fdi and industrial concentration in turkey

8/7/2019 FDI and industrial concentration in Turkey

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International Research Journal of Finance and EconomicsISSN 1450-2887 Issue 23 (2009)

EuroJournals Publishing, Inc. 2009

http://www.eurojournals.com/finance.htm

Foreign Direct Investment and Industrial Concentration in the

Turkish Manufacturing System1

Filiz Elmas

Assistant Professor of Economics, Department of Economics

Gazi University, Incitas Street, No.4, Besevler-Ankara-TURKEY

E-mail: [email protected], [email protected]: 00 90 533 339 99 56

Suleyman Degirmen

Associate Professor of Economics, Department of Economics

Mersin University, Ciftlik Koy Campus, 33342, Mersin-TURKEY

Tel: 00 90 537 288 93 56E-mail: [email protected], [email protected]

Running Head: Market Concentration and FDI

Abstract

Foreign direct investment (FDI) is in ordinary shares, and the operator is usually

multinational corporations. The main framework believes that FDI changes industrial

concentration and decreases monopoly power of domestic firms and transforms market to

perfect competition condition. Based upon this explanation, this study analyzes how theFDI effects the market concentration in the Turkish manufacturing industries between 1989

and 2006. The results of the study point out that there is no link between FDI and marketstructure; in other words, FDI does not shift the market structure to the perfect competition.

Keywords: Foreign Direct Investment (FDI), market concentration and FDI

JEL Classification Codes: F21, F23

1. IntroductionForeign Direct Investment (FDI) is in ordinary shares, and the operator is mostly multinational

corporations. According to the main framework or orthodox economics, on making an investmentabroad, the foreign company provides micro and macro advantages to the host or recipient country.

From the point of the micro benefits which is emphasized by the orthodox literature, the transformationof the perfect competition is an important point. In other words, FDI changes industrial concentration,

monopoly power of domestic firms decrease, and market transforms into perfect competition. Hence,

FDI is advised for the developing countries to improve their market distortion. Furthermore; nowadays,it is becoming more of an issue due to the globalization process.

Turkey as a developing country has changed its economic system from 1980 to this time,

because it wanted to adapt the globalization process. The aim of this study is analyzing the micro

1 Presented at 38th Annual Meeting of Eastern Economic Association in Boston- U.S.A. (March 7-9, 2008)


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247 International Research Journal of Finance and Economics - Issue 23 (2009)

benefits of FDI in the Turkish economy, especially whether it is transformed into the perfect

competition or not. In a sense, it examines how the concentration ratio has been changed in the Turkish

manufacturing industries by FDI. Data period covers from 1989 to 2006. The main sources of data forthe Turkish economy and the Turkish foreign direct investment are the Istanbul Chamber of Industry

and the State Institute of Statistics databases. On the basis of the analysis thus far, this paper is

organized as follows: Section 2 provides a review of literature. Section 3 discusses the data andmethodology used throughout the study and also, presents the empirical results with their evaluations.

And the last section concludes.

2. Literature ReviewFDI is one of the different types of international investment. When FDI is compared with the otherforms of international investment, it includes the element of control over management policy and

decisions. FDI gives rise to costs and benefits for the investing country (the source of the investment)

and the host country (the recipient or the destination of the investment). Nonetheless, there is nottotally agreement in the economic theory. There is no unique answer what are the costs and benefits of

FDI. Orthodox economists emphasize the positive aspects or benefits of FDI. Therefore, the investing

country and host country gains welfare by means of FDI. On the other hand, heterodox economists

highlight the negative aspects of FDI: two countries do not gain welfare. When the FDI occurs, thereare one countrys losses and other countrys gains for the investing process. In this study, the basic aim

is to figure out the market concentration of FDI for host countries in accordance with the Orthodox

view.In the orthodox literature, the impact of FDI on host countries is categorized by economic and

socio-political effects. Economic effects can be classified into micro and macro ones. The first one

consists of structural changes in economic and industrial organizations. As it is known FDI change thestructure of the market by forming more competitive or more monopolistic environments. Therefore,

the critical issue is what kind of shifting occurs. Orthodox approach proposes that FDI has led to the

market more competitive economic environment or changed into a perfect competition. Thus,economic productivity increases owing to the perfectly competitive market [Petrochilos, 1989, 26-45]

Kindleberger [1969] puts forward that the main impact of FDI converts the market intocompetitive form. This is because foreign subsidiaries always back up by strong parents and compete

effectively with local monopoly / oligopoly. Hence, by decreasing monopolistic/ oligopolisticdistortions, FDI can improve the allocation of resources in the host country.

