Bachelor Thesis “The Institutional Setup in Turkey”
International Business and Politics
Advisor: Dzmitry Bartalevich
Hand-in date: 22nd of May 2014
Number of pages:
STUs: XXXXXXXXX
Group number 7
Klaus Højland – 070283-xxxx
Viktor Stauning – 120984-xxxx
Martin Kastrup – 080591-xxxx
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Declaration of Authorship
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Abstract This thesis uses the Varieties of Capitalism to analyse the institutional setup facing firms in
Turkey. Using a conceptualization of institutions as a set of formal or informal rules that actors in
general follow, we examine the Turkish political economy to give a characteristic of the
operational environment for firms in Turkey.
By analysing five spheres of institutional coordination and holding these up against the
ideal types of the Varieties of Capitalism, we identify the characteristics of two distinct
institutional environments in Turkey, which have little operational interaction. Large firms
constitute one segment, which is characterised by measures associated with coordinated market
economies. Small firms populate the other segment and is characterised by fluid labour markets
and little regulation.
We find that each segment lean toward opposite ideal types of the Varieties of Capitalism
but diverge in some respects from the ideal types and have impediments to fruitful interplay.
Substituting for weak labour unions, onerous state regulation on labour protection only apply to
firms that fulfil conditions exclusively found in larger firms. We find that this peculiar feature of
the current institutional equilibrium influences the strategic impetus for both small and large
firms seeking to derive advantages from the institutional environment.
For large firms, investments in workers are protected and small firms benefit from high
flexibility of labour. This has facilitated the growth of a high productivity segment of the
economy while enjoying relatively low unemployment, providing political stability during the
on-going transition. However, due to low levels of education and know-how, small firms fail to
achieve productivity gains and missing fruitful interaction with larger firms who in turn lack an
educated labour force to recruit from.
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Table of Contents
DECLARATION OF AUTHORSHIP ..................................................................................................................... 2
ABSTRACT ............................................................................................................................................................... 3
1. INTRODUCTION ................................................................................................................................................ 6
2. METHODOLOGY ................................................................................................................................................ 9
2.1 WHY THE VOC .................................................................................................................................................................. 11
2.2 SINGLE CASE STUDY ........................................................................................................................................................ 12
2.3 SOURCES ............................................................................................................................................................................. 12
2.4 DELIMITATIONS ................................................................................................................................................................ 14
3. VARIETIES OF CAPITALISM ......................................................................................................... 17
3.1 INSTITUTIONS ................................................................................................................................................................... 17
3.2 THE FIRM ........................................................................................................................................................................... 17
3.3 THE FIVE SPHERES AND SIGNIFIERS ............................................................................................................................. 18
3.3.1 The Sphere of Corporate Governance .............................................................................................................. 19
3.3.2 The Sphere of Industrial relations .................................................................................................................... 21
3.3.3 The Sphere of Vocational Training ................................................................................................................... 23
3.3.4 The Sphere of Inter-‐firm Relations ................................................................................................................... 25
3.3.5 The Sphere of Intra-‐firm Relations ................................................................................................................... 27
3.4 INSTITUTIONAL COMPLEMENTARITIES ........................................................................................................................ 28
3.5 COMPARATIVE INSTITUTIONAL ADVANTAGE ............................................................................................................. 31
4. TURKEY IN BRIEF ................................................................................................................................ 34
4.1 THE STATE AND THE INDUSTRY PROFILE ................................................................................................................... 34
4.2 THE DIVIDED LABOUR MARKET .................................................................................................................................... 36
4.3 POLITICAL LEADERSHIP AND THE EUROPEAN UNION .............................................................................................. 38
5. THE FIVE SPHERES IN TURKEY ................................................................................................................. 39
5.1 CORPORATE GOVERNANCE IN TURKEY ........................................................................................................................ 39
5.2 INDUSTRIAL RELATIONS IN TURKEY ............................................................................................................................ 43
5.3 VOCATIONAL TRAINING IN TURKEY .............................................................................................................................. 48
5.4 INTER-‐FIRM RELATIONS ................................................................................................................................................. 53
5.5 INTRA-‐FIRM RELATIONS IN TURKEY ............................................................................................................................. 57
6. INSTITUTIONAL COMPLEMENTARITIES ................................................................................................ 60
THE SME SEGMENT ................................................................................................................................................................ 60
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THE LARGE ENTERPRISE SEGMENT ..................................................................................................................................... 63
7. COMPARATIVE INSTITUTIONAL ADVANTAGE AND DISCUSSION .................................................. 66
8. CONCLUSION ................................................................................................................................................... 69
10. BIBLIOGRAPHY ............................................................................................................................................ 72
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1. Introduction For more than a decade, Turkey has shown impressive economic performance, averaging 5 per
cent GDP growth per year since 2002. Alongside relative political stability, economic
development has boosted incomes and welfare for millions of Turkish citizens. Structural reforms
stimulated by the EU accession process has increased the role of the private sector and spurred
Turkey to the forefront of globalization and international trade. However, Turkey is still in a
developing phase, with less than half the average disposable income of OECD countries, one in
five Turks is poor, and indices for human development are significantly lower than even the least
developed members of the EU which Turkey strive to become part of (OECD 2014c).
Sustained economic growth and prosperity have many precursors – history, politics,
culture, geography. A key component of economic growth, and the focus of this paper, is the
private sector and the efficiency of firms. It is our view that assessing efficiency and future
viability of firms throughout an economy requires a broader view than GDP growth or
productivity numbers. Each firm and each industry face specific challenges and possibilities, but
the overarching institutional framework in domains such as labour relations, access to finance,
and training outline the operational reality of firms.
To map the specific institutional setup facing firms in Turkey, we will utilize the
theoretical framework of the Varieties of Capitalism. The framework uses two ideal-types of
capitalist coordination and has the firm as main actor. Applications of the framework have for the
most part been to examine highly developed market economies (See for example Hall and
Soskice 2001 and Hancké, Rhodes and Thatcher, 2007). However, we believe that the
redeployment of this theoretical framework on a developing economy while provide a nuanced
view of the institutional setup in Turkey as well as offering a new perspective the theory
underpinning the VoC. The framework organizes the most important elements of the institutional
setup facing firms in five distinct spheres. With characteristics outlined, synergies across spheres
can be identified. The overall efficiency and potential for comparative advantages will become
discernible. Thus, instead of focusing on the characteristics of Turkey as a developing economy,
we hope that the VoC will assist to uncover synergies and disharmonies within the institutional
setup that can inform a further evaluation of the Turkish economy.
The capitalist mode of production in modern market based economies is made possible by
institutions ranging from basic protection of property rights, to complex government
arrangements facilitating upgrades in productivity. We believe that institutions across nations are
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diverse and that a variety of equilibria are present and viable. This view is supported by the VoC,
which proposes two ideal-types that institutional setups in capitalist economies will resemble.
The VoC is distinguished from most models of comparative capitalism by the notion of two ideal
types that are not convergence points, but rather provide a conceptual framework and reference
points to evaluate data in. We believe that widening the application of the VoC does not
compromise the theoretical underpinnings of the framework, in fact, it is in the spirit of the
original work (Hall and Soskice, 2001: 2) that we apply the framework to Turkey and use the
ideal-types as a vehicle for analysis, while allowing for a unique, Turkish institutional setup.
Mapping the institutional setup in Turkey is necessary to uncover synergies and
disharmonies or discernable trajectories. This can provide a basis for considerations for future
domestic and international policymaking. Turkey is a major importer and exporter, and the EU is
the main export market of Turkey. This makes the economic potential and specifics of the
institutional setup in Turkey of vital interest to European policy makers, other regional and
international trade partners, as well as international investors or business interest. Furthermore,
by applying the framework of the VoC to a country, and indeed a type of country, that has not
been explored to great extent by this framework, we contribute to the development of the VoC.
We hope that these considerations can contribute to the broader discussion and continuing
development of typologies of capitalism. This leads us to the following research question:
What are the characteristics of the Institutional setup in Turkey when analysed using the
ideal-types of the Varieties of Capitalism?
The report is structured as follows: The first section will account for our methodological
considerations. The second section outlines in detail the specifics of the VoC framework and how
we intend to utilize it on Turkey. This will expand on the theoretical and methodological
considerations on choices of signifiers that will inform the analysis. The third section will briefly
deal with key elements of the Turkish society before analysing the five spheres and organizing
these in accordance with the theoretical framework. This section uncovers a deep division in the
Turkish economy with each segment representing different ideal-types.
The fourth section will observe and analyse synergies and disharmonies within and across
the five spheres. Among key findings in this section is the specifics of the divisions in the
Turkish economy: one with large, export-oriented firms with reasonably high productivity, access
to capital, collaborative tendencies, and a workforce protected by state regulation. Across the
divide, a vast quantity of small and medium sized enterprises (SMEs) employ almost 80 per cent
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of the Turkish labour force and most of the massive, informal working population. Unlike for
large firms, the institutional reality for SMEs in Turkey is practically unregulated and is
characterised by low levels of technology, low skill levels, and low productivity.
Lastly, the fifth section will wrap up the analytical narrative, discuss findings, and attempt
to put these in perspective. We find that applying the framework of the VoC shows that the two
segments of the economy operate in divergent environments. The underdeveloped SME segment
has the ability to soak up vast quantities of excess labour, providing political stability and
employment, but standards of living and job security remain low. Large enterprises in Turkey is
driving economic growth enjoying rising productivity as well as job security and rising wages for
employees.
We find that this investigation of the Turkish institutional setup provides a feasible
approach to evaluation of the efficiency and viability of the operational environment for firms in
Turkey.
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2. Methodology This paper aims to depict the current institutional setup in Turkey. To do so, we will use the VoC
framework to compose an analytical narrative. Employing this framework and developing the use
of ideal-types allow us to simplify and organize our findings and thereby create a coherent story,
which will give a depiction of the current situation facing firms in Turkey today (Jackson 2011:
146). This application of the VoC relies on five spheres to guide the investigation of specific
elements of the Turkish institutional setup, and allow us to focus our research.
This methodology section will develop the core concepts used in this report in detail
and will create a solid foundation for our method of inquiry. We will then argue for the choice of
VoC framework and develop the use of ideal types in a single case study as a complement the
usual comparative use of the theoretical framework. This redeployment of the VoC theories
builds on the arguments made by Hall and Soskice (2001: 35). We will then outline the important
delimitations and justify our choices regarding the limited use of the theoretical framework.
Finally we will discus the sources used as well as the conception of knowledge adopted from
Patrick T. Jackson’s (2011: 126).
Institutions are at the centre of this report. The VoC framework informs our
understanding of institutions as the formal and informal rules of a nation. This paper focuses on
how institutions within the five spheres shape conditions for the firm (Hall and Soskice 2001: 9-
10). In effect, this is the institutional setup that is the focus of this report.
We assume that all actors in the political economy are acting rationally in order to
optimize their strategic position, and the firm is as the principal actors that follow rational
strategic paths, which are optimal in relation to the specific institutional setup (Hall and Soskice
2001: 6). The implication of this is that we focus on the institutions that have relevance for the
firm, since these will inform the strategic choices of the firm (Hall and Soskice 2001: 9-10).
We will create an analytical narrative that depicts Turkeys specific institutional
setup. This approach is dynamic and flexible to encompass the complexities of the institutional
setup as a whole and allow us to describe the particularities of the Turkish institutional setup as
well as simplify it by holding it up against ideal-types. Because we do not set out to trace the
history behind the current institutional setup, nor do we try to predict its future form, the
analytical narrative and thereby analyticism is a useful methodology (Jackson 2011: 114-115).
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Having justified the choice of VoC we turn to the actual framework in order to
define the ideal-types used for the analysis. Important concepts such as institutions and the firm
are further developed and the five spheres will be introduced and one by one unwrapped and
explicit signifiers identified, which will serve as concrete points of reference and facilitate an
analysis of the institutional characteristics of the case when viewed in the light of the ideal-types.
In short this section will consider the relevant signifiers from the rich VoC literature, drawing up
a set of signifiers that will guide the analysis within the spheres, pinpointing the relevant points of
analysis in Turkey. We sketch out a general portrait of the case, giving context to the detailed and
at times very specific/deep focus of the five spheres guiding us to investigate very specific
elements of the Turkeys institutional setup, avoiding the risk of getting lost in details.
The case is set and the method of inquiry is set, thus we turn to analyse the five
spheres of institutional setup in Turkey. The analysis will follow the signifiers and by observing
these one by one, we will highlight the characteristics of the institutional setup in each sphere.
The five spheres tell by no means a clear and homogeneous narrative, but we will sum up the
most important findings in each of the spheres as we go through them. To create an analytical
narrative of the institutional setup in Turkey we analyse the synergies and complementarities that
cross between the spheres, creating a coherent institutional setup. The final analysis can be seen
as a horizontal analysis of the connecting strings that by careful investigation appear from the
previous vertical analysis of each of the spheres. This analysis reveals a deeply dualistic
institutional setup, which does inform not one but two analytical narratives characterizing
Turkeys institutional setup as a unique combination resembling both of the ideal-types.
Finally we will consider the implications of the strengths and weaknesses of this
institutional setup. E.g. when our findings are viewed in light of VoC literature on institutional
comparative advantage, does a dualistic institutional setup then imply a comparative advantage
because it creates a competitive vibrant network of sub contractors to the large and coordinated
firms dominating Turkey’s export sector?
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2.1 Why the VoC
In the 2001 seminal volume – “Varieties of Capitalism: The institutional foundations for
comparative advantage” – Hall and Soskice sets out to find specific ideal institutional setup
within five key spheres of an advanced economy in order to categorize these and unearth
synergies and convergence tendencies. Two ideal types are identified, the Coordinated Market
Economy (CME), such as Germany and Japan, and Liberal Market Economy (LME), such as
USA and UK. Neither of the ideal types are better at creating superior macroeconomic
performance and each has their specific comparative institutional advantages. The suggestion is
that any advanced capitalist economy can be located in this spectrum. Furthermore,
macroeconomic performance is related to the degree of coherence within the institutional setup.
The argument by Hall and Soskice is that the closer an economy is to either of the two ideal types
the better it will perform in macroeconomic terms. The following section will account for the
original framework and how it will be applied to create an analytical narrative of the Turkish
institutional setup.
Much critique of the VoC (i.e. Crouch, 2005: 444-445) and of analysis inspired by ideal-
types concerns “unrealistic” assumptions and “oversimplified” conclusions (Jackson, 2011: 154).
We avoid these pitfalls by acknowledging the shortcomings of ideal-types and focusing on using
the framework to provide an orderly arrangement of the findings. The analytical narrative
provided by this paper is shaped by the VoC and employs the vocabulary of the framework.
However, it incorporates case-specific factors to explain peculiarities within this idealization, and
remains open for explanations or setups with no precedence in the literature (Hall and Soskice
2001: 2; Jackson 2011: 112-155). These points of caution are especially true for Turkey, which in
most respects differ substantially from the highly developed market economies that normally are
the subject of VoC analyses. The ability to depart from the theoretical framework to construct the
case-specific narrative thus becomes the strength of the ideal-types. Here it is relevant to
emphasize the precise scope of this paper: To map the institutional framework of Turkey, seen
from the perspective of the firm. The analysis is for the benefit of both domestic and international
business interests, large and small, as well as policy makers evaluating trade-related or other
partnerships. For this purpose, the framework of the VoC serves to deliver a vocabulary and a
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framework of analysis for an analytical narrative that answer the research question. In the
delimitation section we justify our redeployment of the VoC framework to apply to a single case
study.
