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Political economy of industrial policy in Turkey: The case of the automotive industry

Working paper 90

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Erol Taymaz and Kamil Yilmaz

In this paper, we analyse the industrial and trade policies in Turkey in relation to their impact on the automotive industry. Established during the import substituting industrialisation era of the 1960s and 1970s, the Turkish automotive industry had seized the opportunities opened up with the customs union agreement between Turkey and the EU that went into effect in 1996. As such, it provides a good example of how an industry with an initially protected home market can be transformed into a competitive and increasingly export-oriented industry through foreign direct investment (FDI) inflows.

In one of the important conclusions of our study, we emphasise the lack of a well-designed, long-term industrial development perspective in place, leading to the current state of the Turkish automotive industry. Rather, the automotive firms that performed well in recent decades did so thanks to their organisational capabilities and experience in international competition. Our analysis of export patterns shows that Turkey’s place in the international division of labour has been determined by the decisions of multinational firms. Motor vehicle manufacturers in Turkey were able to readjust their positions vis-à-vis European value chains by skillfully managing the benefits of geography (proximity to European markets) and the country’s metalworking capability. However, existing tax policies that rely heavily on indirect taxes have created significant obstacles for automotive firms, which in principle can move their production and R&D activities in Turkey towards high quality/high value-added segments of the industry.