Country Economic Memorandum: Leveraging Global Value Chains for Growth in Turkey

Turkey saw phenomenal growth in the 2000s as economic reforms ushered in Foreign Direct Investment (FDI), GVCs expanded, and productivity increased. 

From 2001 to 2017, incomes per capita in Turkey doubled in real terms and tripled in current dollar terms. Turkey transformed from a lower-middle-income country (LMIC) at the start of the 2000s to very nearly reaching high-income status by 2014. 

Rising FDI, exports and GVC integration played a key role in this growth experience. OECD data shows that not only did exports grow over the period, but they were increasingly part of GVCs.

Key Findings: 

• Rising GVC participation has gone hand-inhand with increased value-added from exports. But Turkey’s participation remains relatively low, its products are of limited sophistication and innovation earnings are limited.
• GVC exporters in Turkey are highly productive, large employers, employing four times as many employees, who are each twice as productive compared to the average domestic firm. Domestic GVC supply chains have expanded, but GVC suppliers can do more to realize productivity gains.
• Turkey has high potential for exports and GVCs. Even though exports are sizeable, they are still 50 percent below potential, with higher technology products and GVCs being particularly promising.
• To facilitate GVC growth, Turkey needs to improve market access globally and deepen economic integration with major partners such the EU, especially by reducing barriers to trade in services.
• Lead firms, often the product of GVC-linked FDI, are key to increase GVC participation and productivity-enhancing firm relationships. But FDI is far below levels needed to scale up these effects.
• Entrenching economic and regulatory stability and a committed and consultative approach to business can raise FDI and other GVC-linked investments and scale up GVC upgrading effects.
• GVCs extend domestically, creating more jobs and raising the productivity of local firms. But market failures and a lack of capabilities constrain the ability of firms to join GVCs.
• Public action can help – providing market information, supporting firm capability development, workforce development, and improved frameworks for access to finance. But market-distorting measures like import barriers, domestic content requirements, and incentives are less effective as Turkey moves up the value chain and may even undermine growth.
• GVC growth has been associated with improving employment outcomes in more regions. But activity is still concentrated in major centers, and women are underrepresented, holding back potential.
• Several of Turkey’s GVCs have a large carbon footprint, presenting environmental and economic risks. 
• Improved economic infrastructure and workforce skills in lagging regions, addressing constraints to female employment, and supporting a green transition will further boost the social benefits of GVCs.

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