The considerable increase of foreign investors into the market, particularly in the form of joint ventures (JVs) has played a significant role in the reform and liberalisation of the laws governing foreign investment as part of Turkey's economic programme adopted after 2001. These reforms have been significant in Turkey's pursuit of EU accession. Today Turkey boasts the seventeenth largest economy in the world, attributable to its commitment to sustain a strong economic framework to foster an environment enabling businesses to prosper. Alongside other factors, its outward-oriented economic development strategy has spurred Turkey to adopt incentives that have certainly contributed to the increase in investment. The incentives have also expedited the process in which foreign investors are able to establish JVs in Turkey.

Why joint ventures?

Aside from its ability to maintain a stable intra/extra-economic market, Turkey is the thirteenth most attractive country for foreign direct investors, probably due to its demographic dynamism. Its attractions are, to name a few: a populace of more than 70 million, of whom 65% are below the age of 3; a large potential workforce; a sophisticated infrastructure (legal support, financial and consultancy services); an ever-increasing number of professionals with purchasing power; the high level of Turkish work ethics; and a large local market within Turkey itself.

Another attraction bringing foreign investors to Turkey is its strategic position. Turkey lies on the borders between Europe and Asia and is used as a gateway for those wishing to achieve strategic goals by entering into the Asian or European market. This will be of particular importance for firms that want to access new markets in EU member states – Turkey has signed the European Customs Union (ECU), which has been effective since December 31 1995. The ECU involves preferential trading agreements between EU member countries where goods and services imported are exempt from any duties, and a common export tariff. A by-product of such membership has meant Turkey has had to harmonise its intellectual and industry property rights and adopt standardisation, quality and accreditation controls. This has had an incremental impact on the overall trade environment and international standards a foreign investor can expect when operating in Turkey.

To exemplify: one of the main concerns in a foreign investor's venture with domestic companies is that of transparency. Being able to obtain accurate data on which to base valuations and other decisions may be of concern to the investor, as the accounting standards of the domestic partner may differ from international standards. Turkey has alleviated this problem by setting up the Turkish Accounting Standards Board, with its own legal status and administrative and financial autonomy, in Law 4487, which regulates accounting and financial reporting. The Turkish Accounting Standards Board decided to adopt and fully comply with the International Financial Reporting Standards (IFRS) to allow integration of international accounting practices, and to be in harmony with EU legislations and standards.

The Turkish Accounting Standards Board requires that all enterprises established under the Turkish Commercial Code must prepare statutory financial statements in compliance with the Turkish Accounting Standards Board. The implication of this for foreign investors is that the valuations of local enterprises will be valued according to international standards. This makes accounting data transparent and more reliable for all parties involved. Further efforts to modernise the legal infrastructure of Turkish law are illustrated in the proposal to modernise the Turkish Commercial Code, in the pipeline and envisaged to be effective some time this year. The main reasoning behind the revision of the Commercial Code was to modernise it and bring it in line with the EU harmonisation attempts.

Turkey has an impressive track record, with foreign companies establishing many successful JVs. This illustrates why Turkey is an increasingly popular contender for foreign firms as an attractive place to invest. A few examples of successful JVs, in the form of the partnerships and consortia that have taken place to date, are given below.

ToyotoSA

Date: October 2000

Background: Toyota, a Japanese company, one of the world's largest automobile manufacturer's, made a strategic JV with Sabanc¦ Holding, a Turkish firm, to form ToyotaSA. ToyotaSA is the distributor of Toyota-branded automotive products in Turkey and conducts its marketing, sales, and after service of locally-produced Corolla products.

Objectives: The JV was established as part of Toyota's objectives for expansion and increasing sales volume in Europe. Toyota's goal was to hold 15% of the global automobile market and to be in the world's top three automobile producers.