2.2 Single Case Study Analyticism (Jackson: 2011) has an ontological presumption, which does not rely on comparison
or falsification of theoretical frameworks. This report aims to create a better understanding of the
specific case at hand, and to utilize and thereby develop upon the vocabulary of the VoC. We do
not seek to make generalizable arguments that go beyond this case, neither do we seek to
empirically verify or falsify the ideal-types. The ideal-types of the VoC are applied to guide the
analysis and these ideal-types are based upon comparative studies and hypotheses regarding
bipolar institutional convergence and institutional comparative advantage. This does not alter the
preconditions of analyticism as the singular case study is unique, but it explains why, at times,
certain elements of the ideal type will be illustrated by taking examples from other cases, most
notably the two archetypes of the VoC, Germany and the US. Furthermore, the methods used to
qualify which of the two ideal-types a variable is leaning toward, is based upon a review of VoC
literature, which represents a variety of VoC analysis done on a wide range of cases (e.g.
Culpepper 2001, Cambel and Pedersen 2007, Goyer 2007, Thatcher 2007, and Feldman 2007).
2.3 Sources The notion of worldly knowledge (Jackson 2011: 195), a requisite for the analyticist approach, is
that despite the study being a singular case study it must contribute to a body of knowledge. In
order for this to be, we first need to define knowledge as we see it. Dewey defines “to know
something” as a shift from random doing, into a deliberate and intelligible doing (1920, in
Jackson 2011: 126). Being able to do something intelligibly enables us to judge whether this
doing is true, which in turn allows us to achieve some end. This implies that knowledge comes
from experience. Ultimately, the goal of experience and knowledge, and thereby science, is to
create and develop tools that can be applied to actual situations. Thus, knowledge is not a
shortcut to a divine truth but serve to create tools that can be applied to better understand reality
in a specific case (Jackson 2011: 126). In short, we see knowledge as experience, and in order for
knowledge to create science, it needs to be applied in a systematic manner to a worldly
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phenomenon. In this sense our findings are not generalizable, but reliable and replicable within
the specific case. In the following we will describe how the choice of sources will be guided by
our perception of knowledge and method of inquiry.
In accordance with the ontology and principles adopted from analyticism (Jackson
2011), this paper sets out to identify particular institutional configurations by relaying an
analytical narrative employing the ideal-types of the VoC. The framework as well as the
methodological base emphasises the use of relevant and reliable data, organized and analysed to
most accurately describe reality. This implies that there is no inherent hierarchy in the data, as
long as they come from reliable sources.
Two types of sources are used in this report: qualitative and quantitative. This
report makes use of both quantitative reports from credible institutions and qualitative scholarly
articles that are subject to peer-review. These are found in academic databases through extensive
research using key-words and assistance from librarians. Quantitative data are mainly procured
from international and national statistical institutions. We have triangulated most data in this
report in order to ensure reliability and timeliness. Furthermore, we have implemented an
academic minimum standard in regards to secondary sources, meaning that we prioritise sources
from peer-reviewed articles from acknowledged universities, ensuring a further critical
perspective on the bias of our secondary sources.
The judgement of reliability is subjective and it is therefore important to explicitly
state what we understand by reliable sources. We perceive reliability as closely related to
reputation. If a source is dependent on its reputation, and its primary output is reliable
information, the source stand to lose his or her credibility, thus making the source reliable to the
extent that what it stand to lose is greater than what they gain from manipulating data. We have a
variety of sources, which can be split into four types. The first type is peer-reviewed articles and
peer-reviewed books. Credibility and reliability of these are subject to scholarly review and is
beyond questioning by the authors of this paper, albeit due attention is paid to subsequently
published critique or ontological conflicts. The second type of sources are reports and data from
international organisations such as the Organisation of Economic Co-operation and Development
(OECD), the International Monetary Fund (IMF), the World Bank (WB) and the International
Labour Organisation (ILO). These are not peer-reviewed but are generally accepted as credible
sources. Furthermore, data is scrutinized daily by a wide diversity of users, subjecting this to
continuous evaluation by a wide range of users. Reputation is important to the IO’s, because their
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political clout is highly dependent on its reliability. The third type of sources is data from
government institutions such as Turkstat or Turkish ministries. This data can largely be viewed as
credible. However, these institutions might have bias in conclusions or presentation of data due to
political influence. The final type of sources used in this report is web sites of central actors in the
Turkish economy such as labour unions and employer organisations. We use websites of these
organisations to inform the analysis and validate findings in other reports on their involvement in
labour markets. These web sites have clear political agendas and the information is self reported,
which implies heavy bias, thus has to bee treated with caution. However these organisations do
have an interest in projecting their work and influence meaning that certain data can be valuable
as long as it can be confirmed by other sources.
2.4 Delimitations In this section we will outline the limitations and deliberate delimitations. By limitations we
understand limits that the researcher cannot control and needs to work around. Delimitations are
perceived as the choices we actively made to focus this report in answering the research question.
First of the researchers behind this thesis is limited by not mastering the Turkish
language. This is not an issue that has severe consequences because most scholarly knowledge is
published in English. Furthermore numbers and statistics from official organizations are also
published in English. This said the researcher team has encountered documents referred to by
scholars, which have been in the Turkish language creating a barrier in obtaining some
knowledge. The researcher team has also encountered some websites in Turkish regarding the
labour unions and employer organisations, however these sources were encountered in an attempt
to broaden the contextual understanding of scholarly reports and to monitor the latest
development in the field of the study. This introduces a limitation to the actuality of this report
since we have not been able to monitor the latest developments only relayed in Turkish. However
this report concerns the institutional setup, which we believe to be relatively rigid, thus this thesis
is more general than just the latest developments.
Moving on to delimitations brings us to our theoretical framework. The VoC takes a
specific set of signifiers in perspective and leaves out others. This analysis is not a conclusive
study on every aspect of all the institutions in Turkey, but it is broadening the perspective on the
institutions in Turkey seen from the perspective of the firm. This report should be seen as a
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contribution to a broad debate about the institutions in Turkey. Notable variables that have some
impact on institutions in Turkey, but are not accounted for in depth by the VoC counts issues
related to worker welfare, corruption, regional and local politics, ethnical divisions and relations
to volatile neighbouring states and the EU. This report will need to be complemented in relation
to these variables, thus it cannot stand alone in creating a comprehensive analysis of all aspects of
the institutional setup in Turkey, but it does provide a solid analysis of the institutional setup seen
from the perspective of the firm by focusing on the variables within the five spheres dictated by
the VoC.
VoC is our theoretical framework meaning it provides us with ideal-types and a
vocabulary to understand and analyse the institutional setup in Turkey. In VoC, a significant
element is comparison with other countries. This brings us to a second delimitation, because we
have chosen not to compare Turkey to another country, thus removing a step in the VoC
approach. We argue that it is more relevant to understand the unique case of Turkey against the
ideal-types of the VoC, than comparing Turkey to another country (E.g. Mexico). If we were to
do such a comparison we would risk getting into a swirl of differences, clouding the real aim of
this report – understanding and characterizing the institutional setup in Turkey. Several scholars,
prior to this report, have focused on one case and not a country comparison, paving the
theoretical path in regard to a VoC single case study (e.g. Pedersen and Cambel: 2007). Hall and
Soskice themselves highlight that the VoC is “ a set of contentions that open up new research
agendas (Hall and Soskice 2001: 2) rather than it closes them down by dictating a rigid
theoretical approach. We argue that the first step is to understand Turkey, and this understanding
will provide the needed background to evaluate the relevance of comparing Turkey to other
political economies. Comparative studies of Turkey is by no means irrelevant, we merely argue
that in order to find a valid comparison, we need to understand Turkey’s institutional setup,
which is the aim of this analytical narrative.
The last delimitation concerns time and thereby institutional change. The VoC also
focus on institutional change, which has received much scholarly criticism (Crouch 2005: 444),
because the VoC ‘lack focus’ on why institutions are as they are, but instead focuses on where
the institutions ought to develop toward in order to become the most efficient setup. We do not
engage in this debate, because we do not want to trace the history behind the current institutional
setup, nor do we want to predict its future form.
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We focus on a snapshot in time to enlighten interested actors about the Turkish
institutional setup. We do believe that institutions are rigid and evolve over longer periods of
time, which means that the analysis of an institutional setup delimited in time (i.e. a snapshot) is
relevant, as long as one notes that this report will not be an historical justification of the current
institutional setup, nor will it predict or make recommendations to how Turkey can improve its
efficiency by pursuing a certain set of institutional changes. This report aims to provide an
analytical narrative informing stakeholders about the synergies and disharmonies of the current
institutional setup in Turkey.
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3. Varieties of Capitalism This section will account for the original framework by defining institutions, the role of the firm,
the spheres and its signifiers. Hence it will outline the vocabulary and the ideal institutional
setups that within each sphere will depict the ideal-types by observing typical characteris.
3.1 Institutions This section will define institutions, as we understand them, in order to clarify how
we understand the institutional setup and use it in this report. This report adopts the institutional
understanding from Hall and Soskice (2001), who defines institutions as “… a set of rules, formal
or informal, that actors generally follow, whether for normative, cognitive, or material reasons,
and organizations as durable entities with formally recognized members, whose rules also
contribute to the institutions of the political economy” (Hall and Soskice 2001: 9). This definition
allows for a wide interpretation of which factors are relevant to a particular setup of institutions.
A point emphasised is the role of deliberative institutions often found in CMEs. These are the
institutions that encourage actors to engage in networks with discussion, collaboration and
compromises, rather than the arms-length relationships of contracts and hard laws found in
LMEs. Furthermore the definition and VoC theory in general puts an emphasis on culture, history
and informal rules as being the foundation under the institutional setup.
3.2 The firm In the VoC analysis the firm is the central actor, and Hall and Soskice assumes that
the firm is a rational agent (Hall and Soskice 2001: 6), we will stick to this assumption, as it is a
crucial element of how the synergies between the spheres work. According to Hall and Soskice
the firm is at the forefront of experiencing technological shifts and adapting to shifts in supply
and demand. Thus for any country that base their economy on the market the firm will be the first
to react to changes in the market economy. Hence, countries that have any of the two ideal
institutional setups will give its firms the best possible settings for reacting to changes in the
market. The five spheres, which are the cornerstones of the VoC theory, are selected on the basis
of the relations that the firm engage in. The firm engage in a wide range of relationships, inside
and outside the firm. According to Hall and Soskice firms experience coordination problems with
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employees, suppliers, customers, governments and so forth, each with different motives creating
a potential for coordination problems. The nature of the coordination problems vary and how they
are solved varies from economy to economy. Coordination problems occur in each of the five
spheres and will be elaborated in next section, one sphere at a time.
As Hall and Soskice accounts for, most OECD countries fall into the categories of
CME and LME. In effect they solve the coordination problems using market based or solution
based solutions. The CME relies on non-market relationships, such as unions, business
associations; network based monitoring and long-term strategic coordination between firms and
banks. By contrast, the LME relies on contractual agreements, antitrust legislation, publicly
available financial data, and adjustment to supply and demand (Hall and Soskice 2001).
3.3 The Five Spheres and signifiers We chose Varieties of Capitalism as our ideal type of theoretical framework due to
its ability to organise the political economy of Turkey into smaller, comprehensible parts and its
focus on the firm. The foundational work of Hall and Soskice (2001) laid out five spheres of
analysis. Each sphere is constructed by a careful analysis of relevant signifiers. Analysis of these
signifiers will guide the research for specific empirical data and mechanisms and will be
organised in relation to the ideal types. As outlined in the above sections, the Turkish economy
and specific institutional setup is unique in its entirety. Individual factors and mechanisms do,
however, resemble those of other market economies, either directly or indirectly. For instance,
the huge informal sector of Turkey has characteristics of no labour protection and wages are
entirely set by the market – these characteristics are market based corresponding to the LME
type. On the contrary, the formal sector has recently introduced a very strict labour protection
regime and very high minimum wages – characteristics of a coordinated economy. Together
these two signifiers tell an intelligible and coherent story, albeit the specifics are inherently
unique to Turkey. Which signifiers we deem relevant is based on more recent VoC literature that
uses these in their analysis. Each sphere will be outlined below together with a detailed
pinpointing of relevant signifiers following each of the spheres in order to guide the later analysis
of the institutional setup in Turkey.
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3.3.1 The Sphere of Corporate Governance
The first sphere in the framework of the VoC is corporate governance, which refers
to the financial arrangements of firms in an economy. For both SMEs and large companies,
corporate governance covers ownership arrangements and access to capital. For large or listed
companies corporate governance also refers to board structure and the often much more complex
ownership arrangements. The coordination problems facing the firm are greatly influenced of
whether it is publicly listed or not. However, all firms face the coordination problem of ready
finance for projects (Hall and Soskice 2001: 7). The overarching legal framework, structure of
capital markets, investor relationships, as well as the specifics of monitoring together constitutes
the institutional setup of corporate governance.
The CME solutions to corporate governance, described by Hall and Soskice, closely
resembles the “insider system” known from literature on corporate governance. A 1999 paper on
Corporate Governance systems by Maher and Andersson (OECD 1999) describes the insider
system as characterised by concentrated ownership or voting rights with extensive inter-firm
relationships and corporate holdings. Furthermore, cross-shareholding, pyramidal structures and
close relationships with banks are other key features. The relationships between investors and
firms are a lot closer, and often the investor has intimate knowledge about the strategy of the
firms before they invest. Hall and Soskice (2001) describe how reputation plays an important role
between the investor and the firm. Capital can therefore be tied in long-term strategic business
plans aiming to increase economic performance over many years, rather than immediate results.
Maher and Anderson note that these are typical of Western continental Europe, Japan and Korea.
Most large German corporations are embedded in extensive networks with banks and other
sources of finance playing a crucial role in strategy approval, often with seats on the supervisory
boards of firms. Another key feature is interlocking directorship, where board members serve on
boards of several firms in the same industry in order to coordinate activities across industries.
In LMEs, corporate governance is based on marked based and arms-length
relations. Access to capital for large companies comes from financial institutions and institutional
investors, bond markets and stock markets. For smaller companies, equity funds, angel investors
and other risk willing capital is prevalent. Monitoring of performance is required by law and
rigorously enforced through publicly available disclosures of financial data. Furthermore,
investors use this information to base decisions on, meaning that financial possibilities for the
firm depends on the situation of the firm as it is reflected in the market. Inter-firm relations in
20
LMEs are characterised by intense competition, and an underperforming company is at risk of a
hostile take-over. Boards in LMEs represent shareholder interests and function primarily as a
check on the executive, but have little say in day-to-day activities. The following signifiers for
corporate governance are based on the above characteristics of the LME and CME within the
sphere of corporate governance and on relevant VoC literature (Hall and Soskice 2001; Börsch
2007; Goyer 2007; Feldman 2006).
Access to finance is a key component of corporate governance. An indicator for this
is stock market capitalization as percentage of GDP, which is widely used as a proxy for
importance of financial markets as source of capital for firms. In LMEs such as the US and the
UK, stock market capitalization as percentage of GDP average 112 per cent and 122 per cent
(foreign firms listed in the UK and the US pushes it above 100 per cent). In Germany the number
was 44 per cent and in other CMEs such as Japan and France it is 77 per cent. For emerging
market economies the number is even lower – the Next 11 has an average of 38 per cent (World
Bank 2014). Other major sources of finance for companies in industrialised countries are
institutional investors, other financial intermediaries as well as corporate bonds.
