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EconWorld Working Paper Series No: 2019-001
doi: 10.22440/EconWorld.WP.2019.001 Research Article
1
Why Do Turkish Firms Go Abroad to Invest?
1
Yılmaz Kılıçaslan
2
, Yeşim Üçdoğruk Gürel
3
, Gökhan Önder
4
, Zeynep Karal Önder
5
Abstract
The aim of this paper is to examine the determinants and localization of outward FDI (oFDI)
of Turkish firms that differs from developed country MNEs with respect to firm size,
technology, skills and access to information about global markets. This research is the first
attempt aimed to explore especially the determinants of country/region selection of Turkish
outward FDI at the firm level by using discrete choice models. The findings in this paper are
based on the primary data collected by in-depth-interviews with 299 outward-investing Turkish
firms operating in manufacturing, wholesale and retail trade, transportation and storage, and
information and communication sectors. Our descriptive findings show that 60% of the
investments are green-field. We found that 68% of the investments were made in developing
countries while the developed countries attracted only 32% of Turkish investments. Our
findings show that the main motivation of Turkish firms investing in other counties is
willingness to reach to the larger markets (77%). Our econometric findings show that the size
of the firm and the parent firm are significant factors in selecting developed countries as the
host country for the investment. As the size of the firm increases, the possibility of Turkish
investors to choose developed countries is diminishing, while as the size of the parent firm bets
bigger, the possibility of locating the investment in developed countries is rising. The high share
of foreign ownership in parent firms has a positive impact on choosing developing countries to
locate the investment. It seems that foreign firms benefit from the experiences of Turkish firms
operating in developing markets. Finally, while willingness to avoid from tariffs has no
significant impact on the probability of investing in developed countries (including EU
countries), it increases the probability of investment in the member countries of Shanghai
Cooperation Organization.
Keywords: Outward Foreign Direct Investment, outward FDI, Probit, Logit, Turkey.
JEL Codes : F12, G1, E2
1
This work is a part of 1001 Research Project (113K738) supported by TUBITAK (The Scientific and
Technological Research Council of Turkey) and Treasury of the Republic of Turkey.
2
Corresponding Author Department of Economics, Anadolu University, Eskisehir, Turkey.
ykilicaslan@anadolu.edu.tr
3
Department of Economics, Dokuz Eylül University, İzmir, Turkey. yesim.ucdogruk@deu.edu.tr
4
Department of Business Adm., Anadolu University, Eskişehir. gokhanonder@anadolu.edu.tr
5
Department of Public Finance, Anadolu University, Eskişehir, Turkey. zkaral@anadolu.edu.tr
Why Do Turkish Firms Go Abroad to Invest? Kilicaslan et al.
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1. Introduction
Foreign direct investment (FDI) is considered as a tool that stimulates growth and employment
for economies by increasing capital accumulation and transferring of new techniques and
knowledge. FDI is even more important for developing countries due to their limited capital
and technical resources. Attracting FDI, thereby, is said to be a developing country
phenomenon. In the last quarter, however, there has been significant changes in the geography
of the investments: while developing countries are continuing to host a significant portion of
global direct investments (developing countries host 50% of global FDI in 2017) on the one
hand, they started becoming the home country of these of investments on the other. 8% of global
FDIs was made by developing countries in 2000, this ratio has increased to 42% in 2014, the
highest level of the history, and then decreased to 29% in 2017 due to the fragility of the global
economy and geopolitical risks.
Turkey, like many other developing countries, has dramatically increased outflow FDIs during
this period. Outflow FDI stock of Turkey rose to $ 22.5 billion in 2010 from 3.6 billion dollars
in 2000. In 2017, this figure has almost doubled with $ 41.4 billion investment abroad (WIR,
2018). The Turkish Treasury (2014) data show that there are 2321 Turkish firms located in 110
different countries, 72% of them in service sector, 26% in industrial sector and only 2% in
agricultural sector.
The most fundamental question about FDI is why a firm would choose a foreign market through
affiliate production rather than other options such as exporting or licensing arrangements
(Blonigen, 2005). The standard answer revolves around country level factors like country’s
stage of development, infrastructure, cost structure, skill differences in human capital, network
linkages, market size and growth, institutions and incentive policies and firm level factors like
the presence of intangible assets specific to the firm, such as technologies, managerial skills,
etc. (Blonigen, 2005 and Pradhan, 2004). The relative role of these factors in determining
outward FDI activity is complex to assess and depends largely on firm specific strategies.
Previous studies investigate the relationship between decision made by firms to conduct FDI
activity and firm size (Blomstrom and Lipsey, 1991; Dunning, 2000; Pradhan, 2004),
profitability (Trevino and Grosse, 2002), export orientation (Lin, 2010; Pradhan 2004), age of
firm (Pradhan, 2004), capital intensity (Siddharthan and Nollen, 2004), technological
capabilities (Lall, 1980; Pradhan, 2004), managerial skill (Pradhan, 2004), advertising intensity
(Blonigen, 2005) and financial constraints (Bond et.al., 2003).
The aim of this paper is to examine the determinants and localization of outward FDI (oFDI)
of Turkish firms that differs from developed country MNEs with respect to firm size,
technology, skills and access to information about global markets. This research is the first
attempt aimed to explore especially the determinants of country/region selection of Turkish
outward FDI at the firm level by using discrete choice models. Our findings in this paper are
based on the primary data collected by in-depth-interviews with 299 outward-investing Turkish
firms operating in manufacturing, wholesale and retail trade, transportation and storage, and
information and communication sectors.
The paper consists of four sections. After the Introduction, section two presents a brief literature
review about developing countries oFDI activities. Section three introduces data sources used
in this study and provides a descriptive analysis on outward-investing firms according. Section
EconWorld Working Paper Series No: 2019-001
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four presents the findings of an econometric analysis modeling the country specific
determinants of outward FDI behavior of firms. The last section of the paper summarizes main
findings and discusses policy implications.
