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    Distributed profits

    Fatih Özatay, PhD24 April 2012 - Okunma Sayısı: 1007

    The level of distributed profits, which stood below $500 million before 2003 averages at $3 billion since 2008.

    Foreign direct investments (FDI) are the most desired form of foreign capital inflows. FDI includes foreign capital investments to buy a resident company, real estate or establish a new business. Some brings advanced-technology while some others work on medium-technology. Leaving real estate investments aside, Turkey’s FDI performance appear to have shown a leap after 2005, against the poor performance before then.

    If we leave 2001 aside as an exceptional case, we see that foreign capital inflows had been less than $1 billion between 1995 and 2003. The level of inflows jumped to $8 billion in 2005 and doubled in 2006. Due to the global crisis, FDI inflows to Turkey were affected negatively, by 2009 falling below the level achieved in 2005. In 2011, FDI inflows recovered substantially (Table 1).

    Some of the emerging market economies started to attract foreign direct capital investments long before Turkey. Nowadays, these countries suffer from a problem which became visible later on, affecting current account deficit performance negatively: distributed profits in proportion to overall profits earned in a given country started to increase. In some cases, the amount transferred to home country exceeded the level of new investments in the host country.

    Level of distributed profits increasing

    This was not felt severely in Turkey. The rise in the distributed profits in the last years is striking, however.  The level of distributed profits, which stood below $500 million before 2003 averages at $3 billion since 2008 (Table 1). By February, twelve-month cumulative current account deficit reached $75.2 billion and 4 percent of this amount stems from distributed profits.

    We must expect this figure to grow in the upcoming years. This is just natural. After all, investors are free to use the profit however and wherever they like. What is important for Turkey is that it has to encourage foreign capital investments that bring new technologies, help sub-industry suppliers adopt the technology and try to improve the skills-level of the labor force.

    This commentary was published in Radikal daily on 24.04.2012