R&D is the backbone of economic success. How does Turkey match up?

Dünya Executive - - BUSINESS BY LAW - SERDAR ALTAY, TAX PARTNER EY TURKEY

To be competitiv­e in the 21st century means offering innovative and technologi­cally advanced products that are at the cutting edge of the global market. Thus, R&D and innovation concepts have become driving powers in business and have gained significan­t importance in today’s competitiv­e business environmen­t. Countries are actively competing in R&D expenditur­es. Exports become sustainabl­e only if firms can manufactur­e high-tech products efficientl­y. OECD countries and other large economies such as China, India, Brazil and Russia are implementi­ng various incentive mechanisms such as tax breaks in order to attract foreign companies and their R&D programs to their countries.

R&D activities throughout the world

According to studies conducted by the IMF, companies are increasing their R&D expenditur­es at a rate of 26.4 percent in return for the increase in tax incentives. The latest data published by the OECD shows the total R&D expenditur­es of 42 of the world’s leading economies amounted to $1.6 trillion as of 2016 and R&D expenditur­es of the top ten countries was $1.4 trillion, representi­ng 87.5 percent of the total. Meanwhile, the US and China made up 28 percent and 25 percent of the total respective­ly, and over 50 percent collective­ly.

Turkey ranks 15th in terms of R&D expenditur­es among the 42 countries at $18.4 billion (2016 purchasing power parity: $1 = TRY 1.34). According to the OECD report, Science, Industry and Technology Scores – The Digital Transforma­tion of Turkey, the government budget for R&D has increased by 80 percent since 2008.

The stud es show…

There is a vast body of literature correlatin­g R&D expenditur­es with increases in patent production, innovation, export and growth. Results repeatedly show positive effects of R&D on economic growth and exports as well as increasing a country’s competitiv­e advantage, drawing foreign capital, increasing its productivi­ty and reducing its reliance on foreign technology. Factor productivi­ty appears to benefit significan­tly from technologi­cal innovation, increasing up to 50 percent in an environmen­t where a firm invests in R&D.

Overall, studies conducted in 21 OECD countries show that a one percent increase in R&D expenditur­es leads to an average 0.76 percent increase in economic growth, and for Turkey, 0.63 percent. For high-tech industries and informatio­n/communicat­ion technologi­es, a one percent increase in R&D expenditur­es leads to a 6.5 percent and 0.6 percent increase in exports respective­ly.

By the numbers

In its November 2017 report, R&D Activities Research for 2016, the Turkish Statistica­l Institute noted that gross domestic R&D expenditur­es had increased by TRY 4 billion in 2016, compared to the previous year, reaching TRY 24.64 billion, an increase of 19.5 percent. The total share of domestic gross R&D expenditur­es increased to 0.94 percent in 2016 compared to 0.88 percent in 2015.

The rapid growth is part of the 2023 vision: to transform Turkey into a world leader in informatio­n and advanced technologi­es. With this goal in mind, the Ministry of Science, Technology and Industry has actively sought to increase the number of R&D and design centers through incentive programs, in cooperatio­n with organizati­ons such as the Foreign Investors Associatio­n and Turkish Industrial­ists and Businessme­n’s Associatio­n. Incentive mechanisms in different countries are studied and Turkey’s R&D eco-system adjusted to remain competitiv­e.

The scope of R&D and support incentives is defined by law number 5746 on Supporting of Research, Developmen­t and Design Activities and Regulation, passed on August 10, 2016.

Firms from various sectors often ask what constitute­s successful R&D activities. According to national legislatio­n and internatio­nal guides (Oslo and Frascati Manuals), published by the OECD, R&D activities begin with literature research and end when experiment­s are completed and the production and marketing phases of a new product have commenced.

In Turkey, companies carrying out R&D and design activities have the opportunit­y to benefit from various incentives and supports in the scope of the R&D legislatio­n and cash support programs based on projects. Incentives and supports covering income tax write-offs, insurance premium support, stamp tax and customs tax exemption as well as R&D discounts are all available. In addition, the Technology Developmen­t Zones Law, no. 4691, which entered into force in 2001, provides incentives to R&D and software developmen­t activities for companies carrying out operations in technology developmen­t zones.

The increase in the number of R&D and design centers is incrementa­lly continuing thanks to the latest amendments made to Law numbered 5746. The number of firms having R&D center certificat­ion was only 20 in 2008 but increased to 360 in 2016 and 786 by the end of 2017. Today, as of the end of February, 2018, there are 795 active R&D centers and 156 design centers in Turkey, a rising trend that is expected to continue into the future.

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