2. Outward FDI from Developing Countries: Literature Review
FDI is defined as the establishment of a new production facility or sales unit in other countries,
an acquisition of existing ones or a joint venture with a domestic operation in a host country to
carry out the production and/or commercial activity of an operator outside its territory. In order
to consider an investment as a foreign direct investment, the investor must have a shareholding
of at least 10%. Investments in which the parent company owns between 10% and 50% are
referred to as affiliate and investments with a share of more than 50% are referred to as
subsidiary. Investments in which the parent company owns 100% of the shares are defined as
wholly owned subsidiaries (OECD, 2008: 17).
The developing countries’ multinational firms gained their first oFDI experiences at 1970s. The
share of developing countries in total oFDI rose to the level of 5-6% from 0.2% at the end of
the decade. Due to increase in investments, which has taken place in 70s economic turmoil,
sources of the competitive advantages and operations of developing countries’ firms have begun
to be examined by the researchers. The internationalization process of developing country firms
takes place in an intensely competitive environment where global trade has developed
considerably, as opposed to developed country multinational firms. For this reason, the question
of whether the behavior of these firms will be explained with existing theories or new
approaches gained importance. This section will first briefly address traditional approaches,
and then touch upon new approaches to explain the internationalization processes, strategies
and competitive advantages of developing country multinationals.
The most fundamental question about FDI activity is why a firm would choose a foreign market
through direct investments rather than other market entry options such as exporting or licensing
arrangements. To answer this question, Hymer (1976) focuses on the company's motivation to
control investments abroad. Buckley and Casson (1976) argue that firm can reach the highest
productivity level with the direct investments due to market imperfections. According to
Knickerbocker (1973), the main reason of FDI is competitors’ foreign investments. Johanson
and Wiedersheim (1975) argues that, for a firm is primarily engaged in local markets,
internationalization is the result of decisions supported by operation experience and market
knowledge in foreign countries. To Rugman (1981), FDI is a result of firm specific advantages
(FSA) that express the skills and technology of the firm and country specific advantages (CSA)
that represents country-based factors such as natural resources, labor and culture. Vernon
(1966) tries to explain FDI with product life curves.
In the 1980s, the empirical literature on international business made important contributions to
clarify FDI activity. Dunning (2001) suggested that the previous approaches in explaining FDI
reflect only a certain direction of the subject and that these approaches should be examined
from an integrated point of view in order to arrive at a collective judgment. OLI (ownership,
location and internalization) model developed by Dunning (2001) explains FDI activity with
three advantages that multinational corporations have at the same time: First of these
advantages is ownership advantages based on intangible assets owned by the company, such as
patents, management and marketing skills, and brand value. The second is internalization
Why Do Turkish Firms Go Abroad to Invest? Kilicaslan et al.
4
advantages: the firm uses its ownership superiorities in its own control units in international
markets. Internalization advantages, which reduce transaction costs relative to licensing
agreements and other market entry methods such as exports, and help to protect firm reputation
through effective management, express the ability to use the monopolistic power created by the
intangible assets of the firm. The third and final advantage is the locational advantages that
influence the choice of the country where the investment will be made. Within the scope of
locational advantages, factors such as factor endowment, market size, natural resources, input
prices and quality, transportation and communication infrastructure; economic factors such as
incentives; social elements such as language, culture and business forms, trade laws, and
political and legal elements such as tax regulations were examined (Dunning and Lundan, 2008;
Piteli, 2010).
All of the above-mentioned views are indeed based on the internationalization experiences of
developed country multinational firms (DCF). The first studies examining developing or
emerging country firms (ECFs) dates back to the 1980s. These works try to define the common
features of the first internationalization attempts of ECFs. These initial investments of
developing countries mostly originated in countries in Latin America and Asia and targeted to
the other neighboring developing countries. Researchers called these firms as third world
multinationals or new multinationals. Small scale operations, labor-intensive technology,
standardized goods and price are the main characteristics of the competitive power of ECFs
(Lecraw, 1977; Agarwal & Weekly, 1982; Lall, 1983 and Wells, 1983). In order to protect
export markets and overcome the restraints of the source countries’ market legislations, these
firms have moved to developing country markets where developed country firms find it risky
to enter. Personal, ethnic ties and the ability to adapt to developing country conditions were
other factors that these companies benefited from (Lecraw, 1977, Agarwal & Weekly, 1982 and
Wells, 1983). Despite these general characteristics of third world multinationals highlighted in
the studies above, according to Lall (1983), the sources of competitiveness of these firms vary
from case to case. Because the learning processes and competitive strengths of these firms
depend mostly on the conditions of their domestic environment. Therefore, different country
conditions lead to different internationalization processes, oFDI types, and firm skills. While
some of these firms have a unique set of small innovations that hard to copy for the other firms,
some others may enhance abilities to commercialize a particular product. For this reason, the
advantages of these firms do not depend solely on cheap and qualified labor.
These first wave of investments took place in the 1970s were followed by investments called
the second and third wave in the 1980s and 1990s. During this period, the nature, aim and
geographic scope of investments changed and the amount of capital exported increased
dramatically. Along with these developments, models were needed to explain the behavior,
strategies and achievements of the firms. The basic discussion of these models is that do the
new multinationals imitates traditional competitors from the developed countries? Or do they
have developed different advantages and capabilities in the process of internationalization? In
other words, is the emerging country multinational (EMNE) a new type of multinational
enterprise?
According to Ramamurti (2009 and 2012), the truth is somewhere between the two extremes.
