Shifting gears: Focus to be placed on creativity along with improving the legal framework

Turkish policymakers are implementing a long-term development strategy that prioritises innovation in business, science and technology. To this end, more emphasis is being put on research and development (R&D), as demonstrated by the increase in R&D spending from .5% of GDP in 2002 to .86% of GDP in 2011. Officials project that, by the centennial of the founding of the republic, which will occur in 2023, R&D expenditure will account for 3% of GDP. Two-thirds of this amount will come from the private sector.

“The increased attention given to R&D in the policy community reflects an awareness that our economy needs to shift gears,” Berat Albayrak, the CEO of Çalık Holding, told OBG. “Specifically, R&D in key industries can facilitate Turkey’s transition from an economy based on consumption, technology imports and price competitiveness to one driven by the production of value-added goods and services.”

Challenges

Making this transition will not be easy, given Turkey’s susceptibility to the middle-income trap (see Education overview), which has ensnared many emerging markets in recent decades. History shows that avoiding the growth slowdown that this phenomenon entails requires heavy spending on R&D, an area where Turkey has made progress. As noted in a 2011 report on global scientific collaboration produced by the Royal Society of London, annual growth in R&D expenditure in Turkey between 1996 and 2007 was nearly 7%, the second-highest rate among all 19 countries surveyed, following only China.

However, the R&D system in Turkey suffers from key weaknesses. First, although spending in the segment has risen as a percentage of GDP, it remains far below the OECD average, which is 2.3%. Moreover, despite the expectation that the private sector should contribute two-thirds of national R&D expenditure by 2023, as of 2011 private firms only accounted for 43.2% of R&D spending. This means that they will have to make significant changes to their investment patterns for the government to reach its overall target.

Second, the framework for intellectual property (IP) protection in Turkey needs to be improved. Though Turkey adheres to many of the standards laid down by the World Intellectual Property Organisation, and is a signatory to the Agreement on Trade Related Aspects of Intellectual Property Rights, the country still ranks in the top five globally in terms of counterfeiting activities. Between 2010 and 2011, the estimated value of the counterfeit goods market in Turkey doubled, rising from $3bn to $6bn.

Global Standing

In the 2011 International Property Rights Index, produced by the Property Rights Alliance, a US-based advocacy organisation, Turkey ranked 64th among 129 nations, well behind comparably-developed countries that compete with the republic for foreign direct investment (FDI), such as Poland (43rd), Hungary (37th) and the Czech Republic (33rd).

“To attract greater inflows of FDI, and to support local brand development, Turkey needs to strengthen its IP legislation and make sure existing laws are implemented faithfully,” Mehmet Sezer, the general manager of Xerox Turkey, told OBG. “This has proved difficult, however, as the judiciary has struggled to keep up with the rapid pace of technological change in business.”

As noted in the 2012 General Electric Global Innovation Barometer Scorecard, weak IP protection in Turkey has also had a negative impact on the ability to translate research into patents. In the survey, Turkey scored “below average” in the utility patents category, behind China, Russia and South Africa. Meanwhile, figures from the US Patent and Trademark Office indicate that only 184 patent applications in the US originated from Turkey in 2011. This put Turkey behind China (10,545), Russia (719), South Africa (339), the Czech Republic (271), Hungary (235) and Poland (197).

Progress

Nevertheless, some trends are headed in the right direction. For example, Turkey’s 184 applications to the US market in 2011 represented an increase over its US application numbers in 2010 (150) and 2009 (85). According to the state-run Turkish Patent Institute, in the first six months of 2012 domestic patent applications from Turkish inventors grew 20% over the same period a year earlier, jumping from 4800 to 5700. By 2023, the government aims for annual patent applications in Turkey to reach 50,000.

Gaining A Name

Another trend reflecting positively on Turkey’s research capacity is the domestic increase in scientific publishing. According to the Council of Higher Education (YÖK), between 2001 and 2010 the number of published papers in Turkey listed in international citation indices more than tripled, rising from 8150 to 28,154. Taking a longer view, YÖK figures indicate that scientific publishing in Turkey has grown eight times faster than the global average over the past 30 years, with the republic trailing only South Korea and Iran in this category. These findings were echoed in the Royal Society of London’s report, which found that Turkey’s average annual growth rate for journal publications was over 12% between 1996 and 2008, putting the republic ahead of all 19 nations surveyed apart from China (18%).

Growth in publishing has been accompanied by a rise in university faculty and researcher numbers. According to YÖK, between 2000 and 2010 domestic academic and teaching staff grew from 65,204 to 105,427, an increase of 60%. Figures from the Scientific and Technological Research Council of Turkey (TÜBİTAK), the main public agency overseeing national R&D policies and activities, indicate that the number of full-time-equivalent R&D personnel and researchers rose 13.5% in 2011 over 2010, reaching 92,801 and 72,109, respectively. Turkey’s research manpower is also benefitting from efforts in the higher education system to promote greater international enrolment and collaboration. For instance, through its International Experienced Researcher Circulation Support Programme, TÜBİTAK aims to employ 100 foreign and expatriate scientists in local universities and firms over the next five years. As of late 2012, the programme, which receives funding from the European Commission, had taken in 106 applications, mainly from Europe, Asia and the US.

Yet, there are still doubts about Turkey’s ability to produce the critical mass of skilled engineers, scientists, product developers and technical experts necessary for extensive R&D activities. In particular, many sceptics point to the school system, which continues to under-perform in key areas such as quality and equity (see Education overview). In the 2012 Legatum Prosperity Index, which measured the economic performance of 142 countries along eight sub-indices, Turkey ranked 91st for education, behind other middle-income countries such as South Africa (89), Algeria (77), Tunisia (75), Jordan (53), Romania (49) and Ukraine (29).

