ICT Sector Thrives in Turkey, But Not Without Risks

Key Takeaways:

• The ICT sector is crucial to the Turkish economy, with significant growth in revenues, investments, and employment.
  

• Turkey has launched multiple projects to enhance its 5G infrastructure, improve national connectivity, and bolster cybersecurity.

  
  

  
  

• The ICT sector's growth could foster economic cooperation with the EU, opening new market opportunities for investors.

  
  

  
  

• Turkey could collaborate with the EU on the European Digital Transformation Decade 2030 Program to enhance digital capabilities.

  
  

  
  

• Potential investors must consider risks such as the digital services tax (DST) and government-imposed online activity restrictions.

The Information and Communication Technology (ICT) sector has emerged as a linchpin of the Turkish economy. Between 2021 and 2023, the sector expanded by an impressive 54%, reaching a combined market value of nearly $25 billion.

ICT's influence on economic growth and its potential to unlock new market opportunities is significant. In Turkey, the sector's brisk expansion underscores a narrative of innovation and productivity across various industries.

This technological surge fosters new business models and revenue streams, enhancing Turkey's global competitiveness. For investors, Turkey's ICT sector represents a strategic entry point into the broader regional market.

The development of the ICT sector in Turkey, between 5G and cybersecurity.

But what is ICT? Because technologies evolve rapidly, there is no universally accepted definition. We can define ICT as a broad group encompassing “manufacturing and services industries whose products primarily fulfill or enable the function of information processing and communication by electronic means, including transmission and display.”

More specifically, while information technology refers to "anything related to computing technology that is used by businesses" to enhance productivity, such as computers, smartphones, and TV systems, communication technology entails "anything used to process and communicate information," from social media platforms and live streams to software applications.

According to the U.S. International Trade Administration's assessment, the communication technologies market in Turkey grew from $9.1 billion in 2021 to $13 billion in 2022, while the information technologies market grew from $6.9 billion to $11.7 billion in the same period.

Employment in these two branches of ICT increased by 17% and 7%, respectively. Although employment growth is expected to slow, the Turkish government's prioritization of the ICT sector and recent initiatives bode well for future growth.

In 2016, the Turkish Information and Communication Technology Authority (ICTA) launched the Turkish 5G Forum to prepare for 5G developments. Through workshops, conferences, and cooperation agreements, the Forum has undertaken several initiatives to enhance Turkey's domestic 5G infrastructure and connectivity, especially in major cities.

Parallel to these developments, Turkey recognized the critical importance of investing in cybersecurity. According to the NATO Cooperative Cyber Defence Centre of Excellence, around 136,000 cyber-attacks were identified in Turkey in 2019, prompting significant concern among policymakers.

This led to the establishment of the Turkish Cyber Security Cluster Project, a platform designed to bring together experts from the public and private sectors to devise innovative solutions to cybersecurity challenges and position Turkey as a leading producer of cybersecurity technologies.

Analysis

President Recep Tayyip Erdoğan has expressed aspirations for Turkey to become one of "the world's leading countries in information and communication technologies." From an international perspective, achieving this goal would impact the global ICT landscape. Turkey's sustained growth in the ICT sector might strengthen economic ties with the European Union (mainly Germany, the leading European ICT market).

According to the Report on the Development of Cooperation in the ICT Sector between Turkey and the European Union, areas where Turkey-EU exchange could improve include consumer electronics (PCs, tablets, mobile phones, AI, blockchain, and robotics), AI regulation, and fiber optic solutions.

Expanding Turkey's ICT sector could create new market opportunities for European companies eager to invest and establish partnerships with Turkish firms to access new markets, technologies, or talent. Collaboration between Turkish and European ICT companies could accelerate innovation through joint research projects and exchange initiatives.

These opportunities became even more crucial with the European Union's European Digital Transformation Decade 2030 Program, a comprehensive framework guiding all the EU’s digital-related actions. Investors should assess potential risks related to closer partnerships with Turkey, including democratic checks and balances and taxation issues.

Sector-Specific Considerations: Obstacles of Closer Cooperation with Turkey in the ICT Sector

1. The Digital Services Tax (DST): Investors and businesses interested in entering Turkey's ICT sector should consider the digital services tax (DST) passed in March 2020.

The 7.5% DST affects digital service providers with a global revenue threshold of €750 million and a local revenue of TRY 20 million. It primarily involves revenues from online advertising services, digital content sales or services, and digital platform services.

Critics argue that Turkey's DST affects a broader range of digital activities than similar taxes in other countries. For example, in France, the DST does not affect online sales or the provision of digital content for buying or selling online. However, Turkey is expected to adopt the new international tax framework established by the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy, designed by the OECD/G20 Inclusive Framework.

This framework should replace the DST, aligning Turkey's digital tax system with the global trend. This change could lead to increased tax revenues from digital companies operating in Turkey and greater tax fairness in the global economy. Despite criticisms, the DST remains in force.

2. Restrictions on Social Media Platforms: Another factor to consider is Turkey's restrictions on social media platforms. In October 2022, seven months before the general elections of May 2023, the AKP-MHP coalition endorsed a law aimed at combating disinformation. Critics, including the parliamentary opposition, media rights activists, and external observers, labeled the law an evolution of the censorship implemented by the Turkish government.

Earlier, in 2020, the Turkish government introduced a law to regulate and monitor social media content. Restrictions included requiring users to geolocate under certain circumstances, adhering to parameters for content creation, banning access to specific platforms, and continuous monitoring of personal data. Critics argue that these laws harm freedom of expression and economic activities, particularly for small and medium-sized enterprises (SMEs) reliant on online activities and advertisements.