While existing theories are underestimating the ownership advantages of EMNEs, they
EconWorld Working Paper Series No: 2019-001
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highlight the advantages of the source country in the oFDI process. However, according to the
OLI paradigm, a firm cannot make oFDI without having ownership advantages. EMNEs have
ownership advantages, but these are not the advantages we are familiar with in the developed
country multinational enterprises (DMNEs). DMNEs have more serious ownership advantages,
because they had enough time to develop these capabilities. Deep understanding of customer
needs in emerging markets, ability to adapt to challenging politic, economic and institutional
environmental conditions (adversity advantage), and ability to produce products and services
at ultra-affordable cost by using more labor and less capital and developing products at an
affordable price / quality mix are the examples of the EMNE’s ownership advantages. It took a
long effort to define the ownership advantages of Western companies. If the same effort is also
made to define the ownership advantages of new multinationals, this list can be expanded.
According to Ramamurti's (2012) the other aspects of EMNEs behavior are also different from
the traditional MNEs: First they show very fast internationalization process. Second, the host
countries chosen for the oFDI are not close to and similar to the source country. Third, EMNEs’
investments are usually based on mergers and acquisitions. Capability upgrading and gaining
global reach are the two forces that shape the expansion path of EMNEs and are the main reason
for their rapid internationalization in developed and developing countries simultaneously. They
invest in developing countries for gaining scale and experience, while they invest in developed
ones for obtaining skills and cutting-edge technology. Obtaining skills and technology also give
rise to high commitment to mergers and acquisitions (Guillen-Canal, 2009, Makino, Lau and
Yeh, 2002, Fey et. al. 2016, Jindra et. al. 2016, Kotabe and Kothari, 2016, Cazurra and Genc,
2008). Luo and Tung (2007) called this capability upgrading process as a springboard
perspective. EMNEs use os as a springboard to acquire strategic assets and gain
competitive advantages against their rivals at home and abroad and to reduce their home country
disadvantages. Springboard activities have recurrent and revolving nature. Each oFDI
experience eliminate different deficiencies of the firms and have intense linkages with the
domestic activities.
The EMNEs need significant financial resources to afford the strategic asset seeking
investments. According to Hennart’s (2012) bundling model, these resources come from home
country specific advantages (CSA). Traditional approaches assume that CSA may be accessed
by all firms operating in that country. But some CSAs such as access to distribution networks,
lands, raw materials, and suppliers called complementary local factors in developing countries
owned by locals holding monopoly control of these resources. EMNEs benefit from the
monopoly power to finance the oFDI. In addition to this, complementary local resources have
transaction costs for the foreigners. To access these resources MNEs must know their locations,
availability and practices. Transaction cost level between local owner who held the
complementary local resources and the MNE who held the intangible assets also determine the
optimal market entry choices.
Organizational learning is one of the other factors that explain the rapid growth and success of
EMNEs in international markets. Especially in developed country markets, the ability to utilize
organizational learning and knowledge externalities plays an important role in the success of
strategic asset seeking oFDI in developed country markets. This is one of other topics that
distinguish EMNEs from DMNEs. The experience of internationalization of DMNEs was
Why Do Turkish Firms Go Abroad to Invest? Kilicaslan et al.
6
shaped only by exploiting assets they developed in the home country (Banerjee et al, 2015,
Williamson et al, 2013). Learning is a result of repeated application of linkage and leverage
processes according to 3L model. 3L model emphasize the interconnected structure of the
global economy and try to explain the rapid growth of the East Asian MNEs so called dragon
multinationals. East Asian MNEs tap into the strategic networks, leverage the ties to obtain
skills and learn from the repeated actions of these process (Mathews 2002, 2006, Kedia et al.,
2015).
Another research stream on oFDI is the case studies dealing with particular country experiences.
For example, in Latin American countries including Brazil, Chile, Argentina and Mexico,
oFDIs usually made in mature industries to seek markets and concentrated in other Latin
America countries. An increase in gross domestic product, education levels and international
trade increase the oFDI from these countries (Chudnovsky and Lopez, 2000, Amal et al. 2009,
Perez and Nogueria, 2016). In the case of China, the main factors driving oFDI are host
countries' big markets, weak institutions and natural resources. Chinese firms are investing in
countries that are technically superior to themselves in certain specific industries. Cultural
proximity also plays an important role in the choice of host country for Chinese firms that have
increased their strategic assets seeking oFDI after 2001 (Li et al. 2012, Kolstad and Wiig, 2012,
Buckley et al. 2007).
Empirical studies focusing on the determinants of inward FDI provided evidence on the drivers
that motivate MNEs to engage in FDI in Turkey but there are very few studies in the literature
on the determinants of outward FDI from Turkey. Existing studies examine the outward FDI
decision of Turkish firms by means of location-specific motives like agglomeration and coastal
access (Deichmann et al., 2003), political and economic risk (Erdilek, 2003), human capital,
market size (Kaya, 2014), infrastructure (Akçaoğlu, 2005), market attractiveness and growth
(Kayam and Hisarcıklılar, 2009). However, we suggest that Turkish firms investing abroad
must possess a bundle of “intangible assets” that they find profitable to exploit via foreign
manufacturing rather than exporting or licensing. Moreover, being from a developing country
with lower levels of high-tech industry, infrastructure and skills than other developed countries,
the advantages of Turkish outward-investing firms are likely to be different from those of
advanced country MNEs.
3. Data Sources and Construction of Variables
In this research, we focus only on four sectors: manufacturing, wholesale and retail trade,
transportation and storage, and information and communication. Our descriptive findings based
on the secondary data obtained from Turkish Treasury and the Central Bank of Turkey showed
that there are 2321 outward-investing Turkish firms located in 110 different countries as of
2014. There are about currently 1000 active outward investments/firms abroad.
We collected the primary data of 299 outward investment-making firms (35% of the whole
sample) by conducting in-depth interviews with the parent firm of the outward investment. The
information about these firms was obtained from the Treasury of Turkey. In preparation of the
questionnaire to be used in the field studies, we first determined the variables by surveying the
literature and making use of “Information Form on Foreign Affiliates and Branches” conducted
by the Treasury of Turkey every year.
