. Kagider-001, İstanbul, 154-156.

3. Bradley, Matt. "Iraq Conflict Cuts Trade Routes into Turkey." The Wall Street Journal, July 5, 2014. 28. Elborgh-Woytek, Katrin, Monique Newiak, and et al. Women, Work, and the Economy: Macroeconomic Gains from Gender Equity: International Monetary Fund (IMF), September 2013. 4. Koc, Rahmi M. "An Evaluation of Turkey's 2023 Target's from the Private Sector Perspective." Turkish Policy Quarterly 12, no. 2 (Summer 2013). 29. Smith-Spark, Laura and Tuysuz, Gul. “Rights groups slam Turkey’s Erdogan over remarks on women.” CNN Europe, November, 2014

5. "The Turkish Economy: Strong but Vulnerable." The Economist (2013). 30. Talent 2020: Surveying the Talent Paradox from the Employee Perspective: Deloitte, September 2012.

6. "En Yabancı Sektörler." Capitol: Iş Ve Ekonomi, 2012. 31. World Bank Financial Inclusion Data 2014. World Development Indicators, World Bank.

7. Ellyat, Holly. "Can Turkey Become the China of Europe?" CNBC Europe, 2013, sec. Economy. 32. Banking in Emerging Markets: Seizing Opportunities, Overcoming Challenges: Ernst & Young’s Global Banking & Capital Markets Center, 2013. 8. Satir, Metin Dr. Turkey, SMES, & KOSGEB: KOSGEB, 2012. 33. Financing SMEs and Entrepreneurs 2014: An OECD Scorecard: OECD, page 35. 9. Some questions elicited vague or confused responses. For example, businesses were asked whether they developed a business plan and whether they funded and utilized market research and R&D. Another example is loan terms: how long is a long-term loan to us and to 34. Financial System Stability Assessment on Turkey: IMF, 2013. them? Although those concepts were accurately translated into Turkish and the participants understood the language when asked, the actual conceptualization of these terms may not be aligned between Western and Turkish business culture. The analysis thus takes into 35. Turkish Interest Rate Report: Bodrum Bulletin, September 2014. account the ambiguousness about exactly what “business plan”, et al. meant to participants. 36. Enterprise Surveys Country Note Series: Running a Business in Turkey: World Bank Group.

10. Many businesses were found using connections such as certified public accountants and bank representatives which may imply that 37. "Turkey's Interest-Rate Hike to Affect SME Loans." World Bulletin, http://www.worldbulletin.net/news/129113/turkeys-interest-rate-hike- businesses with a certain level of professionalism or certain social connections may be overrepresented. to-affect-sme-loans

11. The informational gaps in the chart demonstrate another finding. Despite interviews and extensive online research, we were unable to 38. Tunahan, Hakan and Ahmet Dizkirici. "Evaluating the Credit Guarantee Fund (KgF) of Turkey as a Partcial Guarantee Program in the Light uncover basic information about SME coverage, what services are provided, and how that particular bank segments SMEs. All numbers of International Practices." International Journal of Business and Social Science 3, no. 10. are from 2013, unless otherwise noted. 39. Karadeniz, Esra. Entrepreneurship in Turkey: The Global Entrepreneurship Monitor (GEM), 2010. 12. For a detailed overview on SME-supporting organizations, see section III on Stakeholders 40. Koprulu, Ogun. "Turkey: The New Practice of Turkey's First Credit Bureau." Mondaq, http://www.mondaq.com/x/285812/ 13. An interview with a KOSGEB representative demonstrated that the provincial offices individually determine application results and Consumer+Law/Is+Capital+Increase+A+Straight+Forward+Process. procedures, so knowledge and access to programs may drastically differ per location. 41. "Manage Your Future Now." United Nations Development Programme, 2014. 14. Karadeniz, Esra. Entrepreneurship in Turkey: The Global Entrepreneurship Monitor (GEM), 2010. 42. Dahan, Frederique and Elizabeth Kirk. Credit Information Reporting System: European Bank of Reconstruction and Development (EBRD). 15. Ibid. 43. Why Banks in Emerging Markets are Increasingly Providing Non-Financial Services to SMEs: Turkish Economy Bank: IFC: RTI, 2012. 16. Society at a Glance 2011: OECD Social Indicators. 44. SME Banking 2013: Driving Growth in a Changing Sector: Accenture, 2013. 17. OECD Centre for Educational Research and Innovation. “Education at a Glance 2014.” 45. Turkish Factoring Industry: TurkRating, August 2011. 18. Koc, Rahmi M. "An Evaluation of Turkey's 2023 Target's from the Private Sector Perspective." Turkish Policy Quarterly 12, no. 2 (Summer 2013). 46. Türk Cumhuriyet Merkez Bankasi Istatistikler (Statistics from the Turkish Central Bank)

