country profile turkey

Country in Focus: Turkey

Another BRIC in the wall? Ximena Suárez and Esha Mendiratta

Perspectives

towerswatson.com Country in Focus: Turkey Another BRIC in the wall? 2

surpasses those in emerging Asian countries as well as in similar EU markets.

Workers’ skills and education offer some room for improvement. Moreover, English proficiency is low compared with similar European countries and even some emerging economies, such as India and the Philippines. Given the growing competition for low-value-added activities from the Asian emerging economies, Turkey must enhance its educational and skills profile to attract investments in high-value-added manufacturing and services.

Turkey’s volatile macroeconomic and political environments are another concern. Although macroeconomic conditions have stabilized considerably since the 2001 crisis and Turkey is rebounding nicely from the 2009 European crisis, it needs to get inflation and current-account deficits under control. Turkey also needs to address internal and external politics, as MNCs are paying close attention. Turkey’s main challenges in this area are constitutional reform, social demands recently expressed in several public protests, conflicts with Kurdish groups — which held up Turkey’s acceptance into the EU — and its relationship with Syria. On the other hand, Turkey’s strong relationships with the U.S. and the EU are promising.4

Executive Summary

1 See Daniel Dombey, “Fitch Raises Turkey to Investment Grade,” Financial Times, Nov. 5, 2012, http://www.ft.com/cms/s/0/9e2c38dc-2742-11e2-9863-00144feabdc0.html#axzz2NC83dHaI (accessed March 11, 2013).

2 See European Commission. Taxation and Customs Union, Turkey: Customs Unions and Preferential Arrangements, http://ec.europa.eu/taxation_customs/customs/customs_duties/rules_origin/customs_unions/article_414_en.htm (accessed Feb. 1, 2013).

3 Unprocessed agricultural products, coal and steel products are not covered under the agreement.

4 See U.S. Department of State. Bureau of Economic and Business Affairs, 2012 Investment Climate Statement - Turkey (U.S Department of State, June 2012), www.state.gov/e/eb/rls/othr/ics/2012/191254.htm (accessed Jan. 25, 2013).

Turkey is an interesting proposition for multinational companies (MNCs) looking to expand to new markets globally. It is similar to other emerging economies in some aspects, yet very different with respect to others. Economic and structural reforms following the 2001 financial crisis significantly improved the business environment and integrated Turkey into the global economy. By the mid-2000s, Turkey was already becoming more popular among MNCs. More recently, Turkey’s political situation has stabilized somewhat and the country regained its investment grade credit rating after an 18-year hiatus, fueling interest from MNCs.1

Turkey’s obvious advantages include a geographically strategic position and its 1995 Custom Union with the European Union (EU).2 The agreement allows free circulation of industrial and processed agricultural products3 in Europe and harmonizes Turkey’s trade policies, legislation and custom tariffs with those of the EU. Turkey’s large and relatively high-income market is young and powered by a dynamic private-sector economy. Its business infrastructure


Introduction

Figure 1. Average economic growth rate, 2002-2011

0% 2% 4% 6% 8% 10% 12%

Europe & Central Asia (developing only)

European Union

Brazil

China

Turkey

5.2%

1.3%

3.7%

10.6%

5.4%

Source: Towers Watson based on data from World Development Indicators7

5 Ibid. 6 See Klaus Schwab, The Global Competitiveness Report (Geneva:

World Economic Forum, 2012), http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2012-13.pdf (accessed Feb. 1, 2013).

7 See World Bank, World Development Indicators, GDP Growth (annual %) 2002-2011, http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG (accessed Feb. 1, 2013).

8 See DG Trade, Turkey: EU Bilateral Trade and Trade with the World (DG Trade, November 2012), http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113456.pdf (accessed Feb. 1, 2013).

advantage. It has been an EU candidate since 2005 and a member of a Custom Union with the EU countries since 1996. These relationships have increased trade with the EU.8

However, political instability and fallout from European economic turmoil have not escaped notice. These combined with high inflation, large current-account deficits and gaps in human capital development suggest looming challenges ahead.

In this article, we take a closer look at Turkey’s fundamentals to analyze both opportunities and challenges. We examine overall macroeconomic conditions and the competitive landscape, analyzing Turkey both as a market for products and services and as a business locale in terms of its size, talent pool and business environment. We also evaluate whether Turkey is a good fit for MNCs, both culturally and strategically.

