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Summary Turkey’s enterprise sector performance was still worsening by Jan/Feb 2010

but at a slower pace. Sales and employment decline were slowing down and the utilization of installed capacity remained almost unchanged compared to the previous six months.

Firms financial condition, however, have yet to improve. Concentration of short-

term debt maturity in the manufacturing sector expanded from 67 to 74 percent between June/July 09 and Jan/Feb 10; the proportion of firms with overdue payments also increased.

Access to credit remained relatively stable despite the crisis. Turkish firms

received, on average, 92 percent of the full amounts they had applied for, and SMEs seem to have better access to credit than in most euro zone countries . Yet Turkish firms allocated a larger share of internal surpluses to finance working capital.

Businesses were keeping up their R&D spending. Overall, 87 percent of Turkish

companies that invested in research and development before the crisis maintained or expanded it through 2009.

Further monitoring will help understand how liquidity constraints will evolve and

thereby affect the corporate sector’s investments and growth prospects. Less than 20 percent of firms expected sales and employment levels to decline in the near future.

1. Introduction

1. The global financial crisis has dramatically changed the conditions under which enterprises operate. The deleveraging of financial institutions increased capital costs and reduced credit availability; exchange rate adjustments raised the prices of imported inputs and made exports more competitive. The contraction in global trade reduced foreign demand for goods and services, and as a secondary effect, domestic demand.

2. The World Bank’s Financial Crisis Survey (FCS) was developed to monitor the effects of the global financial crisis on the corporate sector and to track firms’ behavior in this

period. Two rounds of data have been collected in mid 2009 (June/July) and early 2010 (January/February) in six countries: Bulgaria, Hungary, Latvia, Lithuania, Romania, and Turkey. Kazakhstan was added in the second round.i

3. This note describes the main results of these two surveys of over 1,100 Turkish firms. It also uses the results of the 2008 Enterprise Surveys (ES) to measure the pre-crisis scenario. Three groups of variables related to enterprise performance were examined -- (i) sales and employment; (ii) enterprise financing; and (iii) innovation and R&D. The results described in this note will be updated with the data to be generated by a follow up survey in June 2010.

The Global Economic Crisis and the Corporate

Sector in Turkey

Evidence from Firm-Level Surveys

World Bank

Europe and

Central Asia

Region

Private and

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Development

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June 2010

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The Global Economic Crisis and the Corporate Sector in Turkey -- Discussion Draft

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2. Sales and Employmentii

The sales decline has decelerated by early 2010.

4. By January 2010, firms in the manufacturing and service sectors were still reporting negative sales, on average. Their average change in sales amounted to a reduction of 11 percent.iii The manufacturing sector alone – which had lost 20 percent between June 2009 and June 2008 – showed a 7 percent sales decrease for the twelve months up to January 2010, according to comparative data extracted from the 2010 survey.iv Overall, among the surveyed countries, Turkey seems to have been one of the least affected (see Figure 1).

Figure 1 -Net Change in Sales, by Country

Data for Turkey in 2009 is only to manufacturing sector

The drop in permanent employment has also seemed to slow down, at least in the manufacturing sector.

5. The mid-2009 survey found that Turkish manufacturing firms experienced a considerable drop in fulltime workers (defined as the total number of paid employees contracted for a term of one or more fiscal years, with guaranteed contract renewal, and eight or more working hours per day). The average difference in the number of permanent employees since 2007 amounted to minus 10 (see Figure 2). In the same period, the temporary employee cohort (defined as the total number of paid, short-term employees, with no contract renewal guarantee, and eight or more working hours per day) rose by almost the same number, suggesting a high

conversion of permanent to temporary employment.

6. By 2010, full-time employment in manufacturing was still below the 2007 level, but not to the extent noted in 2009 survey: the average difference in full-time employees between January/February 2010 and the pre-crisis level amounted to less 5 employees. At the same time, the increase in temporary employment slowed down, reinforcing the indication of deceleration in the decline of permanent employment.

Figure 2 - Changes in Manufacturing Employment Since 2007

7. When comparing the average difference in the number of permanent manufacturing employees since 2007 within countries, Turkey is the only country where the employment decline has decelerated. (see Figure 3).

