Foreign policy towards foreign direct investments: experience of turkey

Abstract. As investment diplomacy has taken its place in world politics recently, it has not been sufficiency covered in a strategic approach by the majority of international actors; indeed, neither are there any associated theoretical approaches in field of foreign policy and investment correlation. Whilst FdI is well researched from the perspective of economics and development, its effectiveness in the development of a given country is still under discussion. Experience of Turkey FdI attraction through foreign policy strategy, it’s effectiveness and results in different periods will be presented in the article. Certain lessons of Ankara can be applied to the countries which focused on the “economization” of foreign policy and FdI cooperation.

Besides many global and domestic economic challenges, Turkey has increased FdI inflows in 2018 by 12% [1]. Since global FdI decrease which achieved 13% in 2018 and made certain states to answer global challenges and compete for foreign investors. Though in 2018 Turkey experienced devaluation and economic development decline, it managed to maintain an increase in FdI flows. Besides this sustainable increase of FdI flows, Turkey was fourth among developing countries worldwide in greenfield FdI projects by 2017-2018, and was fourth after China, the Philippines, and India in the list of economies with the most special economic zones in 2019 [1, p.41]. Ankara guaranteed preferences and security for foreign investors, have investment strategies and formed special institutions to attract FdI, but both have a certain associated political risk; overall, Turkey implemented its foreign policy strategy more effectively.

This experience of Turkey can be very timely assumed in Kazakhstan. Kazakhstan since the 1990s developed strong partnerships with foreign investors and succeeded a lot in FdI inflows attraction. Meanwhile, due to UNCTAd, Kazakhstan showed a decline in FdI by 43% in 2017 and in 2018 by 18.3% [1, 2]. Since 2018 Kazakhstan started the process of economization of foreign policy to attract foreign investors and provide economic sustainability [3]. New Foreign Policy Strategy of Kazakhstan for 2020-2030 shows that NurSultan will enhance economic diplomacy and work hard in attraction of FdI to the country [4]. That is why experience of Turkey could be important to learn with its positive and negative lessons, as the country went through the different periods in investment diplomacy since the nineteenth century till nowadays.

The Ottoman Empire experience in FDI cooperation: the first lessons to learn

It is especially interesting to start by studying the experience of the Ottoman Empire in its history of foreign direct investments as beginning in the nineteenth century to the current experience to see how Turkey manages its inflows.

It is impossible to compare the entrance of FdI into Turkey in the nineteenth century and into Kazakhstan by the end of the twentieth century. Thus, there are similar issues and challenges which both had in FdI matter.

So, despite having had sustainable diplomatic and trade relations for centuries with the European states, the Ottoman Empire has faced economic challenges and decline since the eighteenth century. Indeed, the Ottoman Empire saw economic declined because of the free trade agreements imposed by the European Powers since the European powers, mainly England, assigned a policy of specialization which promoted raw material production at the expense of manufacturing. Bruce Master characterized this as follows: “As money made from trade was not reinvested in protoindustry, as it was in England, Holland, or Western Germany, was the availability of a host of other, more attractive options for returning profits to investors” [5, p. 147].

The Europeans were the first which entered market of the Middle East and with industrial revolution increased their economic activity in the nineteenth century. diplomacy were closely connected with trade for centuries in that region, only increased competition between European states for the influence in the region changed the picture. Weakened by domestic issues the Ottoman Empire was still the core player and it was still important to manage relations with the ottomans.

According to Mears “Looking around for fields for financial expansion, the Western bankers soon began to appreciate the availability of Turkey. Here was a country of vast potential resources, with a strategic geographical location and with government too ignorant, irresponsible and corrupt to protect its interests. It was an ideal field for political intrigue and it did not long remain uncultivated” [5, p.159].

