Foreign capital investments can be defined as the monetary or technical resources that a country obtains from external sources and adds to its economic power. Foreign capital investments contribute to the economy of a country in terms of “increasing the fixed capital stock, bringing technology and business knowledge, creating employment and improving competition, reducing the balance of payments deficit, bringing dynamism to the domestic market, and reducing the shortage of technical staff and managers”. Foreign capital can be defined in two ways according to the way it comes to a country: (1) Foreign Direct Investment (FDI) is defined as “a firm’s acquisition of a firm in another country, establishment of a new firm, or establishment of a partnership by increasing the capital of an existing firm in that country, or to existing firms. Investments made in the form of adding/bringing elements such as license, know-how, technology and management knowledge are called “investments”. This type of investment can also be expressed as private foreign direct investment, direct or foreign investment, or foreign direct investment. According to the OECD, FDI is “a category of international investment made by a direct investor with the aim of establishing a permanent bond with an entity located in another country.” FDI is a real investment in production. (2) Portfolio investment is “a financial transaction that occurs when a foreign investor buys stocks traded in a country’s stock exchange, government-guaranteed bonds/bills.”
It is possible to extend the history of foreign capital investments to the 16th century. However, the real development took place as a result of the industrial revolution, especially in the second half of the 19th century, when the industrializing countries of Western Europe invested in colonial countries to meet their raw material needs. World foreign capital flows followed an up-and-down course due to the First World War and the 1929 economic depression after it. With the increase of Multinational Companies after World War II, FDI started to increase rapidly throughout the world. FDI, which contributes greatly to the globalization process, helps to accelerate the development of developing countries such as Turkey.
2. Before 2000s
Although Turkey followed a liberal policy between 1950-1960, there was no significant foreign capital inflow. Although it followed a planned development model after the 1960s, foreign capital inflows remained low. The FDI to Turkey between 1954-1979 amounted to 228 million dollars. Despite the Foreign Capital Incentive Law No. 6224, which entered into force in 1954, the expected FDI did not arrive in Turkey until 1990. In the 1970s, foreign capital inflows to Turkey remained low due to the implementation of more than one high exchange rate for foreign currencies, the lack of convertible of the Turkish Lira, and political and economic instability. Although 250 million dollars of foreign capital came to Turkey during the 1970s, the debt crisis after the mid-1970s and the great recession in the domestic market took some of the resources abroad.
After Turkey followed an open policy with the Economic Stability Decisions of January 24, 1980, there was an increase in FDI inflows. The decisions taken on January 24 paved the way for the liberalization of foreign trade and foreign exchange and introduced regulations that would allow foreign capital and technology to enter the country. Although the new government came to power after the 1983 general elections and the FDI legislation changes increased foreign investments, foreign investments started to decrease due to the economic instability and worsening economy as a result of the coalition governments established after 1992 and the change of leaders in it. After the reforms of January 24, 1980, between 1981 and 1987, foreign capital inflows to Turkey remained at an average of 93 million dollars.
The high rate of FDI to GDP in a country shows that FDI is an important factor in the development of that country. There are indicators that determine the high rate of a country’s FDI to that country’s GDP. These are “transparency in the country, stable and fast real growth, low interest rate, predictable and low inflation rate, moderate exchange rate fluctuations, liberal foreign trade and exchange regimes, investment incentives, appropriate international taxation arrangements.” FDI remained low in Turkey due to economic and political reasons. In particular, “political and economic instability, inward industrialization policies, overvaluation of the national currency policy, foreign exchange controls, intense bureaucracy, inadequacy of legal regulations, inadequacy of infrastructure, heavy tax burden, negative attitude towards foreign capital in the public” were effective.
Source: Uluslararası Yatırımcılar Derneği
At the end of the 1980s, FDI increased very rapidly around the world. Other developing countries seem to be more successful than Turkey. In addition to the minimum level of foreign capital inflows to Turkey due to the 1997 Southeast Asian crisis and the 17 August earthquake, there are both economic and non-economic reasons for Turkey’s inability to attract FDI before 2000. Among the economic reasons are foreign investors’ exposure to high taxes, chronic inflation, increasing economic instability, lack of intellectual property rights law, lack of privatization, insufficient legal structure and inadequate infrastructure. Non-economic reasons include chronic political instability, PKK terrorism, historical hatred for foreign investors (capitulations in the Ottoman period), fear of countries gaining political influence over the military and civil bureaucracy, disencouraging FDI, and structure of the business world, which are monopolized by some Turkish families and closed to foreign investors. In December 1999, the government signed a 3-year stand-by agreement with the IMF to improve credibility, reduce inflation and implement structural reforms.