Figure 3- Changes in Manufacturing Employment Since 2007, by Country

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Meanwhile, the decrease in capacity utilization remains unchanged.

8. Defined in the survey as the “output in comparison with the maximum output possible using all resources available,” the capacity utilization of Turkish manufacturing firms in January 2010 was 15 percentage points lower than in FY2007 – the same level as of mid-2009 (Figure 4).

Figure 4 - Changes in Capacity Utilization (in Manufacturing) Since 2007, by Country

The fact that the use of installed capacity in Turkey remained almost constant between June/July 09 and Jan/Feb 10 is a positive result. In the other countries covered in the survey – with the exception of Hungary and Bulgaria – the use of installed capacity continued to decrease. Romania showed the deepest reduction: in January 2010 it was 23 percentage points lower than in FY2007, much deeper than in June 2009 when the use of capacity was only 2 percentage points lower.

Fewer Turkish firms went out of business than in neighboring countries.

9. When computing the exit rate as the sum of the percentage of manufacturing and service firms that closed down between the Enterprise Survey (ES) 2008 and the 2010 FCS with the percentage of firms that indicated that they had filed for insolvency or bankruptcy during the interview for the 2010 survey, Turkey’s exit rate is the lowest in the region. By

contrast; Lithuania was hit hardest in the region (see Figure 5).v

Figure 5 – Company Exit Rates 2008-2010, by Country

Some firms grew during the crisis.

10. Almost 28 percent of all (manufacturing and service) firms declared increases in sales in the twelve months to January 2010. Among them, about 55 percent were operating in sectors such as food, textiles, chemicals and other manufacturing. These firms were predominantly domestic oriented, even though they belong to sectors that are among the top exporters in Turkey.vi The motor-vehicle service and IT sectors also bounced back, as 86.1 and 48.1 percent of their firms, respectively, reported sales increases in the same period.

11. The above results seem to reinforce the findings of the 2009 survey (covering only manufacturing), showing that nearly 66 percent of firms that reported sales increases between June 2008 and June 2009 were predominantly domestic-oriented and operating in the food, textiles, or chemical sectors.

12. While it is still too early to identify these results as the configuration of a new pattern, the fact that those firms that reported sales increase are domestic oriented, even though they belong to traditionally export oriented sectors, suggest that the domestic market might have played a key role in the mitigation of the adverse effects of the global economic crisis in Turkey. To some extent, this seems to mirror Brazil and China

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where domestic markets were extremely relevant during the crisis.

Turkish businessmen expected sales and employment to improve.

13. In January 2010, the proportion of manufacturing and service firms that were optimistic or neutral about future sales (for a year from the date of the survey) was larger than the proportion of firms that were pessimistic (Figure 6). Expectations about future sales vary according to market-orientation and firm size.

14. A smaller portion of exporting firms (24 percent) compared to non-exporters (29 percent) expected sales to decrease, a difference that is statistically significant.vii A larger proportion of medium and large firms (69 percent and 68 percent, respectively) expected sales to increase a year from the date of survey, compared to 46 percent of small enterprises. viii

Expectations about (full time) employment levels for the six months following the 2010 survey were negative for only 12 percent of manufacturing and service firms (Figure 6). However, the proportion of firms that planned to reduce their full time workforce was significantly higher among medium firms (15 percent) when compared to small (12 percent) and large companies (5 percent).

3. Effects on Enterprise Financing

Short-term debt increased while foreign-denominated debt decreased.

15. The concentration of short-term debt (with a maturity of less than one year) rose substantially in the six months to January 2010. The corporate sector increased the average proportion of its short-term debt in manufacturing from 67 to 77 percent (75 percent including the service sector).

Figure 7 - Turkish Corporate Debt Profile (in Manufacturing Sector)

16. On the positive side, Turkish firms reduced their foreign-denominated debt exposure, thereby also sinking the potential mismatch between firms’ foreign-denominated debt and local-currency denominated assets. In manufacturing, for instance, the average share of corporate sector debt in foreign currency fell from 21 to 16 percent (see Figure 7).

More than half the working capital of Turkish firms is financed by internal funds.