Turkey’s economic landscape has shifted significantly over the last decade. After the 2001 financial crisis, liberalization integrated the country into the global economy, where it became a strong contender both as a market for products and services and as a business locale. Indeed, between 2002 and 2011, Turkey’s annual economic growth averaged 5.4 percent, higher than the averages in developing Europe and Central Asia (5.2 percent) and among EU members (1.4 percent), as shown in Figure 1. In 2010 and 2011, Turkey was the second-fastest-growing economy in terms of gross domestic product (GDP) (China was first). In 2011, Turkey was the 17th largest economy in the world.5 More recently, Turkey was one of the few countries showing maximum improvement in the Global Competitiveness ranking for 2012-2013.6

Turkey’s location at the crossroads between Asia Pacific and Europe provides a valuable competitive


communication and monetary discipline, which seemed to fuel Turkey’s stunning growth for a while. In 2009, however, the European crisis and conflicts with Syria prompted Turkey to address some of its weaknesses. Following a brief period of low growth, Turkey emerged in 2011 as one of the fastest-growing economies in the world, ranking 17th in GDP growth.13 After an 18-year suspension, it regained its investment grade credit rating in November 2012. Moreover, these growth trends are forecast to continue, with Turkey’s GDP projected to grow by 4.4 percent annually through 2016.14

Like other developing economies, Turkey has shifted away from agriculture toward services and industry. According to 2012 estimates, agriculture accounts for only 8.9 percent of Turkey’s GDP, while industry and services account for 28.1 percent and 63 percent of GDP,15 respectively. The country has expanded production beyond the traditional sectors, exporting more products and services from the textiles and clothing, automotive, construction and electronics industries.16 For example, Turkey has become the largest commercial vehicle producer in Europe17 and in 2010 ranked 16th of all automotive manufacturing countries, producing more than 1 million vehicles and exporting around 70 percent of domestic production.

Foreign trade also reflects this structural shift, both in industry mix and trading partners. Agricultural products, which once dominated Turkey’s exports, have been supplanted by manufactured goods, which accounted for 77.2 percent of exports in 2012. Further, within the manufactured goods category, traditional exports such as textiles and clothing have been replaced by higher-value-added products, such as TVs, electrical appliances and motor vehicles.18 The EU is Turkey’s most important trading partner. In 2010, the EU supplied 39.3 percent of Turkish imports and purchased 46.3 percent of its exports,19 which partly explains Turkey’s vulnerability to the European crisis. According to the OECD, however, Turkey has made one of the strongest import recoveries since the crisis, along with Lithuania and Ukraine.20 Moreover, by diversifying its exports

Macroeconomic fundamentals

Turkey has been improving its macroeconomic fundamentals over the last decade or so. The country was hit by financial crises in 2001 and 2009. In response to the 2001 crisis, Turkey restructured its banking sector and cut back state participation in basic industry, banking, transport,

Competitive landscape

MNCs headquartered around the world have become increasingly interested in Turkey. The country is among 30 preferred destinations for foreign direct investment (FDI) and ranks 15th among developing countries.9

Since 1997, Turkey has been a net inward-outward FDI receiver and has been relaxing restrictions on FDI, becoming the second biggest reformer among Organization for Economic Cooperation and Development (OECD) countries.10 The EU accounted for 66.4 percent of all FDI inflows into Turkey in 2011.11 Nevertheless, the trend is toward diversification, with inflows from other regions rising. In 2011, for example, investments from the U.S. accounted for 9.1 percent of FDI inflows, up 4.5 percent from 2010. The principal recipients of FDI have been manufacturing (26.4 percent), financial intermediation (22.6 percent), and electricity, gas and water (11.8 percent).

After a drop in 2009, cross-border M&As have been on the rise, reaching 46 deals in 2012. Since 2005, almost one-third of M&As have been in the consumer sector, with the financial and industrial sectors next at around 15 percent each.

There are 257 foreign MNCs operating in Turkey today.12 Most of them are in Istanbul, but Kocaeli, Izmir and Bursa are becoming more attractive headquarters locations. Almost 25 percent of these MNCs are in the consumer industry.

9 See UNCTAD, World Investment Prospect Survey 2008-2010 (New York and Geneva: UNCTAD, 2008), http://unctad.org/en/Docs/wips2008_en.pdf (accessed Feb. 2013).

