Turkish Wine Industry

Turkey has the fourth largest vineyard area globally. Despite this endowment, Turkish wine industry is still striving to be attractive for foreign direct investment inflows. One of the challenges facing the industry is the importation of cheap products and substitutes from developed economies in Europe, including Spain and Italy. In the same line, the local demand is low due to high prices induced by rising excise duties and bans in advertisements. Political instability has a direct impact on the industry as it also affects related or supporting industries like travel and tourism.

Winemaking and viticulture are getting limited support from the government. In an effort to understand and probably make informed decisions about FDI in Turkish wine industry, this report explored the competitive advantages of Turkey with a focus on the foreign direct investment as an effective market entry strategy. A detailed qualitative analysis of scholarly resources and relevant government websites and reports was carried out. Results indicate that the Turkish wine industry is still lagging behind in various fronts, including technology and government support.

National competitiveness is created rather than inherited. This assertion implies that the prosperity of any country does not arise out of its natural endowments, currency value, its interest rates and its labor pool as theorized in classical economics. In other words, the competitiveness of a country like Turkey depends on its industries capacity to upgrade and innovate. The same applies to the Turkish wine industry. The competitiveness of the Turkish wine sector as a cluster in the Turkish alcohol and beverage industry depends on the sector’s capacity to make improvements and updates where necessary. These improvements are facilitated by various factors including, strategic management initiatives, political stability, government support, healthy competition and incessant local demand among others.

Turkey still faces numerous challenges despite the 2014 election boost. According to the Euromonitor, growth in the Turkish wine sector continued to be hampered by various negative factors in the Turkish local market, including excise increases in excise taxes bi-annually and ban on the promotion and marketing of alcoholic drinks. These factors are known to hinder foreign direct investment as they make the Turkish wine sector less attractive compared to other developing economies like Chile and South Africa (Azabagaoglu, Akyol, & Ozay). Despite facing these barriers among others, the Turkish wine industry had a positive growth of 2% in 2015 (Euromonitor). To understand and probably inform decisions regarding inward foreign direct investment flows in the Turkish wine industry, and nation-based research is justified. Employing the extended version of Porter’s National Diamond (PND), the competitiveness of Turkey was assessed in the first part of the report. Subsequent to the analysis, the second part discussed the market entry strategy, with a focus on the foreign direct investment. Finally, the last chapters discussed contemporary management challenges in the Turkish Wine Industry.

Porter’s National Diamond Model

The competitiveness of countries is thrilling. For example, a multinational corporation operating in a highly competitive industry within its native country is compelled to analyze other national markets for possible expansion. However, the expansion decision is rarely easy, and the multinational’s management must assess whether such expansion decisions would create value for all stakeholders. In the absence of adequate information, the management may make missteps in cross border expansion decisions leading to unprecedented losses. In fact, for some foreign investors, a misstep in decisions regarding expansion to other markets may jeopardize their entire operations and capital. For these reasons, investors must strategize for expansion. This entails thorough analysis of the targeted market and industry. The analysis involves having a better understanding of the demand conditions, sector strategy and rivalry, availability of infrastructure and other location advantages. This understanding can be arrived at through microenvironment analysis.

Porter’s National Diamond (PND) model for the competitive advantage of nations provides a framework that supports the understanding of a country’s competitive position in the present globalised economy (Porter, 1998). Conventionally, economic theory outlines land, labor, local population size, location, and natural resources as factors for comparative advantage for countries. Since these factor endowments are hardly influenced, economic theory fits a passive perspective towards national opportunities. Sustained industrial growth in a country is hardly dependent on the above factors. In fact, abundance of some of these factors may undermine the competitiveness of a country. For example, the availability of resources such as mineral and energy may hamper the development of the service sector. As an underlying principle, the competitiveness of a nation is an outcome of interconnected activities and factors between clusters of companies. In this context, clusters are groups of interlinked suppliers, enterprises, institutions and related industries that emerge in a particular location.

Factor Conditions

In contrast to the conventional wisdom regarding competitive advantages, Porter’s argued that specialized or key factors of production are created and not inherited. For example, companies that process wine in Turkey develop infrastructure, capital and skilled labor. Modernization of Turkey’s business environment and economy is attributed to the EU accession talks. Additionally, the country’s larger domestic consumer market of over 74 million people drives its modernization (UK Foreign & Commonwealth Office). Furthermore, the country serves as a springboard to the Middle East and Central Asia markets. In line with the WBG’s Doing Business 2016 Report, Turkey falls at position 55 among the sampled 189 economies (WBG). In terms of the ease of starting business, the country fall at position 94 and it takes at least 7.5 days to process and start a business in the country. Figure 2 presents a summary of Doing Business Indicators for Turkey.