17. The January 2010 survey found that Turkish firms in manufacturing and services financed, on average, 58 percent of their working capital from internal funds or retained earnings. This proportion is significantly higher for large firms when compared to other firm sizes (see Figure 8). As data are not available for 2008, it is not possible to say whether this figure changed during the crisis. The use of internal

Figure 6 - Firms' Expectations on Sales and Employment in Turkey

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funding to finance working capital might compromise the capacity of the firm to finance investments necessary for its expansion.

Figure 8 -Firm Working Capital Financed by Internal Funds, January 2010

18. Indeed, when compared to other surveyed countries, Turkish firms in the manufacturing and service sectors used internal funds more than their counterparts in Lithuania (56 percent) and Hungary (29 percent), the countries which were hardest hit by the crisis in the region.

Payment delays increased between the two surveys.

19. The percentage of manufacturing firms reporting delays in payments to authorities or suppliers for more than one week increased from 34 to 46 percent. Moreover, the proportion of firms overdue on obligations to any financial institution increased in the twelve months prior to the 2010 survey (Figure 9).

Small firms appeared to be under greater strain than large firms. The proportion of small overdue manufacturing firms increased from 14 to 18 percent from June 2009 to January 2010, while the proportion of large overdue manufacturing firms was only 6 percent in January/February 2010.

Yet the proportion of firms seeking to restructure their debt declined.

20. Firms under serious financial distress often seek to restructure their liabilities to avoid defaulting. By mid 2009, 17 percent of manufacturing firms had restructured their liabilities in the last 12 months; the proportion of large firms restructuring their liabilities was significantly higher (24 percent) than the one of small firms (only 13 percent). This situation appeared to be reversing in Turkey by January 2010.

21. Indeed, despite the rise in overdue obligations, the proportion of manufacturing firms that restructured liabilities decreased in the period between the two surveys.ix By January 2010, 13 percent of Turkish manufacturing firms restructured their liabilities. Across firm sizes, the proportion has also diminished when compared to the first survey round to 8 percent of small firms and 5 percent of large companies.

Figure 9 – Evolution of Financial Distress in the Turkish Manufacturing Sector

22. The 2010 survey also inquired about the nature of debt restructuring that firms experienced. Of the enterprises that restructured their liabilities in the twelve months to January 2010, 67 percent of manufacturers and 54 percent of service companies chose to extend debt maturity without necessarily engaging in asset rehabilitation or ownership restructuring.

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23. Filing for bankruptcy decreased over time. In the mid 2009 survey, almost 2 percent of manufacturing firms in Turkey were insolvent or filed for bankruptcy. By January 2010, this proportion fell to 1 percent. This declining trend is spread evenly across medium and large firms. The small firms, however, have increased the use of this last resource measure, from 0.5 percent in 2009 to 1 percent in 2010.

Meanwhile, the number of applications for state aid has also declined.x

24. The proportion of manufacturing firms that applied for state aid dropped from 26 to 14 percent, from June 2009 to January 2010 (see Figure 9). This reduction extended across all firm sizes, but was particularly steep for medium sized enterprises: The proportion of small and large firms applying for state aid dropped from 17 to almost 11 percent and from 22 to 10 percent, respectively, while the tendency among medium-sized firms in manufacturing fell from 42 to almost 19 percent between June 2009 and January 2010.

25. Overall, state aid seemed broadly accessible. Approximately 75 percent of manufacturing applicants were beneficiaries by January 2010. The most frequent form of state aid was state credit, corresponding to 38 percent of the total in the period.

Credit was relatively accessible to Turkish firms during the crisis.

26. The 2010 survey round measured both the percentage of firms applying for loans or lines of credit as well as the percentage of loan requests approved during the twelve months up to January 2010. Data indicate that nearly 56 percent of manufacturing and service firms had applied for loans and lines of credit – 68 percent of large, 61 percent of medium, and 52 percent of small firms. Companies received on average over 90 percent of their loan requests (see Figure 10), and 85 percent of them received the full amount applied for. In fact, data show that

the total credit to the corporate sector in Turkey has increased from 2007 to 2009.

