The report combines an analysis of international investment into Turkey over the past five years with a recent survey of over 200 global business leaders about their views on potential of the Turkish market. The latest data for Ernst & Young’s European Investment Monitor (EIM) shows that inward investment in Turkey has steadily grown since 2007. The number of projects more than doubled from 40 in 2007 to 95 in 2012.

This is matched by a positive response from investors who have confidence that Turkey is on a growth trajectory, and its investment appeal is expected to rise further in the future. Turkey’s strategic location, stable and solid economic growth and the size of its domestic market are the cited reasons for the growing corporate interest in the country.

Despite the uncertain global economic environment more than half of total respondents have expressed their intention to set up operations in Turkey within the next year and 71% think that Turkey’s investment attractiveness improved substantially over the last three years. A majority of investors highlighted that the current negotiations around Turkey’s accession to the EU had improved their perception of the country’s attractiveness.

Investor confidence in Turkey’s economy is high with over 80% expecting an improvement in investment attractiveness, this is second only to that of Brazil among major emerging markets and much higher than the 38% who expect improving conditions in Europe.

Müşfik Cantekinler, Head of Transaction Advisory Services, Ernst & Young Turkey comments,  “Turkey has overcome a series of political and economic challenges and is now enjoying a period of stable and solid economic growth. The country still has great untapped potential, with its economy set to grow at least 5% each year in the medium-term. Turkey’s world-class features – including its strategic location and large domestic market – are attracting a number of investors, who remain confident about Turkey’s future.”

Where has investment come from?

The EIM data highlights that, from 2007 to 2012, companies from the US provided 28% of foreign direct investment (FDI) into Turkey with 86 projects. Sectors such as business service, ICT, chemicals, transport and logistics and diversified industrial products (DIP) have attracted significant American attention.

In the past five years, the EU has directed 202 projects to Turkey. The EU’s interest in Turkey mostly focuses on sectors with a high technology component such as DIP and automotive. Other sectors such as business services, and transport and logistics have also drawn investor attention.

Germany is the leading European investments in Turkey with 64 projects followed by France, the UK and Italy with 30, 26 and 24 projects respectively. Although Western Europe remains the largest regional investor in Turkey, its relative importance in FDI inflows to the nation has been declining and it is likely to shrink in the future.

Japan is the sixth largest investor in Turkey and the largest Asian investor. It accounts for more than one-third of the continent’s projects in Turkey. The top sectors for Japanese investment are automotive (29%) and financial services (18%).

The Turkish government has made a conscious effort to deepen ties with the MENA region and although it currently accounts for only 3% of investment decisions in the country, investment from the region is expected to increase in the years to come.

Current levels of FDI also remain low from China, India and South Korea but they have been trying to capitalize on Turkey’s growth story and investment is expected to rise. Together, these countries have directed 23 projects to Turkey since 2007. A number of Chinese firms are seeking investment opportunities in Turkey, especially in nuclear energy, highway, high-speed train, railway and port projects. Turkey and South Korea are collaborating to build nuclear and coal power plants.

Turkey has been lagging behind other regional RGMs in terms of attracting FDI. Both Russia and Poland fared better between 2007 and 2012. But the gap between Turkey and others is narrowing. While FDI in Turkey has been increasing or stable since 2007, its counterparts in Europe have witnessed an uneven trend. Since 2011, the country has shown better FDI performance than the Czech Republic and Ukraine.

Jay Nibbe, Ernst & Young’s EMEIA, Markets Area Managing Partner, comments, “Historically, Turkey has seen the majority of its foreign investment coming from developed economies. However, a major shift is underway for investment and trade flows from the Middle East, Africa and Asia.”

FDI profile dynamic mix of sectors

EIM data shows that business services was the most active sector in Turkey between 2007 and 2012 with 17% of projects. Strong growth potential and macroeconomic stability have encouraged companies to set up sales and marketing offices and contact centers in the country. The US (41%) was the top investor, followed by the UK (17%), Germany (9%) and Australia (5%). In 2011 particularly, business services outstripped all other sectors, with a 167% increase in project numbers, mainly fueled by accelerated investment activity undertaken by US and German companies.

