Foreign Direct Investments (FDI) Climate and Defence Industry in Turkey

FDI has many advantages over the other methods of investment. First, FDI flows appear to be more stable than other forms of capital flows, possibly because the long time nature of FDI all

Issue 8

After the development of FDI in international trade, WTO has envisaged some standards, which
can be named as investment principles,
which overall represent investment climate. These standards are internationally recognized.
Viewed as a whole, many nations have been endeavoring to adopt these standards and making
the necessary amendments in their legislation to ease the entry, settlement and operation of
MNC’s (multinational companies). The first and foremost issue in the implementation of the investment rules, it goes without saying that
markets should be open to entry by foreign investors via the route of foreign direct investment. Certainly, no nation grants full,
unimpeded right of establishment to foreign-owned or foreign-controlled companies. All countries have sectoral restrictions. Many
nations may block the takeover of domestic firms on the grounds of national security, public order
and health, protection of environment and in favor of domestic investor. In some legislation, the sectors where foreign investment is restricted are clearly stated and laid down. In some legislation, there appears to be one specific law which regulates foreign investment and specifies the conditions or reasons where investment may be restricted Turkish egislation, whereas, is quite a mixture of conflicting concepts. The Foreign Investment Law, numbered 4875, dated 5.6.2003, has been drafted in view of the international investment rules and ncludes all of these rules. Within this context, the Directive for the Implementation of the subject Law encompasses these rules. But the main question rising in the Turkish Law is
the contradictions between these new Laws and those that had been adopted years ago, which bring many barriers to foreign investment.
Another important question is the lack of a legislation which lays out clearly the sectors that restrict the foreign investment.
According to FDI Law, no.4875, adopted in 2003, the foreign investors have the right to transfer
profits, dividends, interests, capital gains, royalties and licensing fees from the sale of assets. They can also buy real estate with
investment purposes subject to no restrictions.
Turkish Constitution and FDI Law have clearly defined the expropriation and nationalization process. In case of expropriation and nationalization, the suffering enterprise would be entitled to prompt compensation. MNC’s in Turkey have the right to apply to international ADR institutions, which is ensured both by
the Constitution as well as the Foreign Direct Investment Law. The most important requirement
in foreign investment is the establishment
of a single authority which deals with the foreign investments (one-stop station).
There is some progress in this area as well. The Law on the Establishment of Investment
Support and Promotion Agency in Turkey, no.5523 and the Law on the Establishment of Regional
Development Agencies, no.5449 are important steps through the development of investment climate in Turkey. As come to the foreign investors in defence industry; there are certain
restrictions with respect to the possibilities of FDI in defence sector. In accordance with the provisions of the Law No.3 238, dated 1985
The SSM (Undersecretariat of of Defence Industry) is tasked with seeking the possibilities of foreign capital and technologies, directing the enterprises in this respect, planning the participation of State
in this area (art.10-c), and “…determining other financial and economic incentives (art.10-
g) and coordinating the exportation of defence industry products and offset trade issues (art.10-i). As can be seen, SSM is tasked with
development of defence export as well as coordination of foreign investments in this field. In the Turkish legislation, there
are two basic laws regulating the operation of enterprises in defence sector, both of which were
adopted in 2004. One is about the Law on the Control over the Enterprises in Defence Industry,
no. 5201,dated 29.06.2004, and the other one is the Law on the Security of the Defence Industry,
no.5202, dated 29.06.2004. Both laws lay down the rules pertaining to the establishment of
enterprises that will run in weapons industry. By way of derogation to the general principle of
free establishment, the enterprises to operate in defence sector are subject to the permission and approval from the Ministry of Defence. Despite to these restrictions, moreand more foreign companies have been investing in defence industry in recent years. Most of these
investments are realized through joint ventures (jv) and offsets. The principle, which states that the defence industry should be first procured by the domestic companies, envisages the Turkish companies that will make the procurement seek a foreign partner for
joint design and production. On the other hand, the main purpose of offset is the development of
local defence industry. For the last two decades, many foreign companies have established
joint ventures and committed offset obligations. For example, Sikorsky Company established
a jv with Alpata Group in 999 for the rocurement of Sikorsky helicopters. Sikorsky Company has over 530 million USD offset obligation until 2012. Similarly, BAE Company has direct and indirect obligation in Spews II Program. Lockheed
Martin, one of the largest companies in this field, has committed its obligations successfully. Consequently, foreign investment
in defence industry is a primary means of realizing technology transfer, eliminating budget
deficits, creating high tech man power (human capital) and international cooperation. Foreign
investment should be promoted through enacting more transparent laws and administrative regulations.