Figure 10 – Percentage of Loans Obtained vsRequested Amount in Turkey, by Firm Size

27. Focusing specially on small and medium enterprises, the data show that the majority of them (83 and 86 percent, respectively) received the full amounts of the bank loans or lines of credit they requested. However, there is some heterogeneity across sectors. Small service firms were as successful in applying for credit as their counterparts in manufacturing, while medium manufacturing firms tended to be less favored by lending institutions.

28. Access to finance can also be measured by the rejection rate of bank loans or lines of credit – indicated in the January 2010 survey by the proportion of firms that received zero percent from the originally requested loan/line of credit. The data show that, across the manufacturing and service sectors, medium-sized Turkish firms had the largest loan rejection rate. However, this rate was still lower than in most surveyed countries in the region (see Figure 11).

29. Overall, Turkish SMEs seem better off in terms of credit access than many of their counterparts in the euro zone. Data from the European Central Bank (Survey on Access to Finance of Small and Medium Sized Enterprises in the Euro Area: second half of 2009) show that 60 percent of SMEs in manufacturing received the full amount they requested, while in the service sector (excluding construction) only 57

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percent of small- and medium-sized firms had their applications granted in full.

Firm finances are expected to improve but current liabilities will remain a problem.

30. In order to assess firm’s expectations about their future finances, the survey asked whether firms anticipated that they would fall in arrears in any of their outstanding liabilities over the following six months. The companies that expected to fall in arrears were also asked if they anticipated to not be able to repay their outstanding due liabilities in the following six months.

31. Manufacturing and service firms in Turkey seem to anticipate that their finances would stop deteriorating, as only 16 percent of them expected to fall in arrears. However, among this subset of firms, 55 percent expected that they would not be able to repay their outstanding liabilities.

32. Small firms were more likely to expect not to be able to repay their debts in the next six months: 59 percent compared to 49 percent of medium firms, and 30 percent of large firms. Export-oriented firms were also comparatively more likely to expect being unable to repay their debts, 66 percent versus 51 percent for non-exporters.

4. Innovation and Research and Development

The crisis has also affected innovative firms in Turkey, albeit less than in other countries

33. Evidence from the 2010 survey suggests that innovative firms – as measured by the introduction of new products or services in the 2005-07 period (data obtained from the 2008 ES) – faced a drop in sales of 4 percent in the twelve months up to January 2010. In other surveyed countries, innovative companies have suffered more. For instance, in Latvia, Lithuania and Bulgaria, they witnessed a sales decline of 15, 16 and 12 percent respectively (Figure 12).

34. At first sight, there is no evidence that the performance of innovative firms in Turkey differs significantly from the performance of non-innovative firms in this specific period (January 2009 to January 2010).xi

Figure 12 - Net Change in Sales of Innovative Firms, Jan 2009 - Jan 2010

Most of the innovative firms managed to keep or expand their R&D investments in Turkey.

35. Innovation and R&D are expected to be important sources of growth in GDP and exports in the post-crisis period. The 2010 survey asked firms if their R&D spending had increased, decreased or remained constant in 2009. Linking the 2010 survey data to those of the 2008 ES, it is possible to identify the firms that used to perform R&D before the crisis. Based on this linkage, the 2010 data show that most Turkish

Figure 11 – Rejection Rates for Credit Applicants, by Country

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companies (87 percent) that had been spending on R&D before the crisis managed to maintain or expand it through 2009. The trend is spread relatively evenly across all firm sizes (see Figure 13).

36. This result seems consistent with the findings of other surveys. According to a Booz-Allen survey of the 1,000 public corporations worldwide that spent the most on researching and developing products and services, approximately 2/3 kept or increased their R&D spending. R&D spending for the top 20 companies was up 3.2 percent for 2008, less than half the 10.7 percent increase of the previous year.

Figure 13 - R&D Spending in 2009 Among Pre-Crisis R&D Performing Firms in Turkey, by Firm Size

Innovation efforts of exporting and non-exporting firms were equivalent.

37. International experience shows a positive correlation between R&D investments and exporting, as investments in R&D, or new technology, raise productivity, and increase export payoffs.xii For incumbent exporters, investments in R&D might increase their future sales to foreign markets; for firms that are currently non-exporters, investments in R&D can increase their probability of engaging in export activities in the future.