Lall [1978 and 1979] states that FDI has a tendency to increase levels of manufacturing

industries in the developing countries due to the improvement in the resources of the allocation of thehost countries. FDI obtains scale economies by entering in monopolistic and oligopolistic markets.

Furthermore, Lall and Streeten [1977] argue that FDI may encourage a very high degree of

oligopolistic concentration, imposing diminished price competition.Bourlakis [1987] examines that FDI affects directly the market structure of the economy by

increasing both the relative inequalities in the size distributions of firms in a host country.

Petrochilos [1989] finds that there was an inverse relationship between FDI and concentrationlevel in Greek manufacturing. Although in the short run FDI reduces concentration level, its effect

tends to raise the concentration level in the long run. He calculates a measure of concentration ratio

(CR5) and emphasizes that this ratio has been increasing over time because of FDI.

Markusen and Venables [1997] examine the (micro) effects of FDI on the host country. Theycite that FDI affects positively product market competition substituting for domestic firms, and leads

linkage effects which are complementary. Hence, it is called for FDI to act as a catalyst, leading to the

development of local industry. Moosa [2002] emphasize that this analysis fits well some of the casestudy literature on South East Asian economies.


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International Research Journal of Finance and Economics - Issue 23 (2009) 248

Moosa [2002] study explains the structure of the industries due to the FDI. So emphasizing

issue in his study that whether FDI encourages the creation of a more competitive environment, or

conversely discourages the monopolistic and/ or oligopolistic elements in the host economy.In the study of Bende-Nabende, A. [2002] and Georgian and Weilhold [1992], FDI on based of

regional integration creates trade of goods and services and allocates economies of scale: consequently,

the more FDI the more competition.Amess and Roberts [2006] study an analysis of the determinants of the level and changes

industrial concentration. In particular, the relative effects of foreign and state ownership are examined.The results imply that both state and foreign ownership have a significant impact on industryconcentration and this relationship is U shaped. Minimum efficient scale is found to be the only factor

to impact on industry concentration.

Mod and Peria [2007] analyze banking sector in Latin America. FDI has noticeably increasedin this sector; therefore, they examine how the foreign participation ratio affected concentration ratio in

banking sector. Calculated different kinds of concentration ratio (CR 3, CR5, Herfindahl index) are

illustrated that if FDI, which consisted of only Latin America, increases in the banking sector,

concentration levels increased or remained high. These outcomes are the same with the studies ofBarajas, Steiner and Salazar [2000], Denizer [2000], and Demirguc-Kunt, Leaven and Levine [2004]

[Mod and Peria, 2007, 188-189].

While Petras and Veltmeyer [2007] discuss different roles of FDI in their book and suggest thenon-FDI regimes especially for the developing countries, in this concept, they argue pro and con of

FDI. Contrary to the favor of FDI, it does not enlarge the competitiveness of local production which

leads to efficient firms and forces local firm to become more efficient because FDI decisions are madeby the foreign owners of capital. In other words, this type of capital wants to increase only their

monopoly power over political conditions within host countries.

As a summary the orthodox empirical study concerning about micro effects of FDI, it is

understood that they calculated some industrial concentration measures. After having calculated, theyconcluded that concentration ratio changes, so the market structure transformed into the perfect

competition due to the FDI.

