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Status & Receptiveness Paper

Turkey currently has a democratic form of government, but has had a rough past with military coups in 1960, 1971and 1980, leaving Turkey with lingering collectivist sentiment. Turkey shares borders with Iran, Iraq, Syria, Georgia and Greece. It currently has maritime disputes with Greece over Aegean Sea, conflicts over the status of North Cyprus as a country, treatment of Kurds in Iraq and tense relations with Syria and Iraq over hydrological projects in the Euphrates River. Historically, the US has vested interests in Turkey because of their strategic geographical location between Eastern Europe and Asia and proximity to Iran and Iraq.

Ethics: Turkey’s religion heavily influences its code of conduct, interpersonal relations, and business ethics. The Koran favors ethical business practices, exercising Corporate Social Responsibility, and stresses charitable activity (Hill, 2008, p. 104). Therefore, the Muslim religion that Turkey practices weighs heavily on their code of ethics. This also means that the Turkish people are receptive to international business as long as they operate within the same code of ethics.

Legal System: Turkey operates under a civil law system influenced by the legal system in other European countries. Under civil law systems, there is less room for interpretation and precedence and judges’ work on applying the laws. This seems consistent with Geert Hofstede’s evaluation of Turkey with a higher Uncertainty Avoidance Index (UAI); they require set rules, controls and policies and are not comfortable with uncertainty (Hill, 2001). Additionally, there is a widespread belief that Turkish courts are biased against foreign organizations; a significant hurdle for outsiders, considering that legal decisions require local court enforcement (Turkey Business Forecast Report, 2007, p. 37).

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Socio-Economic: Turkey has a strong and rapidly growing private sector, yet the state still plays a major role in basic industry, banking, transport and communication. In 2000, with US backing the country was International Monetary Fund’s (IMF) biggest clients with $30 billion in subsidized loans and another $7 billion from the World Bank (Rossett, 2003). By 2005, IMF pressure, Turkey has privatized most of its unhealthy industries and was back at a growth rate of 6%. According to the CIA World Factbook, traditional agriculture still accounts for 35% of employment in Turkey. Turkey’s real GNP growth has exceeded 6% in the past years, but this growth has also been interrupted by sharp declines in output in 1994, 1999 and 2001. Turkey’s high current account deficit leaves the economy vulnerable to destabilizing shifts in investor confidence.

Porter’s 5 Forces, Porter’s Diamond and Applicability to Scenario Porter’s Five Forces that shape strategy represent more than just the traditional direct competition, and have significant impacts on not only company, but industry profitability (Porter, 2008). These 5 forces are: threat of new entrants, power of suppliers, bargaining power of buyers, threat of substitutes, and existing rivalry/competition.

Threat of new entrants: There are significant barriers to market entry in the oil industry, to include regional legislation, specialized labor requirements, and significantly inhibitive cost requirements (Investopedia, 2008). Because of these entry barriers, the threat of new entrants into the oil industry is very small. Power of suppliers: There are numerous companies involved in the oil industry, but the majority of the industry is controlled by a very few dominant organizations. Because oil is a necessity and the industry is oligopolistic, there is certainly enough business to render each company profitable. Therefore, competition is not necessarily intense between major companies, but these companies do possess the ability to significantly influence the industry, impacting smaller companies, economies, and consumers (Investopedia, 2008).

Bargaining power of buyers: Buyers are limited in their ability to bargain in this industry, but can moderately impact transactions because all oil company’s products are essentially the same (Investopedia, 2008). This gives consumers the ability to compare products and seek value. Threat of substitute products or services: The threat of substitutes is currently minimal in the refining industry. As the environmental movement continues to gain support and as alternative energy methods are discovered and implemented, the threat will grow, but it is currently so small it is almost non-existent relative to the size of the oil industry.

Rivalry among existing competitors: The oil industry has experienced slight growth for the past several years. The fixed costs associated with refining are high and increasing with the rising costs of materials such as steel. The industry is often burdened with inadequate capacity, creating pull tendencies in the market, and limiting the impact of competition. Perhaps the most significant factor associated with rivalry is the completely insignificant value-added by an inoperable refinery, and the resulting potentially enormous exit costs (Investopedia, 2008).

Porter’s Diamond Model depicts aspects associated with competitive advantage in industry (Askalany, 2008, p. 16). Firm strategy, structure and rivalry: Valero’s current strategy is a refocus on core business competencies and value based expansion. The company takes a conservative approach to business, and as a result, positions itself to weather present but limited competition. Factor condition: Porter (2008) states, that key factors of production (“skilled labor, capital, and infrastructure”) “are created not inherited” (Porter2, 2008). Non-key factors don’t translate into competitive advantage. Valero has a stellar track record of investment in its own employees, thus creating a long term dedicated labor force. Additionally, Valero is fiscally responsible in its value based operational approach, and allocates significant resources to infrastructure investments.