38. In Turkey, data show that, among those firms with R&D activities before the crisis, both exporters and non-exporters had maintained or

expanded their R&D activities by early January. Among firms that were performing R&D before the crisis, 92 percent of the export-oriented firms and 83 percent of non-exporters increased or kept R&D spending constant in 2009. Overall, these numbers suggest that Turkey’s innovators are better prepared to address foreign markets in the near future and to explore potential growth opportunities when the economy will have fully recovered. However, innovation efforts were drastically different across firm ownership.

39. Among firms that used to perform R&D before the crisis, data also show that innovation efforts of locally owned firms were less affected than those of foreign enterprises. While only 13 percent of locally owned pre-crisis R&D performers decreased R&D spending in 2009, 84 percent of foreign owned pre-crisis R&D performers reduced their R&D activities (see Figure 14). xiii

Figure 14 - R&D Spending in 2009 by Pre-Crisis-R&D Performing Firms in Turkey, by Firm Ownership

R&D decline seems linked to firm liquidity.

40. International experience shows that a firm’s decision to invest in innovative activities is sensitive to financial frictions which can prevent them from developing better technologies.xiv The data from the 2010 survey is consistent with this perception and suggest that declining R&D may be linked to firm liquidity. The average share of short-term liabilities is significantly higher within pre-crisis-R&D performers that reduced their

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R&D spending in 2009 (see Figure 15). This result also holds when taking into account firm characteristics such as size, export orientation, age, and sector.xv

Figure 15 - Short-Term Liabilities and R&D Spending in 2009 by Pre-Crisis-R&D Performing Firms

Most firms believed they would keep their R&D activities at the same or a higher level.

41. Firms’ expectations about future R&D were also measured by the 2010 FCS. Firms were asked if they expected their R&D spending to increase, decrease or remain the same in the following six months.

42. The proportion of firms that used to perform R&D before the crisis and that were optimistic or neutral about their future level of R&D spending were larger than the share of firms that were pessimistic: 62 percent of the pre-crisis R&D performing firms expected to increase R&D, 31 percent expected to keep the same R&D spending level, and only 8 percent planed to reduce their R&D spending.

5. Conclusions

43. Turkey’s enterprise sector performance was still worsening by Jan/Feb 2010 but at a slower pace. The 2010 survey indicates a smaller sales decline and a deceleration in the drop of permanent employment in the manufacturing sector when compared to the 2009 survey. The utilization of installed capacity remained constant in the same period. Firms were

predominantly optimistic about the evolution of sales and employment in the upcoming months.

44. Data from the 2010 survey showed that a considerable proportion of firms grew during the crisis, especially in sectors such as food and textiles. It is worth noting that these firms were predominantly domestic oriented, even though they belong to sectors that are among the top exporters in Turkey. This suggests that the domestic market might have played a key role in the mitigation of the adverse effects of the global economic crisis in Turkey.

45. Enterprise finances in Turkey still have to reflect these recent improvements. The concentration of short term debt rose and the number of firms accumulating arrears increased. Over half of their working capital was financed from internal funds or retained earnings, which can be considered high even for countries hardly hit by the crisis. When combined, these two factors can divert available resources for investments, thereby hindering firms from exploiting growth opportunities.

46. Despite the substantial deleveraging of global financial markets, credit remained relatively accessible to companies that applied for it in Turkey. Most firms believed their finances would improve in the near future. On a somewhat cautionary note, most of the firms currently accumulating arrears did not expect to be able to repay their current liabilities in the near future.

47. The 2010 survey also showed that most companies in Turkey managed to keep or expand their R&D expenditures - regardless of size or export orientation. This is an important result as R&D and innovation tend to play a more important role in the expansion of GDP and export in post-crisis periods.

48. Foreign owned companies, however, were predominantly reducing their R&D spending in Turkey. Data also suggested that firms under financial distress were more likely to

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cut their R&D expenditures. If foreign owned companies continue to cut back their R&D expenditures and if the financial distress of local enterprises persists (which could lead them to reduce their R&D spending), the reduction in business innovation might have a negative impact on Turkey’s growth prospects.