Increasing demand and cost competitiveness have also attracted DIP (52), Automotive (49), ICT (39) and Financial services (36) in the period.

Cantekinler comments, “Turkey’s FDI profile is a dynamic mix of established and emerging sectors. The country attracts projects in knowledge-intensive sectors as well as heavy industry. The government has supported investment in all industries by creating a conducive and competitive investment climate.”

Istanbul most favored by investors

Istanbul is the city most favored by investors. It attracted over half of the total FDI projects that came to Turkey between 2007 and 2012. Istanbul benefits from its advantageous geographical location, reasonably well-developed infrastructure and an educated workforce. However, as investment increases in the country investors are also looking further afield to other cities such as Izmir, Ankara and Bursa which also show signs of investment growth.

Improvements to help foster growth

Turkey’s future looks bright, but it needs to remove some barriers to investment. It must enhance the quality of human capital by improving access to primary education and vocational training. The business environment can also be made more conducive to FDI by eliminating obstacles such as bureaucracy and corruption. Investors also highlighted innovation and R&D as other improvement areas.

Attracting FDI has been a high priority for the Turkish Government. The government has been improving the investment climate by implementing structural reforms and incentive schemes.

Looking ahead

The Turkish government has also started to focus on FDI. Some measures include a revamp of the tax regime – to make it more appealing to manage investment funds from Turkey – and encouragement for foreign companies to start greenfield projects in less developed areas. As further improvements are made to the country’s business environment and innovation culture, businesses can benefit from greater efficiency of operations, better competitiveness and enhanced value gained from reduced costs.

When asked about a specific strategy for investment in Turkey, 56% of established investors revealed plans for extending existing operations in the country. While 41% plan to expand facilities, 15.1% are looking to increase their labor force.

Cantekinler concludes, “Given that many investors are optimistic about Turkey’s future prospects, the country is slowly, but surely, attracting investors’ attention. A strategic geographical location offers Turkey the opportunity to develop into a major operational hub over the next 10 years.”

The country still has great untapped potential, with its economy set to grow at least 5% each year in the medium term.

In our first attractiveness survey on Turkey, we highlight the latest foreign direct investment (FDI) trends in the country and ask investors what they think about the investment climate, and the potential for Turkey.

Turkey’s world-class features include:

• Its strategic location at the crossroads of Europe, Asia and the Middle East
• The size of its domestic market
• Its reasonable labor cost-quality profile

These strengths are attracting a number of investors, who remain confident about Turkey’s future.

Istanbul is the most preferred destination for investors in Turkey. Nevertheless, the Government has an opportunity to balance regional development by replicating similar growth in other cities and provinces.

However, some key actions are needed  to increase the country’s attractiveness for FDI:

• Revamp its business environment
• Foster entrepreneurship
• Improve infrastructure
• Make Turkey an innovation hot spot

On the other hand, a series of initiatives, as well as negotiations for Turkey’s accession to the European Union, have brought much-deserved attention from international investors.

This survey is aimed at helping investors understand the growth potential for Turkey, and informing your strategy for investments.

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Visit the the 2013 Turkey attractiveness survey – Turkish version page to download the report in Turkish as a printable document

LONDON AND JOHANNESBURG, 6 MAY 2013: Africa’s share of global foreign direct investment (FDI) has grown over the past five years highlighting the growing interest from foreign investors, according to Ernst & Young’s third Africa Attractiveness Survey, released today.

The report combines an analysis of international investment into Africa over the past five years with a 2013 survey of over 500 global business leaders about their views on the potential of the African market. The latest data shows that despite a fall in project numbers from 867 in 2011 to 764 in 2012 — in line with the global trend — project numbers are still significantly higher than anything that preceded the peak of 2008. The continent’s global share of FDI has also grown from 3.2% in 2007 to 5.6% in 2012.