EconWorld Working Paper Series No: 2019-001
7
According to the primary data collected, the average number of employees in FDI conducting
firms (parent firms) is 1749 persons. 18% of companies are small enterprises (10-49 people),
18% are medium-sized enterprises (50-249) and 64% are large enterprises (250 and above).
This implies that the parent companies are mostly large, established and domestic companies.
While 5% of the parent companies do not export, 16% of these companies do not import. The
average exports of FDI conducting companies is $75 million USD while the average import
amount is about $74 million USD. 33% of the parent companies are exporting above the average
export amount of all companies in the dataset, while 13% are importing above the average
import amount. One of the most important characteristics of the parent companies conduct FDI
is that they are all private sector companies. We observed that 83% of the companies that engage
in FDI are foreign affiliated companies (the company that has more than 50% share of parent
company and operates abroad).
The summary statistics of Turkish firms investing abroad are presented in Table 1. Table 1
shows that 53% of FDI engaging companies interviewed are affiliated with a part of a group
(holding companies). Among these companies, there are young companies established in 2009,
as well as older companies established in 1927. The average age of the parent companies
engaged in FDI is 43 year.
Table 1: Summary Statistics, outflow of FDI from Turkey
Variable
# of obs.
Mean
Std. Dev.
Min
Max
Number of employees
255
202.0
485.1
0
4491
Manager nationality
(TC: 1, foreign: 0)
212
0.787
0.409
0
1
New investment
298
0.601
0.490
0
1
Joint venture
298
0.091
0.287
0
1
Acquisition
298
0.305
0.461
0
1
Establishment year
70
1994
27.95
1884
2014
Partnership
298
0.295
0.456
0
1
Parent company share
298
82.56
26.80
7.23
100
Foreign ownership
281
10.86
21.77
0
90
Risk of investment without partnership
278
0.086
0.281
0
1
The market knowledge of the partner
277
0.097
0.297
0
1
Distribution network of the partner
278
0.053
0.226
0
1
Technological competence of the partner
277
0.018
0.133
0
1
Brand recognition of the partner
278
0.053
0.226
0
1
Capital recruitment of the partner
278
0.054
0.226
0
1
The compliance with production and trade
structure
278
0.097
0.296
0
1
Export to Turkey (1;0)
273
0.139
0.346
0
1
Export to Turkey (thousand $)
259
2331
23500
0
359000
Total export (thousand $)
59
3512
22200
0
170000
Import from Turkey (1;0)
292
0.431
0.496
0
1
Import from Turkey (thousand $)
255
3432
12500
0
150000
Total import (thousand $)
55
1353
2917
0
15000
Source: Authors’ calculation based on primary data.
Why Do Turkish Firms Go Abroad to Invest? Kilicaslan et al.
8
When the years of establishment of the companies conducted FDI are taken into consideration,
it is observed that 49% of these companies are established companies and older than the average
age of the sample. The average number of employees of associates or affiliates operating abroad
is 202 persons. 26% of these FDI conducting companies are small, 24% are medium-sized and
20% are large enterprises. The proportion of subsidiaries or affiliates with a number of
employees less than 10 is 30%.79% of subsidiaries or affiliates operating abroad has a Turkish
manager rather than the citizen of host country. 30% of the subsidiaries or affiliates that operate
abroad have investment activities abroad through partnership. If we evaluate the reasons for the
participation of an affiliate or subsidiary through a partnership; the proportion of companies
stating that it is important to reduce the risk of investment rather than self-investing is 9%, the
percentage of companies indicating that the market knowledge of the partner is important is
10%, the proportion of companies indicating that using entire chain of distribution of the partner
is important is 5%, the percentage of companies indicating that technological competence of
the partner is important is 2%, the proportion of companies stating that brand recognition of the
partner is important is 5%, and the proportion of companies stating that capital recruitment of
the partner is important is 5%. The proportion of the companies that regard the compliance with
production and trade structure of the country as the reason for the subsidiary or affiliate through
the partnership is 10%. 40% of 299 participations and affiliates that are interviewed, are in the
manufacturing sector, 39% of them are in the wholesale and retail trade sector, 20% of them
are in the transportation and storage sector and 1% of them are in the information and
communication sector (see Figure 1). The distribution of the observations by sectors obtained
from the interviews is proportional to the sectoral diversification of all Turkish firms engaging
in FDI.
Figure 1. Number of FDI engaging firms, Mode of FDI and Value of capital stock of FDI
engaging firms, by sector
Source: Authors’ calculation based on primary data.
According to Treasury of Turkey, outward FDI from Turkey in 2014 seems to concentrate in
the services sector (73%) in terms of both the amount of capital and the number of firms.
Investment outflows in the agricultural sector are rather limited (1%). Industry sector accounts
for 26% of investment outflows. Investments in this sector should be taken seriously because
of the large excess of long-term and fixed capital investments. Investments in the industry sector
EconWorld Working Paper Series No: 2019-001
9
are more favorable than other major sectors in terms of technology transfer and employment
transfer. The share of FDI conducting firms in manufacturing sector is 81% of all firms
operating in industry sector. In the services sector, %28 of the number of firms investing abroad
is in the wholesale and retail trade sector and 24% of them is in the construction sector.
According to the capital distribution, only 7% of the total capital invested abroad is from the
wholesale and retail trade sector and the construction sector constitutes only 11% of the outward
FDI.