49. Future survey rounds will continue to monitor the impact of the crisis on firm performance (sales and employment), enterprise financing, as well as R&D and innovation. With the newly-announced Greek bailout and mounting fear of contagion, this monitoring will be particularly timely. The next survey is scheduled in June 2010 and will capture the effects of these new events.

References

Aw, Bee Y., Roberts, M. J. and Xu, D. (2008), “R&D Investments, Exporting and the Evolution of Firm Productivity,” American Economic Review, Papers and Proceedings, 98:2, pp. 451-456.

Bijsterbosch, M. and Kolasa, M. (2009), “FDI and Productivity Convergence in Central and Eastern Europe: An Industry-Level Investigation” European Central Bank Working Paper 992

Hall, B. H. and Lerner, J. (2009), “The financing of R&D and innovation” NBER Working Paper 15325.

Klette, T. J. and Kortum, S. (2004) “Innovative Firms and Aggregate Innovation: Journal of Political Economy, 112 (5), pp 986-1018

Sabirianova, P., K., Svejnar, J. and Terrel, K (2005), “Distance to the Efficiency Frontier and Foreign Direct Investment Spillovers”, Journal of the European Economic Association, 3(2-3), pp 576-586

Annex 1 – The Financial Crisis Survey: Sampling Methodology

1. The Financial Crisis Survey (FCS) was conducted in two rounds, June/July 2009 and January/February 2010, in Turkey, Romania, Hungary, Latvia, Lithuania, and Bulgaria (with the inclusion of Kazakhstan in the second round). Its objective was to assess the effects of the global financial crisis on key elements of each country’s corporate sector, such as sales, employment, and finances.

2. Participation in the survey was voluntary. Each round targeted a subsample of the firms interviewed in the 2008 Enterprise Survey (ES), which had gathered data on firm characteristics, performance, and business environment, most of them refereed to pre-crisis FY2007. The FCS rounds in Turkey contacted the entire original Turkish sample of the 2008 ES (1,152 firms) to determine whether they still existed, had failed, and/or became inactive. The data also took account of non-responsive firms, and enabled an adjustment of the 2008 ES’s sampling weights to provide statistically representative results for Turkey’s nonagricultural private sector in both rounds. The 2009 round covered 514 manufacturing firms; the 2010 round covered 606 firms from both the manufacturing and service sectors (see Table 1).

Table 1 – Sample Description for Turkey in the 2010 FCS

Sample composition by size (number of employees)

Sample composition by industry

Small: <20 32% Industry 80%

Medium:20-99 38% Retail 10%

Large:>=100 29% Other Services 11%

3. The 2008 ES and FCS surveys enabled three different measures of exit rate: first, the percentage of firms that went out of business between 2008 and 2010; second, the addition of firms that stated they had filed for bankruptcy or

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insolvency; and third, the further addition of firms that could not be located. The first and third measures may be seen as the lowest and highest boundaries for the exit rate calculated by using data from the survey.

Annex 2 – Sales Results by Size, Sector, Region, and Export Orientation

1. In both survey rounds, the fall-off in sales was smaller for large firms. The June/July 2009 survey had small (manufacturing) firms (<20 full time employees) reporting a 10 percent sales decline for the twelve months, medium firms (20-99 full time employees) an 8 percent decline, and large firms (100+ full time employees) a 2 percent decline. The January 2010 survey suggests a robust recovery by large companies. While small and medium (manufacturing and service) firms reported an 11 and 2 percent sales drop, respectively, for the twelve months, large firms increased their sales by 2 percent.

2. The most affected sectors were other manufacturing in the 2009 survey, and construction in the 2010 survey. In the mid 2009 survey, targeting only manufacturing activities, other manufacturing showed the largest sales reduction: 7 percent for the twelve months. In the 2010 survey, however, this sector presented the largest deceleration in sales decline, as its sales dropped by only 2 percent in the twelve months ending in January 2010. According to the 2010 FCS, the most affected sector was construction, with a 3 percent drop in sales in the same period. This result points to a similarity with the seen in other OECD countries, where the construction sector showed to be one of the most affected by the crisis. In several of the OECD economies, the collapse of the housing market, along with the credit squeeze, induced a decline in both residential and non-residential construction.