Source: Türkiye’de Doğrudan Yabancı Sermaye Yatırımları ve Bölgesel Dağılışı
The FDI of the Gulf countries in Turkey before 2000 followed a low course compared to the post-2000 period. In this situation, Turkey’s distant attitude towards the Middle East, except for the mid-1950s, was effective. Thus, the number of companies with which the Gulf countries were partners in Turkey was 5 in 1981. After the privatization in Özal’s tenure, relations in the economic field gained momentum. In this respect, Gulf countries have participated in existing companies as well as establishing new companies. For example, İZDAŞ-İzmir Demir Çelik A.Ş. 28% of the capital, one of the leading companies in the iron and steel industry, was bought by Saudi Arabian investors. Gulf countries also participated in the capital of multi-partner companies in many other sectors such as textiles. In the pre-2000 period, Gulf countries were avoiding direct investments with high risk and, instead of it, made liquid investments, which they considered safer. Gulf countries invested their oil revenues on banks and investment companies. In this sense, banks such as Saudi American Bank, Bank of Bahrain and Kuwait B.S.C. located in the Gulf region came to Turkey.
Turkey’s foreign policy orientation has limited Gulf investments in Turkey. From the second half of the 1990s until 2002, when the AK Party came to power, relations between Turkey and the Gulf countries remained in the shadow of Turkish-Israeli relations. However, after Turkey’s reforms within the framework of the EU membership process, FDI started to increase. After the signing of the Customs Union Agreement in 1995, Gulf investments in Turkey have increased rapidly. For the Gulf countries, Turkey’s qualified workforce, modern companies and technological expertise were attractive. The increase in Gulf investments in Turkey was not only due to Turkey, but also the economic transformation experienced by the Gulf countries contributed to it. As a result of the fall in oil prices at the end of the 1990s, the Gulf countries sought to diversify their economies in order to establish economic stability. In this regard, Gulf countries followed strategies such as developing infrastructure, FDI and lending. However, in the pre-2000 period, FDI in Turkey was mostly made by EU countries. In parallel with this, the number of EU origin companies was higher. When we look at the distribution of the number of foreign capital firms by country between the years 1954-1999, it is seen that half of the foreign capital firms in Turkey are of EU origin.
3. After 2000s
In 2003, the “Foreign Capital Incentive Law” dated 1954 and numbered 6224 was replaced by the “Foreign Direct Investments Law” numbered 4875. This law defines the concepts related to investments within the framework of international standards. Contrary to the old law, the new law removes the obstacle of foreign capitals to be realized with a certain permission. For this reason, investments increased rapidly and the sectors in which investments were made diversified. In addition to Law No. 4875, which was put into effect to attract FDIs to the country, the Coordination Board for the Improvement of the Investment Environment (YOIKK) was established in 2004. However, YOIKK could not improve the investment environment as expected. Since the Investment Advisory Council, which was established in 2004 to support this board, provides a common platform for the exchange of ideas between foreign investors and senior policy makers, significant progress has been made in improving the investment environment.
Source: T.C. Cumhurbaşkanlığı Yatırım Ofisi
In the first decade of the 2000s, the EU membership process, the reduction of inflation to 10%, legal reforms for foreign investment and the signing of the international arbitration agreement paved the way for Turkey’s rapid rise in the AT-Kearney International Investment Confidence Index since 2005. FDI, which started to increase after the enactment of Law No. 4875 in 2003, reached a record level of $22 million in 2007. However, the liquidity problem experienced after the 2008 global financial crisis has reduced investments in Turkey. Although it approached a record level in 2015, it decreased in the following years. The failed coup attempt on 15 July 2016 negatively affected foreign direct investments by reducing the political stability and economic growth of the country. After 2015, FDI in Turkey showed a falling tendency. Since Turkey is not rich in natural resources, it is exposed to global macroeconomic conditions.