Capital data of FDI engaging firms could be obtained for 209 observations (%70 of all sample)
through face-to-face interviews. The capital value of these companies is 1.8 billion dollars. If
the capital stock of Turkish firms engaging in FDI is calculated by multiplying the capital of an
affiliate or subsidiary located abroad with the share of the parent company, the total capital of
the 209 affiliates and subsidiaries that belongs to the parent company is about 1.5 billion dollars.
By 2014, the total amount of FDI capital from manufacturing, wholesale and retail trade,
transportation and storage and information and communication sectors in Turkey is 6 billion
dollars. This amount of capital corresponds to about 30% of the total capital outflow that is
been accumulated up to date. Figure 1 shows the amount of capital investment of 209
observations according to sectors. The share of capital investment in the manufacturing industry
is 71%, whereas it is 26% in wholesale and retail trade sector, and 3% in the transportation and
storage sector.
As shown in Figure 1, 60% of the outward investments from Turkey were realized as new
investments, 31% as acquisitions and 9% as joint ventures. The fact that more than half of the
investments are realized as new investments means that the capital invested abroad has created
a new enterprise in the host country. Another implication of this finding is that as the
investments are mostly not made through partnership, Turkish firms do not regard the benefits
associated with partnership through networking as an important factor affecting their decision
to make investment abroad.
Figure 2 shows the geographical distribution of FDI from Turkey according to the number of
affiliates or subsidiaries. 15% of the total investments were located in the Russian Federation
whereas 8% of firms invest in Germany and 5% of firms invest in the US. These firms engaging
in outward FDI hosted by 67 different countries and 68% of the affiliates or subsidiaries are in
developing countries and 32% of them are in developed countries.
According to 2014 data obtained from Treasury of Turkey, the investments flowing outward
from Turkey to developed and developing countries resemble each other in terms of magnitude
and but these capital investments are unevenly distributed in terms of the number of firms.
50.6% of the total amount of capital invested abroad by Turkish firms flowed to developed
countries and 49.4% of FDI flowed to less developed regions. However, 32% of the 2321 firms
operating abroad were located in developed countries, while 68% of them were located in
developing countries.
According to the magnitude of investments, Russia ($368 million), Germany ($171 million),
and the United States ($152 million) are the most capital-transferred countries. The magnitude
of capital stock invested abroad by Turkish firms to developed and developing countries was
observed to be shared almost halfway. Moreover, the magnitude of capital transfers of the
subsidiaries or affiliates obtained from the interviews to developed countries constituted 31%
Why Do Turkish Firms Go Abroad to Invest? Kilicaslan et al.
10
of all investment conducted and this share for less developed countries was 69% of total
investment.
When the number of jobs created by the firms invested abroad is analyzed according to the host
country, it is seen that FDI from Turkey provides 138 thousand jobs abroad (Hazine
Müsteşarlığı, 2012). Total overseas investments analyzed within the scope of the sample
provide jobs to 51.2 thousand persons abroad. This figure indicates that 37% of the employment
created abroad by Turkish investors is covered by the sample obtained form the interviews. The
country where Turkish firms engaging in FDI has created the highest employment level is
Russia with about 12 thousand employees (see Figure 4). The number of employees that
subsidiaries or affiliates has created in Pakistan and Georgia approximated to 4,000 employees.
Figure 5 evaluates the main motivations of Turkish firms in engaging FDI. It is seen that market-
oriented factors (55%) are more important than cost-oriented (14%), strategic asset-oriented
(15%) and region-oriented factors (15%) that define geography of investments. It is reasonable
for investing firms to assign high priority to market-oriented factors for a country like Turkey
where the investment stock value has already exceeded 30 billion dollars and outward
investment has increased in the last decade. It can be said that factors affecting investment
decision will alter in favor of other factors after gaining experience and obtaining a credible
position in international markets. Moreover, these second-generation outward investments will
try to acquire new production technologies and techniques, to redesign production processes by
most efficient cost structures in international markets.
Even though the long-term plans of the firm don’t include any investment abroad, we observed
that the trust-based relations between Turkish investors and foreign public authorities has been
found to be effective in investing in a country. This is especially prevalent for investments in
developing countries and related to relations between investors and public authorities of the
host country. We have defined these investments as “socially embedded FDI”. It seems that,
the social embeddedness concept (Uzzi, 1999; Beckert, 2003) is also effective in oFDI
decisions.
Figure 2. Number of FDI engaging firms, by host country
Source: Authors’ calculation based on primary data.
EconWorld Working Paper Series No: 2019-001
11
Figure 3. Value of capital stock of FDI engaging firms, by host country
Source: Authors’ calculation based on primary data.
Figure 4. The employment creation of FDI engaging firms, by host country
Source: Authors’ calculation based on primary data.
Why Do Turkish Firms Go Abroad to Invest? Kilicaslan et al.
12
Figure 5. Motivation of FDI engaging firms
Source: Authors’ calculation based on primary data.
4. Methodology and Empirical Analysis
The role of firm specific characteristics to explain the determinants of outward FDI activity
(measured as a binary variable for firms indicating whether they engage in FDI activity or not)
will be evaluated by utilizing the binary choice analysis. As dependent variable of engaging in
outward FDI takes binary values 0 or 1, the probit model that links the probability of this
outcome taking the value of one if the firm engages in outward FDI activity and the value of
zero in the opposite case to the normal distribution is used (Greene, 1997). The typical
representation of this type of choice model is,
(1)
y=1 if firm invests in that country and y=0 if not
where denotes individual firm characteristic.
The dependent variable, yi,t, is the investment decision of firm i at time t measured as a binary
variable taking value 1 if firm invests in a specific country and 0 otherwise. Xi controls for firm
specific and country specific effects that determine the decision to invest.
We will use two sets of explanatory variables in the above model in order to evaluate the
investment decision of firms. These can be grouped under two general headings: firm-specific
factors and attracting and deterring factors that originate from the characteristics of both the
source and the host country.
