Law on the Incentive of Foreign Investment

Law on the Encouragement of Foreign Investment is Law No. 6224, adopted on 18 January 1954 and published in the Official Gazette on 23 January 1954, thereby entering into force. Enacted as part of the Democratic Party (DP) government’s objective to open the Turkish economy to the outside world and establish a competitive foreign trade capacity, the law aimed to encourage the attraction of foreign capital into Türkiye. Designed to strengthen Türkiye’s position within the post-Second World War international economic cooperation framework, it was prepared to address the shortcomings of Law No. 5821 of 1951 and was repealed in 2003 by Law No. 4875 on Direct Foreign Investments. The law introduced significant provisions to facilitate the entry of foreign capital, support the domestic private sector, and accelerate economic development.

The Law on the Encouragement of Foreign Investment was a product of the DP’s liberal economic policies during the 1950s. In the aftermath of the Second World War, increasing international cooperation and economic development models led by the United States influenced Türkiye, and reports and programs prepared for the country were implemented by the DP. The DP’s industrialization policies aimed to strengthen the private sector, attract foreign capital, and promote industrial development through public investment. However, from 1953 onward, difficulties in the transition to the private sector and the failure to achieve desired results in economic policies led to an increase in public investments.

During this period, earlier laws enacted to attract foreign capital—the Law No. 5583 of 3 March 1950 on State Guarantees for Private Enterprises and Foreign Exchange Commitments, and the Law No. 5821 of 1 August 1951 on the Encouragement of Foreign Capital Investments—had not achieved sufficient success. The 1951 Law restricted the operational fields of foreign capital and imposed limitations on profit transfers. To remedy these deficiencies, Law No. 6224 on the Encouragement of Foreign Investment was drafted and came into force in 1954. The new law granted broader powers to foreign investors, expanded their operational fields, and eliminated restrictions on profit transfers.

Law No. 6224 on the Encouragement of Foreign Investment consists of 14 articles and related clauses. Its key provisions are as follows:

• Article 1: Establishes the conditions under which foreign capital investments must contribute to the country’s economic development, operate in areas open to Turkish private enterprises, and not create monopolies or special privileges. A Foreign Investment Promotion Committee was established to assess the suitability of investments. The committee comprises the General Director of the Central Bank of the Republic of Türkiye as chairperson, the General Director of the Treasury, the General Director of Internal Trade, the General Director of Industry, the Director of the Bureau of Studies and Planning of the Directorate of Enterprises, and the General Secretary of the Union of Turkish Chambers of Commerce and Industry and Commodity Exchanges. The committee evaluates applications within 15 days, and decisions may be appealed within 30 days. The appeal authority is the Ministries of Finance, Economy and Trade, and Enterprises.
• Article 2: Defines foreign capital and recognizes spare parts, auxiliary components, raw materials, and technical services as capital.
• Articles 3 and 4: Regulate the methods of evaluating profits and principal capital.
• Article 5: Facilitates the transfer of shares and specifies that the Ministry of Finance may guarantee the transfer of dividends and proceeds from the sale of shares or temporary receipts.
• Article 6: Regulates that the Ministry of Finance may provide guarantees for foreign borrowing up to one billion Turkish Liras.
• Article 7: Defines the employment of foreigners.
• Article 9: Assigns responsibility for the implementation of the law to the Ministry of Economy and Trade.
• Other Articles: Contain provisions regarding the enforcement of the law.

In 1995, Law No. 4105 amended Article 1 of Law No. 6224 to prohibit foreign capital from holding a majority stake in institutions that would constitute a monopoly.

The primary objective of the law was to attract foreign capital and promote collaboration with the domestic private sector to accelerate Türkiye’s economic development. The law introduced the following innovations to facilitate the entry of foreign capital:

• Expansion of Operational Fields: While the 1951 Law restricted the operational fields of foreign capital, the 1954 Law removed these limitations and opened all sectors contributing to the country’s economic development and accessible to Turkish private enterprises to foreign investment.
• Profit and Capital Transfer: The previous law imposed restrictions on the transfer of profits and principal capital; the new law eliminated these restrictions and allowed free transfer of profits, proceeds from the liquidation of shares, sales revenue, and interest and amortization payments on foreign debt after 31 December 1953. The Ministry of Finance and the Foreign Investment Promotion Committee monitor the compliance of such transfers.
• Equality Between Domestic and Foreign Capital: Foreign capital was granted equal treatment with domestic capital, and restrictions imposed on foreign capital by Laws No. 2007 and 2818 were removed.
• Technical and Material Capital: The law expanded the definition of capital to include spare parts, auxiliary components, raw materials, and technical services as capital. It also ensured that foreign capital already entered into the country prior to the law’s enactment would benefit from the same provisions.

The law aimed to promote industrial investments using domestic raw materials to achieve foreign exchange savings, increase exports, transfer advanced technical knowledge to the country, and generate new employment opportunities to raise national income.

The adoption of the Law on the Encouragement of Foreign Investment was regarded as a significant step in Türkiye’s economic development process. According to an assessment conducted in 1954, it was estimated that to employ the 150,000 individuals entering the working age each year, an average investment of 3,000 liras per person was required, amounting to an annual investment need of 450 million liras. In the 1954 budget, state investment expenditures were set at 596 million liras, but it was noted that this amount was insufficient for establishing new facilities and that foreign capital was urgently needed.

Among the first investments attracted to the country after the law came into force were:

• 67,500 British pounds by a British company for a sewing and embroidery thread factory,
• 75,000 US dollars by the American Poset Match Factory for a match factory,
• 50,000 US dollars by a French company for a chemical industry plant,
• 10,000 US dollars by the American Express Company Inc. for a travel and tourism office,
• Investments by the Swiss-based Migros in retail stores,
• A match factory established in Sakarya through a joint venture between domestic and foreign capital.

Following the 1951 Law, 42 applications for investment in Türkiye were submitted, of which 17 were rejected, 15 accepted, and 10 remained under review. The approved applications brought approximately 15 million liras of foreign capital into the country. It was anticipated that the broader opportunities provided by the 1954 Law would lead to increased demand for foreign investment.

The law’s liberal structure aligned with the international economic cooperation framework of the time, but it also faced criticism and shortcomings. The newspaper Ulus criticized the law for the relatively small amount of capital attracted to Türkiye, comparing it with Israel, where a similar law brought one billion liras in investment, while Türkiye received only 29 million liras. According to the newspaper, most of the 36 firms applying to invest in Türkiye produced goods considered luxury or non-essential items, and investments directly contributing to economic development remained limited.

Certain provisions of the law were viewed as restrictive to capital inflow. Criticism was directed at the narrow definition of “enterprise” as the only eligible form of investment and the limited scope of the concept of foreign capital. Additionally, permitting foreign capital to enter agriculture and trade raised concerns that Turkish peasants and domestic traders could suffer harm. Drawing on the example of Palestine, it was argued that uncontrolled entry of foreign capital could generate political and social risks. However, the law’s mechanism of controlling investments through the Foreign Investment Promotion Committee mitigated these concerns to a considerable extent.

Law No. 6224 on the Encouragement of Foreign Investment formed the foundation of Türkiye’s foreign investment policy for many years. In 1995, Law No. 4105 amended the law to prohibit foreign capital from holding a majority stake in institutions that would constitute a monopoly. The law was repealed in 2003 by Law No. 4875 on Direct Foreign Investments, which introduced a more modern framework for regulating foreign investments.