Source: T. C. Cumhurbaşkanlığı Yatırım Ofisi
Looking at the FDI source countries in Turkey, it is seen that the Gulf countries made more investments in the post-2000 period. When the AK Party administration came to power, it improved its economic relations with the Gulf countries as a result of Turkey’s policy of diversifying its export markets and reducing trade with the European Union. In particular, the rejection of the March 1 motion regarding the use of Turkish territory by the USA to invade Iraq was the cornerstone of the relations between Turkey and the Gulf countries. After the Cold War, until 2002, when the AK Party came to power, the relations between Turkey and the Gulf countries were shaped by the Arab-Israeli conflict and the regional order. During this period, Turkey’s policy of staying away from conflicts in the region and its close relationship with Israel resulted in its distance from Gulf countries. However, political, security and economic developments in the 2000s accelerated the relations between Turkey and the Gulf countries. Among the economic developments, the Gulf capital, which was associated with terrorism in the West after September 11, turned to new markets for investment; Turkey’s pursuit of privatization, foreign capital and markets to ensure economic stability after the 2001 economic crisis; As a result of the increase in oil prices after 2002, there is an increase in capital in the Gulf countries. Looking at the political developments, Turkey has displayed a high profile in the Organization of the Islamic Conference (Organization of Islamic Cooperation), Turkey has sought cooperation outside the European Union, and also the Gulf countries have sought cooperation outside the USA, and the geopolitics that emerged after the US invasion of Iraq turned the balance in favor of Iran. The Gulf countries (especially Saudi Arabia), who were worried about the spread of Iran, saw Turkey as a fortress wall against Iran. The security reasons that brought Turkey and the Gulf countries closer in the 2000s are the problems caused by the dependence of the Gulf countries on the USA for security. In this context, Iran’s influence in Iraq has increased, non-state armed actors such as Hezbollah have emerged in Lebanon, and, in turn, the Gulf countries have seen Turkey as a balancing factor against Iran, which is at the stage of producing nuclear weapons.
Source: P.R.T. Investment Office
The increase in oil revenues of the Gulf countries due to the rise in oil prices between 2003 and 2007 made Turkey a center of attraction for investment. Thus, in 2006, Gulf countries earned more than $400 billion in oil revenue. As a result of this, since 2003, the number of Gulf-based investments in Turkey has more than doubled. Accordingly, Gulf-based investments in Turkey reached 1.78 billion dollars in 2006. The majority of this investment was made in the agricultural sector with the aim of increasing the strategic food reserve. Besides, the trade volume between Turkey and the Gulf countries, which was 17 billion dollars in 1998, increased to 166 billion dollars in 2008. Also, the development of commercial relations between Turkey and the Gulf countries has a significant impact on the Turkish economy. While the per capita income in Turkey doubled between 2002 and 2007, the Turkish economy grew by an average of 7 percent annually.
Gulf countries invested 6.5 billion dollars in Turkey between 2004 and 2011. During this period, the UAE made more than half of the Gulf countries’ investments in Turkey. Saudi Arabia invested 1.3 billion dollars and Kuwait 1.7 billion dollars between 2004 and 2009. However, considering that the total foreign investment of the Gulf countries worldwide was 166.5 billion dollars between 2004 and 2009, it is seen that Gulf-based investments in Turkey remained quite low. In the first decade of the 2000s, banking, finance and telecommunication sectors were the leading areas in which Gulf capital invested in Turkey. In 2005, Saudi Arabia-based Oger Telekom bought 55% of Türk Telekom’s shares for $6.5 billion, and in 2007 National Commercial Bank, the largest bank of Saudi Arabia, acquired 60% of the shares of Türkiye Finans, Turkey’s largest participation bank, for approximately $1 billion. In addition, the majority of Adabank and MNG Bank shares were purchased by Gulf-based companies. Kuveyt Katılım Bankası (Kuwait Participation Bank) was established. In 2007, Abraaj Capital, one of the largest investment funds in the Arabian Peninsula, purchased 50% of Acıbadem Sigorta. Another area in which the Gulf capital invests is the investments made in the regions within the scope of the Southeastern Anatolia Project (GAP).
Among the other sectors that Gulf countries invested in in the 2000s, there are several different sectors such as tourism. In terms of the tourism sector, although the number of tourists increased after 2007 and between 2008 and 2010, there was no increase in tourism revenues. Due to the 2008 global financial crisis, the exchange rate and price reductions were effective in this. Although tourism revenues and the number of tourists increased continuously after 2011, the direction of demand has shifted to rival countries in the Mediterranean basin since 2016, as a result of increasing domestic security concerns due to terrorist incidents after 2015 and political tension with Russia. After the 2008 global financial crisis, worldwide foreign capital investment showed a falling tendency and FDI in the world could not reach the investment level of 2007 ($2.1 trillion) again. In this situation, in addition to the increasing geopolitical risks and policy uncertainties in 2016, the decrease in the profitability of international companies, low demand and weak economic growth were effective.
Political developments and conflicts that took place during the post-2010 Arab revolts have affected Gulf-based investments in Turkey. In this period, when the regional visions of Turkey and Qatar matched, Gulf countries, apart from Qatar, followed a different policy towards the Arab revolts. While Turkey was calling for political reform, the Gulf countries followed a policy of preventing the overthrow of the regimes. Arab revolts changed the regional balance of power and started a new relationship between Turkey and the Gulf countries. The Turkey’s policy towards the Arab revolts has caused Saudi Arabia to no longer see Turkey as a strategic partner.
