The customs union between Turkey and the EU (PDF)

country, Turkey needs advanced technologies to speed up its industrialization process. There is a natural alliance between the new trade theory, with its emphasis on increasing returns and imperfect competition, and the view that technological change is a key factor driving international specialization. Technological development is normally an increasing returns process carried out in imperfectly competitive industries, and the most important sources of increasing returns in practice probably lie in dynamic economies of learning and research and development. If bigger sales markets and increased competition initiate innovations and growth processes, which excite technologic dynamics, then those positive effects can be carried over to other companies or even to other sectors by spill-over effects, learning effects and income effects.Technological gaps are also explainable with the traditional trade theory. The H–O model would predict that technologically advanced countries have a comparative advantage in technology-intensive goods. Innovation, by increasing the range of products, represents an increase in real world productivity. Technology transfer then since it is allowing a wider range of goods in Turkey, also represents a gain from a global point of view. Innovation as well as technology transfer increase world output. Hereby innovation disproportionately benefits the EU, the more innovative area, while technological transfer supports Turkey. The high protection rates of the Turkish industry before the CU lead to a relatively underdeveloped level of technology in its production. It shall be considered how this situation changed under the CU.

The whole level of technology itself is not measurable, however technology-input can be measured with the expenses for education, research and development or the employment of scientists and engineers. The following graphic gives an overview about the employment of research and development (R&D) personnel including scientists and technicians. As it can be seen the number of people employed within R&D increased significantly during the regarded period. The comparison between Turkey and other chosen countries in Appendix N with respect to the education expenses as a percentage of GDP confirms Turkey’s high technology input. In 2002 Turkey spend 7.26% on education being 1.36 percentage points higher than the OECD average. Unfortunately there are no time series evidences available in this matter. Yet, the different factors indicating Turkey’s technology input show positive results. Technology-output is measured by the number of patent applications. If this number increases within the time period of the CU it can be interpreted as a positive sign for the catching-up process of Turkey. Alternatively the percentage of innovative firms can give an impression about the technology output. In the following graphic the development during the years 1997-2004 is shown. The percentage of innovative firms increased being a sign on the one hand of more investment in R&D and on the other hand of possible spillover effects due to the closer integration with Europe. The overall estimation for Turkey’s technology change is a positive one although Turkey still needs to increase its transfer of technology to overcome the shortcomings of their trade balance. Another possibility would be to attract more DFI which is the topic of the next chapter.Direct foreign investment:Positive growth effects can occur when the CU leads to an increase in investments. Reasons like high competition plead for such a positive relation. The CU had influence on the location and volume of real investment which is analysed in more detail in this chapter. Theoretic implementation:„Direct foreign investment is defined as an investment in which the investor acquires a substantial controlling interest in a foreign firm or sets up a subsidiary in a foreign country. DFI involves ownership or control of a business enterprise abroad.” 

Thus the distinctive feature of DFI is that it involves not only a transfer of resources but also the acquisition of control. The subsidiary is part of the same organizational structure. In case of a plant the transfer of resources and production capabilities, and therefore DFI, contribute to the industrial base of the host country Turkey. DFI is one important pillar of convergence theories, in which it is assumed that capital flows into the region with lower wages and higher interest rates. In the „catching up” theory it is the source of technology and know-how because every investment from developed countries will cause a technology transfer, and the production will have external effects via learning-by-doing and spill-over to other industries. Increasing intra-industry trade is a sign of catching up while DFI flows may be an indicator of technology transfer. The growth in investments is one important requirement to catch up with the development level of the EU.

There are a lot of factors determining investment decisions, among others: In developing countries there often exists a lack of savings and capital accumulation which is needed to realize additional profitable investments. Hence investment opportunities which promise high profits are realised by foreign entrepreneurs especially if the domestic demand in the invested sector offers good growth prospects. Another advantage is the relatively cheap quality and surplus of the labour force in developing countries. By shifting the assembly industries to these countries they can reduce their costs and increase their ability to compete in the world market. Moreover the geographical position of the country and suitable connections to different foreign markets are a determining factor for choosing the country of investment. In this way Turkey could be used as an export base to the Middle Eastern and Islamic countries.