3. Data and MethodologyMarket concentration or industrial concentration represents the influence of the number and sizedistribution of firms in an industry on the behavior of those firms which distort the ability of markets to

perform effectively. In other words, perfectly competitive market does not occur due to powerful firm

or firms. In the literature, there a lot of measurements of industrial concentration: Concentration Ratio(CR4 -four-firm concentration ratio, CR8-eight-firm concentration ratio), Herfindahl (H) Index, Linda

Index, Entropy Index, Redundancy Measure etc. Some authors have tried to compare alternative

measures of concentration with each other. They reached the conclusion of each measure highlycorrelated with the others.

In this study Concentration Ratio (CR4) and H Index are used as a method. The concentration

ratios provide information about the relative distribution of industry shares between the largest four oreight firms. These ratios are the proportions of the industry's output accounted for by the 4th and 8th

largest firms respectively.

==

==m

i

i

m

i

im PXX

CR11

1

This formula shows that the percentage of industrial share owned by largest m firms. m is

specified number of firms, generally 4. One extreme is that the CR4 equals to zero, and it means an

extremely competitive industry. The benchmark used in the industrial concentration literature todetermine whether an industry is oligopolistic is a CR4 of 40 per cent, for industries with CR4 greater

than 40 per cent there is considerable scope for collusive action among firms. On other extreme is also


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that CR4 equals to 90, that one firm controls more than 90 % of the market, and it is effectively

monopoly.

Herfindahl (H) index takes into account the number of firms and the inequality of shares inindustry output. It is defined as:

=

=n

i

iPH1

2

where n is the total number of establishments in the industry and Xi is the output of establishment. It iscalculated by taking the sum of squares of the industrial shares of every firm. For instance, being only

one firm on the industry, which firm have 100% market share and of course, H index equals to unity incase of pure monopoly. The value of the H index is zero for a competitive industry. The H index

combines both the number of firms and the size distribution of firms in the industry. It therefore gives a

more complete picture of the market because of its ability to include all the firms in a market and toweight each firm according to its relative size.

In this study it is used Istanbul Chamber of Industry database. This database covers the period

from 1997 to 2006. It is only the data resource to generate the economic data set on the basis of thefirm level.

Table 1 shows the sectoral distribution of FDI in the manufacturing sector in terms of the

amount of the production. In the database, two economic indicators represent the amount of theproduction: Revenue from production and sales revenue. It is used the revenue from productionbecause it does not include stocks since it is a real measure for the nominal production made in current

year.

In the light of figures in this table, it is indicated that FDI determined in 13 sectors, especiallyfood manufacturing, tobacco manufacturing, manufacture of other chemical product, manufacture of

miscellaneous product of petroleum, manufacture of rubber product, manufacture of machinery and

manufacture of transport equipment. FDI makes an investment on the high-tech product. It might beshown that FDI takes an advantage against the domestic firms due to the technological knowledge. In

addition, foreign companies invest the sector which allows them to consume their product easily. By

this way, they find some opportunities to reduce their transformation cost and their profits increase

because of FDI.The calculation of CR4 and H index calculated both revenue from production and sales

revenue. The same results are approximately reached and Table 2 shows only the ones deriving from

the revenue from sales. It could not be made for all of them because of the inadequate number of thefirm in the classification of 314 and 355.


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Table 1: The FDI Sectoral Distribution

Code Sector 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

210 Mining 2.22 2.03 1.53 1.64 2.32 2.26 6.27 1.80 1.67 3.25

311 Food manufacturing 11.16 8.63 6.46 2.63 2.54 5.43 10.40 10.57 18.14 15.85

312 Other food manufacturing 4.09 0.00 0.00 0.00 0.00 11.87 14.62 14.08 11.48 6.03

313 Beverages Industries 0.00 0.00 0.00 0.00 7.88 21.43 20.40 6.79 4.63 4.08314 Tobacco manufacturing 35.59 38.63 43.33 38.56 40.09 41.78 35.18 90.55 43.41 90.58