After the Arab Revolts, a three-pole structure emerged in the Middle East. While Iran was on one side, Saudi Arabia and the UAE were on the other, it was seen that Turkey and Qatar formed the third bloc in the region. These different blocs are based on their different foreign policy towards the Arab Revolts. While Turkey-Qatar supported the legitimate demands of the Arab peoples in this process, Saudi Arabia-UAE-Bahrain took a stand against the Arab peoples. As a third bloc, Iran supported the Assad regime in Syria. The divergence of the policies of Turkey, Saudi Arabia and the UAE in Syria, Libya and Egypt, and even posing a threat to Turkey’s security, led to the cooling of relations between Turkey and some Gulf countries. The Qatar crisis, which started in 2017, also shows that the two blocs have diverged. An example of the tension between the two blocs can be seen at the point where Turkey has a military base in Libya and Qatar and carries out military deliveries. Therefore, in the process that started with the Arab Revolts, it decreased with Saudi Arabia and UAE-based investments in Turkey. On the other hand, after the Qatar crisis, while the investments of Saudi Arabia and the UAE continued to decrease, Qatar’s investments in Turkey increased.
In the last 18 years, Gulf countries have invested in many sectors in Turkey, from industry to finance, from retail to media. During this period, investments in Turkey reached 11.4 billion dollars. Among the Gulf countries, the UAE was the country with the most investment in Turkey with 4.3 billion dollars, while Qatar was the second Gulf country with the most investments with 2.7 billion dollars. While Saudi Arabia ranks third among Gulf countries with 2 billion dollars, Kuwait ranks fourth with 1.9 billion dollars. One of the most prominent sectors in which Gulf investments are made in Turkey is Turkish banks. Gulf investors have ownership or partnership in 8 banks in Turkey. Among the top three banks are Qatar-capital QNB Finansbank with 198 million dollars, UAE’s Emirates NBD with 122 million dollars, Saudi Arabian capital Türkiye Finans with 118 million dollars.
Source: Katar Yatırımları ve Türkiye’nin Yeri
The most investing Gulf countries in Turkey in the last five years are Qatar with 1.8 billion dollars, followed by Kuwait with 342 million dollars and the UAE with 205 million dollars. Dubai-based private equity firm Abraaj Group, which has been operating in Turkey since 2017, acquired KFC Turkey, which operates with 104 restaurants, in December after purchasing shares from Netlog, one of Turkey’s largest logistics companies, in July 2017. In the last 5 years, Qatar draws attention as it has made more than 70 percent of the direct investments of the Gulf countries in Turkey. Qatar first came to the fore with its investments in Turkey by purchasing Alternatif Bank in 2013. With an investment of 469 million dollars in 2013, it became the eighth country with the highest direct investment in Turkey. Moreover, in July 2013, Qatar’s first private bank, The Commercial Bank, purchased 70.8% of ABank’s shares from Anadolu Group, and purchased the remaining shares of the bank for $222.5 million in 2016. By continuing its investments in the banking sector by acquiring Finansbank, Qatar demonstrates the interest of Gulf-based capital in the banking sector. Qatar invested in Mado, Banvit, Ankas, Boyner and BMC after purchasing ERGO Portfolio and Digiturk. Also, in 2015, the Qatari investor bought Kontes Beach Hotel Turizm for $7.9 million. Qatar’s investments in Turkey accelerated especially after the blockade of Qatar that started in 2017. While the share of investments from the Gulf countries was 3.4 percent in 2017, this figure reached 7.9 percent in 2018 and 12 percent in 2019.
One the other hand, Gulf investments also experienced some obstacles in Turkey. One of these problems is the real estate sector. In recent years, the stagnation of real estate sales in Turkey and the slowdown in the construction sector due to rising iron prices have caused Gulf investors to follow a wait-and-see policy. As the Gulf investors earned money by selling the property in Turkish Lira when the value of the property they bought in Turkish Lira increased in a few years, the constant depreciation of the Turkish Lira against the dollar and the excess supply in the housing market caused them to lose. Gulf origin investments continued until the July 15 Failed Coup Attempt. However, developments such as the US attempt to seize the Gulf capital and the attempts of Saudi Arabian managers to open investment fields in their own countries for non-oil income may affect Gulf investments in Turkey in the medium and long term.
