Report No. 54123-TR Public Disclosure Authorized TURKEY Investment Climate Assessment From Crisis to Private Sector Led Growth May 2010 Public Disclosure Authorized Public Disclosure Authorized Europe and Central Asia Region Public Disclosure Authorized Document of the World Bank CURRENCY EQUIVALENTS Currency Unit – New Turkish Lira (TL) EXCHANGE RATE May 12, 2010 TL 1.53= USD 1.00 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 – December 31 Vice President: Philippe H. Le Houerou Country Director: Ulrich Zachau Sector Director: Fernando Montes-Negret Gerardo Corrochano Sector Manager Lalit Raina Task Manager: Donato De Rosa ACRONYMS AND ABBREVIATIONS Small and Medium Enterprises Development ABGS Secretariat General for EU Affairs KOSGEB Organization ABİGEM EU Turkish Business Centers KSS Small Industrial Estates ACTAL Dutch Advisory Board on Administrative Burden MAS Manufacturing Advisory Services Training and Small Industry Support Foundation of BILGE Computerized Customs Activity MEKSA Turkey BRSA Banking Regulation and Supervision Agency MEP Manufacturing Extension Partnership CBRT Central Bank of Turkey MLT Medium- and long-term CC Commercial Code MNC Multinational Corporation Second Competitiveness and Employment CEDPL2 MPM National Productivity Center Development Policy Loan CGF Credit Guarantee Fund MTP Medium Term Program CIF Cost, Insurance & Freight NIS Networks and Innovation Survey CMB Capital Markets Board NPAA National Plan for Adoption of the Acquis Japanese Council for the Promotion of Regulatory CPRR NPL Non-Performing Loans Reform DA Development Agency NSC National Steering Committee Organization for Economic and Cooperation D&Q Design and Quality OECD Development DB Doing Business OLS Ordinary Least Squares ECA Europe and Central Asia OSB Organized Industrial Zones EFCAS Enterprise Financial Crisis Assessment Survey PMR Product Market Regulation EIF European Investment Fund R&D Research and Development ES Enterprise Survey RIA Regulatory Impact Analysis EU European Union SBA Small Business Administration EURADA European Association of Development Agencies SCM Standard Cost Model FDI Foreign Direct Investment SIC Standard Industrial Classification FOB Free on Board SME Small and Medium Enterprise FX Foreign Exchange SPO State Planning Organization GDP Gross Domestic Product TASB Turkish Accounting Standards Board GERD Gross Expenditures on R&D TESK Merchants and Artisans Confederation of Turkey GoT Government of Turkey TFP Total Factor Productivity GOV Governance TFRS Turkish Financial Reporting Standards Union of Chambers and Commodity Exchanges of GVA Gross Value Added TOBB Turkey Small and Medium Industry Owners and Managers GVC Global Value Chains TOSYOV Foundation of Turkey IAC Investment Advisory Council of Turkey TPI Turkish Patent Institute ICA Investment Climate Assessment TSI Turkish Studies Institute Scientific and Technological Research Council of ICS Investment Climate Survey TUBITAK Turkey ICT Information and Communication Technologies TÜRKAK Turkish Accreditation Agency IFRS International Financial Reporting Standards TURKSTAT Turkish Statistical Institute IIPR Intellectual and Industrial Property Rights USPTO United States Patent and Trademark Office ISE Istanbul Stock Exchange VEDOP Tax Offices Automation Project ISO International Organization for Standardization WDI World Development Indicators Investment Support and Promotion Agency of ISPAT WFE World Federation of Exchanges Turkey Japan Finance Corporation for Small and Medium JASME WIPO World Intellectual Property Organization Enterprises Coordination Council for the Improvement of the KADIM Struggle against Unregistered Employment Project YOİKK Investment Environment KKB Credit Bureau of Turkey ACKNOWLEDGMENTS This report was prepared in close cooperation with the YOİKK Secretariat. Preliminary and intermediate findings of the report were presented to YOİKK Steering Committee meetings on June 11 and November 13 2009. Intermediate findings were presented to various stakeholders in a series of roundtables held in November 2009. The World Bank team also performed field visits to Izmir and Adana, where it greatly benefited from discussions with local stakeholders. The World Bank team was led by Donato De Rosa and included Dragana Pajovic, Paulo Correa, Murat Seker, Federica Saliola, Delia Rodrigo, Carlos Piñerúa, Jorge Peña, Alvaro Escribano, Manuel de Orte, Baris Dincer, Irem Guceri, Selma Karaman, Ayse Seda Aroymak, Zeynep Lalik, Erkan Erdil, Murat Ucer. The report was undertaken under the guidance of Ulrich Zachau, Fernando Montes-Negret, Gerardo Corrochano, Lalit Raina and Keiko Sato. Indispensable contribution and insight came from İbrahim H. Çanakcı, Undersecretariat of Treasury, Cavit Dağdaş, Deputy Undersecretariat