Other authors, like Issawi wrote that, after 1838, the Ottoman trade regime was among the most liberal in the world [5]. Since the Europeans were expecting and working actively for the dismemberment of the Ottoman Empire, they wanted to have direct investments (physical assets) in the country, in order to increase their claims from the spoil. FdI started with a strong demand of infrastructure and agricultural development. For the Empire, it was easier to follow a cooperation based on long-lasting diplomatic relations and long trade history, with existing financial loan practices. The Ottoman administration did not explored the opportunities provided by centuries of that cooperation to diversify economy and increase its power but in certain terms used this opportunity belatedly. They used the diplomatic and economic competition of the Europeans powers for the survival of the Empire. The Ottoman Empire, benefited from FdI in infrastructures because such investments served both to the home and host the country interests. despite of foreign policy, the Ottoman administration used national interest in the strategy of foreign policy and extracted from some economic development.

Four centuries of strong diplomatic connections between the Ottomans and European states brought a certain experience, but to the nineteenth century, the Ottomans significantly lost their weight in political arena. Moreover, they became increasingly dependent on the military and economic supremacy of the Europeans, their industrialization and innovation [6]. So, being in contact with Europeans for centuries in trade relations, the Ottomans had the same problem which some states have nowadays; namely, the lack of industrialization and diversification of their economy.

As Gilpin, scholar of international political economy, noted “in the tradition of nineteenthcentury liberals who extolled trade as a force for peace, some writers believe that the sharing of production by states and corporations of different nationalities creates bonds of mutual interest that counter and moderate the historic tendency for the uneven development of national economies to give rise to economic conflict. If corporations of declining economies are able to continue as industrial producers through foreign direct investment, it is argued, they will be less apt to resist the rise of new industrial powers” [7, p. 261].

The problem of taxation of foreign investments made the Ottomans urgently to adopt regulations preferable for investors. According to Quartet [5], the internal security problems in the first half of the nineteenth century also had a negative impact on capital investment. The Ottomans were collecting export taxes of 12 per cent, while duties were only 3 per cent for imports. As noted by Puryear, “the British made the Ottomans accept free trade before they accepted it in their own country” [5, p. 26].

Geyikdagi wrote “the British, who effectively controlled the Ottoman trade from 1838 to the 1860s, has introduced free trade to the Ottoman Empire long before they did so in Britain” [5, p.26].

First of all, after being a superpower in the region for many centuries, the decline of economic and political strength forced the Ottoman Empire to open the country to FdI inflows and allow Western countries to invest in their country. Whether the Europeans had a bigger interest to enter a new market and sell their goods or to enforce the economic interdependence of a key country in their region is not easy to evaluate. In the second half of the nineteenth century, the leading European states were competing for power and influence, especially in the Middle East, and preparing for war.

Besides profits, FdI aims to bring new technologies to the host country. The Ottomans were not just open to financial inflows but were further interested in the kind of real industrialization that would work in favour of the country and restore its previous strength. The transportation and financial sectors received the first foreign capital inflows which further resulted in a major impact, though with a certain vulnerability, as well [8].

“Almost all of the earlier FdI in the Ottoman Empire were for commercial purposes as the Europeans assigned a specialized production and trade activity for this country. The Ottomans had to produce raw materials for the European industries and buy manufactured products of these industries as expedited by the 1838 Trade Agreement. The impoverished Ottoman people, who could not afford the high- quality but more expensive traditional textiles manufactured by the local craftsmen, bought instead the cheaper imported cloth. during the process, cotton, silk and other textile exports to Europe and the East declined while other local industries dwindled, and the country underwent de-industrialization as a consequence” [5, p.156].

The key countries investing in the Ottoman Empire were Britain, France, Belgium, and later Germany, which entered the European concert and started its activities. Eventually, Germany increased her diplomatic influence and privileges regarding its FdI share, and subsequently became one of the largest investors in the country. The competition between Europeans to invest and gain political and economic influence in the territory became stiff. Besides FdI, the Ottoman Empire had a substantial foreign debt, which can be broken down as follows: France 49.5 %; Britain 6.9%; Germany 20.1%; Belgium 11%; and Holland 3% [5, p. 49]. Moreover, the Ottoman Public department of Administration was established with the purpose of guaranteeing the loan payments.