10 See Stephen Thomsen, OECD FDI Regulatory Restrictiveness Index: A Tool for Benchmarking Countries, Measuring Reform and Assessing its Impact (OECD, 2010), http://www.oecd.org/daf/inv/investmentstatisticsandanalysis/48684001.pdf (accessed Feb.1, 2013).

11 See OECD, StatExtracts, FDI Flows by Partner Country, http://stats.oecd.org/Index.aspx?DatasetCode=FDI_FLOW_PARTNER (accessed Feb. 1, 2013).

12 This does not include Turkish MNCs. Information from Dow Jones.

13 See footnote 4. 14 See International Monetary Fund, World Economic Outlook Database,

October 2012. 15 See CIA, The World Factbook, s.v. “Turkey,” https://www.cia.gov/library/

publications/the-world-factbook/geos/tu.html (accessed Feb. 1, 2013). 16 See IndexMundi, Turkey Economy Profile 2012, http://www.indexmundi.

com/turkey/economy_profile.html (accessed Feb. 1, 2013). 17 See Republic of Turkey Prime Ministry Investment Support and Promotion

Agency, Invest in Turkey: Automotive, http://www.invest.gov.tr/en-US/sectors/Pages/Automotive.aspx (accessed Feb. 1, 2013).

18 See Tugba Kalafatoglu, “Doing Business in Turkey Helps Bridge Europe and Asia,” Global Business and Organizational Excellence 29, no. 2 (January/February 2010): 61–75.

19 See footnote 8. 20 See OECD, OECD Economic Surveys Turkey (Paris: OECD, July 2012),

http://www.oecd.org/eco/surveys/OVERVIEW%20ENGLISH%20FINAL.pdf (accessed Feb. 1, 2013).


Turkey’s purchasing power has risen significantly over the last decade, making it an even more attractive market for certain product segments. Now classified as an upper-middle-income country, Turkey’s GDP per capita jumped by 246.5 percent over the last decade — from US$3,037 in 2001 to US$10,524 in 2011.30 GDP per capita in Turkey is nearly twice that in China and seven times India’s. Moreover, the middle class now constitutes 59 percent of the population or roughly 43.5 million.31 Most people (71 percent) live in urban areas.32

Consumption, technology access and communications have expanded as well. The number of Internet users has soared from 4 million in 2002 to 50 million today. Mobile phone subscribers have increased their number from 23 million in 2002 to 65 million in 2011, and credit cards users from 16 million to 51 million over the same period.33

Some industries to watch

Turkey has reinvented itself as one of the fastest growing energy markets in the world. The Turkish Electricity Transmission Company estimates that, between 2009 and 2023, Turkey’s demand for electricity will grow by 6 percent annually.34 Market liberalization, the country’s potential as an energy terminal in the region and increasing demand make Turkey attractive to MNCs in this sector.

The real estate sector also has growth potential. The number of apartment units sold in Turkey in the second quarter of 2011 was 18 percent higher than the number sold during the same period in 2010.35 Expenditures on housing and rent represented 25.8 percent of total consumption expenditures. In household consumption, food and beverage accounted for 20.7 percent in 2011.36

toward industrial products and expanding its markets to the Middle East, Africa and the U.S.,21 Turkey is sending a strong signal to potential investors.

Challenges remain

Inflation has burdened Turkey for over a decade. After inflation reached 54.4 percent in 2001, significant monetary adjustments by authorities brought it down to roughly 6.5 percent in 2011.22 Although the Central Bank expects inflation to be 5.3 percent in 2013 and 4.9 percent by year-end 2014,23 Turkey’s current-account deficits threaten its ability to meet these projections. The current-account balance has been very uneven recently, highlighting Turkey’s dependence on foreign capital. A credit-fuelled rise in import demand and higher oil prices (Turkey imports almost 70 percent of its energy) pushed the deficit up to 10 percent in 2011.

The deficit is expected to ease to around 5 percent of GDP in coming years,24 but several factors could derail this forecast. For instance, Turkey’s gross debt was 37.7 percent of GDP in 2012,25 which is similar to Romania’s debt (34.6 percent) but much larger than China’s (22.2 percent) and Bulgaria’s (17.9 percent).