Outcome:

• The establishment of ToyotaSA gave Toyota entry into the European market and the Turkish automotive factory has been the leading supplier of Corolla Verso's into Europe. New markets include Germany, Italy, France and the UK.
• The Corolla plant in Turkey is one of the world's best state-of-the-art automotive plants and runs at 100% capacity.
• The branch employs more than 500,000 people.
• The Turkish factory alone has produced more than €2.2 billion ($3.5 billion) worth of automobiles.
• The venture enabled an 8% holding of the automobile market share and recently announced its eleventh consecutive year of sales in Europe, with the Toyota Carolla Sedan, produced in Turkey, being the third best-seller in Europe.

Borusan Mannessman Boru

Date: 2004

Background: A JV was established between Borusan, a Turkish steel company and Mannessman Boru, a German company, namely Borusan Mannessman Boru, which welds steel pipes and profiles as well as plastic pipes.

Outcome: Annual manufacturing capacity rose to 70,000 tons upon realisation of the merger.

It achieved $520 million in 2006 and now stands as one of the top five steel pipe producers in Europe.

Koç-Shell: Tüpras

Date: January 2006

Background: Koç, one of Turkey's largest holding companies, and Shell, a worldwide group of oil, gas and petrochemical companies, established a consortium and won the tender for the privatisation of a 51% stake in Tupras (Turkiye Petrol Rafinerileri), an oil refinery company and Turkey's largest industrial enterprise, for $4.14 billion. Operations are undertaken under the joint stock company name Enerji Yatirimlari AS.

Objectives: To strengthen its position in the oil refinery market.

Outcome: The JV has now gained coverage throughout Turkey including areas far from the location of the Tüpras refineries, and currently controls all of Turkey's refining capacity.

Samsonite & Desa

Date: October 2007

Background: Samsonite Group, the world leader in travel bags, luggage and accessories, and Desa, the leading manufacturer in the production, distribution and retail of luxury leather goods and travel goods in Turkey. Samsonite acquired a majority stake in the strategic partnership.

Objectives: Samsonite wanted to expand into eastern Europe and strengthen its market presence in Turkey, Georgia, Azerbaijan, Armenia and Syria.

Legal aspects

Although there is no specific legal definition of a JV under Turkish commercial law, the general understanding that can be derived from common commercial practice under the scope of Company Law and Obligation Law is that a JV is the engagement of two or more individuals or legal entities pooling together their resources for the purpose of executing a particular commercial undertaking.

Under the Foreign Direct Investment Law, Law 4875 (new FDI Law), dated June 17 2003, the burden for foreign investors with foreign capital to acquire certain permits in order to establish or participate with a company established under Turkish Law has been removed. The procedures for establishing a JV by foreign investors are the same as for domestically-owned companies established under the Turkish Code of Obligations. The rationale behind the new FDI Law was to establish an equal and non-discriminatory avenue in advocating local and foreign relationships by removing the initial screening process, sharing transfer and minimising capital requirements.

JV vehicles

JVs are relatively easy to establish in Turkey thanks to the introduction of the new FDI Law in 2003. Once all the requisite documentations have been prepared and furnished to the relevant authorities, official establishment of the JV takes between about one and three days.

There are several ways in which JVs can be formed in Turkey. The structure in which the JV is to be established is significant to the operation of the venture and must therefore be chosen carefully. Under Turkish Law, a JV may be formed under two umbrellas: a commercial company (ticaret _irketi), governed by the Turkish Commercial Code, and an ordinary company (adi _irket), governed by the Turkish Code of Obligations.

Commercial companies

A commercial company is registered and recognised as having a legal identity separate from its shareholders. According to the Turkish Commercial Code, the commercial enterprise JV may be established under five titles – unlimited partnerships (general partnerships), limited partnerships (special partnerships), companies limited by shares (stock corporations), limited liability companies (corporations without shares) and cooperative companies (cooperative societies).

The most common types of commercial companies in Turkey established by foreign investors are joint stock companies (Anonim Sirket), limited liability companies (Ltd Sti), branch offices and liaison offices. Limited liability companies are more suitable and probably more attractive for companies that require a simple shareholding structure and management – between family members for example. A limited liability requires an initial capital of TL5,000 ($3,900) and two shareholders (with a limit of 50 shareholders); a joint stock requires an initial capital requirement of TL50,000 and five shareholders. This aside, a joint stock company is better for a JV than a limited liability company because it allows for a more complex structure and is more flexible for transfers of shares, due to its more flexible nature.