The Ottoman Empire had a long trade history with the Europeans, but in the nineteenth century was unprepared for the industrial revolution as it had no infrastructure or technology in the European sense. Most of its FdIs were focussed on the transportation and finance sectors in order to facilitate trade activities with the Europeans.

This period of history is very significant as the Ottoman Empire had played a major role in that region for centuries. However, its political and economic influence decreased dramatically in the nineteenth century, when the country became very dependent on the Europeans to meet its industrial needs. It turned into a place of competition between the great powers which were focussed on effective investment so that they could gain increased political influence and economic privileges. The last quarter of the nineteenth century was a time when a coming war was widely expected, and even then FdIs to Ottoman Empire went on increasing diplomatic relations with the Ottomans.

The European gave an economic and political competition increased by the end of the nineteenth century, as Germany was eager to invest for getting a very strong ally in the European arena. It’s even possible to say that foreign policy became even more important in FdIs in relations with the Germans, the Europeans were competing with each other for domination through investments here with a long-lasting influence here and it was in favor of Ottomans. The Europeans invested in transportation and finance, but did not so much in industry is the Ottoman Empire got a transportation and transport construction experience which remained in the country. But excepting cheap European goods and giving up local production was a major weakness in their policy. diplomacy definitely was in place here and had an influence in increasing relations like with France and Germany, and at certain times, changes in relations with Britain led to the declining of FdI. But a very important feature is that foreign investors did not count risks as much as they do nowadays and relied on the country where they invested, and expecting diplomatic support in their interest. They were not anticipating a loss of political influence, getting no profit from investments.

Obviously, the Ottoman Empire didn’t have some special foreign policy approach towards FdI and it was fragmentary and due to the circumstances of the nineteenth century, the policy and interest of the European powers. However, the first FdIs had not brought effective impact towards economy of the Ottoman Empire it brought experience when FdI interests were closely interconnected with diplomacy, the Europeans were competing for the resources and geopolitical position of the Ottoman Empire and FdI, foreign policy were the tools. Since then state could have used lessons in following strategies. National security risks were not included in economic partnership with the Europeans and it brought Republican Turkey after the dissolvent of the Ottoman Empire to the tough consequences. Soon the Ottoman Empire will be dissolved and Turkey stability will be significantly damaged. Surely, domestic political and economic issues, considered among the main of that however, economic dependence on the great powers should not be neglected as well.

The history of FdI in the Ottoman Empire requires very important consideration. The Ottoman Empire being geopolitically in a core place of interest and competition between Britain, France and Germany, was politically important but had considerable economic weaknesses. Lately a lot of emerging states will have the same experience in relations with big powers in FdI matter.

New economic agenda: FDI and the foreign policy strategy of Ankara since the 1980s

The twentieth century brought another experience of FdI which was successful enough but was somehow still based on historical background.

The outcomes of the First World War and foreign debt led to the Republic of Turkey strengthening economic diplomacy and developing relations with the USA, Italy, Germany, the UK, and the USSR. The earlier period of the Republic of Turkey focussed, and indeed insisted, on strong foreign economic relations which were mostly based on foreign trade. The policy of the Republic of Turkey achieved certain economic results and went the way many developing countries went in the interwar and cold war period. Among its main partners were Germany, the USA, the UK, Italy, and the Soviet Union [9, p.11]. Because of the damaging experiences with FdI during the Ottoman period, the new Turkish Republic viewed all kinds of foreign investments with suspicion. Foreign policy strategy in the cold war period was more based on political and security interests than on economic development. It was more important for the country to find a secure position in the bipolar world and the country was consistently balanced in cooperation with the Western bloc [10].

Economic and political tension, oil and exchange crisis, de-tension in bipolar world between the US and the USSR led to Turkey reformulating its political agenda and foreign policy strategy. The diminished security threats, internal political and economic problems led to a coup in 1980 [11, p.393], changes in the global world and the opening up of new global borders, which coincided with an increase in global FdI flows and brought new opportunities. Foreign policy strategy towards economic diplomacy was based on two factors: internal economic needs and opening the east, and new partners and markets for “pro-Western isolationist existence”. Economic power started to become more important in global politics, which actually favoured developing states. Asia, the Middle East, Eastern Europe and, later, the dissolving USSR, became new vectors in Turkey’s foreign policy unless it was clear that economic sphere relations with the USA and the European Union could bring real impact. Turkey tended to secure stability in the regions through establishing economic links and decencies. It was vital to ensure international partners and investors open access to the new market [12, p.208].