Firm specific factors that affect decision of firms in selecting host country for foreign
investment can be listed as follows:
1. The sector in which the firm operates (manufacturing industry and wholesale and retail
trade sector)
2. Size
3. Foreign ownership
The three main firms specific controls are firm size, size of parent investing firm and share of
foreign ownership. The sector, expressed as a firm-specific factor, is a dummy variable created
yi
*=¢
b
Xi+
e
ii=1,...,n
it
X
EconWorld Working Paper Series No: 2019-001
13
according to the sector in which the company responding to the survey operates. According to
this, if firms are in the manufacturing industry sector, the dummy variable takes the value 1 and
0 otherwise. Another firm-specific factor is the size of the firm. The size of the parent firm
making overseas investments is calculated by taking the logarithm of the number of employees.
FDI activity usually undertaken by large firms since they have greater ability to overcome the
risk and uncertainty associated with investing abroad. In order to check for possible U-shaped
relationship, we also include the square of size of parent investing firm into the model.
The size of the parent firm and the size of the foreign hosting firm are among the factors
determining the country’s choice for foreign investments. The size of an overseas subsidiary or
affiliate is measured by taking the logarithm of the number of employees. Finally, the capital
structure of the parent firm that invests abroad is also another factor that determines the decision
to invest in a country. A dummy variable that takes the value 1 with a foreign capital share of
10% in the capital structure of the parent company and 0 for otherwise was formed. The share
of foreign ownership explores the degree of internationalization of firms.
Attracting and/or deterring factors are associated with more country-specific or global
inducements that motivate firms to invest abroad. As this study will examine foreign direct
investments from Turkey, the attracting factors of the host country are often the driving factors
for Turkey (the source country). The attractiveness factors to be used as explanatory variables
in the model can be listed as follows (Dunning, 2006):
1. Market-oriented factors (access to major markets, desire for diversification of the
market, desire to protect export markets and international diversification of investments, desire
to invest abroad in order to avoid tariffs and quotas)
2. Cost-oriented factors (advantages in labor costs, advantages in other input costs,
incentives and tax advantages, advantages in energy costs, advantages in transportation costs,
and advantages in financing)
3. Region-oriented factors (the host country being a suitable export center, being a member
of economic integration such as the EU, NAFTA, the host country having political stability,
having cultural and legal norms that determine commercial life, cultural proximity to the host
country)
4. Strategic asset-oriented factors (brand prestige and/or recognition, the acquisition of
successful brands, access to large suppliers and distribution networks, and the desire to reach
new production techniques and technologies)
5. Disadvantages in Turkey (limited growth opportunities, high input costs, economic and
political instability, difficulties in tax and similar obligations) (Assuncao et al., 2011)
The country specific variables represent the answers of firms to some questions regarding their
choice of location. Different dummy variables are defined for the region-oriented, strategic
asset-oriented, cost-oriented factors and investment deterring factors in Turkey. For example, a
dummy variable that takes the value of 1 is defined as a strategic asset-oriented factor if investor
firm states answer of yes to any of the elements of strategic assets like brand prestige and/or
recognition, the acquisition of successful brands, access to large suppliers and distribution
networks, and the desire to reach new production techniques and technologies. A similar
method has been followed for region-oriented, cost-oriented and deterring factors encountered
in Turkey.
Why Do Turkish Firms Go Abroad to Invest? Kilicaslan et al.
14
Lastly, for each of the market-oriented factors, we defined a dummy variable in our regression,
including whether firms want to diversify markets, or want to preserve their export market
shares, or want to allocate the risk of uncertainty to different markets, or want to shield their
products from tariffs, or want to reach out for developed countries and emerging markets. The
most important reason for adding market-oriented factors to econometric model as separate
variables is that firms participating in the survey pointed out the importance of market-oriented
factors affecting their decision to invest abroad.
Selection models (Probit estimation method) were used to determine the factors affecting the
choice of host country for investment abroad. In these model(s) the dependent variable takes
the value of 1 if the firm has invested in the country, or 0 if it has not. The first model
determining the choice of the host country for FDI is a model covering all firms and containing
only firm-specific explanatory variables (firm size, parent firm size, and foreign ownership). In
addition to firm-specific explanatory variables, the second model includes market-oriented
factors, strategic asset-oriented factors, regional-oriented factors, cost-oriented factors and
deterring factors in Turkey as dummy variables in order to evaluate the country selection
decision of foreign capital investments. Finally, Models (3) and (4) include only manufacturing
sector firms, while the last two models only include firms operating in the wholesale and retail
trade sectors.
Regarding the allocation of outward FDI in different host countries, 50.6% of the capital from
Turkey flows to developed countries, 46% to EU, 17% to G8 countries, 7% to BRIC countries,
8% to Shanghai Cooperation Organization countries, 6% MENA countries and 2% of them
flows to Central Asian Turkic Republics. Keeping this allocation in mind, we will evaluate the
factors affecting the outward investment decision of Turkish firms for developed countries and
Shanghai Cooperation Organization countries.
The size of the parent firm has an important effect on determining the decision to invest in
developed countries (Table 2). While the impact of this variable is positive and significant in
the models covering all firms, the size of the parent firm does not have a significant impact on
different sectors. Another striking point is that as the size of the investing firm increases, the
likelihood of Turkish investors choosing developed countries is diminishing. This suggests that
the relationship between firm size and country selection is inverted-U shaped. The probability
of choosing developed countries as a host country decreases as the size of the parent firm
increases in the wholesale and retail trade sector.
The high share of foreign ownership in firms that conduct foreign direct investment has a
negative impact on the location choice of developed countries. This result can be explained by
the internationalization of investors. The only sector that the size of investing firm positively
and significantly influences the possibility of choosing developed countries is the wholesale
and retail trade sector.