Stock market sophistication is likewise used as an indicator of coordinated or
market based solutions to corporate governance by the literature (Hall and Soskice 2001; Börsch
2007; Goyer 2007; Feldman 2006). While stock market sophistication is not a generic term per
se, the World Economics Forum has developed a ratio based on a composite index of availability
and affordability of financial services, financing through the local equity market, ease of access
to loans, venture capital availability, restriction on capital flows, soundness of banks, regulation
of securities exchanges and legal rights (WEForum 2008). This paper will use this ratio as a
signifier for corporate governance.The legal framework and structure of the board of directors,
coupled with analysis of occurrence of interlocking directorships are other crucial indicators.
There is no direct measure for board structure, other than descriptive analysis of the workings of
these. The role of the board in CMEs and LMEs differs extensively. In CMEs, two-tier boards
with representation of a diversity of interests are common. Furthermore, In LMEs, the board
functions primarily as a check on the CEO and the overall strategy making sure that the firm
operates in the interest of shareholders. While this is also to some degree true of CMEs, boards
can be much more involved in the day-to-day operations and are often not bound by legal
requirements. In LMEs, it is common to see one-tier boards representing shareholder interests
with ruled based arms-length relationship with the executive management. Common for both is
21
that the principal role of a board of directors is to separate ownership and control, in order to
overcome agency problems and to align interests of owners and managers. Atakan, Oba and
Ozsou (2010) argue that despite intentions of the legal framework, corporate governance in
emerging economies rarely resembles those of developed markets. In developed economies –
LME and CME alike – corporate governance is equity-market based. Emerging economies are
typically of family-based control systems. A key difference is that a major source of equity is
from the family instead of financial markets. This bridges the agency issue between managers
and owners and of monitoring, but presents an issue of minority shareholders vis-à-vis majority
shareholders (Atakan, Oba and Ozsou 2010).
Lastly, ownership structure of firms is analysed and covers the following. The level
of concentrated ownership, where high levels indicate coordination and non-market deliberations.
The market for corporate control and frequency of hostile take-overs, leaving firms in an LME at
constant risk of these, in CMEs they are rare or non-existent. Emerging economies are often
characterised by limited importance of autonomous financial institutions as equity is raised
within the family or groups, which is similar to the insider system and the CME.
3.3.2 The Sphere of Industrial relations
The second sphere in VoC is industrial relations. In this sphere the central
coordination problem facing the firms is the negotiation of wage levels and working conditions.
These are typically negotiated between the employee and the employer or the trade unions and
the employer’s organisation (Hall and Soskice 2001: 7). The coordination problems arise due to
different priorities. On the one hand there is the companies that has one set of priorities – profit,
efficiency and competitive strength – and on the other hand you have the employees with their
priorities – personal optimization, working hours and salary increase (Hall and Soskice 2001).
One cannot exclude that some firms are completely aligned with their employees’ priorities, but
in general one will detect conflicting interests between employers and employees, which is the
reason for the existence of labour unions and global labour organisations or unions like the
International Labor Organization (ILO). The coordination problems concern the productivity of
the firm and thereby its competiveness. “The wage and productivity will determine the success of
the firm and rates of unemployment or inflation in the economy as a whole” (Hall and Soskice
2001: 7). Hence the coordination problems therefore lie at the heart of the firm’ interest.
22
In typical CMEs where unionization is high, wage levels and working conditions
are coordinated between employer or industry organisations and trade unions. This will often
result in higher minimum wages. Higher wage levels are also a subject of negotiation and will
provide a stable wage level for specialised workers. Coordination of wage levels and working
conditions create spill over effects in the sphere of vocational training as it protects firms’
investments in their workers from poaching by other firms. Hence, increasing firm’ interest for
investing in vocational training of their employees. This makes it easier to hang on to employees
with high levels specialised skills. Additionally the coordinated solutions often affect the intra-
firm relations by having employees’ representatives on the supervisory board in firms. Hence the
coordinated solution to wage levels and working conditions can be complementary across the
spheres of vocational training and intra-firm relations (Hall and Soskice 2001: 24-25).
When wage levels and working conditions are solved through a market-based
solution as in LMEs, the employer and individual worker negotiate directly. Low unionization
renders unions with much less resources and influence, and it is up to the individual workers to
secure themselves. Employer organisations are often also more scattered than in the CMEs,
leaving them less powerful. Strict anti-trust regulation and enforcement furthermore limits inter-
industry coordination. The effect of weak trade unions and employer organisations is a
dependency of market competition between firms on wage levels and working conditions, to
secure the right level of wages and benefits. Additionally employment and inflation levels will be
more dependent on the macroeconomic policy since the labour market actors do not negotiate
overall wage levels (Soskice 2007: 119; Franzese 2001: 104-105).
Following a market-based solution to industrial relations creates a labour market in
which firms are able to hire and fire easily. Firms will thus discourage long-term employment
contracts and instead take advantage of the current opportunities in the market. Additionally the
vocational sphere tends to create general skills that the hire and fire mentality in the labour
market encourage. Furthermore the inter-firm relations sphere will often be affected, by the
flexible labour market and the use of general skills, since these lead to knowledge sharing when
workers moves from one company to another. Hence the market based solution to wage levels
and working conditions can be complementary across the spheres of vocational training and inter-
firm relations. (Hall and Soskice 2001: 29-30)
When using the VoC to investigate how a country solves its coordination problems
within the sphere of industrial relations, the following signifiers are used to determine whether
23
the country use coordinated or market based solutions. The first signifier is the power of
employer organisations, which needs to be investigated in order to qualify the representative
strength of firms in negotiations in the institutional setup about wage levels and working
conditions. This signifier will be investigated using number of members of the employer
organisation. Additionally this signifier will be investigated through economic output the
members of an employer organisation represent. Furthermore the ability of employer
organisations to create coordinated solutions within the five spheres will be investigated.
The second signifier regards how workers organise themselves. This will be
investigated using membership numbers in the largest trade unions, which will give an indication
of which labour unions are important. Once these are located, comparing their numbers to the
total unionisation in Turkey can assess their bargaining power. Furthermore an investigation of
the regulation that labour unions are subjected to will describe its bargaining power in
negotiations. Additionally this signifier will be investigated through the overall unionisation
numbers, which indicates the representative power of trade unions in collective bargaining.
Furthermore the ability of labour unions to create coordinated solutions within the five spheres
will be investigated. In effect these two signifiers will enable us to analyse the powers of actors in
the sphere of industrial relations (Hall and Soskice 2001: 24-25 and 29-30).
Following these signifiers a third signifier analyse how external factors influence
the above mentioned coordination problems. In effect the analysis will investigate if external
factors influence wage levels or the working conditions. External factors will be international
organisations that have the power to put pressure on the state to implement new regulation that
influence the coordination problems (Thatcher 2007: 147).
3.3.3 The Sphere of Vocational Training
The third sphere in the VoC is vocational training, which focuses on the skill base and training
systems for the labour force. The main coordination problem facing firms is having a workforce
with the necessary skills. Additionally the workers are faced with the problem of deciding in
which skills to invest in (Hall and Soskice 2001: 7). The choice of which leave consequences for
the firm. The institutional setup of an economy can either facilitate industry specific skills or
general skills. Estevez-Abe, Iversen and Soskice (2001: 145-148) define skills in three
categories: industry specific skills, firm specific skills and general skills. It is relevant to
distinguish between these as they differ substantially in portability. Firm specific skills are the
least portable and are generally obtained through on-the-job training and only relevant to that
24
specific firm. Industry specific skills are typically obtained through vocational schools and
apprenticeships, resulting in certificates, which are acknowledged within specific trades. Industry
specific skills are still in the specific category but more portable in the sense that they are widely
applicable in an industry and therefore useful for more than one firm. General skills are skills that
are acknowledged across all firms and industries and are typically associated with university
degrees and undergraduate qualifications. Specific skills, both firm and industry, are associated
with the CME and the general skills with the LME.
LMEs tend to facilitate institutions that promote general skills because employment
and unemployment protection is low. With little protection, workers find that the best way of
securing themselves is by obtaining high general education levels, making one-self attractive to a
variety of employers (Estevez-Abe, Iversen and Soskice 2001: 162). It enables workers to move
more easily from one firm to another. The institutional setup in LMEs favours a different strategy
for the firm. In the LME poaching are high and job tenures are short, which supports a system
where the educational responsibility lies with the employee who wants to be generally educated
thus opening oneself up to more job possibilities. This also indicates that the government
facilitates the educational and vocational training system. Every firm is basically competing alone
and cannot bear the cost of educating its own employees, especially not in the case of the LME
where poaching is often practiced.
CMEs tend to obtain its firm and industry specific skills by decentralized vocational
training coordinated by industrial organizations and labour unions. These organisations are able
to obtain intimate and relevant information from firms facilitating information circulation and
deliberation. Labour unions coordinate with the state in order to encourage firms to incur the
costs of vocational training (Culpepper 2001: 275-306). The idea is that in order for firms to
realize that they will gain from investing in employee’s skills, the state is required to create the
incentives initially. Once firms have realized the benefits, the state will withdraw subsidies and
decentralization is complete. The underlying assumption made by Culpepper is that “employers
and unions know best the requirements of a firm-based skill system, so it should be left to
regulate themselves, with minimal state intervention” (Culpepper 2001: 279).
Skills can be difficult to measure because they are not directly observable. Estevez-
Abe, Iversen and Soskice (2001: 169) use job tenure as indirect measures of skill level. Longer
job tenures indicate that employees have their careers bound up in specific firms. If careers are
connected to a single firm or industry, specific skills become good investments for workers.
25
Conversely, if job tenures are short workers prefer general skills, which are more portable. This
notion rests on an assumption that the employee looses ground if he/she starts to obtain specific
skills in relation to other employees not doing this. “Since most skills are maintained by use,
refreshment, and updating, the employee’s marketable skills will deteriorate.” (Estevez-Abe,
Iversen and Soskice 2001: 151).
The employee will therefore demand a certain level of protection before making an
investment in obtaining asset specific skills. This protection usually takes form of employment
protection, unemployment protection, and wage protection. (Estevez-Abe, Iversen and Soskice
2001: 150). Employment protection has a tendency to promote firm specific skills because it
ensures the employee reasonable conditions for holding on to his or hers job, making the
investment in the firm specific skills less risky. Unemployment protection will on the other hand
tend to promote industry specific skills, because it buys the employees time to relocate within the
industry if employment with a firm ends.
Employees are not the only ones that demand protection of their investments –
firms do as well. High skill levels are a product of educational and vocational training, which
comes at a cost, either directly when the employer pays, or indirectly through lost hours. The
employer will therefore be worried about poaching and demand protection of his or hers
investment. To convince an employer to take on this cost, the employee must be sure to return to
the firm putting newly acquired skills to good use by increasing efficiency, introducing new
knowledge or improving processes. In order to solve these coordination problems unions or other
institutional bodies needs to ensure or facilitate a common understanding of wages and cost
sharing, thus addressing the risk of investing in skills (Culpepper 2001).
Signifiers for vocational training are the general education system as well as
coordination of training efforts by the state, industry, industry associations, labour unions or other
employee associations. Furthermore, employment protection and unemployment benefits require
analysis, as well as job tenures. Lastly, dominant industries can influence tendencies and
requirements to vocational training.
3.3.4 The Sphere of Inter-firm Relations
The fourth sphere is inter-firm relations, where the central coordination problem facing firms
concern inputs for production, demand for products, access to market information and
participation in knowledge sharing (Hall and Soskice 2001: 7). The latter point is a point that is
26
becoming more important due to globalisation and this has made it a crucial parameter in
international competition. A modern economy within the OECD has to focus on how to create
technological advance in order to keep up and gain a competitive advantage.
In CMEs, supply and demand rely more on reputational and coordinated solutions
than contracts and enforcement by courts (Casper 2001: 387-388). In Germany, courts follow a
regulatory approach in disputes, which seek to balance risk between parts in the contract and
considering imbalances. The effect is that courts look beyond the written word of the contract and
considers intent, thereby facilitating coordination of the inter-firm relationship (Casper 2001:
390). In the LMEs, contractual disputes are solved with heavy emphasis on the written word
rather than intent of the contract, and courts resolve conflicts more to the point of the contract.
The goal of this approach is to protect the rights of each actor to form and participate in contracts.
Thus, information of actors becomes a source of competition in the process of forming and
participating in contracts. Using this approach courts seek to enforce the contract alone, which
supports the market-based solution of the contractual relation (Casper 2001: 390). Additionally,
LMEs enforce antitrust laws extensively to prevent firms from using non-competitive means such
as size and political power to squeeze smaller competitors (Hall and Soskice 2001: 30-31). LMEs
thus actively combat coordination within and across industries, and rely on competition instead.
In LMEs, due to the flexible labour market, knowledge transfer between firms is
mainly from movement of workers between firms. Large public research institutions breeds
workers at the cutting edge of technology, which transfers knowledge to the private sector.
Additionally development of knowledge comes from the competitive process of licensing
innovations. In LMEs, formal standard setting is rarely possible due to lack of strength of the
employer organisations and anti-trust legislation. Thus, the firm that come up with the best
solution to the market will be able to license the production to other firms leading to knowledge
transfers (Hall and Soskice 2001: 30-31).
When it comes to knowledge sharing in CMEs, firms have little knowledge transfer
from movement of workers from one company to another. Instead, firms engage in collaborative
research projects and joint ventures to secure the benefits of knowledge sharing. Additionally, the
state participates in or subsidises research projects to facilitate knowledge development and
sharing. In order to direct resources and effort in the most optimal direction employer
organisations use its collected firm specific data to support the process (Hall and Soskice 2001:
26). Hence, a coordinated solution to knowledge sharing is furthered by the use of coordinated
27
solutions in the spheres of vocational training and industrial relations. In effect specific skills and
the industry wide negotiated wage levels tend to generate a need for coordinated knowledge
sharing in order for it to exist.
Applying the analysis of the VoC to a country within the inter-firm relations sphere,
the following signifiers is used to determine whether a country uses a coordinated or market
based solution. The first signifier is how contractual relations are solved. This signifier
investigates the use of contracts and how these are enforced. In effect this signifier reveals how
firms conduct business together and how supply and demand is negotiated. The second signifier
is the strength of business organisations and to what extent these participate in collaboration and
coordination. As in the case with industrial relations this signifier will be using number of
members of the employer organisations and the economic output that the members of an
employer organisation represent. The third signifier is how knowledge is dispersed throughout
the economy.
3.3.5 The Sphere of Intra-firm Relations
The fifth sphere of the VoC is intra-firm relations. The central problem facing firms is to ensure
that its employees work in the best possible way to advance the objects of the firm. Each
employee in a firm will in due time come to possess firm specific skills and information.
However, in a capitalist economy, most employees are not owners, and thus require an incentive
to employ these skills and information in such a way that maximizes profits for the firm. Hall and
Soskice mention issues such as adverse selection and moral hazard. Additionally employees
become reservoirs of knowledge that can be to the benefit of the management if it is not withheld
(Hall and Soskice 2001: 7). Thus the two main coordination problems for firms in this sphere are
how to secure internal knowledge sharing and to determine the type of management system.