Demand condition: Turkey has an independent business and profit and innovation inclination similar to that of the United States. Related and supporting industries: Turkey has supported industry and infrastructure, though neither is quite cutting edge. The knowledge and experience does, however exist, presenting the potential for upstream and downstream collaboration for innovation and advancement. Government: The role of government in each country presents a major difference. Governments can push for increased innovation  nd productivity and offer incentives for advancement, among other options to facilitate increased competitiveness (Porter2, 2008). Turkey’s government is pro-business, supporting innovation and involved in promoting economic advancement.

FDI: Advantages, Disadvantages & Applicability The choice of entry mode into a country is a significant strategic decision for a company. Valero must consider its internal strengths, long term goals and ability to deal with emerging economies while deciding its mode of foreign investment. When undertaking horizontal FDI, a few considerations are quite important: transportation costs – is the shipping price inhibitive, or enough to render a venture cost ineffective, advantages associated with location, mimicking effect and tariffs, regulations, restrictions, quotas on imports and their impact (Hill, 2008, p. 229-237).

Firms constantly seek opportunities to invest overseas where they can gain advantages that their competitors do not enjoy. They gain these advantages due to the market factors for product demand and factors influencing production i.e. due to the absence of a perfect competition market. The flaw in this theory is however that it does not explain the need for foreign production to be undertaken by a firm (Katsikeas & Morgan, 1997).

This theory suggests that a firm will try to invest in producing goods in a foreign country depending on the advantages it has in its home country vs. advantages it can gain in a foreign country. The main emphasis in this theory is that apart from the firm’s own resources and territorial advantages in a foreign country, the foreign policies and Govt. trade policies also attract or deny entry to new businesses (Katsikeas & Morgan, 1997).

FDI in Turkey: According to Week 4’s provided United Nations conference on Trade & Development Report (2008), Turkey ranks 29th globally and eighth among developing economies (p.53). Despite this moderately high ranking, UNCTAD2 (2008) lists Turkey as an underperformer in its FDI Indices. Turkey ranks 85 out of 141 countries in FDI inflows from 2004-2007 (United Nations3, 2008) and 77 in outward FDI (United Nations4, 2008). According to UNCTAD’s World Investment Prospects Survey 2008-2010, Turkey is one of the top two countries in West Asia for FDI (United Nations, 2008, p. 58). In 2007, West Asia realized a 12% increase in inward FDI, among which Turkey saw the second highest investment (United Nations, 2008, p. 27).

Turkey’s Inward Stock has experienced significant increases from 2002 – 2007. Turkey’s inward stock (22.2%) is slightly lower than the world average of 27.9% in terms of GDP. It is also apparent that Turkey’s Outward Stock is frail and insignificant, as 1.9% of GDP. This pales in comparison the world average of 28.9%. Turkey’s outward stock represents the value of Turkish based companies’ assets in foreign economies (United Nations5, 2008).

Inward and outward FDI flows represent the capital coming into and exiting the country for FDI purposes, respectively. Turkey’s 2007 Inward Flows (15.56%) are slightly higher than the world average of 14.8% when expressed as a percentage of GDP (United Nations5, 2008). Turkey’s Outward Flows (1.5%) are significantly lower than the world average of 16.2% (United Nations5, 2008). Recently, new FDI law changes have decreased administrative requirements and awarded foreign businesses the same rights as domestic businesses (Turkey Business Forecast Report, 2007, p. 40). This policy change is a significant driver of the continued FDI increase, projected to exceed twenty billion dollars in 2008 (Emerging Europe Monitor, 2008, p. 11).

Despite its large increases in FDI, Turkey still has not fared as well as other countries (Erdilek, 2003). FDI inflows have lagged behind much of the globalized world. Perhaps this is because of the still developing nature of Turkey’s business environment. Given the AK party’s pro-business record, history of deregulation, and focus in economic issues, we can hope the future holds the additional reforms needed to make Turkey a frontrunner with respect to FDI, and the prospective admittance to the European Union just may.

REI and Relevance to Turkey Hill (2008) defines Regional Economic Integration as “agreements among countries in a geographic region to reduce and ultimately remove tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other” (p. 262). Trade agreements facilitating REI have significantly increased in the past twenty years; almost every WTO member state is included in a current trade agreement (Hill, 2008, p. 262).

