Lack of foreign investment limiting growth of Turkish SMEs

Originally appeared on Bosphorus Consulting in February 2015

Turkey’s SMEs have seen extraordinary growth over previous years, with the number of companies in the sector doubling between 2009 and 2011, contributing 52.9% of the country’s added value (European Commission “Enterprise and Industry 2014 SBA Fact Sheet Turkey”) and establishing themselves as a powerful force in the Turkish economy. In its 2014 report on Turkish SMEs, the OECD states that securing increased investment from outside Turkey’s financial system (i.e., from abroad) remains one of the greatest obstacles to this sector maintaining its upward trajectory. There are two reasons for this:

1. Further SME development will require modern technology and know-how not currently available in Turkey. Turkey suffers acutely from a lack of high technology, resulting in billions of dollars of unnecessary imports, such as mobile phones and digital cameras, as well as office machinery and aircraft. In 2013, the number of patents granted in Turkey amounted to 16.07 per million people, whereas in Poland, another, smaller emerging market this number was 63.17 per million people (World Intellectual Property Organization “Country Profiles”). The number of patents per million people in Turkey was 3.82 in 2009 while it was 119.5 in the EU27 in the same year (I. Hakan Yetkiner, M. Teoman Pamukcu, Erkan Erdil “Industrial Dynamics, Innovation Policy, and Economic Growth through Technological Advancements”, 2013). It is repeatedly argued that the current low level of innovation in Turkish SMEs is concomitant with the low level of technological development. According to the Global Innovation Index 2014, Turkey was ranked 54th in the world for innovation, just below Panama and South Africa and just ahead of Romania and Mongolia.

Of the world’s 20 largest economies in 2014, only Brazil, Mexico, India and Indonesia are less innovative than Turkey.

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Source: Global Innovation Index (2014). The blue column represents the rank of the country or economy’s GDP, rather than the amount of GDP, out of the top 97 countries/ economies surveyed by the Global Innovation Index. The higher the column, the closer the economy is to being the highest ranking in terms of GDP. Similarly, the orange column corresponds to the rank of the country’s innovation score relative to the others, rather than the numerical value of the score itself.

2. A common path for SMEs to enter the international scene is by partnering with a large company, thus allowing them to focus their resources on developing a niche and letting the larger company deal with international marketing. Recent examples of this have been the SMEs Unidesk, which partnered with Dell (ForbesHow Small Companies Can Get Big, Fast”, 4 October, 2014) and Profitero, which partnered with IBM (The GuardianHow small businesses can partner with bigger firms”, 13 December, 2013), both cases leading to growth and success for the smaller companies. In Turkey, the European Commission’s Enterprise Europe Network helped the Turkish SME Teknose partner with a Greek company to both companies’ benefit (Enterprise Europe Network “Success Stories: Testing the waters for irrigation innovation”, 18 January, 2012). For the same reason, namely, not having a larger company’s support which allows smaller companies to innovate, the World Bank’s 2014 report on the World Bank Group – Turkey Partnerships states that access to finance is still one of the three main obstacles for SMEs seeking to grow, adding that many of these companies need to increase their governance standards (World Bank “World Bank Group – Turkey Partnership: Country Program Snapshot” October, 2014). This has been remedied somewhat according to the OECD’s 2014 SME Scoreboard, with an increase of 156% in the amount of loans given to SMEs from 2007 to 2012.

In 2014, the World Bank approved a $250 million loan for SMEs in Turkey to encourage innovative access to finance, in particular Islamic financing and the method of financing known as factoring (World Bank “World Bank Supports New Innovative Financing to Reach SMEs and Exporters in Turkey”). This demonstrates a substantial commitment from one of the big names in international finance to helping to supply Turkish SMEs with much needed financing, and therefore a sense that this is needed. Like the World Bank, the European Investment Bank partnered with Garanti Bank last year to provide a fund to support SMEs in Turkey (EIB “EIB partners with Garanti Bank for SMEs in Turkey”, 9 December, 2014). While these are positive developments in helping companies access finance, it is crucial that SMEs use new access to finance to move beyond surviving on loans from international organizations and instead secure partnerships with competitive enterprises to power their growth.

One way in which SMEs can improve their access to capital is by engaging more actively and innovatively in Investor Relations (IR) activities. As our 2014 survey of IR practices in Turkey identified, IR in Turkey is generally under-supported, though there are a few smaller companies which are starting to take more active steps in this area and are reaping the benefits, putting some of their larger peers to shame. With good IR, SMEs stand a better chance at securing partnerships and investment from international businesses looking to fund innovation. With backing from a larger company, Turkish SMEs can ride the wave of globalization rather than be swept away in its undertow.

It is without question that Turkey receives considerable attention internationally, but many investors remain unaware of how to approach smaller companies in the country. Turkey has suffered from a serious perception problem of late, which has left many investors hesitant to engage. The companies that engage with IR and combat these perception issues by presenting a professional, informative face to the world will be the ones that will succeed. If SMEs can present international investors with a platform they can engage in, they will distinguish themselves from their competition and may well find a market curious and eager to connect with them. Borsa Istanbul is seeking to expand its international presence and make Istanbul a regional hub for finance, at the same time encouraging SMEs to list. This sort of step could make it easier for SMEs to attract much needed investment.

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