Mark Otty, Ernst & Young’s EMEIA Managing Partner comments, “A process of democratization that has taken root across much of the continent; ongoing improvements to the business environment; exponential growth in trade and investment and substantial improvements in the quality of human life have provided a platform for the economic growth that a large number of African economies have experienced over the past decade.”

Despite the impact of the ongoing global economic situation, the size of the African economy has more than tripled since 2000. The outlook also appears positive, with the region as a whole expected to grow by 4% for 2013 and 4.6% for 2014. A number of African economies are predicted to remain among the fastest growing in the world for the foreseeable future.

Eighty-six percent of those with an established presence on the continent believe that Africa’s attractiveness as a place to do business will continue to improve. Those surveyed rank Africa as the second most attractive regional investment destination in the world after Asia.

Increasing investment from emerging markets

Investment in FDI projects from developed markets fell by 20%.  Although FDI projects from the UK grew (by 9% year-on-year), those from the US and France — the other two leading developed market investors in Africa — were considerably down. In contrast investments from emerging markets into Africa grew again in 2012, continuing the trend over the past three years.

In the period since 2007, the rate of FDI projects from emerging markets into Africa has grown at a healthy compound rate of over 21%. In comparison investment from developed markets has grown at only 8%. The top contributors from the emerging markets are India (237), South Africa (235), the UAE (210), China (152), Kenya (113), Nigeria (78), Saudi Arabia (56) and South Korea (57) all among the top 20 investors over that period.

Intra-African investment has been particularly impressive during the same period, growing at 33% compound rate. South Africa has been at the forefront of growth in intra-African trade and broader emerging market investment – (the single largest investor in FDI projects in 2012  outside of South Africa .) Kenya and Nigeria have also invested heavily but it is expected that others such as Angola, for example, with a US$5b sovereign wealth fund, will become increasingly prominent investors across the continent over the next few years.

Ajen Sita, Ernst & Young’s Africa Managing Partner comments, “There is a growing confidence and optimism among Africans themselves about the continent’s progress and future.”

There has also been an important shift in emphasis in investment into the continent over the past few years, in terms of both destination markets and sectors. While investment into North Africa has largely stagnated, FDI projects into Sub-Saharan Africa have grown at a compound rate of 22% since 2007. Among the star performers attracting growing numbers of projects have been Ghana, Nigeria, Kenya, Tanzania, Zambia Mozambique, Mauritius and South Africa.

Perception versus reality

Our 2013 Africa Attractiveness Survey shows some progress in terms of investor perceptions since the inaugural survey in 2011. The majority of respondents are positive about the progress made and the outlook for Africa. Africa has also gained ground relative to other global regions. In 2011 Africa was only ranked ahead of two other regions, while this year it ranked ahead of five other regions (the former Soviet States, Eastern Europe, Western Europe, the Middle East and Central America).

However, there still remains a stark perception gap between those respondents who are already doing business in Africa versus those that have not yet invested in the continent. Those with an established business in Africa are overwhelmingly positive. They understand the real rather than perceived operational risks, have experienced the progress made and see the opportunities for future growth. Eight-six percent of these business leaders believe that Africa’s attractiveness as a place to do business will continue to improve, and they rank Africa as the second most attractive regional investment destination in the world after Asia.

In contrast, those with no business presence in Africa are far more negative about Africa’s progress and prospects. Only 47% of these respondents believe Africa’s attractiveness will improve over the next three years, and they rank Africa as the least attractive investment destination in the world.

The two fundamental challenges that are present for those already present or those looking to invest in Africa are transport and logistics infrastructure and anti-bribery and corruption. However, moves are being made on both accounts to help allay fears of investors.