19. OECD Better Life Index 2014. 47. "Turkish Republic Ministry of Economy: Turquality Program." 2014, http://www.turquality.com/about-us/what-is-turquality-2.

20. Mili Egitim Istatistikleri (National Education Statistics) Table 1.8 2013. Education Indicators; table 1.8 48. Satir, Metin Dr. Turkey, SMES, & KOSGEB: KOSGEB, 2012.

21. 2013 tarihli Örgün Mesleki ve Teknik Egitim Sürecine Genel Bakim; http://www.radikal.com.tr/turkiye/ozendirmek_var_ozen_yok_meslek_ 49. Erkan, Erdil. "Clusters and Clustering Policies in Turkey." Middle East Technical University (2013). liseleri-1146743 50. Customer Management in SME Banking: A Best-in-Class Guide. Washington D.C.: International Finance Corporation (IFC), 2012. 22. Mili Egitim Istatistikleri (National Education Statistics) Table 1.8 2013. Table: 8.6 51. Research and Innovation Performance in Turkey, Country Profile: European Commission, 2013. 23. Political Vision of the AK Party for 2023. http://www.akparti.org.tr/english/akparti/2023-political-vision, 40-41.

24. Asik, Gunes. "The Tenth Development Plan and an Old Question: Can Women Boost Turkey's Growth?" The Economic Policy Research Foundation of Turkey (August 2013).

25. Ibid.

62 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 63 APPENDIX 4: BIBLIOGRAPHY

Asik, Gunes. “The Tenth Development Plan and an Old Question: Can Women Boost Turkey’s Growth?” The Economic Policy The Global Competitiveness Report: World Economic Forum, 2013-2014. Research Foundation of Turkey (August 2013). Growing the Global Economy through SMEs: Edinburgh Group, 2013. Banking in Emerging Markets: Seizing Opportunities, Overcoming Challenges: Ernst & Young’s Global Banking & Capital Markets Center, 2013. Heritage Foundation 2014 Index of Economic Freedom.

Bloom, Nicholas and John Van Reenen. “Why do Management Practices Differ Across Firms and Countries?” Journal of Kapisiz, Samet. “Financial Problems of SMEs in Turkey and how do they Deal with them?” Institute of Strategic Thinking, Economic Perspectives 24, no. 1 (2010). http://www.sde.org.tr/en/newsdetail/financial-problems-of-smes-in-turkey-how-do-they-deal-with-them/3341.

Bosma, Niels, Sander Wennekers, Maribel Guerrero, Jose Ernesto Amoros, Alona Martiarena, and Slavica Singe. Special Karadeniz, Esra. Entrepreneurship in Turkey: The Global Entrepreneurship Monitor (GEM), 2010. Report on Entrepreneurial Employee Activity: Global Entrepreneurship Monitor (GEM), 2013. “Kobilerin Karsilastiklari Isletmecilik Sorunlari (Managerial Problems SMEs Face).” PEGEM, http://tiponaybelgesi.net/ Bradley, Matt. “Iraq Conflict Cuts Trade Routes into Turkey.” The Wall Street Journal, July 5, 2014. projedt/377-kobilerin-karsilastiklari-isletmecilik-sorunlari.html.