Demand Conditions

Expectedly, the greater the domestic demand, the greater the corresponding pressure facing entities to continue improving their competitiveness. This is true in all the sectors of the Turkish alcoholic and beverage industry, which covers the wine sector. In other words, the more customers in Turkey demand wine products, the greater the pressure on local manufacturers and importers to stabilize their supply. If a gap exists domestically, then new entrants, both local and foreign entities are much likely to invest in the same industry to exploit the gap in supply. Over the 2015 forecast period, Euromonitor noted that the volume of wine sales in Turkey were restricted by various factors, including bans on the promotion and advertisement and promotion of alcoholic products, as well as rising excise taxes. Consequently, these factors increased the prices of wine, in turn affecting the Turkish tourism industry. The demand and sales of wine in 2016 was projected to continue falling because of the continuous political conflict in Turkey, as well as the diplomatic crisis between Russia and Turkey. This diplomatic crisis is perceived as a threat to the Turkish travel and tourism industry, and in turn the wine industry because Russia is one of the main sources of inbound tourism flows. Furthermore, additional excise duties on alcoholic drinks was expected in 2016.

Related and Supporting Industries

Similar to any manufacturing and process industry, spatial proximity of downstream or upstream industries tend to facilitate information exchange. This proximity also promoted the exchange of business ideas and technological innovation. The Turkish wine industry is closely linked to the country’s travel and tourism industry, which is very sensitive to the political environment of the country. As noted by the Euromonitor, the sales of wine in Turkey in 2015 was greatly affected by the political instability in Turkey. Further, the political environment was further affected by a diplomatic crisis between the country and Russia, which is one of Turkey’s major sources of inbound flow. Consequently, the wine industry is negatively affected by the poor performance in the travel and tourism industry.

Government

The government’s role in the PND model is to serve as a challenger and catalyst, as well as encourage or push entities to improve their business aspirations. To that end, the government serves as an enabler of competitive advantages of a nation. Consistent with present multi-sectoral reforms, the Turkish government encourages companies in different sectors to improve their performance (Coskun & Tattersall). Further, the government also stimulates the demand of various advanced products and focuses on creation of specialized factors meant to stimulate local rivalry.

Politically, Tukey is a secular democracy headed by a President. As of this review, the country’s Head of State was President Recep Tayyip Erdogan. Under his leadership from 2014, the Turkish government has set out a number of multi-sectoral reforms aimed at rapidly progressing the economic growth and development of Turkey. In the same line, Erdogan’s government embarked on efforts directed towards the development of a new Turkish Constitution. One of the political challenges emanates from the continued fighting between the Kurdistan Workers Party (PKK) loyalists and the Turkish security forces (UK Foreign & Commonwealth Office). These armed conflicts are focused largely in the South-east parts of Turkey.

Firm Structure, Strategy and Rivalry

The current globalised and competitive wine industry compels firms to devise new and innovative strategies to survive, create new products and sustain competitive advantages. In 2015, for example, Kavaklidere Saraplari AS sustained its competitive advantage as the leading Turkish wine company with a volume share of 22% (Euromonitor). According to Euromonitor, this strategic position is attributed to the high level of consumer awareness of the brand, having been in the industry longer that its domestic competitors. Furthermore, the company benefits from an extensive distribution network. Observably, the increasing bans of promotion and marketing of alcoholic products in Turkey tend to favor the existing leading brands because the bans limit the awareness of new entrants.

Market Entry Strategy

By establishing the opportunities and threats in foreign market, a multinational is able to effectively utilize its distinctive and rare resource to exploit the location, ownership and internalization advantages available in the targeted country. For example, according to the UK Foreign & Commonwealth Office, the bulk of the Turkish economy is constituted with a diversified services industry including education, health, financial services and real estate. The manufacturing industry also plays a critical role in Turkey’s economic development and growth because it accounts for a significant portion of the country’s exports to Europe. An understanding of this market and of incentives for FDI inflows, is a strategic initiative that ensures the adoption of an effective market entry strategy in Turkey. This process demands a review of its underlying concepts as well as the analysis of its appropriateness and limitations in the Turkish wine industry.

Theories of Foreign Direct Investment

Foreign direct investment theories can be approached from two broad groups: micro- and macro-level. Micro-level FDI theories include John Dunning’s Eclectic theory; oligopolistic markets and theory of internalization (Dunning & Lundan). On the other hand, macro-level theories of FDI include those that cover exchanges rates, institutional analysis and the economic geography of a country. Macro-level theories are vital as they help to shed light on motivations for foreign investments. Other key theories relevant to the understanding of motivations for FDI include economic geography theory and capital market theory. The former posits that there is a variation in FDI levels because each country has unique national competitive advantage enablers including natural resources, workforce and infrastructure. The latter posits that interest rates influence foreign direct investment inflows to a country.