In LMEs, employees have little or no protection from legislation and collective
bargaining agreements. The lack of extensive protection gives the opportunity to ensure hard
work through the threat of firing. The ability to hire and fire combined with other elements in the
LME leaves the executive management of the firms with high degrees of autonomy. This also
translates into the overall management structure of firms in LMEs, which tend to have a structure
that gives unilateral control to the manager, which makes the CEO capable of making decisions
on his own, independent of the board. Furthermore, employees are incentivised to employ as
much of their specific firm knowledge to the benefit of the company in order to pursue higher
wages, as these are not coordinated centrally.
28
In coordination-based economies, employees are protected by legislation and
collective bargaining agreements making it difficult to lay off employees or requiring the
employer to pay costly severance fees. Furthermore, the employer is often required to pay for a
range of social services. Managers therefore have constraints on autonomy, sometimes followed
by employee representation on supervisory boards, as is the case of Germany. The CEO will
hence seldom enjoy universal control in the company, but needs to get his strategies approved by
a supervisory board. This board will often include employee representatives, other industrial
executives, owners and large investors. The employee representatives and other actors that
participate in the board will then have an interest in the viability of the long-term strategy, and
less interest on short-term management issues. This aligns their incentives with that of managers
if the overarching institutional infrastructure – notably a peaceful market for corporate control
and of capital being patient – is present.
A VoC analysis of Estonia and Slovenia by Feldman (2006) finds that average job
tenure is a useful signifier for intra-firm relations, where high tenures are indicative of a CME. In
general, a committed relationship between employer and the employee translates into a regime in
which employers and employees are committed to each other, facilitating investment in firm-
specific skills and human capital. Knowledge dispersion throughout the economy happens
through industry collaboration and employer associations
Noted by Hall and Soskice in the original volume, an indicator for coordination or
market-based solutions is the capacity for managers to make decisions unilaterally. That is, when
there is little employee protection or costly severance fees, and no need to consult employees or
employee representatives in matters of strategy. Furthermore, labour force protection and
unionisation are likewise important signifiers. Signifiers for intra-firm relations are therefore
executive autonomy, labour force protection and job tenure. For economies with limited
influence from unions, other signifiers for worker protection such as minimum wages and level of
wage coordination are likewise useful for analysis.
3.4 Institutional complementarities The notion of institutional complementarities is a key part of the VoC framework and informs the
second part of the analysis of the institutional setup in Turkey. A complementary good in the
classical economic sense is when an increase in the price of one good depresses demand for
29
another – a familiar example is bread and butter. Hall and Soskice extend this principle to the
institutions of the political economy. “Here, two institutions can be said to be complementary if
the presence or efficiency of one increases the returns from or efficiency of another” (Hall and
Soskice 2001: 17). As outlined in the previous section, CMEs and LMEs coordinate activities
based on a coordinated approach or a market approach. The analysis of the five spheres will be
analysed in relations to its institutional complementarities. Hence, observing key cross-sphere
mechanism
An example of an institutional complementarity from the ideal CME type of
Germany is within industrial relations and corporate governance. In the ideal CME type labour
unions provide protection for workers, across these spheres, allowing them to invest in firm
specific skills, and employer organisations, which collaborate on training systems, wages and
joint R&D ventures to minimize costs and eliminate fears of poaching (Goyer, 2007). This is
complemented by a corporate governance regime of patient capital and close supervision and
involvement by banks. During downturns, financial markets that emphasize current profitability
will demand lay-offs and the firm will be at risk for hostile takeovers.
For the LME, radical innovation and high general skill levels complement a flexible
labour market with high portability, as is the case in the US. Following critique for narrow-
minded focus on the specific setups in ideal-typologies in the VoC framework, Hancké, Rhodes
and Thatcher (2007) argue that the approach allows for a great variety in the specifics of
complementary mechanisms, but in practice, all can be characterised as either of the coordinated
kind, or of the market-based kind. Echoing this, Höpner (2005) accounts for different
mechanisms of institutional adjustments across countries as being conceivable and an integrated
part of the VoC approach. The aim of Hall and Soskice was not to present a final theory of the
specifics of the divergences, rather it was to point out that there is a divergence and not a
convergence, and that the overall equilibria will consist of complements. Substantial differences
in the specific institutional setup, which in practice works similarly is especially true for those
countries characterised as CMEs. For instance in Japan, Höpner (2005) describes a mode of
production related to the formation of long-term production teams. Organisation of workers in
teams makes it difficult to monitor individual workers, introducing the risk of moral hazard. This
is overcome by a credible contract of long employment, coupled with a culture of strong work
ethic, and the threat of liquidation by banks if the firm underperforms making it in the interest of
the worker to fully utilize firm-specific knowledge and innovative capabilities (Höpner 2005). In
30
practice, this resembles the German system of coordinated efforts, but the specifics and
underlying culture is quite different. The key point is that the German and Japanese system are
different in the particulars, but similar overall, and neither setup is necessarily superior, unless
disharmonies is rampant. A theoretical disharmony could be to remove the strong work ethic or
threat of liquidation out of the equation. This would potentially induce workers not to work their
best and a new solution would need time to develop and settle. Until a new equilibrium that
ensures alignment of incentives is found, the economy will function sub optimally.
The Turkish institutional setup is still evolving and the economy retains
characteristics of a developing economy with an abundance of cheap, low skilled labour. This
allows for alternative equilibria and alternative disharmonies. An example of an alternative
equilibrium is outlined by VoC analysis of Denmark, in which Campbell and Pedersen (2007)
argue that a labour market configuration of low protective, generous and government provided
unemployment benefits, and extensive re-training systems create a flexible labour market with
high levels of specific skills, and a correspondingly unique industrial mix. Supporting the notion
of alternative configurations, Börsch (2007) conducts a VoC analysis of Switzerland, and argues
that a regulatory institutional framework strongly resembling that of market based coordination,
does not necessarily entail a regime of hire-and-fire and low specialisation. In Switzerland,
despite a regulatory framework with little protection and low unionisation, there is a strong
tradition of peaceful industrial relations and long tenure. The strong culture has without support
of the institutional setup developed patterns of informal and voluntary networks, in effect
rendering Swiss intra-firm relations and skill development as of the coordination-based kind.
Following the basic notion of institutional complementarities the VoC states one
central claim regarding institutional change and equilibria: the setup of one institution breeds
complements in others. For instance, in a CME, there can be a high degree of collaboration
between business associations on vocational training. This will be conducive to collaboration on
wage setting and working conditions, as well as research projects or joint ventures. Furthermore,
these firms will push governments to defer from enforcing strict anti-trust legislation. Another
example is that patient capital complements high labour protection in that availability of capital is
not dependent on quarterly financial performance. This will push governments to make hostile
takeovers by foreign firms difficult or impossible, to ensure stability during downturns. This
creates a degree of complementary institutional path-dependence, resulting in institutional
31
clustering, consolidating the divergence, and making it possible to identify economies on a range
between LME and CME.
When assessing complementarities in Turkey we will allow for significant
divergences from the ideal type. Furthermore, dominant industries have yet to consolidate fully
and the stage of development in Turkey is currently at the potential for significant divergences
from any path dependency predicted by the VoC approach. Institutional developments in Turkey
are still heavily influenced by volatile domestic and regional politics, culture and religion, as well
as influence from the EU and other international actors. Thus, the aim is to identify possible
unique synergies or potential shortcomings in accordance with the objective of mapping the
current institutional setup in the language of the VoC.
3.5 Comparative Institutional Advantage In the VoC framework, the concept of comparative institutional advantage brings together the
five spheres of coordination, their institutional complementarities, national economic
performance and industrial mix. The concept builds on another idea from classical economics –
comparative advantage in international trade. The gist of the classical theory is that a country will
specialise in those products that they have a comparative advantage in and trade with countries
that has a comparative advantage in something else. This enables trade for countries that have no
absolute advantages, to the benefit of both trading partners (Krugman, Obstfeld and Melitz 2012:
56). To supplement this and explain the emergence and success of national industrial clusters, the
VoC approach states that countries have a specific institutional setup that favours specific
industries and specific kinds of innovation, making them competitive in industries that work well
within this institutional framework. Furthermore, these countries will attain higher degrees of
competitive advantages corresponding to the level of coherence of these institutions (Hall and
Soskice 2001: 38). The concept of industrial clustering is well accounted for in agglomeration
theory – put simply, companies that make related products tend to cluster, be that the intensely
competitive software firms in Silicon Valley or incrementally innovative and collaborative
mechanical engineering industries in Baaden-Würtemberg. The contribution of the VoC
framework is to uncover the reasons why these specific clusters appear in a particular nation at a
particular institutional equilibrium. Specifically, the comparative institutional advantage concept
in the VoC framework seeks to explain which institutional setup that foster a specific clustering.
Put shortly, industries benefiting from coordination and collaboration will cluster in CMEs and
32
CMEs will nurture these industries best by solving all their coordination problems by CME
means (Hall and Soskice 2001: 38).
Assessing comparative advantages for a still developing and emerging economy
such as the Turkish, presents significant challenges when using the framework of the VoC, as the
framework takes certain levels of institutional coherence and equilibria for granted. The result is
that the equilibria attained might lack precedent in VoC literature.
A key claim of the notion of comparative advantages in the VoC literature is that
economies with homogenous institutions perform better than economies with heterogeneous
institutions. The logic behind this theory is as follows: with two identical firms, the one that face
institutional barriers, however small, will perform worse. A cutting-edge software firm operating
in Germany will face issues acquiring high skilled labour without signing long-term contracts,
and will have difficulties luring them from their current position due to industry wage bargaining.
Furthermore, risk-willing capital is harder to come by. These can be surmountable challenges,
and the government can provide institutions that ameliorate difficulties and it is possible that it
will be cheaper than to trade due to transportation costs. However, it will still amount to a barrier,
and this theoretical firm will produce at greater total cost than a similar, theoretical firm in an
LME. The economy would thus benefit from increasing institutional coherence and focusing on
industries that benefit from this. The Turkish economy does present a degree of departure from
this element of comparative institutional advantage as it is characterised by a sharp duality, and
the notion of superior performance with homogenous institutions is challenged, as the two
segments benefit from different institutional setups.
Barry and Nienhueser (2010) investigate German aviation industry, which exhibits
dualistic tendencies that as such present an anomaly in the archetype. Findings suggest that there
is a tentative convergence in some industries toward LME solutions due to liberalization across
the European Union. A crucial difference to the Turkish case, however, is that the low-cost
segment in Germany employs equally productive workers and based on voluntary opt-outs by
smaller firms to compete in niches with different employment conditions. This is not at all the
case in Turkey, where the low cost segment is much less productive, and it is a lack of human
development and capital stock that inhibits movement to the coordinated segment.
The last element in comparative institutional advantage is that an economy leaning
either way has different capacities for innovation. An economy with the LME characteristics of
high levels of general education, fluid labour markets, and risk-willing capital will have the
33
institutional complementarities that facilitate extraordinary performance in rapidly changing
high-tech sectors such as pharmaceuticals or software. In CMEs incremental innovation in
industries such as mechanical engineering, which is characterised by long-term investments as
well as benefits from collaboration within the industry, and with public research facilities. While
Turkey has low levels of technology and still struggling to catch up with Western production
processes, it is relevant to assess which industries are dominant in Turkey, as these will still
benefit from an institutional setup that serves its needs.
To sum up, the section on comparative advantage will serve to highlight the
relevant synergies and disharmonies as well as the most notable elements of the specific
institutional setup in Turkey.
34
4. Turkey in Brief In 2014 The International Monetary Fund (IMF) voiced a concern about Turkey being able to
keep a GDP growth by four or five per cent annually (Dombey 2014: 1). In the 2000s Turkey has
had impressive growth rates compared to other OECD members, but the IMF warned that
political stability was dependent on the growth staying at this high level. Turkey currently has a
population of 74 million (Turkstat 2014a) and a GDP of $1561bn USD making it the 17th largest
economy in the world (OECD Statistics 2013a). Turkey is still a developing economy struggling
to catch up with industrialised Western economies. In 2023, the current government aims to
celebrate the 100th year, since the birth of the republic, with an average income per capita of
23.000 USD. According to IMF, this is highly optimistic with an average income per capita in
2014 of 10.000 USD. This goal demands higher growth rates than the four to five per cent
annually (Dombey 2014: 1). Turkey has had a steep economic developing curve the last decades,
but Turkey require further economic and political developments and reforms to accomplish the
goals of the Turkish government. In this section we will provide an overview of the elements in
the Turkish society that are relevant for the analysis that follows and will serve as context for the
following analytical sections, which will dig deep into the institutional setup of the five spheres.
4.1 The State and the Industry Profile Turkey has a tradition of a centralized and strong state dating back to the Ottoman Era. Despite
several military coups in the second half of the 20th century, the government is still centralized
and powerful. The state rather than the market is the main driver of both change and uncertainty,
which to a large extent influence markets, unions and media. These actors often avoid expressing
criticism, as this will attract unwanted attention from the government. Additionally Turkey has
the dubious honour of ranking first in the OECD for most journalists in jail (Oba and Semercioz
2005: 170).
Policymaking is highly centralized. Most policymaking processes grant political
bodies (e.g. employer and labour organizations) influence, but this is in most cases just for show
off, because politically appointed bureaucrats carry out the will of the administration with a firm
hand (Bolukbasi and Ertugal 2013: 245). The military has historically had a powerful position in
35
Turkish political life as a check on the government, resulting in five coups since World War II.
However, Bolukbasi and Ertugal (2013) argue that the current government has kept the military
from obstructing their hold on the power, thus giving the current Turkish government a firm grip
on legal, political and economic policymaking processes.
Turkey has moved from an import substitution industrialization (ISI) strategy to an
export oriented industrialization (EOI) strategy. This development occurred largely in the 1980’s
where neoliberal ideas inspired the Turkish government as well as most other market economies
on that side of the Iron Curtain (Wasti and Wasti 2008: 119-120). This resulted in a wave of
privatizations of large state owned enterprises and a large inflow of foreign direct investment.
These foreign direct investments included both currency and knowledge and spurred
industrialization of Turkey through the 1980s and 1990s. This development moved Turkey up the
economic ladder, and the living standards improved vastly, but also unevenly.
The main economic driver since 2000 is the medium- and high-tech industries1.
This is a significant change from the 1980s and 1990s where the economic driver was the move
from an agricultural based economy to medium- and low-tech industries. Furthermore, growth in
manufacturing industries that demands higher-skill levels accelerated in the 2000s and continues
to grow rapidly. The share of medium- and high-tech industries as share of total manufacturing
exports in Turkey increased from 30 per cent to more than 60 per cent between 2002 and 2008,
and their share in total output rose from 23 per cent to about 30 per cent (Gönenç et al. 2012: 16).
This is depicting the development in the Turkish economy as one depending increasingly on a
manufacturing industry that demands more technical knowhow and employees with high levels
of specific skills. OECD accordingly describes this as primary drivers of research and
development indicating a significantly higher labour productivity. OECD also points to medium-
and high-tech firms as “an important driver of Turkey’s aggregate productivity growth” (Gönenç
et al. 2012: 16).
The primary economic growth driver in Turkey is its medium- and high-tech
manufacturing industries, and follows that in order to reach its goal of becoming the 10th
largest economy in the world, Turkey is to a large extend dependant on the industrial
sector’s ability to stay competitive and keep growing (Dombey: 2014).