321 Manufacture of textiles 1.77 1.76 0.94 6.08 7.69 8.44 4.81 4.12 3.70 0.92322 Manufacture of wearing apparel, except

footwear

7.77 4.59 3.50 3.75 2.81 3.57 4.06 2.06 3.61 7.48

323 Manufacture of leather and products of

leather

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

324 Manufacture of footwear 6.38 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

331 Manufacture of wood 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

332 Manufacture of furniture 0.00 0.00 0.00 0.00 11.77 16.77 12.11 9.73 7.84 6.60

341 Manufacture of paper 0.00 9.85 14.87 17.99 9.37 17.95 18.49 24.53 19.50 19.80342 Printing, publishing 0.00 0.00 0.00 1.44 9.51 11.20 10.04 8.67 11.02 12.34

351 Manufacture of Industrial Chemical 4.99 7.46 7.56 5.54 4.82 5.20 17.01 14.02 23.56 21.48

352 Manufacture of other chemical product 35.87 39.05 41.38 42.45 42.35 39.39 42.77 43.58 42.51 44.39

353 Petroleum refineries 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

354 Manufacture of miscellaneous product ofpetroleum

36.90 26.96 27.39 37.70 27.85 41.63 40.96 41.49 40.41 44.03

355 Manufacture of rubber product 62.80 8.41 55.51 60.05 66.07 26.41 57.45 41.24 31.39 55.95

356 Manufacture of plastic product 19.60 11.94 12.12 11.51 19.22 18.06 32.26 33.56 26.64 21.85

361 Manufacture of pottery, china 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

362 Manufacture of class 0.00 0.00 0.00 0.00 0.00 0.00 3.42 4.02 3.68 13.42369 Manufacture non other metallic product 3.23 8.19 8.77 10.41 15.35 15.95 17.68 13.53 12.98 13.72371 Iron and basic steel industries 1.49 1.66 0.54 2.02 2.61 4.64 4.22 5.20 5.93 6.72

372 Non ferrous metal basic industries 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.27

381 Manufacture of fabricated metal prods. 10.01 12.37 12.18 17.04 24.93 22.84 9.98 11.19 7.88 8.11

382 Manufacture of machinery 22.69 24.95 27.60 25.25 31.11 30.44 32.35 24.53 22.50 22.00383 Manufacture of electrical machinery 46.90 48.17 52.48 51.12 57.98 51.68 42.05 44.20 46.12 48.34

384 Manufacture of transport equipment 45.15 43.22 47.65 44.29 38.67 46.93 48.05 51.38 47.86 49.85

385 Manufacture of scientific equipment 100.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

390 Other manufacturing industries 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

400 Electricity 0.00 0.00 0.00 0.00 0.00 0.00 21.48 6.98 8.17 0.74

Sources: ICI, 1997-2007.

According to the Tables 2 which shows the results of CR4 and H index, FDI generally does noteffect market concentration except 354, 382 and 384. Nevertheless in these sectors the calculated ratio

shows that the structure of market does not signal any change significantly. There is no link betweenFDI and market structure; that is to say FDI does not shift the market structure to the perfect

competition.

Table 2: CR4 and H Index

1997 1997[FDI] 1999 1999[FDI] 2002 2002[FDI] 2004 2004[FDI] 2006 2006[FDI]Code

CR4 H CR4 H CR4 H CR4 H CR4 H CR4 H CR4 H CR4 H CR4 H CR4 H

311 35 0.06 32 0.05 24 0.02 22 0.02 26 0.03 25 0.03 19 0.02 17 0.02 23 0.02 25 0.02

341 54 0.11 54 0.11 46 0.08 40 0.07 40 0.06 36 0.05 33 0.05 30 0.04 38 0.06 34 0.05

351 71 0.19 68 0.17 54 0.10 52 0.09 65 0.15 61 0.13 68 0.16 58 0.12 74 0.21 62 0.14

352 42 0.06 29 0.04 28 0.04 24 0.03 31 0.04 26 0.03 31 0.04 22 0.03 37 0.05 28 0.03

354 98 0.73 92 0.34 95 0.62 90 0.37 95 0.57 88 0.26 97 0.56 88 0.25 98 0.58 80 0.23