Newly forming foreign policy strategy would create a basis for foreign policy with economic focus. Accordingly, the 1980s was described by Mustafa Aydin as follows: “The foreign policy became increasingly concerned with obtaining necessary foreign loans, opening up necessary markets for Turkish goods, and striking necessary deals with foreign governments and sometimes even with companies in order to bring more investments into the country. Thus, as the foreign policy of the country needed to be in tune with its economic programs, economic necessities also became an important variable of Turkish foreign policy making” [13, p.12].

EU investments in Turkey

EU states all the history in Turkey were a core investor and this was not changed with the time. In the eve of liberalization strategy of Turkey in 1982 FdI stock divided between Switzerland (28%), Germany (18.9 %) and the USA (14%) [14].

In 1982, FdI was distributed among the following sectors: chemicals (11.19%), foodbeverages (11.79%), banking (9.19%), and textiles (8.59%) [14, p.159].

Then, with the new liberalization policiesand more active support for foreign investors, these relations became increasingly diversified. during the period 1975-2002, FdI stock reached $15.1 billion, the new investment policy and reforms of the 1990s allowed the FdI for the following period from 2003-2016 to reach $179.7 billion, where during 20052008 the annual inflow was around $20 billion [15]. However, a large part of the FdI inflows came from the acquisition of already existing firms, rather than new investments, thus making a very limited contribution to the economy [16, p. 392].

In 1987, Turkey applied for the EU membership which was the central point in foreign policy orientation until the end of the 1990s. However, whilst the political aspects of this integration were not positive, economic growth and sustainability between Turkey and the EU states was impressive.

As was explained, “by the end of the 1990s Turkey, perhaps has all of the characteristics sought by foreign investors and they endow Turkey with a competitive edge over other developing countries in its bid to attract foreign direct investments. despite this, the volume of FdI Turkey attracted so far is relatively low” [17, p.392].

Before 2000, the main investing countries were France, Germany, the USA, the Netherlands, and for a long time the EU states provided 80% of all FdI in Turkey, while since 2005 Asian States (mainly Gulf states) started to invest, and since 2016 more than 30% of FdI inflows have been from Asian countries [18].

Table 1. FDI stock by countries’ 1980-2007 [19]

Table 2. FDI stock by country’s share, 2002-2017, % [20]

despite a world downshift in 2017, with declining FdI inflows and a strong devaluation of currency in Turkey, 2018 showed an increase in FdI of 13% as compared to 2017 [21]. Certainly, Turkey appears to be working hard to maintain its FdI and to develop and diversify the economy in different fields in times of crisis. Still, in 2018, the service sector (55%) dominated, with manufacture (31%), and energy (10%) playing lesser roles in FdI inflows [22]. FdI inflows by country in 2018 was divided between the Netherlands, Azerbaijan, Italy, Austria, the US, the UK, Germany, Luxembourg, France, and Taiwan [22].

Again, Turkey is presently managing to attract FdI to diversified sectors of the economy which are not resource based even at a very challenging time. Turkey has maintained FdI inflows to the country despite economic and political uncertainties. A wide range of investing countries with shares that are not larger than 11% has allowed Turkey greater political independence.

Table 3. FDI flows by country in 2013-2018, millions of dollars [1].

Table 4. FDI stock by country, 2000, 2010 and 2018, millions of dollars [2].

Even the effectiveness of the FdI in economic development is not a question of this paper, there is a discourse on effectiveness of FdI on the economic development of states with developing or transitional economies which in some cases has in some cases effectively zero or even a negative impact on FdI flows [23, p.