Caglar, Esen. Turkey’s Growth Depends on the Normalization of SMEs: Economic Policy Research Foundation of Turkey (TEPAV), Koc, Rahmi M. “An Evaluation of Turkey’s 2023 Target’s from the Private Sector Perspective.” Turkish Policy Quarterly 12, no. 2 2010. (Summer 2013).

Corruption Perceptions Index: Transparency International, 2013. Koprulu, Ogun. “Turkey: The New Practice of Turkey’s First Credit Bureau.” Mondaq, http://www.mondaq.com/x/285812/ Consumer+Law/Is+Capital+Increase+A+Straight+Forward+Process. Customer Management in SME Banking: A Best-in-Class Guide. Washington D.C.: International Finance Corporation (IFC), 2012. “Manage Your Future Now.” United Nations Development Programme, 2014. Dahan, Frederique and Elizabeth Kirk. Credit Information Reporting System: European Bank of Reconstruction and Development (EBRD). Mili Egitim Istatistikleri (National Education Statistics) Table 1.8 2013.

Doing Business 2013: World Bank. MIST: The Next Big Thing Or Just Hot Air? Grail Research, 2012.

Doing Business in Turkey: PricewaterhouseCoopers (PWC) Turkey, 2011. Nurrachmi, Rininta, Khairunnisa Abd Samad, and Ibrahim Foughali. “The Development of SMEs in Turkey.” MPRA Pa- per (2013). Economy and Foreign Trade Report: Turkish Exporters Assembly (Turkiye Ihracatcilar Meclisi), 2014. OECD Better Life Index 2014. Elborgh-Woytek, Katrin, Monique Newiak, and et al. Women, Work, and the Economy: Macroeconomic Gains from Gender Equity: International Monetary Fund (IMF), September 2013 Paul Vroonhof, Jan de Kok, Wim Verhoeven Niek Timmermans, Ton Kwaak Jacquenline Snijders, and Florieke Westhof. Do SMEs Create More and Better Jobs? The Netherlands: EIM Business & Policy Research, 2011. http://ec.europa.eu/ Ellyat, Holly. “Can Turkey Become the China of Europe?” CNBC Europe, 2013, sec. Economy enterprise/policies/sme/facts-figures-analysis/performance-review/files/supporting-documents/2012/do-smes-create- more-and-better-jobs_en.pdf “En Yabancı Sektörler.” Capitol: Iş Ve Ekonomi, 2012. Political Vision of the AK Party for 2023. http://www.akparti.org.tr/english/akparti/2023-political-vision Enhancing the Competitiveness of SMEs in Turkey: Country Report: KOSGEB, October 2012. Providing Comprehensive Non-Financial Services to SMEs in Turkey: A Success Story for both Banks and Clients: Turkish Economy Bank Enterprise Surveys Country Note Series: Running a Business in Turkey: World Bank Group. (TEB) Case Study, 2012.

Erkan, Erdil. “Clusters and Clustering Policies in Turkey.” Middle East Technical University (2013). Research and Innovation Performance in Turkey, Country Profile: European Commission, 2013.

Financial System Stability Assessment on Turkey: IMF, 2013. Salman, Umay. “Ozendirmek Var, Ozen Yok: Meslek Liseleri.” Radikal, 2013.

Financing SMEs and Entrepreneurs 2014: An OECD Scorecard: OECD. Satir, Metin Dr. Turkey, SMEs, & KOSGEB: KOSGEB, 2012.

Gezi Park Protests: Brutal Denial of the Right to Peaceful Assembly in Turkey: Amnesty International, 2013. SBA Fact Sheet: Turkey: European Commission: Enterprise and Industry, 2013.

Giving Credit Where Credit is due: How Closing the Credit Gap for Women-Owned SMEs can Drive Global Growth: Goldman Sachs Schneider, Friedrich. The Shadow Economy in Europe, 2013: AT Kearney and VISA, 2013. Global Markets Institute, February 2014.