In addition to firm-specific explanatory variables determining the location decision of foreign
direct investment, the country-specific factors were included into the estimation model. (Table
2, Model (2)). Region-oriented factors increase the likelihood of investments in developed
countries, both in models involving all firms and in models with separate sectors. Considering
all firms, strategic asset-oriented factors encourage firms to invest in developed countries
whereas, the desire to avoid tariffs and quotas as one of the market-focused factors decreases
EconWorld Working Paper Series No: 2019-001
15
the likelihood of firms to locate their investment in developed countries. Factors that have a
positive impact on the choice of developed countries for the firms in the manufacturing industry
are the desire for market diversification and strategic asset-oriented factors. The factor that
increases the likelihood of investment in developed countries for the wholesale and retail trade
sector is the disadvantages deterring domestic investment in Turkey. The factor that reduces
the likelihood of choosing developed countries as centers of foreign investment for the same
sector is cost-oriented factors like advantages in input costs, transportation and financing costs.
Table 2. The determinants of Turkish outward FDI to developed countries
All firms
Manufacturing
Wholesale and retail
trade
Variables
(1)
(2)
(3)
(4)
(5)
(6)
Firm size
-0.150***
-0.211***
-0.062
-0.164
-0.248**
-0.606***
(0.050)
(0.059)
(0.080)
(0.132)
(0.112)
(0.203)
Parent firm size
0.958**
1.132**
-0.289
0.045
0.870
1.459
(0.429)
(0.502)
(0.965)
(1.468)
(0.584)
(0.938)
Parent firm size (squared)
-0.077**
-0.085**
0.006
-0.013
-0.070*
-0.114*
(0.030)
(0.036)
(0.065)
(0.104)
(0.042)
(0.066)
Foreign ownership
-0.667**
-0.208
-0.635
0.366
-0.367
1.951*
(0.314)
(0.373)
(0.555)
(0.902)
(0.495)
(1.025)
Market diversification
0.045
0.901*
-0.116
(0.283)
(0.547)
(0.891)
Preserving export markets
0.080
0.461
-0.421
(0.316)
(0.658)
(0.665)
Allocating investment risk
-0.226
-0.328
1.134
(0.339)
(0.674)
(0.836)
Avoiding tariffs and quotas
-0.900**
-1.027
-0.956
(0.423)
(0.738)
(0.833)
Access to major markets
-0.355
-0.798
-1.329
(0.323)
(0.616)
(1.055)
Cost-oriented factors
-0.177
-0.908
-1.536*
(0.273)
(0.601)
(0.825)
Region-oriented factors
0.727**
1.081*
1.345**
(0.283)
(0.573)
(0.614)
Strategic asset-oriented factors
0.715***
1.905***
-0.892
(0.264)
(0.529)
(0.665)
Disadvantages in Turkey
0.230
-0.861
2.766***
(0.262)
(0.527)
(0.793)
Constant
-2.887**
-3.926**
1.183
-0.861
-2.326
-3.558
(1.458)
(1.726)
(3.391)
(5.120)
(1.969)
(3.405)
Number of firms
80
80
24
24
41
41
Number of observations
218
208
101
100
83
82
LR chi2
30.25***
49.13***
7.13
41.38***
20.15***
46.60***
Pseudo R2
0.133
0.226
0.075
0.453
0.195
0.454
Notes: Robust standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1
Source: Authors’ calculation based on primary data.
Finally, we will examine the factors that determine the direct foreign investment from
Turkey to the countries of the Shanghai Cooperation Organization (Table 3). There is no
significant impact of the size of the firm in the host country when the FDI from Turkey chose
the countries of the Shanghai Cooperation Organization as investment location. Nevertheless,
Why Do Turkish Firms Go Abroad to Invest? Kilicaslan et al.
16
we can say that the size of the parent firm negatively affects the probability of investing in the
countries of the Shanghai Cooperation Organization. There is a positive and significant impact
on the likelihood investing in these countries if firms have a high share of foreign capital. In
other words, foreign ownership of the parent firm both increases the likelihood of choosing the
countries of the Shanghai Cooperation Organization as an investment center for all firms in the
sample and for manufacturing industry firms.
Table 3. The determinants of Turkish outward FDI to Shanghai Cooperation
Organization countries
All firms
Manufacturing
Wholesale and retail
trade
Variables
(1)
(2)
(3)
(4)
(5)
(6)
Firm size
0.068
0.044
0.095
-0.010
0.139
0.069
(0.048)
(0.056)
(0.079)
(0.101)
(0.111)
(0.129)
Parent firm size
-0.830**
-0.381
-1.089
-1.511
0.338
1.265
(0.333)
(0.445)
(1.001)
(1.297)
(0.595)
(1.385)
Parent firm size (squared)
0.060**
0.021
0.086
0.120
-0.027
-0.104
(0.024)
(0.032)
(0.066)
(0.090)
(0.042)
(0.097)
Foreign ownership
0.825***
0.850***
1.008**
1.914**
-0.168
0.136
(0.253)
(0.326)
(0.405)
(0.826)
(0.502)
(0.845)
Market diversification
-0.110
0.870*
-1.099
(0.282)
(0.484)
(1.001)
Preserving export markets
0.657**
0.859
0.967
(0.293)
(0.525)
(0.729)
Allocating investment risk
0.446
-0.793
1.254
(0.305)
(0.619)
(0.946)
Avoiding tariffs and quotas
0.0263
0.368
0.482
(0.353)
(0.532)
(0.801)
Access to major markets
-0.182
0.229
0.427
(0.309)
(0.439)
(1.091)
Cost-oriented factors
0.652**
0.965**
0.836
(0.256)
(0.417)
(0.617)
Region-oriented factors
-0.595**
-1.316***
-0.904
(0.250)
(0.417)
(0.650)
Strategic asset-oriented factors
0.148
-0.682
0.524
(0.235)
(0.426)
(0.611)
Disadvantages in Turkey
-0.064
0.018
-1.138
(0.243)
(0.407)
(0.846)
Constant
1.615
0.151
1.918
2.870
-2.056
-5.128
(1.102)
(1.548)
(3.596)
(4.629)
(2.014)
(5.243)
Number of firms
73
73
34
34
23
23
Number of observations
218
208
101
100
83
82
LR chi2
22.85***
38.06***
13.27**
31.77**
2.02
13.83
Pseudo R2
0.089
0.154
0.109
0.263
0.024
0.165
Notes: Robust standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1
Source: Authors’ calculation based on primary data.