Ordinary companies

The other form of JV – an ordinary company governed by the Turkish Code of Obligations – is not recognised as having a legal identity. In most cases, a contract will bind the understanding between the parties, but when no contract or agreement is assigned, the venture will be governed solely by the provisions governing ordinary companies under the Turkish Code of Obligations or Commercial Code. The two types of ordinary company are ordinary partnerships and consortia. Normal ordinary partnerships and consortia are used as vehicles for foreigners that want to partner with Turkish entities or participate in a tender. They are ideal for achieving short-term specific objectives, for example, the construction of a bridge. These types of ordinary company may be established in two forms.

Normal ordinary partnership consortia

All parties to the company are jointly responsible for the success or failure of the project. The consortium is distinguished from the normal ordinary partnership because each party is liable for contributing to the project, conditional on the consent of the creditor.

However, the parties' separate liability applies exclusively to liabilities owed to the creditors. All other liabilities owed to any other parties are shared jointly.

Once the necessary procedure has been administered, the JV is officially established and the project or undertaking may commence. The next step will be to inform the General Directorate of Foreign Investment of the establishment of the JV (this is merely a formal procedure for records). However, when establishing a JV, it is imperative that the parties observe the Turkish Competition Law regulations.

Competition

JVs are wide in the spectrum of their cost-benefit ratio – the cost being their potential negative influence on the market they operate in and the benefit being their potential pro-competition effect. For this reason, JVs warrant assessment in terms of their competitive effect. Turkey's competition laws are parallel to EU Council Regulation on competition.

The Turkish Competition Law and Regulations have a monetary and capacity threshold for JVs, their purpose being to safeguard competition in the respective market. These laws and regulations state that permission from the Turkish Competition Board does not need to be sought as long as the combined contributions of the parties do not exceed TL25 million and the JV does not occupy 25% or more of the Turkish market it will enter into. However, if it does exceed these thresholds, then the JV must apply to the Competition Board, which may allow the JV to occur under a two-phase application, namely exemption and negative clearance.

An exemption sets out sector-specific criteria, which may enable the applicant JV to be established. If the applicant JV does not fall under exemption, then an application for negative clearance should be sought. However, the likelihood of reaching this stage is small and only becomes possible in exceptional cases. In the case of negative clearance, the merits or eligibility for qualification of the JV are highly case-specific and are generally based on the requirement that although the applicant JV is above the threshold, its presence will not affect the dynamics of the market in question. If the Competition Board authorises the JV, then the company may officially proceed with its intended undertakings.

Success

In principle, JVs seem destined for success. However, in practice there is no concrete rule that assumes all JVs to be successful. Aside from the financial and corporate strategic aims of the parties involved, the success of a JV is highly dependant on the relationship between the parties involved before and after the JV, not to mention their differing cultural and business ethics.

Considering this, the gap between international and Turkish practice codes is narrowing rapidly. Turkey has been able to set the pace for developing countries by adopting international standards in many respects. At the rate at which globalisation is occurring, it is vital that all countries position themselves to be more accessible and to welcome investments in order to receive the benefits that cross-border transactions may yield. This requires creating an environment that attracts business, and then striving to maintain a good business environment in which those businesses may operate successfully. Turkey has not only recognised this concept but has also taken the steps to realise it.

Turkey is continually undergoing legal and regulatory reforms and restructuring in an attempt to modernise how businesses can operate, as a response to the increasingly complex and dynamic activities of the business world. Naturally, along with the reforms and new legislation that have been adopted in compliance with international standards, Turkish business ethics and practices have also evolved to meet those standards. This will enable a common understanding between foreign and local partners, which will greatly ease the strain and remove the reservations foreign investors have in partnering with companies in developing countries. Turkey's favourable economic environment, business ethics and socio-economic qualities combined, have contributed to the vast growth in the investments the country has experienced in the past few years.