Infrastructure gaps, particularly relating to logistics and electricity, are consistently cited as the biggest challenges by those doing business in Africa. At a macro level, too, Africa’s growth will be inherently constrained until the infrastructure deficit is bridged. The flip side of this challenge, however, is that strong growth has been occurring despite such infrastructure constraints. This indicates the potential to not only sustain, but accelerate growth as the gap is narrowed. Our analysis indicates that in 2012 there were over 800 active infrastructure projects across different sectors in Africa, with a combined value in excess of US$700b. The large majority of infrastructure projects are related to power (37%) and transport (41%).

Moving away from extractive industries

Due to volatile nature of commodity prices, an over-dependency on a few key sectors clearly raises questions about the sustainability of growth. Despite perceptions to the contrary, less than one third of Africa’s growth has come from natural resources.

The trend of growing diversification continues, with an ever increasing emphasis on services, manufacturing and infrastructure-related activities. In 2007 extractive industries represented 8% of FDI projects and 26% of capital invested in Africa; in 2012, it was a mere 2% of projects and 12% of capital. In comparison, services accounted for 70% of projects in 2012 (up from 45% in 2007), and manufacturing activities accounted for 43% of capital invested in 2012 (up from 22% in 2007).

Mining and metals is still perceived by survey respondents as the sector with the highest growth potential in Africa, but the number of respondents who believe this (26%) is down from 38% in 2012 and 44% in 2011. In contrast, interest in African infrastructure projects is clearly increasing, with 21% of respondents identifying this as growth sector versus 14% last year and only 4% in 2011. Other sectors where there has been a noticeable shift include ICT (14%, up from 8% last year), financial services (13%, up from 6% last year), and education (which has come from virtually nowhere to register 10% this year).

Mark comments, “These changing perceptions of relative sector attractiveness in Africa reflect the changing fundamentals of many Africa economies: the diversification of both sources of growth (for example, the increasing contribution of services and the growing consumer class), and of the actual FDI flowing into these economies.”

South Africa most attractive for foreign investors but others hot on its heels

The large majority of respondents view South Africa as the most attractive African country in which to do business: 41% of all respondents put South Africa in first place, while 61% included it in their top three. The primary reasons for South Africa’s popularity appear to be it relatively well developed infrastructure, a stable political environment and a relatively large domestic market. The next most popular countries were Morocco (20% placing in the top three, and 8% in first place), Nigeria (also 20% in top three, and 6% in first place), Egypt (15% top three and 5% first), and Kenya (15% top three and 4% first). In general, these rankings align with emerging regional hubs for doing business across different parts of Africa.

Looking ahead

Ajen concludes, “With an increasingly solid foundation of economic, political and social reform, together with resilient growth rates, we are confident that the continent as a whole is on a sustainable upward trajectory. This direction of travel, rather than the current destination, is what is most important.

“A critical mass of African economies will continue on this journey. Despite the fact that there will undoubtedly be bumps in the road, there is a strong probability that a number of these economies will follow the same development paths that some of the Asian and other Rapid Growth Markets have over the past 30 years. By the 2040s, we have no doubt that the likes of Nigeria, Ghana, Angola, Egypt, Kenya, Ethiopia and South Africa will be considered among the growth powerhouses of the global economy.”

Despite the ongoing growth, the situation for foreign direct investment (FDI) was a mixed one this year. Overall, project numbers were down, reversing the growth trend we saw last year.

This reveals that the perception gap does remain a factor and work must still be done on bridging the gap.

Our report reinforces the point that those already doing business in Africa are overwhelmingly confident about the continent’s progress and prospects. They are:

• Growing their investments and operations
• Expanding into ever more diverse activities
• Supporting the long-term growth and developmental agendas of an increasing number of African economies

In this context, it is time for a shift of emphasis away from trying to persuade the Afro-skeptics toward promoting the successful growth of private enterprise across the continent.

The emphasis should be on what needs to be prioritized in order to further improve conditions for those already doing business across the continent.

With a critical mass of us pulling in the same direction, and with collaborative leadership across government and those already doing business on the continent, Africa will continue its rise and become an investment destination of choice in the decades to come.

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