A large, high-income market

Turkey placed fifth in market attractiveness — after China, India, Russia and Taiwan — in a ranking of 39 emerging economies, using Towers Watson Offshoring Indicators.26 Its domestic market is large, young and growing — 73.6 million inhabitants with an average age of 28.827 versus 41.2 in the EU.28 Historical and expected annual population growth is 4.7 percent and 4.6 percent, respectively, and the United Nations projects Turkey’s population to reach 92 million by 2050.29

21 See footnote 4. 22 See World Bank, 2012 World Development Indicators (Washington D.C.:

World Bank, 2012), http://data.worldbank.org/data-catalog/world-development-indicators (accessed March 1, 2013).

23 See Economist Intelligence Unit, Country Report: Turkey (EIU, 2012) and Central Bank of the Republic of Turkey, Inflation Report 2013-I (2013),http://www.tcmb.gov.tr/research/parapoli/inflation2013I.php (accessed Feb. 1, 2013).

24 See Seltem Iyigun, “UPDATE 2-Turkish c.bank may act if bank lending overshoots-Basci,” press release, Jan. 24, 2013, http://uk.reuters.com/article/2013/01/24/turkey-centralbank-idUKL6N0AT5VA20130124 (accessed Feb. 1, 2013).

25 See footnote 14. 26 See Yoel Kwacz, Mauricio Ruiz and Juan Ignacio Scasso. Services

Offshoring Ranking: A Comparative Analysis of Emerging Economies, Perspectives (Montevideo: Towers Watson, May 2013).

27 See IndexMundi, Turkey Median Age, http://www.indexmundi.com/turkey/median_age.html (accessed Feb. 1, 2013).

28 See European Commission, EuroStat, Population Structure and Ageing, http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Population_structure_and_ageing (accessed Feb. 1, 2013).

29 See United Nations. Department of Economic and Social Affairs. Population Division, World Population Prospects: The 2010 Revision, http://esa.un.org/wpp/unpp/panel_population.htm (accessed Feb. 1, 2013).

30 See World Bank, World Development Indicators, GNI per Capita, Atlas Method (Current US$), http://data.worldbank.org/indicator/NY.GNP.PCAP.CD (accessed Feb. 1, 2013).

31 See “Turkey’s Middle Class Pious, Careful in Spending, Survey Shows,” Today’s Zaman, May 7, 2012, http://www.todayszaman.com/newsDetail_getNewsById.action?newsId=279617 (accessed Feb. 1, 2013).

32 See World Bank, World Development Indicators, Urban Population (% of total), http://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS (accessed Feb. 1, 2013).

33 See Republic of Turkey Prime Ministry Investment Support and Promotion Agency, Invest in Turkey: 10 Reasons to Invest in Turkey, http://www.invest.gov.tr/en-US/investmentguide/Pages/10Reasons.aspx (accessed March 1, 2013).

34 See Republic of Turkey Prime Ministry Investment Support and Promotion Agency, Invest in Turkey: Energy, http://www.invest.gov.tr/en-US/sectors/Pages/Energy.aspx (accessed March 1, 2013).

35 See Republic of Turkey Prime Ministry Investment Support and Promotion Agency, Invest in Turkey: Real Estate, http://www.invest.gov.tr/EN-US/SECTORS/Pages/RealEstate.aspx (accessed March 1, 2013).

36 See TurkStats, “Household Consumption Expenditures, 2011: The Expenditures on Housing and Rent Have the Highest Share in Total Consumption Expenditures,” press release, Aug. 13, 2012, http://www.turkstat.gov.tr/PreHaberBultenleri.do?id=10875 (accessed March 1, 2013).


corporate income tax rate is one of the lowest among OECD countries.40

Infrastructure

According to Towers Watson Services Offshoring Ranking,41 Turkey ranks 17th of 39 emerging economies in the infrastructure category. Its modern and low-cost sea and railway transport facilities are its main strengths, along with transportation connections to most EU countries.

Moreover, Turkey’s Internet usage and coverage are strong. According to the Global Competitiveness Index, 42.1 percent of residents have Internet access, which is much higher than in India (10.1 percent) and China (38.3 percent), and only slightly lower than in Brazil (45 percent). Moreover, 10.3 percent of citizens have access to broadband Internet subscriptions.42

Istanbul is the 27th most expensive city in the world, according to Cushman & Wakefield. Rents increased by 6 percent in 2011, reaching US$456 per square meter per year. In Ankara, rent is US$252 per square meter per year, but a strong push by the Turkish government to make Istanbul a new financial center may prompt many companies to relocate from Ankara, thus stimulating demand for prime space in Istanbul.43