Expectedly, countries such as France, Spain and Italy have higher levels of FDI than Turkey because of their high levels of development in their political, social, economic, technology and legal environments (Azabagaoglu, Akyol, & Ozay). Congruent with the institutional analysis theory, the institutional framework of Turkey is a key determinant; hence, political stability of the country is vital in attracting FDI inflows, especially in the wine industry.

As part of the micro-level FDI theories, the OLI (Ownership, Location and Internalization) Framework is the most comprehensive model for understanding the pattern and degree of inward foreign direct investment (IFDI) and outward foreign direct investment (OFDI). Consistent with Dunning’s OLI Paradigm theory, also known as Eclectic Paradigm theory, potential foreign investors in Turkey must have ownership, location and internalization advantages (Dunning & Lundan). Ownership advantages include patents, production technologies and marketing systems. In other words, the availability of ownership advantages in a country increases the possibility of a foreign investor or multinational company to locate its business in that country.

Besides ownership advantages, the degree of FDI in a country is also influenced by advantages linked to location. Location-based advantages include low production costs, resource endowments, better institutions and access to raw materials. This observation justified the noted high degree levels of FDI in developed economies marked by low operational costs due to efficient transport systems, accessibility to affordable labor and good mature legal institutions (Kolstad & Villanger). For instance, the high level of maturity of the Italian and Spanish wine industries make them more attractive than the Turkish wine industry due availability of more location advantages in the two countries. Lastly, the internalization advantages centers on the “how” feature of the foreign direct investment. Economically, FDI serves to minimize transactional cost of multinational entities associated with the imperfections in a market. For this reason, internalization helps multinational corporations (MNCs) to improve their profitability.

Determinants and Appropriateness of FDI

Cost of labour and productivity. Wage remains as the most debatable determinant or indicator among FDI determinants. Theoretically, low cost of labor attracts FDI under dependency and modernization arguments. In other words, higher wages or cost of labour tend to discourage foreign direct investments. The cost of labour is a key determinant of FDI especially in vertical FDI and labour intensive industries. However, the cost of labor is insignificant where there is relatively a small difference in the cost of labour among countries. Under such conditions, the FDI is often attracted by the availability of the desired skilled labor.

Market openness. The openness of a market is reflected by the ratio exports and imports to GDP. The underlying rationale is that countries that are open to international trade or globalization are more attractive for FDI than countries that tend to limit international trade. For entities seeking horizontal FDI, market restrictions make the host countries less attractive. On the other hand, less market restrictions have a positive effect on FDI. This assertion compliments the tariff jumping argument, which points that foreign entities seeking to serve the demand of a local market are much likely to invest in a host country if the entities meet difficulties in exporting to the host country. There is a strong correlation between FDI inflows and market openness in the manufacturing sector (Mina).

Political risk. The significance of political stability in determining FDI inflows is clear especially, industries that largely depend on the political stability, such as the tourism and travel industry. In some rare scenarios, for example, the extraction of oil in Nigeria, profitability of some sectors tends to cover the risk of instability. Proxy factors such as the frequent incidences of riots and protests also influence the level of FDI inflows because absenteeism and turnover have a negative impact on the productivity of companies. The likelihood of regime change also influences FDI.

Infrastructure, growth and tax. Good infrastructure is an opportunity for FDI inflows. Infrastructure includes telecommunication systems, railways, ports and roads among others. Furthermore institutional developments such as legal services and accounting also collectively form a country’s infrastructure. For most developing economies, poor infrastructure is often highlighted as the barriers of FDI inflows (U.S. Department of State). A rapidly growing economy is likely to offer better opportunities for foreign investment relative to stagnant economies (Lipsey).

Limitations of FDI

Despite the fact that most emerging economies in Western Asia and the Middle East region have noted considerable improvement in regard to their domestic investment environment since the wake of the 2008 economic crisis, there are a number of factors limiting FDI inflow in modernizing economies like Turkey. Undoubtedly, the significance of this limiting variables differ between economies in Western Asia and Europe. Some of the common challenges hindering FDI inflows in the region include high inflation rates, political instability, bureaucracy and rampant corruption, slow implementation of privatization initiatives and weak law enforcement. Turkey and other economies undergoing modernization are faced with challenges of bureaucracy and corruption (U.S. Department of State). For this reason, foreign investors are forced to undergo lengthy proc government procedure to set up. Despite the Turkish government’s recent efforts to streamline the privatization and the globalization efforts, corruption is still rampant in several business activities in the country. Unquestionably, Turkey has continued to adopt multi-sectoral economic reforms with the aim of improving their regional and global competitiveness and attractiveness to various investors through tax reforms and investment in the promulgation of a new constitution. Despite these developments, there are instances of misinterpretation of the Turkish constitution, as well as inconsistent and sluggish enforcement of laws; thus hampering FDI inflows into the wine sector.