1 See graph 1 – Industry profile
36
Graph 1: Industry profile
4.2 The Divided Labour Market The labour participation rate is only about 50 per cent, which is closely connected to the women’s
share of the non-agricultural work force of a low 23 per cent (OECD 2014a). Approximately 65
per cent of the Turkish working-age population only have primary education or less and the rate
of youth in employment, education and training is 27 per cent. Despite significant improvements
in the 2000s, these numbers are poor in comparison with EU and the OECD countries (World
Bank 2013).
SMEs as a group are in aggregated numbers the largest employer of the Turkish
economy and employ 78 per cent of Turkeys labour force but deliver only 44.9 per cent of GDP
(OECD 2012). The Turkish Economy is divided in two respects: the first division is between
large corporations and SMEs. The other division is between the formal and informal labour
37
market. These two divides will be clear throughout the analysis in this report because the
conditions in each are fundamentally different.
In 2006, informal employment made up approximately 50 per cent of the labour
market (Bolukbasi and Ertugal 2013). For developing countries it is not uncommon that the
informal sector make up an even larger part of the labour market than in the case of Turkey (ILO
2014). The definition of informal labour is debated among scholars (Salem, Bensidoun and Pelek
2011: 58-59). In this paper we will use the definition used by the International Labour
Organisation (ILO). ILO divides informal labour in two definitions that can be used to measure
the magnitude of the informal sector and informal employment. The first is a definition of what
the informal sector is. Enterprises that meet the following criteria are part of the informal sector:
a) Individual owned enterprises or households in which it is difficult or impossible to distinguish
between private and business related activities. b) At least a part of the goods or services
produced are sold or used to barter. c) The enterprises employ below a certain level defined
according to country circumstances. In this case the number is set at five employees (Salem,
Bensidoun and Pelek 2011: 59).
The second part of the definition concerns what constitutes an informal job2. ILO
defines informal employment as being jobs that are undeclared and therefore not subject to labour
legislation or social security (Salem, Bensidoun and Pelek 2011: 60). This definition covers
owners of informal enterprises, contributing family members and employees holding informal
jobs that do not reside under national legislation (Hussmanns 2014: 6-7). The latter definition
implies that informal jobs can occur in the formal sector if these are not part of national
legislation.
In Turkey, informal jobs are those that are not covered by formal social security.
Additionally, numbers for informal employment can be further divided by excluding the
agricultural sector. Including the agricultural sector, approximately 50 per cent of employment in
Turkey was informal in 2006. Excluding the agricultural sector, informal employment was 35 per
cent in 2006. From 2000 to 2006, informal employment outside the agricultural sector increased
from 25 per cent to 35 per cent (Salem, Bensidoun and Pelek 2011: 61-62). However, more
recent data from ILO show a decrease in informal employment outside the agricultural sector,
reaching 30 per cent in 2012 (ILO 2012). The data uses the same measuring standards as
described above.
2 Informal jobs and employment are used interchangeable
38
4.3 Political Leadership and the European Union Turkey is a parliamentary representative democracy. Kemal Atatürk formed the republic in 1923
on a foundation of secularism with strict curbs to religious symbols especially in political life.
Atatürk’s foundational principles have later become known as Kemalism, which has six core
principles: republicanism, populism, secularism, statism and reformism. As the head of the
Development and Justice Party (AKP) and prime minister, Recep Erdogan has had a firm grip on
power since 2002. The AKP has roots in Muslim culture which 99 per cent (CIA 2014) of Turks
identify themselves as. In March 2014, local elections confirmed the dominance of the AKP and
Erdogan, which puts them in a good position ahead of presidential and legislative elections in
August 2014 and June 2015 (EIU 2014).
AKP and Erdogan came into power in the wake of a deep economic crisis. Turkey
was forced to accept big loans from the IMF, which came with a range of policy requirements.
Public spending was reduced severely and the bank sector reformed. The AKP was stuck with the
direction of these policies, including public social spending at only 12,4 per cent, which is
significantly lower than the OECD level of 21,9 per cent (OECD 2014b).
Turkey has long fought for membership of the EU and has made considerable
headways since around the turn of the century. In 1999, the Helsinki summit acknowledged
Turkey as official applicant to EU. In 2005, 35 chapters of negotiation officially opened. The 35
chapters are substantial and it is still uncertain if the negotiations will succeed, but much progress
has been made and several chapters have been agreed upon. Policy areas regarding Cyprus, rights
to labour unions, environment and competition law are among those still contentious and
outstanding. A wide body of scholarship have covered the path to the EU admission for Turkey
but it is beyond the scope of this paper to go deeper into the EU admission process. However, it is
relevant to note that EU policies, requests and influence do have a significant impact on the
Turkish government’s policies (Bolukbasi and Ertugal 2013: 247).
39
5. The Five Spheres in Turkey Above we have laid down the theoretical and methodological foundation for this report. We have
listed our conduct of inquiry and portrayed how we understand VoC within our method. We have
in detail described the signifiers, which will be our core reference point in the following analysis
of the institutional setup in Turkey. The following analysis will analyse the empirical data related
to the signifiers in the context of the overall case, which we have just gone through. The analysis
will accordingly analyse the five spheres in Turkey, followed by an overarching analysis
deducting the institutional complementarities and institutional comparative advantages.
5.1 Corporate Governance in Turkey Corporate governance in Turkey is characterised by very concentrated ownership and control
structures, little influence of the stock market or institutional investors and limited protection for
minority shareholders. This section will argue that the corporate governance regime for large and
listed companies in Turkey exhibits extensive characteristics of coordination-based solutions
resembling those of a CME. Corporate governance in SMEs are primarily characterised by being
underdeveloped where basic financial management and access to credit are main obstacles.
The Turkish institutional setup for corporate governance has undergone several
transitions, from practically non-existent in the 1980s, to the modernized but still evolving legal
and institutional framework of today. These transitions broadly follow the many dramatic
political events as well as financial crises, capital shortages, and so forth, which troubled Turkey
in the latter part of the 20th century. The state has always had huge influence on Turkish
industrialization both as source of capital, but also as a source of uncertainty, because capital
flows could be inconsistent when political favours changed. It was not until the late 1980s, during
a shortage of public capital that private banks were permitted to engage in investment banking
activities. Most of the large family owned conglomerates quickly established their own banks to
limit reliance on the state as a source of funding. Following a major liquidity crisis in 2000 and a
deep financial crisis and recession in 2001, a wide range of reforms across the economy was
initiated. Included in these reforms were updated corporate governance principles and corporate
reporting, which all public listed companies complied with by 2004. The reforms also
strengthened a range of regulatory agencies, most important the Capital Markets Board and
Banking Regulatory and Supervisory Agency. The relative success of the reforms are attributed
40
both to the external anchors coming from terms agreed to with the IMF, following the bailout
also by IMF, but also from talks with the EU (Atakan, Oba and Ozsou 2010).
Stock market capitalization as a percentage of GDP reached a high of 44 per cent in
2007 but has since stabilized to an average of 33.5 per cent in the years 2006-2012 (World Bank
2014). This is below the average of the Next 11 countries (38 per cent), lower than the EU
average (67 per cent) and far below those countries usually labelled as liberal market economies,
which are usually above 100 per cent (World Bank 2014). The low stock market capitalization is
a clear indicator that firms turn to other sources of finance. Furthermore, a report on the Turkish
bond market decries the largely absent market for corporate bonds, which deprives Turkish
enterprises from a source of capital most firms in the developed world utilize to a great extent.
Furthermore, the lack of a bond market concentrates credit in banks and thereby also concentrates
risks for the corporate sector (World Bank 2012). According to this study, 88 per cent of financial
assets are accounted for by banks and less than 1 per cent by bonds. Large firms typically have
ownership stakes in banks or have established close networks with these – a characteristic
familiar to CMEs. While Hall and Soskice argue that this cooperation can present advantages as
capital is more patient, the World Bank cautions that it concentrate risk in banks and makes
corporations vulnerable to changes in inflation and exchange rates. Nonetheless finance for large
firms is raised in banks or other sources such as the family or business groups.
For smaller firms, the absence of multiple sources of finance inhibits the
possibilities to pursue opportunities or expand rapidly in times of growth, and difficulties in
financing small firms is by several accounts considered a major barrier for the economic growth
from this sector (World Bank 2011; KOSGEB 2012). The main culprit of SMEs lack of access to
finance is the banking system, only 20 per cent of bank loans are to an SME, with 66 per cent of
these loans maturing in less than one year.
To overcome this issue, the government founded the ‘Republic of Turkey Small and
Medium Enterprises Development Organization’ (KOSGEB) in 2003 under the ministry of trade
and industry. KOSGEB is primarily involved in a targeted investment credit interest support
program, in which banks can pool risks when lending to SMEs. Furthermore, KOSGEB is the
vehicle for a rapidly growing credit subsidizing scheme for SMEs. In 2011, 200.000 SMEs out of
2.5m SMEs in total received credit assistance from KOSGEB.
41
Another government initiative is a Credit Guarantee Fund, which assists SME’s
with collateral for credit (KOSGEB 2012). The World Bank cites 42 other, smaller, programs
using grants, loans and assistance directed at SME’s. However, these initiatives lack a systematic
approach and reach only few firms. While initiatives are lacking, the subsidized interest rate
scheme and involvement by business groups and civil society suggest moves toward less market
and more coordination, although still in its infancy.
A very high degree of family based ownership concentration in Turkey is widely
agreed upon as a central feature of the Turkish private sector (Mandaci and Gumus 2010; Kula
and Tatoglu 2006; Demirag and Serter 2003; Yurtoglu 2000). The number of companies listed on
the Istanbul Stock Exchange increased from 80 in 1986 to 274 in 1998 (348 companies was listed
in 2013), 75 per cent of the companies was majority owned by individuals or families in holding
companies (Yurtoglu 2000). For SME’s, the manager owns the company he runs 99 per cent of
the time (World Bank 2013). Furthermore, most of these owner-managers have technical or
engineering background with limited insight in accounting and corporate finance and lack
knowledge about general management including incentives or possibilities of hiring professional
managers (KOSGEB 2012).
Board Structure and corporate governance legal framework is primarily a concern
for the large and/or listed firms. Turkey has a principle-based and voluntary corporate
governance system with roots in the French-origin legal family of civil law (Aytekin, Miles and
Esen 2013). Civil law is characterised by hard regulation and code of law as opposed to the
British tradition of common law, which builds on consensus and precedence.
The Commercial Code of 1956 regulates listed companies, Capital markets Law of
1981, Decree-law no. 91 of 1983, enforced by the Capital Market Board and the Istanbul Stock
Exchange. Turkish law does not adopt the one-share one-vote principle and a legal loophole
protects shareholders with special voting rights by allowing holders of these rights to delay votes
on classification of shares indefinitely. This loophole allows the family-owned holding
companies to control a very wide range of companies, as they can sell off the majority of shares
without losing control, thereby freeing capital to pursue other ventures. With special voting rights
and concentrated ownership, the controlling shareholders and managers, who are often the same
person or a tightly knit group or family, dominate the supervisory boards.
The pyramidal structure of ownership is very common in Turkey. Here, a single
group, typically a family, owns a holding company that has controlling shares in a wide range of
42
listed and non-listed companies, (Demirag & Serter 2003). More recent data suggests a similar
picture with the two largest business-dynasties, Koc Holding and Sabanci Holding owning more
than 25 per cent of the market capitalisation of the Istanbul stock exchange and both groups
controlled by families (The Economist 2014b).
Furthermore, most Turkish private banks are under control of a business group,
which also serves as its main source of finance. Foreign ownership is also very high in the
Turkish stock market – 61.9 per cent in 2011. Foreign ownership is often an indicator of LME
characteristics, as foreign investors require protection of minority shareholders as well as sound
corporate governance. However, as this is not the case in Turkey a possible explanation could be
the combination of low domestic savings ratio and persistent current account deficits (IMF
2013a), leaving Turkey starved for foreign capital and consequently higher returns to these
investors. Furthermore, family holding groups are eager to sell off shares to pursue new ventures,
as they do not lose control of the firm as long as they keep the shares with special rights.
The family-owned conglomerates with pyramidal ownership structures constitutes a
complex web of inter-corporate shareholdings with reputational monitoring and agency issues to
overcome in-house. This limits the importance of institutional investors, as funding is mainly
from the family, banks – often owned by the very same group – the state, or business networks.
The structure of ownership for large firms in Turkey is quite different from that of Germany and
other developed CMEs. However, when a small business group or family owns and controls a
large number of firms across different industries in a conglomerate, it is possible to align
strategies, share market information, establish long-term supply chains, limit poaching and
competition – all in all, the concentrated ownership in practice resembles the cross-shareholding
and interlocking directorships of the German industry.
The level of sophistication in the stock market is by several accounts low. In 2008,
the World Economic Forum gave the Turkish stock market sophistication a total score of 5.0,
ranking 39th in the world. While scoring high on limits to restriction of capital flows, Turkey
scores very low on key indicators that are characteristic of an LME economy, such as ease of
access to loans (75th in the world), ‘venture capital availability’ (97th in the world). In 2013, the
influential annual ‘Doing Business’ report by the World Bank ranks Turkey as number 71st in the
most important indicator ease of doing business, another composite index. This report echo above
43
findings and Turkey scores low in key LME indicators such as ‘Protecting Investors’ and ‘Getting
Credit’.
It is clear that Turkey is not an LME in the sphere of corporate governance. In a
comprehensive study of corporate control of the 100 largest companies on the Istanbul Stock
Exchange, Demirag and Serter (2003) concludes emphatically that Turkey can be classified as an
“insider system” and that the dominant insiders are the richest families in Turkey. More recently,
Atakan, Oba and Ozsou (2010) describes the Turkish economy and Turkish corporate governance
as characterised by: “(...) a dominant state, an emerging economy, concentrated ownership by
families in the form of pyramidal structures, weak legal procedures in private property rights and
minor dependence on financial markets for equity concerns”(Atakan, Oba and Ozsou 2012: 2).
Turkey is still in the relatively early developing phase of institutions and there are
persisting legacies of the very large family owned conglomerates, many of which were
established in the 1950s. These business groups exhibit very high rates of concentrated ownership
and concentrated control. This ownership structure dominates large firms in Turkey and functions
in practice much like the corporate networks, cross shareholding, interlocking board
memberships, and industry associations in the CME archetype of Germany. It is crucial to note
that the many reforms throughout the 2000s have not made attempts to break up control of the
family dynasties or significantly foster competition over coordination. This creates both a legal as
well practical setup of coordination.
5.2 Industrial Relations in Turkey This section will investigate how Turkey solves its coordination problems within the sphere of
industrial relations. We will argue that while unionisation is very low and collective bargaining
agreements even lower, labour market reforms in the 2000s have provided Turkey with extensive
protection for eligible workers in the formal sector. This indicates a regulatory framework
resembling the CME where the employees are heavily protected. However, due to the huge
informal sector, strict eligibility criteria and low unionisation, in practice most workers have no
formal employment protection, few unemployment benefits, and wages set by the market.
Turkish industrial relations have historically been different from industrial relations
in Western Europe. Western European countries are often associated with collective bargaining
and social protection for instance in Scandinavian countries or Germany. In terms of the VoC,
44
Western European countries, Germany in particular, are associated with coordinated solutions to
wage and working conditions, which are the main coordination problems between firms and
workers within industrial relations. Turkey has a very low unionisation of 5 per cent (OECD
Statistics 2014b). In addition, unions are politically weak, resulting in low levels of collective
bargaining (Yildirim and Calis 2008: 213). Regarding formal labour force regulation, Turkey has
a very strict labour force protection system. According to an OECD measure for strictness of
employment protection, regular contracts score 2.47, over double that of the US (1.17) and
slightly less than Germany (2.98) (OECD Statistics 2014c). Regulation of temporary contracts is
even stricter, being four times as strict as that of Germany and almost 20 times that of the US.