Talent pool

Turkey’s labor force numbered 26.5 million in 2010.44 Of these workers, 15.9 percent had a tertiary education in 201045 (Figure 2), up from 9.7 percent in 2000. Turkey’s tertiary education levels compare favorably with those in other emerging economies, such as Brazil (7.3 percent), China (6.2 percent) and Romania (10 percent), and are comparable to Bulgaria (17 percent). Moreover, the tertiary educated talent pool is projected to grow by 4.7 percent annually between 2010 and 2021 — the fourth highest projected growth rate among emerging countries, after India (7.3 percent), Brazil (5.6 percent) and Indonesia (4.9 percent).46

Doing business in Turkey

Business environment

The World Bank’s Doing Business ranked Turkey 23rd of 49 upper-middle-income countries, although it dropped from 68th to 71st of all countries in 2013. Turkey ranks 43rd of 144 countries in the 2012-2013 Global Competitiveness Index.37

In 2012, Turkey set out to improve its business environment. The government made it easier to start a business by eliminating notarization fees for articles of association and other documents, and reduced the social security contribution rate for companies by 10 percent.38 It also established three special investment zones: organized industrial zones (OIZs), technology development zones (TDZs) and free trade zones.39

OIZs provide companies within an industry with infrastructure, such as roads, water, natural gas, electricity, communications and waste treatment. Locating companies in the same industry together enables participating MNCs to exploit spillover of technologies and know-how from other companies. The number of OIZs has grown from 25 in 1990 to 148 today. The benefits include no value-added tax (VAT) for land acquisitions, a five-year exemption from real estate duty, low water, natural gas and telecommunication costs, exemption from municipality duty for construction and use of the plant.

Turkey offers 27 operative TDZs or Technoparks, which are specifically designed to encourage R&D and attract high-tech field investments. Companies in Technoparks are exempt from income and corporate taxes for R&D-derived revenues and software development, and from VAT on sales of application software.

Turkey has 21 specialized free trade zones, most of them on the West coast. Manufacturers in these zones are exempt from corporate taxes (until Turkey joins the EU), have 10-to-30-year operating licenses, pay no VAT, and enjoy custom-free production and easy supply chain management.

In addition to the tax advantages of operating in these specialized zones, Turkey’s 20 percent

37 See footnote 6. 38 See IFC and World Bank, Doing Business 2012: Doing Business in a

more Transparent World (Washington D.C.: The International Bank for Reconstruction and Development; The World Bank, 2011), http://www.doingbusiness.org/reports/global-reports/doing-business-2012 (accessed March 1, 2013).

39 See Republic of Turkey Prime Ministry Investment Support and Promotion Agency, Invest in Turkey: Special Investment Zones, http://www.invest.gov.tr/en-US/investmentguide/investorsguide/Pages/SpecialInvestmentZones.aspx (accessed March 1, 2013).

40 See Republic of Turkey Prime Ministry Investment Support and Promotion Agency, Invest in Turkey: Taxes, http://www.invest.gov.tr/en-US/investmentguide/investorsguide/Pages/Taxes.aspx (accessed March 1, 2013).

41 See footnote 26. 42 See footnote 6. 43 See Cushman & Wakefield, Office Space across the World 2012 (London:

Cushman & Wakefield, 2012), http://www.spgintercity.ch/en/portraet/press-releases/osatw_2012_report_en.pdf (accessed March 1, 2013).

44 See World Bank, World Development Indicators, Labor Force, Total, http://data.worldbank.org/indicator/SL.TLF.TOTL.IN (accessed Feb. 1, 2013).

45 Labor force with tertiary education is the proportion of labor force that has a tertiary education, as a percentage of the total labor force (See footnote 47).

46 See Oxford Economics, Global Talent 2021: How the New Geography of Talent will Transform Human Resource Strategies (Oxford Economics, in collaboration with Towers Watson, 2012) towerswatson.com/assets/pdf/7656/Global_talent_2021.pdf (accessed Feb. 27, 2013).


a struggle. Other challenges included a shortage of available skills in the local workforce (63 percent), difficulties in planning succession management (53 percent), and upward pressure on incentives and compensation (51 percent). Towers Watson’s Offshoring Ranking positioned Turkey 28th of 39 countries in education and innovation.51 The OECD has made similar observations, suggesting that although Turkey’s overall enrollments have climbed, the quality of its education remains low.52

Low English proficiency poses another competitive disadvantage. According to the English Proficiency Index,53 Turkey is the lowest performer among 54 participating European countries. Although it ranks higher than China and Brazil, English proficiency is particularly crucial for Turkey, given that it conducts so much international business with Europe.