Contemporary Management Issues

The current outward foreign direct investment conditions induce significant challenges to various global investment chains. Following the 2008/2009 global economic and financial crisis, the nature of foreign direct investment (FDI) around the world has nurtured conflict of interest between emerging and developed economies (Aybar A). Some of the areas of contentions include protection of the environment, security, sustainability and labor standards. There has also been a debate on the viability of bilateralism in the ever increasing polarized world. Following the absence of standards international legislations to resolve conflict between corporations, as well as nations, FDI climate has continued to be problematic in reducing poverty, offering worth employment and income distribution, developing an equitable and sustainable world. Leveraging sustainability regulations and safeguarding the interest of for-profits entities also induces a serious challenge. As highlighted earlier, bureaucracy and rampant corruption also limit the success of investments in Turkey. Central to these challenges is the political instability in Turkey. Political instability and other factors in the external environment are hardly influenced by companies. Therefore, strategic and competitive advantages can easily be gained by focusing on the internal environment of companies operating in this competitive industry.

From the review above, it is quite evident that the most predominant challenges facing

Turkish companies operating in the wine sector include marketing barriers and lack of adequate organizational structures. For this reason, more attention is needed in the areas of strategic marketing, pricing, promotion and distribution. Branding is one of the most important issues in the Turkish wine industry which is constrained by bans in advertising alcoholic drinks (Euromonitor). As noted earlier, only existing and leading brands remain visible even in the absence of promotion and advertising efforts. Despite the fact that the significance of branding has been highlighted in the alcoholic and beverage industry, the wine sector is still lagging others in implementing this strategic advantage. Therefore, companies in the Turkish wine industry should strive to protect their brand by understanding their competitive and commercial value.

Regarding inadequate organizational structures, small and new entrants should consider forming associations with leading brands in order to gain premium prestige and status as means of effective market entry, as well as gaining consumer acceptance. The same approach would work in farms where combined efforts would generate economies of scale and competitive advantages. For example, small wineries can combine characteristics of water quality, soil and climate in clusters to produce a unique taste of wine, specific to that cluster; hence, not imitable in other regions. Even after developing inimitable wine production processes and products, companies in the Turkish wine industry need innovative marketing professionals to present and position products that will gain widespread consumer appeal in various market costs effectively. Both business and technological innovative capabilities are essential in improving the performance and productivity of small firms.

Innovative entrepreneurship is essential in the wine sector because it translates to product and market driven production. To sustain their competitive advantages in the global market, Turkish wine makers should adopt a hybrid of product differentiation and pricing strategies (Baroto, Abdullah, & Wan1). Product differentiation can be achieved by focusing on Turkish grape varieties, including Kalecik Karasi, Okuzgozu and Bogazkere (Azabagaoglu, Akyol, & Ozay). Additionally, the Turkish wine sector should apply market oriented strategies to improve its market share globally. An increase in the global market share is essential as it will cushion the sector from market dynamics as in the case of falling inbound inflows from Russia because of political instability.

Direct marketing should also be used to improve wine sales. The success of direct marketing demands that the Turkish wine sector understand its strategic role in implementing effective marketing concepts. Therefore, companies in the Turkish wine sector should approach direct marketing as a strategic initiative; hence, it is important to plan distribution, communication, marketing and customer information. It is at this point that information systems should be adopted by the sector to improve strategic and competitive advantages of the sector. Some of the information systems that can be used to support direct marketing include customer relationships management (CRM) systems, decision support systems (DSS) and knowledge management systems among others (Laudon & Laudon). Furthermore, redundancies in management and administrative processes in the Turkish wine sector organizational structures can be minimized through process standardization and system consolidation where necessary. In line with process standardization, the Turkish wine sector should consider outsourcing non core business activities and focus on the core business of farming and wine making.

Conclusion

This report presented a detailed analysis of the Turkish wine market, with emphasis on the Porter’s National Diamond model, Foreign Direct Investment and contemporary management challenges facing entities in the Turkish wine industry. The ability of Turkey to encourage and attract FDI depends largely on the provision of a favorable investment setting because the investment environment plays a vital role in influencing investment decisions made by foreign investors as to whether to invest in the Turkish industry or to make investments in other countries that offer location, ownership and internalization advantages. The relatively low FDI inflows in Turkey can be chiefly linked to the political instability in the country, underdeveloped domestic market and insufficient infrastructure.

Collectively, these factors limit market opportunities in Turkey, in turn discouraging FDI inflow as the cost of other developing economies such as South Africa and Chile. Some of the factors limiting FDI inflows into the Turkish Wine sector include political instability, underdeveloped domestic market, bureaucracy and corruption. Despite the dismal performance of Turkey’s FDI inflows, there is limited studies regarding the competitiveness of the Turkish wine sector. Therefore, researchers should consider conducting a quantitative study of the sector alongside to improve FDI inflows.