64 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 65 ACKNOWLEDGMENTS

SME Banking 2013: Driving Growth in a Changing Sector: Accenture, 2013. We would like to thank all of the SME And lastly, we would like to extend our participants, thought leaders, and deepest gratitude to: SME Trends and Policy Review: European Union; European Turkish Business Centre Network, 2010. executives in Turkey for their willingness and time, without whom this research SMEs in Turkey & SME Support Mechanisms: KOSGEB, 2012. Kim Wilson would not have been possible. For believing in our research from day Smith-Spark, Laura and Tuysuz, Gul. “Rights groups slam Turkey’s Erdogan over remarks on women.” CNN Europe, November, We are also incredibly thankful for the one and for the constant support 2014 MasterCard Center for Inclusive Growth through ideas, critique, and inspiration. Society at a Glance 2011: OECD Social Indicators. and for the staff of the Institute for Business in the Global Context for their financial Arthur Sculley Talent 2020: Surveying the Talent Paradox from the Employee Perspective: Deloitte, September 2012. support and guidance. Who graciously provided us with his Tasmen-Jones, Jessica. “Turkish Family Businesses.” Campden FB, http://www.campdenfb.com/article/infographic-turk- In particular, we would like to acknowledge time, expertise, and contacts in ish-family-businesses. Bhaskar Chakravorti, Christopher Tunnard, furtherance of our research. Jamilah Welch, Katherine Round, and Dan Tracy, Mary. “The State of Entrepreneurship in Turkey” (2013). Wilson Center for Social Entrepreneurship. Paper 11. Popko for all of the work they did to help Arda Tunca http://digitalcommons.pace.edu/wilson/11 complete this project. For his expertise, hospitality, and for Tunahan, Hakan and Ahmet Dizkirici. “Evaluating the Credit Guarantee Fund (KgF) of Turkey as a Practical Guarantee Program connecting us to business owners and in the Light of International Practices.” International Journal of Business and Social Science 3, no. 10. private sector stakeholders.

“Turkey’s Interest-Rate Hike to Affect SME Loans.” World Bulletin, http://www.worldbulletin.net/news/129113/turkeys-interest- Umut Ertür rate-hike-to-affect-sme-loans. For providing his expertise and opening “The Turkish Economy: Strong but Vulnerable.” The Economist (2013). up his business networks to our research The UN Refugee Agency (UNHCR). Syria Regional Refugee Response Inter-Agency Information Sharing Portal 2014. team.

Turkish Factoring Industry: TurkRating, August 2011. Neslihan Tombul

Turkish Interest Rate Report: BodrumBulletin, September 2014. For pulling from her years of wisdom in the financial services industry to guide “Turkish Republic Ministry of Economy: Turquality Program.” 2014, http://www.turquality.com/about-us/what-is-turquality-2. us through the complex SME segment in Turkey. “Turkish Statistical Institute (TURKSTAT) Metadata.” http://www.turkstat.gov.tr/PreHaberBultenleri.do?id=15856.

Ulusoy, Recep and Reyhan Akarsu. “Turkiye’De KOBI’Lere Yapilan Destekler Ve Istihdam Uzerindeki Etkileri (Support for SMEs Kemal Eroglu in Turkey and its Influence on Employment).” Kocaeli Üniversitesi Sosyal Bilimler Enstitüsü Dergisi 23, (2012): 105- 126. For generously showing us around Gaziantep and helping us locate study “Vocational Education and Training in Turkey.” Ankara, Turkey, The Republic of Turkey Ministry of Education, January 11, 2012. participants. Why Banks in Emerging Markets are Increasingly Providing Non-Financial Services to SMEs: Turkish Economy Bank: IFC: RTI, 2012.

World Bank Financial Inclusion Data 2014. World Development Indicators, World Bank.

66 MORE THAN MEETS THE (EVIL) EYE BUSINESS PRACTICES AND CONSTRAINTS OF SMEs IN TURKEY 67 Institute for Business in the Global Context The Fletcher School, Tufts University 160 Packard Avenue, Cabot 404 Medford, MA 02155 USA