I am starting to believe that the flaws of the industrial incentive system are not what push an electronics giant to do construction in Istanbul.

Here is the issue that has occupied my thinking lately: how was South Korea’s electronics giant Samsung able to become a global giant while a peer in Turkey prefers to engage in the construction business in Istanbul? Why did the one in Turkey switch from being an industrialist to a contractor, while its Korean peer did the exact opposite? I still cannot forget a meeting with Turkish companies from a couple of years ago. When making investment plans, Turkey’s industrial giants aimed at growing nationally in the service sector. I am starting to believe that the flaws of the industrial incentive system are not what push an electronic giant to do construction in Istanbul. The design of the system, I think, suffers from a series of more fundamental shortfalls. And I believe that these cannot be addressed without a new constitution.

Turkey used to be one of the important actors in Europe’s television industry, meeting 25 percent of its total demand for televisions. Those were cathode ray tube televisions, by the way. Later, the production technology changed in the sector with diversified models including panel televisions. Back then, when tube-televisions were still widely used, Turkey was under the protection of the 1996 Customs Union agreement. Taxes on televisions imported from the Far East reached as high as 30 percent while Turkey enjoyed zero tax rates. For a decade, Turkey’s electronics sector and electronics companies grew rapidly under the protection of the European Union. Later, however, the entire world joined the competition. We suddenly realized that Turkey was failing to follow the state-of-art technologies: not a single step was taken to catch up with the new technologies in the television industry. Turkey was not able to produce panel televisions. It was the year 2005 or 2006. Turkey had large electronics companies, but they were not able to turn into global giants. They therefore chose the construction sector.

Koç and Sabancı, two of the largest holding companies in Turkey, also shared the same fate. Samsung and Hyundai of Korea were like the Koç Holding and Sabancı Holding of Turkey: they started in the construction sector and still own construction companies. But with the Korean economy, they created global giants. But Turkey couldn’t. Why? How did South Korea’s holdings that set the path in the construction sector electronics giants grow into global giants while Turkey’s industrial giants switched to the construction sector?

Was this their fault? Why did Turkish companies choose to transfer their accumulations protected by the Customs Union to the construction sector? I believe the problem is not about Turkish companies per se or the inefficiency of the incentive system. Turkey’s problem relates mainly to the investment ecosystem. If you ask me, there are three reasons why Turkey’s industrial giants were not able to grow larger. The first one is about the modus operandi of the justice system, the design of which deems that the investor is a thief and the state is fair. Trials are like endless stories going on for ages. This is wrong and the system must be changed from top to bottom. The mentality behind this system must be reviewed from scratch. With this justice system, Turkey cannot make innovation. And without innovation, it cannot have global giants. So, have there been any non-political attempts to transform the justice system in the last decade? No.

Second, R&D laboratories require a qualified labor force. Turkey’s education system is insufficient to train one. Turkey’s labor force does not speak English. They are not qualified to take part in teams that study cutting-edge technologies. If there is a limited number of experts connected with the world, you cannot have global giants. The sharpest students in Turkey prefer studying practical professional fields over studying basic sciences. Under these conditions, Turkey can neither train people for R&D laboratories nor make any break throughs.

Third, if a country cannot tax urban rents, it cannot encourage investment into skills or financial savings, either. Please tell me which one is better: to facilitate high-quality education at a private school for your daughter or get a share of land in a forgotten - as yet – location in Istanbul? Which would secure a prosperous life for your daughter and future generations of your family? Tell me, can such a country make an industrial leap? No, it cannot. To make a long story short, Turkey cannot raise its per-capita income from $10,000 to $25,000 unless it initiates a tax reform. So, were there any non-political attempts made to transform the tax system in the last decade? Again, the answer would be no.

Turkey does not suffer from a distinct defect. The issue is that a country cannot create global giants if the people’s imagination is limited to the build-and-sell strategy. Turkey cannot have a world giant without a new constitution.

This commentary was published in Radikal daily on 21.09.2012