of Treasury, Berrin Bingöl, Murat Alıcı, Mehmet Dündar, Özge Dumlupınar, Serenay Usta, Gamze Özdurgutlu, Gönül Bakır Kartal, Bahar Konak, Başak Ünal and Can Gürlek (Undersecretariat of Treasury team). In addition to the Treasury team, recognition is extended to all YOİKK member institutions. Willem van Eeghen and Stefka Slavova (World Bank) and Rauf Gönenç (OECD) were peer reviewers for the report. In addition, the team received helpful comments and suggestions from Mark Roland Thomas, Cihan Yalcin, Kamer Karakurum-Ozdemir, Mediha Agar, Muammer Komurcuoglu, Jesko Hentschel, Cristobal Ridao-Cano, Raif Can, Steen Byskov, Jean-Louis Racine, Cemile Hacibeyoglu, Andres Federico Martinez, Mahesh Uttamchandani and Anthony Ody. TABLE OF CONTENTS EXECUTIVE SUMMARY ............................................................................................................................................i OVERVIEW AND POLICY OPTIONS ...................................................................................................................... ii Chapter 1. CHALLENGES FACING THE TURKISH BUSINESS SECTOR ............................................................. 1 1.1 Macroeconomic Setting ....................................................................................................................................... 4 1.2 Effects of the Global Crisis on the Corporate Sector: Preliminary Evidence ...................................................... 9 References .......................................................................................................................................................... 12 Chapter 2. EVOLUTION OF THE TURKISH INVESTMENT CLIMATE ............................................................... 13 2.1 The Investment Climate and Business Sector Performance .............................................................................. 13 2.2 The Regulatory Environment ............................................................................................................................ 21 2.3 Labor Market and Skills .................................................................................................................................... 36 2.4 Innovation ......................................................................................................................................................... 45 2.5 Access to Finance and Corporate Governance .................................................................................................. 52 References .......................................................................................................................................................... 62 Annex 2-A. Econometric Methods ..................................................................................................................... 64 Annex 2-B. Investment Climate Variables Used for the Econometric Analysis ................................................ 76 Chapter 3. PROMOTING SME GROWTH ................................................................................................................ 79 3.1 Patterns of Firm Growth in Turkey ................................................................................................................... 80 3.2 Investment Climate Constraints to SME Growth .............................................................................................. 84 3.3 Enhancing the Ability of SMEs to Access Bank Credit .................................................................................... 87 References .......................................................................................................................................................... 94 Annex 3-A. Descriptive Statistics and Econometric Analysis ........................................................................... 95 Chapter 4. STIMULATING KNOWLEDGE FLOWS .............................................................................................. 102 4.1 Production Networks and Knowledge Flows .................................................................................................. 104 4.2 Increasing the Absorptive Capacity of SMEs.................................................................................................. 110 References ........................................................................................................................................................ 117 Annex 4-A. Econometric Methodology and Results ........................................................................................ 120 Annex 4-B. International and Domestic Trade Flows: A Regional Perspective .............................................. 121 Chapter 5. ENHANCING