What this initially tells us is that Turkeys institutional setup resembles the CME in as much as it
provides extensive benefits that coordinates markets and provides incentives for workers to
engage in obtaining specific skills. However as the following will depict, this is not a fair and
comprehensive presentation of the institutional setup in Turkey.
In 2003 a new labour act introduced a relatively high severance pay and redundancy
payment that is still applicable. However, it only come into force after one year of employment
and is only applicable for firms with more than 30 employees (Yildirim and Calis 2008: 218-
219). An OECD report on structural reforms in 2012 argues that this merely results in low-skilled
Turkish workers being fired just before the end of the first year of employment, and rehired the
next day (OECD 2012b). The effect is that the coordinated solutions introduced by the state are
avoided by the market, which instead conforms to market based solutions. Other circumventions
mentioned by the report are that some firms have fewer than 30 employees on contract and the
rest are informally employed. Thus these firms avoid the extensive regulation that the state
introduced in order to coordinate the market. The report establishes a link between the
persistency of informal employment, even in large, modern enterprises, as a by-product of strict
labour force protection.
On the contrary, as the duration of severance pay is based on seniority and only
paid out if workers are involuntary laid off – the employees who obtain a formal contract are very
disinclined to change job unless they have a new job on their hands. Hence the extensive
coordination can have the effect of keeping employees longer in the same position. However, the
strict CME protection of workers tends to create a labour market characterised by market based
solutions.
45
One of the key features of the extensive regulation of the formal labour market is
that Turkey has the highest minimum wages as percentage of average wage in the OECD (OECD
Statistics 2014a). However, as in the case of other parts of the regulated formal sector, the high
minimum wage is another reason employers use labour without contract. As with the high
severance pay, the CME regulation reinforces circumventions that give way to solutions
resembling the LME. Baskaya and Hülagü (2011) identify a wage gap in Turkey between formal
and informal labour of around 20 per cent in the years 2005 through 2009. Thus the informal
sector, which constitutes a large part of the Turkish labour market, is without protection from
regulation or by labour unions. Furthermore part time employment or employment on temporary
contracts is lower than the OECD average, indicating that this is relegated less extensive than full
time employment contracts (OECD Statistics 2014d).
Most firms in Turkey are represented by one of four employer organisations, which
are divided according to firm size, and type of industries. Members of the employer organisation,
which represent large firms, generate more than 50 per cent of all value adding in Turkey and
approximately 80 per cent of foreign trade (TUSIAD 2014). These numbers are impressive and
indicate that this employer organisation possesses great bargaining strength in representing large
corporations in Turkey. The other segment of employer organisations is the ones representing
small and medium sized firms within trade, crafts and industry sectors (Yildirim and Calis 2008:
214- 215). These labour organisations are by far the biggest in number of members, but
contribute relatively little to GDP due to low productivity per worker in these sectors (OECD
2004: 27).
These employer organisations participate in coordination of industrial relations
when they negotiate collective bargaining with labour unions on behalf of their members. Though
the employer organisations participate in the collective bargaining few are concluded due to the
low unionisation. Apart from this, evidence shows that a few employer organisations participate
in establishing educational institutions in order to promote skill level upgrading’s (Vega and
Parissaki 2008; TOBB 2014). However, these examples are rare and the employer organisations
main role is providing of information and participation in policy recommendations.
The great number of membership and economic representation normally put such a
labour union in a strong bargaining position, because, although the jobs are not the most
productive, they are employing the majority of the workers, keeping a lid on unemployment
numbers, which is both politically stabilizing and reducing social unrest. However, according to
46
Bolukbasi, and Ertugal (2013), even though unions are given hearing time and opinions are being
voiced in bargaining processes, government officials tend to stick to their own agendas. This
aligns very well with the reality facing the SMEs. The segment of the economy regarding the
SMEs is dimly regulated with weak institutions. Employer organisations representing SMEs on
the surface resemble CME characteristics, but in reality they have little coordinating power,
leaving coordination between stakeholders to the individual SME, thus resembling the LME in
practice.
Unionisation in Turkey was 11 per cent in 1999 but has since then declined by half
a percentage point every year reaching 5 per cent unionisation in 2011 (OECD Statistics 2014b).
In total, labour unions have around 3.8 million members out of a workforce of above 27 million
people (TPM 2014a). The relative low covering of collective agreements is the result of
historically preconditions and of very strict regulation of the possibility for labour unions to
negotiate collective agreements (Yildirim and Calis 2008: 215). Due to the very low unionisation
the main strength of the labour unions, which is to unite the voice of great numbers, is severely
limited. It is although depicting labour unions with limited collective influence not the least
because it is only representing approximately 5 per cent of the Turkish labour force, resembling
the LME approach further (Yildirim and Calis 2008: 215). The shrinking number of unionisation
and the following limitation of bargaining power are resulting in limited coordinated bargaining
on behalf of the employees.
The Turkish state employs 10 per cent of the labour force (OECD 2012c). These,
public employed workers, are represented by three labour unions that have the same bargaining
power (ETUC 2010: 5). In the general labour market one labour union dominate leaving more
bargaining power in the hands of the general labour market, since it is less fragmented (Yildirim
and Calis: 215). The picture of weak labour unions is further emphasized when we look at the
regulation of these.
Two laws regulate those unions, which represent the publicly employed. ‘The
Public Servants Act’ from 1965 and the ’Public Servants Trade Unions Act’ from 2001. Two
obligations stand out: (1) unions cannot engage in collective bargaining. This forces members to
make local agreements on the workplace or to have no collective agreements at all and to some
degree removes the ability of unions to negotiate higher wages or better working benefits. (2)
Removal of the right for the publicly employed to strike (Yildirim and Calis 2008: 214). Again
47
the power, and to some extent the whole idea of unions is obstructed with these laws, which gives
great autonomy to the state as employer.
Labour unions in the general labour market are subject to the Trade Unions Act of
1983 and the Collective Bargaining, Strike and Lockout Act of 1983. The first set strict rules for
who and how employees can become members of a labour union. In effect it hinders high
unionisation. The second act restricts the use of strikes by prohibiting general and solidary
strikes. This restriction removes power from labour unions and hinders the ability to put serious
pressure on the state or other employers. Additionally, it includes a number of workplaces in
which strikes are prohibited (Akan 2012: 328-329) – Yet another restriction to the power of the
labour unions. The restrictive nature of these acts comes from the trade unions role in numerous
strikes before 1980, which were argued to reduce the economic output. Thus the underlining
history of strikes took part in shaping the institutional setup that trade unions act within today.
In 2008 a range of amendments, intended to remove the harsh parts of these two
acts was introduced, including removal of the restriction on general and solidary strikes, but the
amendments have not yet been approved by parliament (Akan 2012: 339-340). These
amendments should be seen in the light of EU admission talks. Turkey initially applied in 1987,
was granted candidate status in 1999 and in 2005, 35 articles of negotiations were officially
opened. Among these, industrial relations are a point of concern, where the EU has made
demands of movements toward a more European system, with social rights and security for
workers. The Public Servants Trade Union Act of 2001 was adopted as a first step toward
meeting EU standards. This gave public employees the right to participate in trade unions and in
effect gave the publicly employed the right to participate in collective bargaining with the state.
However, since the act does not give the right to collective agreements, the International Labour
Organization and the EU remain critical of the progress (Yildirim and Calis 2008: 217-218).
To sum up in regards to the unionisation density and the subsequent institutional
setup, unions are scattered, have low membership ratios and little room to bargain on behalf of its
members. Workers in Turkey do not expect unions to drive the fight for extended labour rights,
leaving the playing field for the state and employer unions.
In an overall perspective the regulation can be characterized as increasing the
coordinated aspects of the formal industry primarily concerning the firms who employ more than
30 employees, but leaving the rest of the labour market as functioning by market based solutions.
The result within the sphere of industrial relations is one of division. First off, a huge part of the
48
labour market is unaccounted for because it reside in the informal sector. Hence the informal
sector is not part of the strict labour market regulations. In the formal sector, unions are scattered
and has low membership ratios, and even fewer members under collective bargaining
agreements. In addition, labour unions are severely restricted by regulation. However, in its
place, legislation, in particular the labour act of 2003 puts constraints on employers’ ability to lay
off workers once they are on contract, a clear CME incentive. Specialised workers have few
options to coordinate bargaining outside the rules set by the state, limiting incentives to invest in
own skills and the individual worker is left to negotiate directly with the firm. The result for the
low skilled worker is a very flexible labour market with low wages – a characteristic of LMEs.
On the other hand are employees on contract with long tenures dis-incentivised to switch jobs and
they are expensive to lay off – a characteristic of CMEs. In practice, the market solves most of
the coordination within the sphere of industrial relations. However, the state employs 40 per cent
of workers, and the legal protection of workers has moved toward greater protection of
employees. These are characteristic of the CME, in which the employer and the employee are
committed to each other.
5.3 Vocational training in Turkey The sphere of vocational training in Turkey is characterized by few coordinated training systems,
extensive protection for labour on contract, and an emerging industry requiring specialized high
skilled labour. The large informal sector in Turkey is uniformly characterized by unprotected low
skilled labour, which is still in high demand. This section will particularly focus on the formal
economy and regulatory aims, because it shows the deliberate institutional setup, indicating
which kind of setup Turkey strives towards in order to become a developed economy, eligible for
membership in the EU. The following will examine the signifiers outlined in the methodology
section.
Turkey has a centralized government structure, which is also visible in the
educational system. The state determines the structure of the educational system, which to a large
degree makes for a general and top-down regulated educational system. Mandatory school
attendance has recently been increased from 8 to 12 years of education. Similar to the German
school system, on the 8th school year, at an age of 13½, students will either choose an academic
secondary education or a vocational secondary education. It is possible to pursue an academic
49
career from the vocational high schools, but this group constitutes a minority3. The tertiary
educational institutions, which are reached at an average age of 17½, receive funding from the
national budget, tuition fees and self-generated revenues.
Tertiary educational institutions are closely supervised by the state, and ‘general’ in
its educational directives. The vocational education branch offers some influence to stakeholders
in the economy through the “Vocational Education Council.” This council decides on planning
and development, with representatives from relevant ministries, trade and employers' unions and
other key social stakeholders. The “Vocational Qualifications Authority” aligns Vocational
Education and Training (VET) professional qualifications with professional standards; and for
each province there is a “Board of Vocational Education” (OECD 2013). This does to some
extent ensure alignment to local and specific educational needs and wishes (i.e. decentralization).
Some vocational High schools and Universities are collocated with Organized Industrial Zones
(hereon after OIZ), thus enjoying closer coordination with the specific needs of the industries
represented in these zones.
We will in this paper look into one of these zones and use it as an indicator for the
rest of the zones. Ortadoğu Sanayi ve Ticaret Merkezi (OSTIM) is, according to the OECD, a
good representative for Turkish SMEs in general (Elci 2011). With approximately 5000
companies in eight main sectors and 50,000 employees it is “Turkey’s largest small and medium
sized industrial zones” (OECD 2013). Further more the vocational and educational training sites
and facilities tend to be concentrated around the concentration of its costumers (firms), so in
order to observe on this signifier the OIZ gives us best case. It is, however, relevant to note that
this does not reflect the situation of all SMEs. We consider the SME OIZ to be sufficient proxy,
keeping in mind that it might overstate the level of coordination.
The sphere of vocational training and education is in a developing phase according
to Prof. Dr. Sabahattin Balci from Cankiri Technical and Business College, Ankara University
(Balci and Gurbuz 2000). This is driven by Turkey’s positive economic development which has
been facilitated by strong growth in the manufacturing industry, which is becoming increasingly
sophisticated, thus demanding more specialization and higher skill levels of workers. The
shipbuilding industry is an example of this tendency. According to a study by the OECD, the
shipbuilding industry in Turkey is one of the most promising and important industries both 3 For an overview of the Turkish school system see figure in appendix 2
50
domestically and in terms of export (OECD 2011). Internationally Turkey has risen to become
the 5th largest producer in the shipbuilding industry.
This developing tendency is reflected in recent government regulation such as the
193 Income Law (September 2003), where a 100 per cent tax deduction can be provided for
contributions to education (OECD 2013). This creates institutional incentives for firms to invest
in industry specific skills. The state is promoting decentralizing of vocational training and
education in order to be able to keep up with the increasing need for specialized skills. Industries
like the ship building industry have embraced these initiatives by funding high schools and
tertiary educational institutions. Furthermore, in a recent regulation change of the “Private
Teaching Institutions Law” (January 2013), government funds have been provided to private
vocational and technical schools in organized industrial zones in addition to the funding available
to private schools with students in special education (OECD 2013). This state substitution of the
industry further increases firms’ incentive to invest in industry specific skills. Both these
regulations increase incentives to create coordinated solutions in the institutional setup for
vocational training. According to the Turkish Under-secretariate of Maritime Affairs, the amount
of high schools with ship construction departments increased from 17 to 31 in the years 2004 to
2008. Furthermore, four universities have specific shipbuilding departments (OECD 2011: 24).
The recent 10 years of development within the sphere of vocational training and industry profile
of Turkey is indicating that there is a wish to move towards an economy with a high level of
specific skills complementing the growing industries in Turkey. This regulation implemented by
the government is very close to being a copy of what Culpepper (2001) explained is the necessary
institutional setup for a decentralized vocational training systems to succeed. In short, recent
developments within the institutions regarding vocational training resemble distinct and clear
CME notions.
In contradiction to these ‘coordinated’ incentives, the school system is top-down
controlled and has limited room for firms and industry to influence curriculum. However some
large corporations, e.g. the shipbuilding industry, do get influence and tend to promote specific
skills. Drawing on the findings from the sphere of industrial relations it is visible that there is a
sharp distinction between the SMEs and large national ‘champions’. The two employer
organisations (representing respectively the SMEs and the large firms) have different access to
51
policymaking, and the large enterprises with political clout have all together different
preconditions.
Taking the above into perspective it is important to investigate if the same picture is
evident among the SMEs. As earlier pointed out, SMEs are by far the biggest employer in the
Turkish economy. They employ 78 per cent of Turkeys labour force and delivers 44.9 per cent of
GDP (OECD 2012). As mentioned above the preconditions for SMEs seeking specific skills are
different. SMEs, by nature, does not command the same resources to finance and support
educational initiatives as the large enterprises, which means that the need for coordinating
measures facilitating pooling of resources is more explicit.
OECD published a research paper in 2011 evaluating the use of vocational training
by SMEs in the OSTIM (Elci 2011). The report found that the use of training was surprisingly
low and three specific concerns were prevalent: (1) Difficulty in determining and measuring
benefits of investing in training, (2) fear of other SMEs poaching their employees once they had
obtained new specific skills, and (3) a lack of public funding (Elci 2011: 55). To ameliorate these
concerns the report recommends initiatives such as encouraging inter-firm collaboration,
coordination with the state and relevant institutions, development of mechanisms to ensure that
universities and vocational schools obtain information directly from SME’s. This signifies that
decentralizing vocational training and increased endorsement and focus on high levels of specific
skills have not yet been achieved at the SME level. Within the domain of SMEs, a high level of
general skills is therefore still the best social security for an employee. Initiatives for vocational
training for large firms indicate regulatory support for the CME approach, but this support is
lacking for SMEs, creating similarities to the LME. It is important to note that the LME notions
are based on a weak or non-existing institutional setup, and the cause of a institutional setup
deliberately promoting the synergies of the LME like we see it the USA and UK.