Female labor force participation rates are stagnant and relatively low. Since 2001, employment rates have been around 35 percent for all women and 25 percent for married women.54 The OECD has recommended that Turkey boost women’s labor force participation.

Despite these advantages, certain features of the Turkish labor market need improvement. Since 2004, unemployment among workers aged 15 to 24 has generally hovered around 20 percent, peaking in 2009 at 25.4 percent for men and 25 percent for women.48

Moreover, the unemployment rate is 4.6 percent among illiterates but 10.4 percent for those with tertiary education.49 At first blush, this might appear attractive to MNCs, implying a young educated workforce that local industry cannot fully employ. Unfortunately, however, the problem has deep roots in the Turkish educational and skills development systems. According to a 2011 Towers Watson Turkey Talent Survey,50 HR professionals encounter increasing shortages of critical-skills talent in Turkey. Eighty-three percent of respondents cited difficulties in recruitment and selection, and 81 percent reported that finding appropriate talent was

Figure 2. Percentage of labor force with tertiary education

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

9.7%

9.8%

11.0%

11.1%

10.5%

11.5%

13.1%

13.9%

14.8%

15.4%

15.9%

Source: Towers Watson based on World Development Indicators47

47 See World Bank, World Development Indicators, Labor Force with Tertiary Education (% of Total) http://data.worldbank.org/indicator/SL.TLF.TERT.ZS (accessed Feb. 1, 2013).

48 See World Bank, Unemployment, Youth Total (% of Total Labor Force Ages 15-24), http://data.worldbank.org/indicator/SL.UEM.1524.ZS (accessed March 4, 2013).

49 See Turkish Statistical Institute. Labour Force Statistics Database, “Unemployed Ratio by Educational Status and Periods (15 + age),” 2011, http://www.turkstat.gov.tr/Start.do (accessed Feb. 1, 2013).

50 See Peryön and Towers Watson, Turkey Talent Management Survey 2011 (Towers Watson, 2011), http://www.peryon.org.tr/pdf/Peryon_Tw_Talent_Survey_Report_En.pdf (accessed Feb. 1, 2013).

51 See footnote 26. 52 See footnote 20. 53 See Education First, English Proficiency Index (EF EPI), http://www.ef.com/

epi (accessed Feb. 1, 2013). 54 See footnote 49.


Turkey must invest more in education and skills development.

Turkish policymakers are moving in the right direction. Private-sector R&D increased from €6.6 billion in 2009 to €7.7 billion in 2010, albeit accompanied by a slight drop in the GDP share of R&D, according to a survey by TurkStat. Moreover, during the same period, the number of full-time equivalent (FTE) researchers jumped from 58,000 to 64,000.60 Turkey has also launched programs to fund research, science and technology, including private-sector innovation-related projects, and to establish science centers in all provinces by 2023.61 While six new universities were established in 2012,62 Turkey needs to ensure uniform quality and equitable access to education throughout the country.

Retirement benefits63

Company benefit plans typically include death, disability and medical benefits. Supplementary retirement benefits are generally offered only by large local and multinational companies and are usually reserved for white-collar employees. Most companies provide only statutory retirement or termination

Wages in Turkey are relatively high. In the second half of 2012, the monthly minimum wage55 was €411.89 (US$557).56 Although the minimum wage has been relatively stable since 2008, it is almost 30 percent higher than in comparable European countries, such as Hungary (€323.17 equivalent of US$436) and Czech Republic (€312.01 equivalent of US$421),57 and much higher than in emerging Asian economies. Indeed, Turkey had the seventh highest labor costs of 39 emerging economies in the Towers Watson Offshoring Ranking.58

Annual performance-based bonuses as a percentage of annual earnings reached 17.30 percent59 in 2010. In Figure 3, which compares Turkey’s labor costs and skills with those in other emerging economies, Turkey stands alone in the high-cost/low-skills quadrant.

Turkey’s high-cost/low-skills profile constitutes a serious drawback. Given its high labor costs, MNCs have little incentive to move lower-value-added operations to Turkey. And insufficient skills development and innovation potentially discourage high-value-added activities as well. To attract MNCs,

55 See Eurostat, Monthly Minimum Wages - Bi-annual Data, http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=earn_mw_cur&lang=en tps00155 (accessed Feb. 1, 2013).