The existence of the EU is a prime example of a successful REI. The numerous changes experienced by EU member countries decreased barriers and restrictions on trade, created a single currency, and essentially created a unified market large enough to rival that of the United States (Hill, 2008, p. 263). Regional Economic Integration provides benefits not only to developed nations, but also to disadvantaged areas, allowing them to compete in a broader capacity. It allows less developed or less competitive nations to combine resources and compete globally. If Turkey is successful in its bid for UN admission, it would significantly increase turkey’s economic viability.

Thus far, Turkey and the EU have enjoyed somewhat of a reduction in trade barriers and both have received benefits. However, Turkey began to experience economic trouble, and began to create additional trade barriers (CIA, 2008). In 1980, Turkey was taken over by a coup, eliminating dialogues with the EU until 1983, when a civilian government was once again realized and applied for EU entry. Turkey and the EU reduced trade barriers and both received benefits to conform to EU expectations, and move toward European societal expectations. These benefits would render Turkey a more economically viable, politically stable, and westernized nation, and certain economic benefit would follow.

Global Market & Friction We are already experiencing the initial “reinvention” by new entrants in the form of a rising Chinese economy. “During these recent centuries, Europe and the West evolved and perfected the current capitalist economic system, a system based on markets, strong property rights, relatively open trade, innovative technology, general education, efficient capital allocation mechanisms, and clear legal frameworks” (Kelley, 2006, p. 132). In the current system, the states that are economically dominant are the states that developed the system. This system is inherently cyclical in its reinforcement, continuing to underline the advantage of the initial entrants.

As the trickle down effect continues to provide technology and economic resources to developing nations, the recipient developing nations will continue to become empowered, self sufficient, and economically viable. Perhaps they will enjoy additional advantages in that their underdeveloped economies and governmental structures have the flexibility to adapt to current times and facilitate increased competitiveness.

Additionally, the catch-up effect will allow these areas to realize more advancement that industrialized nations. When we look at the statistical standard distribution model, we see that the deviations more distant from the mean require less resources to incite a greater change. The same idea applies to developing nations, in that fewer resources are required to obtain similar advancement.

This economic trend will continue as the global market continues its approach toward some level of equilibrium. Future market dominance depends upon (1) science, development and innovation and (2) institutions and policies. Turkey is somewhat in the middle of the spectrum, and will benefit significantly because it possesses westernized and pro-business attributes, along with low cost operations and other characteristics of developing nations.

Conclusion: Most Advantageous Expansion Mode/Entry Vehicle Valero Energy is successful for a number of reasons. These include its relative size, location, physical dispersion, recruitment, and core quality focus, and likely the most important, its conversion ability. Valero’s conversion ability lies in the process of converting low grade stock into high grade fuels (Datamonitor, 2007, p. 6). Valero is an industry leader in this regard, and has improved numerous facilities to develop this capability. This investment in facilities is indicative of Valero’s focus on investment. Low grade stock and conversion comprises a significant portion of Valero’s operations; approximately sixty percent (Moroney, 2008). Purchasing low grade (sour crude) inputs and converting facilitates higher profit margins given the beta between input resource price and industry matching retail prices.

Valero’s competitive advantages in technology, processes, structure, culture, and recruiting would be best maintained in expanding via wholly owned subsidiaries. This is a very important issue when exploring potential expansion into Turkey, which possesses insufficient Intellectual Property legislation, and lacks the judicial system to enforce what little legislation is present.

In choosing this method, Valero would guarantee strict control over its operations, and procedural and manufacturing quality control could be adequately over watched. Company strategy would be embodied by the new foreign site, direction and culture adopted, allowing Valero to maintain its advantages in these areas. Hill (2008), states that the largest disadvantage of pursuing a foreign wholly owned subsidiary is the cost (p. 411). The initial costs would be significant, but not inhibitive, as explained above. For Valero, the price tag on such a venture would be similar to current ventures, even with an additional 15% added representing the average cost overrun of international projects.

Turkey possesses the potential for relatively inexpensive operation with a relatively solid and strengthening pro-business environment. It is strategically located in a position that provides significant logistical advantages along major trade routes, and is geographically close to (1) the largest oil surplus in the world, and (2) a very solid and lucrative market that is the EU. This venture represents a very solid and opportunistic longer term venture, one that falls in line with Valero’s business strategy. The payback time for this venture is relatively short, the risks are low, the profit potential is high, political and other risks are low. Turkish entry pursued through a vehicle of acquisition and wholly owned subsidiaries presents a lucrative and viable opportunity.

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