beyondbrics

By Hans-Paul Bürkner and Burak Tansan of Boston Consulting Group

For all its success, Turkey is commanding less attention from multinationals than China or India. That should change. In these troubled times, Turkey, with its rapid growth, young population and expanding middle class, offers multinationals opportunities they are in danger of missing.

When the Boston Consulting Group’s worldwide group of partners gathered recently on the banks of the Bosphorus, we found an amazingly vibrant, cosmopolitan city brimming with confidence. In Istanbul, one can tangibly feel the excitement of a globalising world.

Turkey’s economy is surging forward, having grown by 8.9 per cent in 2010. Its economy tripled between 2002 and 2008, and by 2015, it is projected to pass $1,000bn in size – up from $729bn in 2010.

Public debt stands at 43 per cent of GDP — one of the lowest among the OECD nations, and well below 130 per cent in neighbouring Greece. Foreign direct investment (FDI) amounted to $97bn between 2002 and 2010 – compared with just $15bn during the previous 20 years.

This performance is no accident. It is built on strong foundations. Turkey has a young population of 74m, a fast-growing middle class, a broad export-manufacturing base, and an enviable geographic location that connects East and West. It also has one of the Muslim world’s few stable secular democracies and it is led by a government that is not afraid of taking tough decisions for the long-term benefit of the country.

But Turkey’s compelling growth story is being obscured by two issues. One is the rate of growth, which is sparking concern that the economy is “overheating”: in the first quarter of 2011, it increased by 11 per cent compared to the first quarter of 2010, making it the fastest growing major economy in the world. Second, its current account deficit is getting bigger and bigger. In January-May, it amounted to $37.3bn, up from $16.8bn in the same period of last year.

On the first issue, it is possible that this is transitory – the consequence of a natural rebound following the slowdown in the wake of the global economic downturn. Certainly, in May 2011, the production index increased by more than 8 per cent compared to the year before, suggesting that the economy is settling on a more sustainable path.

On the second issue, it is clear that tackling the deficit won’t be easy, since it is largely due to the country’s dependence on imported oil, coal, and natural gas to fuel its burgeoning economy. The government has taken action: curbing consumer lending, considering proposals to incentivise export-oriented production, and making plans to invest $100bn in energy infrastructure over the next 20 years.

But the deficit could be further plugged if the country took steps to generate more FDI. And our analysis suggests that Turkey could be attracting so much more than it actually does today.

The Investment Deficit

To begin with, it is striking to note that Turkey attracts limited investment from the United States. It may be the world’s 16th largest economy, but it is ranked a lowly 40th in the list of countries that attracted FDI from the U.S. between 2008 and 2010.

According to our “fair share” analysis – which estimates how much FDI a country should receive on the basis of its size, growth rate and business potential – Turkey should receive three times the amount it currently receives from the US. In other words, instead of the $6.6bn it received between 2005 and 2010, it should have received $19.5bn.

What should Turkey do to address this?

Change Perceptions

One thing Turkey should do is overturn some outdated perceptions. Old views die hard, and perhaps one reason for the country’s lower than deserved profile is that many CEOs remember the Turkey of yesteryear. Founded as a republic in 1923, Turkey endured decades of short-lived governments, hyperinflation and bailouts by the International Monetary Fund.

The new Turkey is now investing in all the right things – infrastructure, innovation, energy, education. Indeed, schools and universities have surpassed defense as the government’s number one budget expense.

This is a great story to tell – so it would be a good idea for the government to launch a centrally coordinated marketing campaign, with a cross-industry taskforce, carefully packaged investor materials, and road shows that target some top FDI nations including the U.S.

Establish Itself As “The World’s Logistics Hub”

As well as tackling investors’ misperceptions, Turkey should develop a Unique Selling Point. Just as China established itself as the world’s manufacturing hub, Turkey should establish itself as one of the world’s logistics hubs. It is perfectly placed to play this central role in the global economy – sitting as it does on the crossroads between Europe, Asia, the Middle East and Africa.

But to maximize this position as the world’s entrepot, Turkey has to invest even more heavily in infrastructure than it is doing today. In particular, it should develop its seaports and airports – improve the customs processes, its warehousing capabilities, and connections with special trade zones.

The Opportunity for Multinational Companies

If Turkey takes these steps, it can woo new investors. But even now, there are good opportunities. We estimate that between 2011 and 2013, the country’s privatisation programme will amount to around $50bn, embracing the energy sector, banking, transportation and telecoms.

Moreover, there is a burgeoning group of companies with global ambitions and an appetite to partner with multinationals from the US and Europe. Two have already entered our top 100 list of “global challenger” companies in rapidly developing economies – Koc Holding and Sabanci Holding. We expect others to join them in the next few years.

Beyond this, there is a real sense of change – change for the better – that multinationals could use to build their own momentum. While in Istanbul, we met Mehmet Şimşek, a former top Merrill Lynch banker who serves as finance minister and who is among a team of gifted technocrats who have ushered in reforms. In some ways, he epitomizes the transformation of the country. Raised in a rural town in the southeast part of Turkey, he defied the odds to earn a college degree in Ankara before pursuing postgraduate studies in the UK.

Turkey may not have oil, like its Middle Eastern neighbours, but it has geography and demography on its side, as well as a mission to transform. “We believe that if we can educate our own people,” said Şimşek, “we can make a difference”.

Hans-Paul Bürkner is chief executive of The Boston Consulting Group and Burak Tansan is a partner and managing director in BCG’s Istanbul office

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