Among the problems faced by Gulf investments in Turkey construction of “Dubai Towers,” which was decided to be made in November 2005 during the visit of Dubai Prince Mohammed Rashid al-Makhtum. In 2007, Sama Dubai Holding CEO Fardan Faraduni announced that a lawsuit was filed by the Istanbul Chamber of Architects on the grounds that the land allocated for the construction of the towers belonged to IETT and that they would not make a prepayment of 875 million dollars before the lawsuit was concluded. The former Istanbul Metropolitan Municipality Mayor Kadir Topbaş announced that they are behind the sale decision. Since the lawsuit filed by the Istanbul Chamber of Architects was not concluded, some Gulf-based companies hesitated to invest in Turkey. However, Gulf-based investments continued in general. While a Qatari firm bought the shares of Sabah Newspaper, Dubai-based investors invested in the real estate, banking and civil aviation sectors in 2005. Dubai Islamic Bank acquired MNG Bank for $160 million. In 2007, Emirates Airline grew 25 percent, making a profit of approximately $800 million. In addition, the Dubai-based Tamir Holding announced that it will undertake a project worth 8 billion dollars in Istanbul. In addition to the UAE, investments originating in Kuwait also increased. It is seen that Kuwaiti investors bought a significant amount of shares from Halkbank in addition to investing in shopping malls such as Cevahir in Istanbul. In addition, the Global Investment House, one of Kuwait’s largest banks in the Gulf countries, paid 120 million dollars to the 60 percent share of the Fund, which is one of the investment officers of Ülker company. However, a month later, the Kuwaiti company announced that they had withdrawn their offer because the Turkish government did not reduce the 18 percent Value Added Tax to 1 percent in line with the agreement. As a result, the environment of uncertainty or subsequent changes hampered investments.
Another obstacle to Gulf-based investments in Turkey is the language used by domestic politics in Turkey. This language specifically targets Qatar. The CHP Chairman Kemal Kılıçdaroğlu used critical language regarding the transfer of the Istanbul Stock Exchange to the Qatar Investment Authority in November 2020. In addition, the IYI Party linked the transfer to the closed purchase of the transfer transaction and declared that it is the product of authoritarian regimes. However, Qatar bought the 10 percent share purchased by the European Bank for Reconstruction and Development from the Istanbul Stock Exchange in 2015. Finally, CHP deputy Ali Mahir Başarır used the expression “sold army” regarding the sale of 49 percent of the Tank Pallet Factory to Qatar. In this regard, the Ministry of Turkey National Defense announced that the ownership and management of this factory belongs to the Ministry and Qatar only has a say in the operation of the factory. Therefore, the investments of the Arab capital, and especially Qatar, in Turkey have been the stuff of domestic politics for political parties to gain votes.
In the pre-2000 period, insufficient technical and legal infrastructure, political instability and the problem of terrorism prevented the increase of Foreign Direct Investment in Turkey. In the pre-2000 period, Gulf countries avoided direct investments with high risks and made liquid investments, which they considered safer. Gulf countries used their income from oil by investing in banks and investment companies. However, investments originating from the Gulf remained limited. Gulf investments in Turkey entered into a rapid increase during the AK Party period. In addition to Turkey’s foreign policy orientation, which also cares about the Middle East, the conditions that the Gulf countries went through, such as the rise in oil prices, had a favorable effect on the investments. Gulf origin investments in Turkey have exceeded 10 billion dollars. However, this amount occupies a small place in the 165 billion dollar investment of Gulf origin countries in the world. While the UAE makes the highest total investment of 4 billion dollars in Turkey, it is followed by Qatar, Saudi Arabia and Kuwait. In addition, due to Turkey’s support for Qatar during the Qatar crisis, Qatar has been the Gulf country that has invested the most in Turkey in the last five years. Finally, Gulf investments in Turkey faced some political and economic obstacles. High inflation rates in Turkey affect these investments negatively because Foreign Direct Investments are long-term investments. In addition, the constant decrement of the Turkish Lira against the Dollar negatively affects these investments. It is expected that Turkey’s implementation of a new economic model centered on the industry and agriculture sector, instead of the construction sector, will positively affect the investments. Turkey and Qatar are complementary to each other due to Turkey’s human capital and infrastructure and Qatar’s strong capital accumulation. In terms of political reasons, Turkey’s taking a different position from Saudi Arabia and the UAE during the Arab Revolts reduced the investments of the two countries in Turkey. Therefore, FDI inflows and outflows in Turkey occur in parallel with the regional order in the Middle East and Turkey’s position in this order. Finally, the use of Arab and especially Qatari investments by opposition parties in Turkey as a domestic political tool is one of the obstacles to Gulf investments in Turkey.