What is more, Turkish universities have weak connections to the private sector, which often prevents them from transforming their research into profitable products and processes. “There has been a proliferation of higher education institutions in Turkey over the last several years; however, many of these schools lack capital and linkages to industry,” Emre Gönen, the vice-rector of Bilgi University, told OBG. “This means that many of the exciting ideas developed in academia never make it to the market.”

Helping Hands

Well aware of this challenge, the government has launched several schemes encouraging collaboration between universities and the world of business, including the Industry Thesis Supporting Programme (SAN-TEZ). Introduced in 2007 by the Ministry of Industry and Trade (which is now the Ministry of Science, Industry and Technology), SANTEZ covers up to 75% of the costs that PhD students incur while conducting thesis research.

To receive state support, this research must have commercial potential and serve the technological needs of local companies. According to ministry officials, between 2009 and 2010 the number of applications received for SAN-TEZ nearly tripled, rising from 98 to 280. In 2011, the ministry received 2000 applicants, of which 280 were granted support. From the inception of SAN-TEZ in 2007 until 2011, eligible projects garnered TL102m (€44.04m) in public funding.

Giving Support

In addition, a wide range of programmes fostering university-industry collaboration are overseen by TÜBİTAK. One such scheme, the TÜBİTAK University-Industry Cooperation Support Programme, partners local higher education institutions with small and medium-sized enterprises and large corporations to convert scientific research into business processes and saleable goods. Under this initiative, TÜBİTAK covers up to 75% of a project’s budget, with a maximum support duration of 24 months and an upper funding limit of TL1m (€431,800).

According to TÜB TAK records, overall support provided by the agency for domestic R&D initiatives rose 25-fold between 2000 and 2009. From June 2012 to June 2013, TÜBİTAK will seek to further enhance its profile while holding the chairmanship of the EUREKA organisation, which is an intergovernmental network fostering collaboration between universities, research centres and businesses on R&D ventures throughout Europe. Out of the 42 EUREKA member countries, Turkey ranked 28th for implemented projects in 2007; however, by 2011 the republic had managed to climb to 11th place in the organisation for project volume.

Turkey’s proactive approach to stimulating R&D activity is also embodied in the legal code. Under the current R&D law, which is valid until 2023, incentives are granted to R&D investment projects meeting certain criteria. For example, projects using 500 or more research personnel are eligible for 100% tax deductions on R&D expenditure. For projects that use 50 or more R&D personnel, the authorities offer income tax withholding exemptions for employees, a five-year 50% exemption for employers on worker social security premiums and exemptions on stamp duties for relevant documents. What is more, additional R&D incentives are available in the country’s wide array of technology development zones (see analysis).

Key Industries

A key to Turkey’s R&D strategy is attracting investment in critical industries such as information and communications technology (ICT), manufacturing, food and beverage processing, renewable energy, pharmaceuticals and agribusiness, all of which have the potential to sustain long-term economic growth through the development of indigenous brands and value-added goods. Another such industry is the automotive sector, which accounted for $19bn in exports in 2012, helping the total value of Turkish exports to reach an all-time national high of $152bn in that year, according to figures from the Turkish Exporters Assembly.

Moving forward, government officials are keen to leverage R&D for greater localisation of automobile component production, thus limiting the need for manufacturers to import intermediate goods (and, in turn, reducing the current account deficit). In addition, R&D is regarded as a means for the country to develop a national car, or to begin producing energy-efficient vehicles. To this end, from June 2012 to September 2012 TÜBİTAK accepted applications for a grant programme providing up to TL5m (€2.16m) for any firm that plans to conduct R&D on electric or hybrid cars. “We are taking a step that will mark the start of an important period,” Nihat Ergün, the minister of science, industry and technology, told local press when announcing the scheme. “Fields of industrial application will be developed for products that bring technological innovations to the hybrid and electric engines sector.”

On The Defence

Another industry where R&D is playing a key role is defence. In the first 10 months of 2012, local defence contractors and aviation firms increased their exports over the same period a year earlier by 52%, with total export volume from the sector exceeding $1bn. In part, this growth has been driven by R&D investments at public agencies like TÜBİTAK, which announced in 2012 that it had successfully developed a sensor system for laser-guided missiles.

Foreign investors are also contributing to Turkey’s defence business through R&D activities. In November 2012, for instance, the US global aerospace, defence, security and advanced technology company Lockheed Martin signed a research partnership with Koç University for the development of a net-centric technology system that will provide the Turkish armed forces with more advanced data management as well as command and control systems. In the same month, the US-based company signed an agreement with Sabancı University for research collaboration on radar technologies.

Outlook

As Turkey aims to become one of the world’s 10 largest economies by 2023, and as the nation’s growth model begins to place greater emphasis on intangible capital, productive upgrading and local brand development, R&D will play an increasingly important role. Given that the social benefits for R&D in Turkey are still much higher than the private returns, government expenditure will be essential, especially in support of basic research. Historical lessons from other countries, especially the US, suggest that federal spending on even small research projects can produce positive spill-over effects for the economy at large, whether in agriculture, IT, health care, defence or manufacturing. Though spending on the segment has increased, and success stories in key industries are making headlines, more must be done to give firms and inventors lasting claims to their discoveries. Despite these challenges, it is clear that a policy alignment is taking place, as incentives for key R&D investment have grown.