56 Exchange rate as of February 8, 2013, Oanda. 57 See footnote 55. 58 See footnote 26. 59 See Eurostat, Annual Bonuses as % of Annual Earnings by NUTS 1 Regions

and Economic Activity (Enterprises with 10 Employees or more) - NACE Rev. 2, B-N, http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=earn_ses10_rbns&lang=en (accessed Feb. 23, 2013).

60 See European Commission, Turkey 2012 Progress Report (Brussels: EU, 2013), http://ec.europa.eu/enlargement/pdf/key_documents/2012/package/tr_rapport_2012_en.pdf (accessed Feb. 27, 2013).

61 Ibid. 62 Ibid. 63 See Towers Watson Data Services, Retirement, Risk Benefits and

Employment Terms Report – Turkey (TWDS, 2013).

Figure 3. Skill/cost trade-off

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.00.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0Brazil China

Russia

HungaryCzech Republic

Poland

Turkey

High costLow skills

Low costHigh skills

High costHigh skills

Bulgaria

Romania

India

Low costLow skills

Cost level score

Ski

ll le

vel s

core

Source: Towers Watson based on TW Offshoring Ranking


participants, this result in a government matching contribution of 25% with an annual cap of the annual national minimum wage. These government contributions came with a vesting rule that depends on the number of contributory years.

The new regulations also allow transfers from defined benefit to defined contribution plans without incurring tax (until the end of 2015), providing more favorable tax treatment of distributions at retirement.

These changes were made as a way to encourage more savings among employees and to finance government infrastructure projects. They also create larger asset pools to be managed by the financial services industry, which the government hopes will promote Turkey as a regional financial services center.64

indemnities. Local employers do not commonly provide additional occupational pension benefits.

The Turkish pension system consists of a first pillar which is a public pay-as-you-go social security system and a third pillar, which consists on individual arrangements.

The mandatory retirement benefit provision in place guarantees a benefit from both the social security system and the termination indemnity system. There is no mandatory second pillar pension system. The Private Pensions Savings and Investment System Law, introduced in 2001, has established a legal framework for individual savings, allowing individuals to contribute on a voluntary basis to the system and therefore increasing their retirement income. An employer has the possibility to sponsor the plans that are set up in the framework of this Law on Individual Pension Savings, by paying contributions into the system on behalf of the employee.

New pension reform was introduced by Turkish Government and it came into force last January 1, 2013. Whereby a contribution made by the

64 See Towers Watson, “Turkey: New Pension Reforms to Include Government Matching Contributions,” Global News Brief, Aug. 20, 2012, towerswatson.com/en/Insights/Newsletters/Global/global-news-briefs/2012/turkey-new-pension-reforms-to-include-government-matching-contributions (accessed Oct. 1, 2013).


Concluding remarks

As global competition intensifies among emerging economies, Turkey needs to exploit its unique competitive advantages, such as serving as a crossroads to both Middle Eastern and European markets and offering its own young high-income market powered by a dynamic private sector.

Turkey’s ability to resolve its complex internal and external political situations will shape MNCs’ evolving perceptions about its desirability for investment. The country must also tackle macroeconomic fundamentals, such as an over-dependence on energy imports and current-account deficits.

At a more granular level, weaknesses in Turkey’s workforce highlight the importance of talent for MNCs. Companies need high-quality talent with critical skills, and employers are concerned about skill shortages and mismatches in Turkey. Improving the quality of its workforce is particularly important given Turkey’s high labor costs.

Turkey is moving in the right direction. Even in the midst of a political transformation, the country is acting to improve its business environment. If its efforts succeed, the political and business environment transformation will give Turkey a strong edge in global competition.

About Towers WatsonTowers Watson is a leading global professional services company that helps organisations improve performance through effective people, risk and financial management. With 14,000 associates around the world, we offer solutions in the areas of employee benefits, talent management, rewards, and risk and capital management.

Towers Watson is represented in the UK by Towers Watson Limited and Towers Watson Capital Markets Limited.

The information in this publication is of general interest and guidance.

Action should not be taken on the basis of any article without seeking specific advice.

Copyright © 2013 Towers Watson. All rights reserved.TW-RAS-2013-0004. October 2013.

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