3. All regions, except the Black Sea-East, reported a reduced decline in sales between

2009/10 and 2009/08. The largest deceleration in sales decline occurred in Marmara. In this region, sales of manufacturing firms decreased by 12 percent in the June/July 2008 to June/July 2009 period, while in the 2010 survey, the decrease of manufacturing and service firms was 5 percent for the twelve months leading up to January 2010. Meanwhile, in the Black Sea-Eastern region, the sales decline did not change significantly (from -1. to - 2 percent).

4. Data from both survey rounds indicate that sale losses were smaller for exporting firms. The June/July 2009 survey showed that (manufacturing) export-oriented firms experienced a 7 percent sales decrease while (manufacturing) non exporters reported a 13 percent sales drop. By January 2010, exporting firms in the manufacturing sector were still reporting a sales decline, but not to the same extent as presented earlier. They faced a smaller sales reduction of 1 percent, while manufacturing non exporters witnessed a 6 percent sales decrease. When taking into account both the manufacturing and service firms in the second survey round, the data show that export-oriented firms noted a decrease of 2 percent while non exporting firms faced a sales reduction of 9 percent for the twelve months up to January 2010. i Annex 1 summarizes the sampling methodology for both surveys. ii Throughout this note, when making comparisons between

2009 and 2010 data, the whole sample of interviewed firms in each year will be considered. The focus will not only be on the panel firms. iii The average percentage change in sales is the net change

computed by weighting the percentage change in sales reported by the sales that firm recorded in the baseline Enterprise Survey 2008. iv

Annex 2 discusses the sales performance of the Turkish corporate sector by size, region, sector and export orientations. v The inclusion of the firms that were impossible to locate between the 2008 ES and the 2010 FCS raises Turkey’s exit rate to almost 20 percent. Such a high number of “missing” firms suggests that Turkey's exit rate may have been higher than indicated by the other metric. The reasons behind this discrepancy are not clear at this time and will require further data that may accrue from future survey rounds. However, even this 20 percent exit rate does not seem

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abnormal: While it indicates that almost 20 percent of manufacturing and service firms have exited the market in the two year period between 2008 and 2010, a study of Turkish firm dynamics - presented in the World Bank’s Turkey Investment Climate Assessment (2007) - shows that the annual average exit rate (between 1996 and 2001 for manufacturing firms with more than 10 employees) was about 10 percent. vi

Among Turkish firms that have reported sales increases, the domestic market absorbed 72 percent of their sales in other manufacturing sector; 81 percent in food; 58 percent in textiles; and 84 percent in chemicals. vii

Export orientation is defined as having over 10 percent of sales as direct exports. viii

Firm size is defined by the number of full time employees declared by the firm at the time of the interview (and refers to the previous month to the time of the interview). ix The 2010 survey round made strict reference to

restructuring liabilities without going to court, while the 2009 round gave only a broad definition of the process. x The survey did not make any reference to a particular legal

definition of state aid. State aid was broadly defined as any form of assistance, subsidy, or program, offered by the State. xi An ordinary least squares model for each country was

performed to explain the net change in sales from January 2009 to January 2010, controlling for size, export orientation, age, ownership and sector. The standard errors were clustered to allow for possible correlations in sales performance across firms in the same sector. The coefficient for innovation did not show to be statistically significant for Turkey, but it was significant and positive for Latvia and Romania. The results can be made available upon request. xii

Klette and Kortum (2004) and Aw, Robert and Xu (2008) provide empirical documentation and theoretical models on this subject. xiii

Throughout this note, foreign ownership is defined as having over 10 percent of share in firm ownership. xiv

See Hall and Lerner (2009) for an extensive review of this subject. xv

An ordered probit model to measure the probability of R&D spending increasing, decreasing, or remaining constant, under strained economic conditions (when controlled for firm size, age, export-orientation and sector) shows that the probability that R&D spending would decrease in 2009 was significantly higher among firms with high short-term liabilities. The results can be made available upon request.