108]. However, whilst the topic of the economic effectiveness of FdI is beyond the scope of this article, before we compare data it is important to note that, since 2004, Turkish FdI inflows did not result in any benefits in terms of new production or the creation of jobs or growth; rather, they were in the form of M&A and transfer of ownership [16, p. 395]. Some econometric analyses even demonstrated “that there was no 3 of 1 relationship between FdI and economic growth over the period 1998-2010 in Turkey” [24, p. 66]. So far, further state has to increase effectiveness of FdI inflows.

Gulf investments in Turkey: when FDI does not mean sustainability in diplomacy

Moreover, Turkey has managed to attract FdI not only from developed Western countries but also a quite considerable from the Gulf States. despite Western inflows of FdI being dominant, Turkey is nevertheless lucky to have a diversified list of home countries.

While it was mentioned that in 1980 Turkish foreign policy strategy considered the Middle Eastern states to be its core strategic direction, this was not in terms of any economic partnership. Since 2002, with APK’s new foreign policy approach, Turkey firstly re-identified a national interest in cooperation with the Gulf States which Ankara had not considered since the Ottoman experience [24, p.1]. For the most part, it was economic interest that drove Turkey to approach the Gulf States, since when political and economic dialogue has led to more considerable investment cooperation.

For Gulf States since 2001 relations with the West went down and made them to look for other partners and new regional opportunities [25]. This led, in 2005, to Turkey and the Gulf Cooperation Council signing a Memorandum of Understanding to support economic cooperation, encourage exchange of technical expertise and information, improve economic relations, and initiate negotiations to establish free trade zones [26].

Further, strategy based on economic cooperation resulted in an increase in trade and, as an example, between 2003-2015 Turkey (at $4.9 billion, or 11.8%) was the second highest in Saudi Arabia’s outward FdI after China (19.4%) [27, p.133]. However, Gulf investments were focussed only on the sphere of Islamic banking and real estate and was more a capital inflow that did not reflect of economic growth in Turkey. Overall, in 2017, Turkey had only a 3.8% share of the Gulf States’ outward FdI, which total $262 billion [28]. So, FdI cooperation between these countries brings diversity among investors, closer political ties, which meanwhile became less sustainable. Even increasing FdI and economic cooperation has not prevented the development of political tension.

In different periods, Turkey’s political position in relation to Iran and further in time of Gulf political crisis, has left the country having to make the choice between Iran or Saudi Arabia [29], and Qatar or Saudi Arabia. Both were important investors, and while it was uneasy to choose any particular side at such times, Ankara made the diplomatic choice to support doha in its isolation and gained an even greater desire from Qatar to increase its investments in Turkey [30], which was responsible for around 65% of all Gulf State FdI in Turkey [31, p. viii] between 2009-2016. In 2015-2016, a downshift in political relations with Russia lead to Turkey substituting Russian energy imports with those from the Gulf States. This did not result in any considerable change but could possibly show how Turkey uses policy to further its economic interests.

Political contradiction between Riyadh and Ankara, and further political crises between Saudi Arabia and Turkey in 2018 did not allow for the development of cooperation in all fields and were unfavorable for Ankara as far as FdI inflows were concerned; Saudi Arabia decided to use FdI to promote its foreign policy and made incredible increases in outward FdI, but of which Turkey did not gain a substantial share. Saudi Arabia almost tripled its outward FdIs in 2018 by $21 billions of which, due to political tension, Turkey received very little.

Turkey and the Gulf States are not so politically close, and both tried to maintain a certain Western orientation while looking into diversification programmes for their economies. They diversified their foreign policy strategies and established a good platform. Turkey, taking advantage of its geographical location, could offer a hub for cooperation with the EU. However, it is clear that FdI from Gulf States just enriches FdI inflows and strengthens relation between states but does not reflect economic growth and does not represent an alternative to Western FdIs [32].

Besides, Gulf States investment shifted seriously to China and India which allowed both sides to focus only on business interest [31, p. 199]. So, it seems that being focused on economic profit only allows for bigger profit than identifying some perceived political or cultural closeness.