356 64 0.13 52 0.10 39 0.06 35 0.05 36 0.05 30 0.04 40 0.07 41 0.07 40 0.06 37 0.05

369 32 0.05 31 0.05 24 0.03 21 0.03 31 0.04 26 0.03 28 0.03 24 0.03 24 0.03 20 0.02

381 72 0.16 65 0.13 49 0.09 44 0.08 55 0.12 54 0.10 65 0.16 62 0.14 37 0.06 40 0.06382 86 0.25 71 0.16 77 0.32 67 0.19 79 0.41 77 0.25 79 0.33 70 0.21 77 0.32 67 0.20

383 49 0.08 41 0.06 46 0.07 42 0.07 57 0.13 50 0.10 64 0.13 61 0.11 50 0.09 40 0.06

384 61 0.12 49 0.08 51 0.08 43 0.06 56 0.13 47 0.07 66 0.19 51 0.08 67 0.12 51 0.19

Sources: ICI, 1997-2006.

The determinants of market concentration can be explained by variables such as scale

economies, competing exports and imports, capital intensity, foreign investment as well as verticalintegration. Especially FDI means the relatively large size firms which are found to have a significant

impact on concentration. So it is important to discuss what the difference between Orthodox and

heterodox economics are in terms of micro effects of FDI.


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4. ConclusionForeign direct investment (FDI) is in ordinary shares, and the operator is usually multinational

corporations. According to the main framework or orthodox economics, FDI changes industrialconcentration and monopoly power of domestic firms decrease and market transforms to perfect

competition condition.

The aim of this study is to analyze the micro benefits of FDI, especially whether it is

transformed into the perfect competition or not. In other words, it examines how the concentration ratio

has been changed in the Turkish manufacturing industries by FDI.This study has depicted that FDI takes place in 13 sectors especially including the high-tech productbecause it takes an advantage against the domestic firms due to the technological knowledge. In

addition, foreign companies invest the sector which allows them to consume their product easily.

Having calculated the two different concentration measures (CR4 and H index) it is seen thatFDI generally does effect neither the market concentration nor the structure of market. This leads us to

the result that there is no link between FDI and market structure.

The determinants of market concentration can be explained by variables such as scaleeconomies, competing exports and imports, capital intensity, foreign investment as well as vertical

integration. Especially FDI means the relatively large size firms which are found to have a significant

impact on concentration. So it is important to discuss what the difference between Orthodox and

heterodox economics are in terms of micro effects of FDI. In this context, next study will be the microeffects of FDI on the Turkish manufacturing sector.


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Development, Ashgate Publishing Limited, USA.

[3] Bourlakis, A.C. 1987., Multinational corporations and domestic market structure: The case ofGreek manufacturing industries ,Review of World Economics, Vol: 123, No: 4, pp: 719-733

[4] Georgion, G.C and Weinhold, S. 1992.Japanese Direct Investment in the US, WorldEconomy, Vol: 15, No: 6, pp: 761-778

[5] Kindleberger, C. P. 1969.American Business Abroad: Six Lectures on Direct Investment, YaleUniversity Press.

[6] Lall, S. 1978. Transnational, Domestic Enterprises and Industrial Structure in Host LDCs: aSurvey, Oxford Economic Paper, Vol: 30, pp: 217-248.

[7] ---------. 1979. Multinationals and Market Structure in an Open Economy: The Case ofMalaysia, Weltwirtcshaftliches, Vol: 115, No: 2, pp: 325-350.

[8] Lall, S. and Streeten, P..1977. Foreign Investment, Transnational and developing Countries,Macmillan, UK

[9] Markusen, J.R. and Venables A.J. 1997.Foreign Direct Investment as a Catalyst for IndustrialDevelopmentNBER Working Paper, no: 5696

[10] Mod, A. and Peria. M. 2007. How foreign participation and market concentration impact bankspreads: evidence from Latin America, Foreign Direct Investment and the World Economy,

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Macmillan, USA

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fdi and industrial concentration in turkey

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