Apart from firm-specific explanatory variables that determine the country choice of foreign
direct investment, the country-specific variables like cost and region-oriented factors also came
into prominence as influencing investment decision (Table 3). Unlike developed countries,
EconWorld Working Paper Series No: 2019-001
17
cost-oriented factors increase the likelihood of selecting the countries of the Shanghai
Cooperation Organization as the center of outward FDI both for all firms and manufacturing
industry firms. The region-oriented factors have a negative impact on the investment decision
to the Shanghai Cooperation Organization countries for all firms and for firms operating in the
manufacturing industry. In addition to this, the desire for protecting the market diversification
and export markets positively affects the likelihood of the foreign capital investments from
Turkey to the Shanghai Cooperation Organization countries.
5. Conclusions and Policy Implications
Global FDI outflows reached $ 1.4 trillion in 2015, have increased more than 11% compared
to the previous year. Developed countries conducted 74% of these investments while 26% of
them were undertaken by developing countries. 2015 has been recorded as the only year in
which the investment performance of developing countries has experienced a significant
decline for the last 15 years. Only one year ago, in 2014, developing countries made about 40%
of global FDI. Developing countries have gradually increased their FDI outflows since 1970s
and have gained a role as source countries in addition to being host countries for foreign direct
investments.
Up to 2014, the amount of Turkish capital exported abroad for the purpose of direct investment
is about $45 billion. Turkey’s foreign investments have increased significantly, especially since
2005. In 2014, the amount of capital exported was $6.6 billion USD and this value decreased
to $4.7 billion in 2015. Turkish firms investing abroad employed about 140 thousand people in
2013. However, given the amount of capital made in the last four years, we now expect that this
figure reached probably to 200,000 jobs.
In this research, we collected firm-specific information about 299 investments, operating in the
four selected sectors (manufacturing, wholesale and retail trade, transportation and storage, and
information and communication sectors) and representing approximately 30% of the main
sample (1211 investors). The total investment of these 299 investments is approximately
amount to 1.8 billion US dollars. This amount corresponds to 40% of the total capital exported
in 2015 for these sectors. Moreover, these 299 investments providdes employment to
approximately 51 thousand people abroad.
The investments from Turkey going to 110 countries indicate that outward FDI from Turkey
has a wide geographical distribution. Our findings based on the interviews with 299 outward-
investing firms show that 68% of the investments were made in developing countries while the
developed countries have attracted only 32% of Turkish investments. Even if the number of
firms established in developed countries is lower compared to developing countries, the fact,
the amount of capital invested is more than developing countries. While Turkish firms make
usually capital-intensive investments in developed countries where economic and political risks
are less than developing countries, a large number of firms in developing countries are operating
with low intensity of capital investment.
Econometric findings show that the size of the firm undertaking outward investment is a
significant factor in selecting developed countries to invest. As the size of the investing firm
increases, the likelihood of Turkish investors choosing developed countries is diminishing. This
suggests that the relation between firm size and country selection is an inverted-U shaped. The
region-oriented factors increase the probability of investing developed countries whereas
Why Do Turkish Firms Go Abroad to Invest? Kilicaslan et al.
18
decreases the probability to invest in the member countries of Shanghai Cooperation
Organization. Willingness to differentiate the market and strategic asset-oriented factors are the
main factors in choosing developed countries to invest for manufacturing industry firms. The
probability of investing in the member countries of Shanghai Cooperation Organization
increases with cost-oriented factors but decreases with region-oriented factors. Moreover, the
willingness to diversify markets increases the probability to invest abroad for manufacturing
firms regardless of location. Finally, while willingness to avoid from tariffs has negative and
significant impact on the probability of investing in developed countries (including EU
countries), it has no impact on the probability of investment in the member countries of
Shanghai Cooperation Organization.
Foreign investment of multinationals from developing countries is considered to be a way of
acquiring technology, experience and new capabilities in the global markets. Firms with
outward investment have the opportunity to access new technologies and capabilities through
overseas acquisitions and partnerships. Making outward direct investments may be said to be a
way of accessing human resources, as one of the most important sources of competitiveness,
and maximizing the use of global human capital.
Apart from the above-mentioned benefits, foreign investments also provide prominence and
reputation to the firm. For this reason, firms seek to increase their company’s reputation and
brand value in the perception of consumers, investors and other commercial stakeholders by
purchasing world famous brands and investing in prominent sectors in certain regions.
Activities in foreign markets are also closely related to the goals of firms. The only way that
makes a global company competitive is to operate in every market where profitability is high.
This study concludes that even if the number of outward investing Turkish firms is not too
many, it seems that Turkish large and established firms are also aiming to become a global
company.
As a result, our findings show that foreign investments provide considerable contributions to
the firm and the economy. Foreign investment is an inevitable reality in today’s world due to
the fact that competition is accelerating both locally and internationally. Firms face global
competition, even if they operate only in national markets. To cope with this competition,
thereby, the firms have to participate in global production and trade chains through engaging in
foreign investment and production networks.
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