The present government of Turkey is trying to promote FdI and to this end provides substantial incentives to foreign investment in Turkey. When the current government came to power, it promised exceptionally favorable conditions and lower taxes for foreign companies. In 2004, an Investment Advisory Council was established that including the top-level executives from twenty foreign companies operating in Turkey [16, p. 393].

The outcome of the foreign policy strategy in the 1980s in economic sphere lead to economic growth and internationalization of the Turkish economy. The limited political perspectives associated with the EU integration did not give the results that might otherwise have brought sustainable economic relations with EU members and make the EU the biggest investor in Turkey. By turning foreign policy vector towards the Middle East and focusing on the economic perspective, Turkey succeeded in attracting FdI flows from the Gulf States which brought inflows without any associated risks.

To include an outward FdI strategy by which to spread its foreign policy interests, as well as its economic interests, Turkey’s experience could be considered.

Conclusion

The Turkish experience in FdI cooperation in the nineteenth and twentieth centuries highlighted the fact that the state should follow in line with joint foreign policy and economic strategies to avoid vulnerability and in order not to damage national security.

The fragmentary foreign policy strategies of Ankara in terms of FdI inflows at different points in history can be assumed by Kazakhstan. Kazakhstan and Turkey have a lot in common; whilst they also have their differences, the similarities in their political and business cultures, the geopolitics, and maneuvering between great powers in the world arena, already justifies the applicability of Turkey’s approach to Kazakhstan. The main challenges in sphere of FdI which Turkey experienced in the nineteenth century and Kazakhstan by the end of the twentieth are almost identical: potential economic and political dependency, vulnerability, and transparency issues.

In certain cases, economic dependence on the foreign investments put Turkey in a vulnerable political position and for Kazakhstan, as well as other states, it could be important for diplomacy to enhance interdependence in cooperation with foreign investors. However, since the 1980s Ankara has succeeded in liberalization and maintaining the balance of FdI flows, promoted a favorable foreign policy and investment climate and greater diversity in its investor portfolio. Clearly with the example of the Gulf States, Ankara learned how to manage in a certain diplomatic tension in favor of its interest and increase FdIs and started to use outward FdI to further its economic and political interests in less developed regions – this is what Nur-Sultan should learn to follow in the foreign policy. While it’s still a path to develop in investment diplomacy, Turkey already went forward steadily even in crisis moments. Turkey has equal shares in FdI inflows among diverse state-investors, which invest in different spheres, finance, service, manufacture and is not dependent on natural resources exploration. Among the leading investors in Turkey are the UK, the Netherlands, Gulf States, Germany, the US. FdI brought dependence, negative experience, further helped to bring some innovations and technologies, develop green-field projects even in challenging times; however, steady FdI inflows failed to strengthen the economy of the country sufficiently. So, systematic foreign policy provided sufficient FdI inflows to Turkey, and within enhancing existing foreign investors, Ankara managed to attract different partners. For Kazakhstan, which managed to attract FdIs in a short time in the beginning of 1990s and provide economic stability in the first decades, now is the time to strengthen position diversifying portfolio of states investors. Since now, FdI inflows have to provide effectiveness and economic development. The first investors from the Western countries were focused in oil and other natural resources reserves in Kazakhstan like it happens in the rest of the world. Surely, FdI partnerships even supported in establish international relations and enhanced Kazakhstan position in international arena. Increasing cooperation with existing core investors, Nur-Sultan could attract FdIs from new partner-states and especially from the states which can bring green-filed investments to Kazakhstan. FdI inflows in Turkey from the beginning were on various sectors of economy, that could be considered by Kazakhstan as shares of FdIs in non-natural resources exploration should be increased in future. Moreover, like Turkey, Kazakhstan could develop an FdI outward policy in its foreign policy interests, investing in Central Asia and other states. The key task for Kazakhstan will be to provide the balance in cooperation when FdI inflows, partnership have to work in favor of national and foreign policy interest.

Kazakhstan foreign policy have enough resources and power to succeed all the goals in investment diplomacy and cope with challenges in that turbulent times.

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