The above analysis of institutions and factors relate to the employer and state side
of the equation. This section will focus on the employee. Employment protection, unemployment
protection and job tenures are incentives that either facilitates a wish for specific or general skills
for the individual employee. The incentives facing employees in the formal and informal sector
are radically different. First off, informal workers are usually low skilled, and they have neither
the resources nor the access to formal training. Thus, the Informal industry is inherently flexible
because neither employer nor employee is under any form of institutional protection (Bolukbasi
and Ertugal 2013). No data on job tenures are available but due to the hire and fire nature of the
52
informal sector and flexible markets job tenures are low. This means that the best social security
policy in the informal labour market is obtaining general skills, thus optimizing the possibility of
finding a new job if laid off. However, this can be difficult due to lack of resources. It is not until
a worker is formally employed, and has become eligible for protection and benefits that
employers as well as the employee have incentives to invest in firm-specific skills.
The formal segment of the Turkish labour market provides a degree of security for
the employee. A new unemployment insurance scheme has been implemented for the first time in
Turkey. However, it is very difficult to qualify for the benefits and these are relative low
(Bolukbasi and Ertugal; 2013: 243). The difficulties in obtaining these social security benefits
make the Turkish social security system encourage workers to maximise job tenure, because the
alternative is to get no security. This does not explicitly dictate that all job tenures in the formal
sector are long, but it does indicate that conditions for long tenures are present in the formal
labour market.
This leaves us with a somewhat muddy picture of the incentives facing workers for
specific or general skills in the formal segment of the labour market for SMEs. On the one hand
employees is left without protection and on the other hand the state invest and encourage firms to
invest in industry specific skills. However, due to EU pressure and an increasing demand from
the industry, it is likely that the state will provide more incentives for coordination and higher
skill levels.
The profile of the Turkish economy does seem to call for a high level of specific
skills. Both SMEs and large corporations have voiced this through OECD reports, correlating
with a rapidly growing manufacturing industry, which is the biggest export sector. However,
public institutions do not support this, because they do not provide substantial security for
workers making it risky to pursue specific skills rather than general. This is especially true for the
informal sector where a social security system does not exist.
In sum we conclude that the Turkish government does pursue a high level of
specific skills to support their economic development. This pursue of specific skills by
decentralizing vocational training is difficult because the culture stemming from the strong
centralized state have set some difficult preconditions. Decentralization of vocational training
systems has only been successful when large corporations with political influence and financial
muscle can support the development. The present conditions facing firms in the sphere of
vocational training bear a resemblance to the LME, with mostly general skills. However, there is
53
a prevalence of low general skills, which does not support the industries usually combined with
LMEs. Recent regulatory developments such as tax incentives indicate that the Turkish
government is pursuing institutional reforms putting vocational training systems on a path
towards a CME. Furthermore, the promises of the manufacturing industry as the future export
engine will demand specific and higher skill levels filling gaps and spurring decentralization and
coordination.
5.4 Inter-firm Relations This section will analyse how the Turkish institutional setup solves the coordination problems of
conducting business with other firms and the spread of knowledge. The Turkish inter-firm
relations are characterised by networks relying heavily on reputation, rather than contractual
enforcement. Furthermore, knowledge sharing is characterised by both LME and CME solutions.
The three signifiers that will inform this analysis, of the inter-firm relations in Turkey, will use
the following structure. First, contractual relation between firms in Turkey is investigated by
analysing how Turkish firms conduct business with other firms. Second, the role of business
organisations will be analysed by investigating how SMEs in an industrial district conduct
business, and how large automotive firms conduct business with SMEs. Additionally the analysis
draws on knowledge about the large employer organisation described earlier. Third, an analysis
of how Turkish firms participate in knowledge sharing will be conducted.
The culture of contractual enforcement will be analysed through an investigation of
two representative sectors. The first sector is the leading textile district in Turkey, largely made
up by a multitude of SMEs, which, in this case defined as firms employing less than 300
employees (Oba and Semercioz 2005: 175). The second is the automotive industry in which
larger firms preside. The investigation of these two sectors will give us an indication of how
business communities in Turkey conduct business with each other.
The Merter textile district, located in Istanbul, the capital, is the leading district for
textile production in Turkey. It produces 40 per cent of the Turkish textile production and hosts
more than 2500 SMEs. It is the definition used by the Istanbul Chamber of Industry (Oba and
Semercioz 2005: 175). An industrial district is a geographical area that comprises many SMEs
that participate in the production of a final product. Hence, each firm in an industrial district
contribute with a specialised part of the production process and the district as a whole produces
the final product. In Merter, where SMEs are in close geographical proximity to each other,
54
workers and management know how other firms conduct business through long business
relationships. Reputation of firms in industrial districts is a crucial source of competition. Firms
in Merter primarily use verbal commitments to place or receive orders. This indicates a very high
degree of trust between firms in industrial districts and few formal contracts. Additionally many
firms in Merter believe that good reputation and long term relationship with business partners are
very important factors. Furthermore, only a few firms use social factors like affiliation to a
family, religion or geographical area, in their evaluation of trust to other business partners (Oba
and Semercioz 2005: 174-179). In effect the industrial district in Merter is characterized by the
use of coordinated solutions of the contractual setting they engage in.
Moving on to the automotive industry, which is the third largest industry in Turkey
(Wasti and Wasti 2008: 119). The automotive industry in Turkey is dominated by large
companies and will therefore give an understanding of how larger companies conduct business
with their SME suppliers. The Turkish automotive industry has existed for about 50 years and is
highly dominated by foreign brands like Ford, Renault and Toyota. The industry has been faced
with a highly volatile institutional setup. Among other things, the import-substitution strategy
pursued by the Turkish state from 1954 to 1980 created an industry in which foreign firms was
required to form joint ventures with Turkish firms to participate in the market. Today some car
manufactures participate in joint ventures and others do not (TPM 2014b). These manufacturers
buy parts for the production from smaller firms on the international market and on the Turkish
market. The end result is a tipped balance in the business relationship towards the large
manufacturers, since these can shift suppliers easily (Wasti and Wasti2008: 119-120).
Nevertheless, it is important for both parties to create a trustworthy relationship. This trust has
often been built by assistance of the manufacturer to the Turkish supplier. The large car
manufacturers have often desired implementation of soft technologies such as the famous Toyota
just-in-time delivery systems. However, since smaller Turkish firms often experience difficulties
implementing new technology, manufacturers have in many cases assisted them with the
implementation. Thus, instead of using other suppliers, either Turkish or foreign, manufacturers
have tied themselves more closely to Turkish suppliers. This helping hand has increased the trust
in the relationship between foreign car manufactures and small Turkish suppliers. As in the case
of Merter, the large automotive manufacturers and the SMEs use coordinated solutions to engage
in inter-firm relations.
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Moving on to the strength of employer organisations the issue of receiving market
information is of great value for firms. However, firms can be reluctant to reveal market
information but interested in acquiring it. This section investigates how employer organisations
can solve this problem and inform its members of market tendencies. When firms participate in
various relationships with other firms in the market, information is key to establishing well-
functioning relationships. As seen above, trust is an important parameter when conducting
business in Turkey. In cases, unlike the Merter district, where firms find themselves more
distanced from their supplier or buyer they will search for information. The kind of information
they are looking for is general market information and reputational information about the firm
they engage with. In such cases employer associations and industry specific associations become
important for delivering such information. In the sphere of industrial relations we analysed the
largest employer organisations. Here we will look at the employer representative of the Merter
district. The MESIAD organisation, which has the job of representing its members at
governmental levels and is forming, ties to other associations. Additionally it provides national
and international market information to its members. Furthermore, it seeks to strengthen
relationships and unity between members through seminars and training sessions, (Oba and
Semercioz 2005: 170-171). In addition to small specific employer organisations, like the
MESIAD, the four large employer organisations TISK, TUSIAD, TESK and TOBB help
coordination of inter-firm relations. All of who represents large parts of the firms in Turkey.
The reluctance of sharing market information is evident within knowledge sharing.
Efficient knowledge sharing between firms can be a competitive advantage for an economy,
facilitating innovation and process evolution. For firms that participate in the global economy,
knowledge is an increasingly important source of competition. Knowledge has, in terms of
competitive resource, become as important as coal was during the industrial age. Knowledge is a
source used to innovate processes and products. Therefore knowledge becomes the source of
tomorrow’s organisations, product processes and products. The firms that form these innovations
will be at the forefront of international competition. Therefore, it is important for firms to be able
to structure how they acquire and participate in knowledge sharing. Developing knowledge in
firms can take many forms. For instance, on the basic level, firms hire new employees to increase
their stock of knowledge (Bozbura 2007: 209). However, existing knowledge inside an
organisation can also be combined or used in new ways. Thus the internal process of catching
56
knowledge and directing it towards the proper place in the organisation is essential (Kamasak
2009: 306-308).
A different venue for firms to obtain knowledge is to engage in knowledge sharing
with other firms. Sharing knowledge with other organisations can create many new structures of
knowledge. On the other hand it often makes organisations feel vulnerable of the risk for being
copied and outperformed (Bozbura 2007: 209). From the perspective of the state, it is important
that national firms are able to create innovations and thereby be at forefront of international
competition. When national firms succeed, with this innovative process, states will perform well
in economic terms. Indeed the future strength of a state depends highly on the market actor’s
ability to share knowledge.
Above we saw how large international firms in the automotive industry assist
Turkish SMEs to implement soft technologies. Now we will investigate the general tendency of
knowledge sharing involving Turkish SMEs. SMEs are by some scholars regarded as being very
important innovators in a market economy (Bozbura 2007: 209). In Turkey, where most of its
firms are SMEs, it becomes highly valuable for the economy if these have a great tradition for
sharing knowledge with other firms in the market. Turkish SMEs are primarily family-owned,
which tends to keep company knowledge inside the family. A study conducted on Turkish SMEs
showed that these did not find it important to share knowledge (Bozbura 2007). Instead, focus
was on diminishing outflows of knowledge. By diminishing information outflow the market as a
whole miss possible innovative development and firms lack the opportunity of acquiring new
knowledge from the outside. Evidence from other countries is that the individual firm miss out on
a healthy growth and improvement of the firm (Bozbura 2007: 209). The study indicates that
Turkish SMEs use a very conservative approach to knowledge sharing hindering their long term
growth potential. A countervailing effect is the great flexibility in the Turkish labour market.
When employees frequently move across the labour market they will take knowledge with them
and the new firms will benefit from this. Generally, these studies reveal no involvement of formal
research programs or intervention in the market by the state to facilitate knowledge sharing
between small and medium sized firms. Thus, the market is the primary vehicle for knowledge
sharing. For larger firms, joint ventures and industry collaboration, exacerbated by concentrated
ownership creates knowledge transfers.
As is the case in vocational training and industrial relations coordination problems
in the relationship between firms point in two directions. The fear of loosing know-how limits
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spread of knowledge and information and the very flexible low-skill labour market creates
knowledge sharing across SMEs. The latter is a characteristic of LMEs. Conversely, reputational
and network monitoring solves contractual relations between firms, which is a coordination based
solution. For larger firms, concentrated ownership, joint ventures and some instances of vertical
coordination between large manufacturers and smaller suppliers indicate coordination based
solutions to knowledge sharing. Market information is kept in-house for both small and large
firms, although with concentrated ownership, in-house sharing for larger firms spreads across
industries.
5.5 Intra-firm relations in Turkey This sphere will draw on the analysis from the other spheres as the intra-firm sphere overlaps
these. Apart from this it will seek to observe and analyse the typical decision making processes in
Turkish firms, the average tenure and the cultural setting. Findings are that the intra-firm sphere
in Turkey is divided between SMEs and large firms, except for a pervasive culture of patriarchal
control systems. SMEs resemble LME solutions and large firms resemble CME solutions.
The formal regulatory framework of Turkey in the sphere of employment protection
is among the most rigid in the OECD, even to the point where incentives are distorted. However,
the informal sector, which by nature is unregulated, is highly flexible. This leaves CEOs with
great autonomy over the hiring and firing of informal labour, but limited autonomy over
employees on formal contracts. Low unionisation and strict regulation preventing collective
bargaining, relegates the bargaining of wages to the workplace in most cases. Formal labour force
protection is based on seniority, which in practice increases the threat of exit before the first year
of employment. Despite that the employer might be satisfied with the worker. Conversely, the
steep severance fees and employment protection pacifies the threat of firing workers employed
more than one year. Hence, committing employer and employee to each other when high
seniority is achieved. For workers that are ineligible for the formal labour force protection wages
are to a high degree based on market mechanisms. The market wage mechanism is especially
prevalent for the informal sector.
On the issue of capacity for unilateral decision-making by the executive of a
company, there is a sharp distinction between the informal and the formal sector. 80 per cent of
informal labour occurs in firms with less than 10 workers (Salem, Bensidoun and Pilek 2011: 65).
58
Managers of small firms, who are often also the owners, have high degrees of autonomy due to
employment of mainly un-contracted labour.
In the large family owned conglomerates, ownership is very concentrated, and as
accounted for in the section on corporate governance, boards are often merely for show. This
limits influence of employees on strategy. However, the extensive labour protection inhibits
managerial autonomy on firing. The OECD report on structural reforms in Turkey show that
compliance with severance payments, especially for firms that go bankrupt, is limited. However,
for large firms both private and publicly owned, employing mainly formal labour, the picture
remains as concentrated control over strategy, but limited autonomy on firing.
In a book on the culture of corporate governance from 2008, Mustafa A. A. use
social studies to gauge Turkish attitudes toward managers and enterprise. Key findings are that
Turkish people accept powers of seniors and of persons that are higher in a hierarchy and are
disinclined to question or disobey orders. Turkish people are in general very risk averse and
prefer to follow a leader, rather than individualistic initiative. Individualistic attitudes of the
working population were by his account 30 per cent, slightly higher than that of China, but far
lower than Anglo-Saxon countries, which scored 82-85 per cent. Furthermore, there is a distinct
tendency of secrecy and conservatism, where 99 per cent of SMEs are owned and managed by
the same person, usually the patriarch of a family. Generally these firms have non-public
financials and employ informal labour approximately half the time. Mergers and acquisitions are
very rare and with very limited access to risk-willing capital – or even basic credit from banks –
most SMEs stay small. By this account, management practices for both small and large
companies are authoritative with the ‘boss’ reluctant to listen to outsiders and decisions are based
on intuition, rather than long-term strategic planning.
Statistics for job tenure from Turkey is accounted for differently than in other
OECD member countries, measuring only those workers with tenure over 3 years, which is 54
per cent. This is lower than the German average of 71 per cent and closer to that of Australia, an
LME, which is 58 per cent. However, a classical example of an LME, the UK, is 70 per cent,
which is the same as Germany, but after 5 years of tenure, the two diverge significantly, with
Germany having 44 per cent with 10 years or more, and the UK only 34 per cent with 10 years or
more. It can thus be concluded that due to lack of data, the average job tenure in Turkey is
inconclusive.
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The overall picture of intra firm relations in Turkey is that of a sharp division
between small and large firms, and formal and informal labour. Managers of small firms have
great autonomy on all accounts: Contracted employees are not covered if there are less than 30
workers in the firm, and informal labour has no protection at all. For large firms, employees are
extensively protected, but have little access to strategy. The overall picture reminisces of other
spheres where the informal sector and small firms strongly resembles the LME, while large firms
and the regulatory framework are leaning toward the CME.
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6. Institutional complementarities Through the analysis of the five spheres of institutional coordination in Turkey, a picture of deep
division between large enterprises and small and medium sized enterprises have emerged. On the
one hand, large enterprises operate primarily in manufacturing and heavy industries with
economic growth, surging exports, relatively high productivity, labour protection and expanding
training systems. Firms with more than 1000 employees employ 11 per cent of the total labour
force but accounts for just over 20 per cent of total revenue and 25 per cent of total value added
in Turkey (Turkstat 2014). On the other hand, 2.5 million SMEs – of which 98 per cent have
fewer than 20 employees have low productivity, low skill levels, low levels of technology, absent
job or social protection and frequent use of informal labour. The institutional setup surrounding
these two segments is equally divided in solutions resembling CME for the large corporations
and resembling LME for SMEs.
The following section will analyse how the Turkish setups in the five spheres across
the institutional setup complement or impede each other. It is organized as follows: the first part
will explore institutional setup in which SMEs operate which finds that the predominant LME
characteristics has capacity for employing great numbers, but has low productivity and upgrading
or higher productivity through effective competition is impeded back lack of technology and
crucial LME institutions. Secondly the institutional setup facing large enterprises is largely of the
coordinated kind, and state polices have successfully ameliorated the lack of some
complementarities of the ideal type. Lastly the interplay between the two will be assessed and
finds that the technological gap limits interplay between the two sectors.
The SME Segment Across the five spheres of the institutional setup, the most evident characteristic of the SME
sector in Turkey is the interplay of institutions that creates an abundance of cheap and flexible
low skilled labour. The institutional setup that facilitates this characteristic, is constituted by the
combination of small-scale family ownership, widespread use of informal labour, strict eligibility
criteria for labour protection provided by the state, low and fragmented unionisation. These
characteristics gives creates a situation where the owner and hence the manager reigns supremely
internally over employees. Apart from enjoying full autonomy, the employer has the power to
hire and fire at will since the labour is absent of protective regulation and the labour unions are
left without the necessary power to participate in collective bargaining. The effect of the
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institutional setup for SMEs is a cross-sphere regime of flexibility and market based solutions
resembling the LME.
However, this section will argue that in order for this market based institutional
setup to relate more closely to the ideal type, crucial complementary institutions in the spheres of
vocational training are lacking, as well as institutions facilitating competition in the market place.
Lastly, initiatives from the government and private sector organizations that are designed to
upgrade knowledge and disseminate know-how resemble coordinated based solutions. However,
these initiatives are ineffectual and reach few firms. A reason for this is lack of complementary
institutions such as unions or employer organisations.
The above regime, of flexibility and market based solutions, carries effects into the
sphere of vocational training for SMEs. Due to the lack of coordinated solutions to labour
contracts poaching of employees becomes the fear of the firm. For the firm, the fear of poaching
of their employees by other companies reduces the interest and incentives to invest in vocational
training of its employees. Additionally the culture of secrecy and conservatism in Turkey
(Mustafa 2008) exacerbate the reluctance for managers to invest in developing firm and industry
specific skills for their employees. This reluctance is prevalent even despite the implementation
of tax deductions for investments in upgrading skills for employees.
The reluctance for making investments in upgrading specific employee skills leaves
the employee with responsibility to find the balance of upgrading his or hers skills. However, for
the individual worker, little hope for promotion in SMEs due to family based ownership, the lack
of protection in cases of firing and the lack of protective rules for unjustifiable firings makes it
unattractive to invest in firm or industry specific skills – which are largely unavailable for
workers anyway, due to lack of supportive resources by the state or the firm. Rather than in
investing in specific skills the institutional setup emphasise investments in general skills that can
be used in many firms and industries. The acquisition of general skills will hence enable the
worker to move more easily from one firm to another in cases of firings. Thus the flexibility,
created due to the lack of protective regulation and strong labour unions, gives incentives for the
worker and the firm to promote general skill levels.
The favouring of general skill levels and the subsequent high portability of workers
will, according to the logic of the VoC approach, create a dynamic and adaptable economy.
However, in the case of Turkey low productivity (World Bank 2011), low human development
(UNDP 2013), low levels of technological penetration and insufficient know-how in SMEs
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(OECD 2004) for SMEs in Turkey clearly show that education and skill levels are low, creating a
disharmony and inhibiting utilization of the flexible, market-based regime. Hence, even though
the Turkish labour force used by SMEs tends to develop general skills these are often low, which
hinders the growth potential that the market based flexible labour market presents.
The result of the low general skill level is a high number of SMEs with low
productivity, many workers with low skill levels and correspondingly low wages. These effects
create a high quantity of SMEs in the Turkish market economy with low skill requirements for
workers and correspondingly low wages. It gives these SMEs the ability to soak up excess labour
in the Turkish labour market. Additionally it facilitates high adaptability, to changes in supply
and demand, for the Turkish economy. However, with the absence of effective unions and
unemployment benefits from the state, this flexibility comes at great cost to the individual
worker, which is partly responsible for keeping skill levels low as the worker is forced to take
lower paying jobs, instead of upgrading skills in order to fit into the low skill requirement of
SMEs.
In the sphere of inter-firm relations, SMEs in Turkey mainly operate in labour
intensive sectors – trade, crafts and agriculture – with low barriers of entry. Reputation-based
relational networks are the main business partners for SMEs in Turkey and non-formal contracts
is the norm. Despite this, cooperation between SMEs is very limited. In an LME setting, this
combination fosters competition. However, as evidenced by the textile district in Merter,
industrial clusters are characterised by numerous non-competitive suppliers to a final product.
Hindering the competition that otherwise is a key driver of SMEs. Within the agricultural sector,
improving productivity requires extensive coordination to receive high enough skill levels as well
as momentous investments in large-scale production infrastructure – all of which are unavailable
for SMEs due to lack of institutional infrastructure and a corporate governance regime
unsupportive of small-scale entrepreneurship.
Lastly, these severe structural and financial barriers leave even the best SMEs with
limited opportunities for rapid or exponential economic growth. The latter is an intrinsic
characteristic of small firms in LMEs as a result of increased competition. Furthermore, without
rigorous anti-trust measures, as seen in ideal LMEs, large firms are in a position to exploit their
size to squeeze up-and-coming competitors from the SME segment. It is evident that the flexible
labour market is underutilized because of cultural factors and the competitive dynamics of the
production mix of SMEs.
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Moving on to the complementarity between the industrial sphere and the sphere of
inter-firm relations, the flexible labour market in ideal LMEs facilitates knowledge dispersion
between firms when workers are fired and re-hired in new firms. However, in Turkey, benefits
from the flexible labour market in terms of knowledge dispersion, is severely limited due to the
low skill levels. Additionally the Turkish employer organisations representing SMEs are
hampered by lack of commitment by a broad and differentiated membership base. Employer
organisations in the ideal type and many developed economies provide knowledge sharing,
common vocational training facilities, distribute market insights or information on support
schemes or credit facilities. Throughout the 2000’s, initiatives to provide that which employer
unions have failed to do have been instituted by government agencies and a number of private
sector groups. These promote education and innovation in SMEs and provide subsidized credit
facilities, but reach few firms and issues of bureaucracy and slow procedures are prevalent
(World Bank 2011). Furthermore, firms decry top-down design and serious shortcomings in
stakeholder involvement in these support programs (World Bank 2011).
The chief characteristics of the SME sector is the capacity for employing large
numbers and a correspondingly abundance of available labour. However, the sector has low
productivity and improving productivity through effective competition is impeded by the lack of
crucial LME institutions. Low levels of knowledge and technology would benefit greatly from
institutionalized coordination of efforts to include stakeholder considerations, and crucially for
dissemination of basic know-how and market information.
The Large Enterprise Segment Across the five spheres of the institutional setup, large firms have solved the coordination
problems as understood in the framework of the VoC, through measures largely associated with
CMEs. One notable exception is the absence of labour unions and employer organisations, the
latter of which is mainly concerned with spread of information and policy recommendations for
the government. Thus, coordination of the institutional setup across the five spheres lacks a
crucial element to resemble the ideal CME type. However, as seen in the case of hybrids or
different configurations of coordination, other setups will resemble the ideal-type in practice.
This section will observe if this is the case in Turkey and conclude that the practical setup has the
preconditions for effective coordination and collaboration but lack the economy wide
collaborative institutions of the ideal type.
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In the segment of large enterprises Turkey the lack of coordinated solutions in the
sphere of inter-firm and industrial relations create incentives to divert from CME solutions in the
sphere of vocational training. Within vocational training the two main problems hindering
upgrading of skill levels are poaching for firms and lack of coordinated solutions to support
incentives for workers. For firms the chief concern of investing in training for workers is
poaching of skilled workers by competing or other firms. Conversely, for the individual worker
the fear of being fired during downturns or not adequately compensated by the firm after
upgrading of skill levels keep workers from investing in firm or industry specific skills. In ideal
CME types, this is solved by coordinated efforts in the spheres of industrial and inter-firm
relations through employer or industry organisations, which coordinate wages with labour unions
and thereby create equal wage levels for the same skill level across the labour market.
Additionally the employer and industry organisations can create coordination incentives to share
costs of having training schemes or facilities, as seen in Germany, or with a culture of life-long
employment and upgrading in Japan.
In the case of Turkey, an interplay between several institutional spheres creates a
substitute that keeps workers at the same firm for longer tenures. This interplay is seen in the
sphere of corporate governance, which has concentrated ownership and family-owned
conglomerates that span a wide range of industries with patient capital from co-owned banks and
limited influence from financial markets. These function to some degree as employer
organisations in the sense that these actors can influence large parts of the Turkish labour market
and hence create coordination across it. This type of coordinated based solution allows for
coordination of wages and employment strategies, and reduces fear of poaching by other firms.
Additionally two other institutional setups create incentives for coordinated solutions in the
sphere of vocational training – High protection of employees and the industrial mix. In Turkey,
eligibility for protection from the government for workers does not take effect before one year of
employment, and benefits increase with seniority, rewarding workers for staying at the same
firm. Lastly, the industrial mix, with a rapidly growing emphasis on manufacturing, benefits
greatly from highly educated and specialized workers. Overall, these three complementary factors
makes it attractive for firms in Turkey to invest in workers as these have few places else to go
and are incentivized by the government to stay at the same firm.
For the worker, most employees in large firms are, or can, become eligible for the
extensive labour market protection granted by government regulation. Giving them coordinated
65
solutions. This compensates to some degree for the lack of collective bargaining and protection
excluded due to lack of strong labour unions. Furthermore, as accounted for in the section on
SMEs, employment and long tenure in a large firm is highly desirable, with higher wages and
greater security. Thus, skills of any kind are highly desirable for the worker, as it will likely be
the only means of security.
This combination creates a tentative synergy with longer employment tenures for
workers and with incentives for the workplace to upgrade qualifications of its employees
continuously. In the sphere of vocational training, current levels of human resources are low due
to lack of educational infrastructure in the past. The government exhibits efforts to coordinate and
promote training and education. Several large reforms and overhauls of the education sector in
the latter part of the 2000s and the start 2010s have yet to make its impact. The government
further supports vocational training through generous tax deductions to educational investments
and influence on curricula in technical schools. However, only the largest enterprises, such as the
shipbuilding industry have the financial muscle to create training facilities and exploit the
generous government tax deductions. Lastly, evidence suggests that research and development
cooperation between public facilities and industry does not utilize the full potential.
Lacking the flexible labour market of the LME, dispersion of knowledge
throughout the economy in the ideal CME type usually happens through industry organisations
and labour unions. In Turkey, employer organisations distribute market information, new
technological information and export advice but do not coordinate larger training schemes or
industrial collaboration. Industry pursues knowledge sharing and knowledge creation through
joint ventures with foreign or domestic firms.
To sum up, the non-governmental setup, namely trade unions and employer
organizations servicing large firms and their employees in Turkey is underdeveloped and have
little influence. Lacking these institutions, government regulation has created an institutional
regime where workers are protected and dis-incentivized to switch job. This is underpinned by
de-facto industrial collaboration due to the presence of huge family owned conglomerates and
concentrated ownership. This creates a regime where coordinated investments and efforts for
continuous education and upgrading is well rewarded, but lacks crucial CME institutions in order
to utilize its potential to the fullest.
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7. Comparative Institutional Advantage and Discussion In this section, we will sum up on key findings, map the institutional setup facing firms in Turkey
and conclude the analytical narrative. Finally, we will discuss the implications of our findings,
taking into consideration a broader context.
For large enterprises in Turkey, the formal regulatory framework and industrial mix
resemble the CME. Within the sphere of corporate governance, the manufacturing and heavy
industries are characterised by concentrated ownership in conglomerates and pyramidal
ownership structures, which entails rampant executive autonomy. Furthermore, due to co-
ownership of banks, capital is patient. Within industrial relations, skeletal labour unions is
mitigated by governmental labour regulation that punishes layoffs severely, but encourages long
tenures. This incentivises long term investment in specific skills for workers. In vocational
training, education facilities are underdeveloped and suffer from limited stakeholder
coordination. Inter-firm relations are characterised by coordinated business networks within the
conglomerates. Vertical cooperation with SME suppliers is evidenced but scarce. However, joint
ventures with foreign companies facilitates some knowledge sharing. Lastly, intra-firm relations
are characterised by a culture of obedience and patriarchal hierarchies, exacerbating executive
autonomy. Large enterprises in Turkey have the ownership structure and regulatory environment
to operate as coordinated business groups aligning strategically within, and across, industries.
Across the divide, the institutional framework facing the massive SME segment
operates largely unregulated, but in most instances resembling the LME. On corporate
governance, access to credit is scarce and most companies are owned and run by the same
person, usually the head of a family. Industrial relations are best characterised as absent: labour
unions lack membership and are restricted by government regulation, employer organizations are
scattered and ineffectual, government regulation does not apply to firms with less than 30
employees. Furthermore, use of informal labour is rampant and cheap labour is abundant. On
vocational training, workers as well as the owner-managers have very low skill levels and little
access to training. Inter-firm relations are characterised by reputational monitoring and informal
contracts but due to a culture of secrecy, knowledge dispersion is slow. Intra-firm relations show
unbridled executive autonomy due to lack of regulation and the abundance of labour and high
turnover.
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The preceding sections accounted for the dualism in the Turkish economy, with
large enterprises operating mostly in an institutional framework and industrial mix of the CME,
and SMEs operating largely unregulated in a setup with characteristics of the LME. The latter has
a critical lack of human resources and an absence of key institutions to attain the dynamic
competition that fosters the high productivity levels in developed LMEs. The result is that firms
face two discrete institutional setups, according to their size, in the Turkish market economy.
For large enterprises, the plethora of unregulated smaller firms provide a highly
flexible supply base and a readily available supply of low skill labour to produce during upturns.
However, SMEs lack basic technology and knowhow limiting the range of products supplied
from here. An example of this in the section on inter-firm relations is that large firms in the
automotive industry – Turkey’s biggest export sector - have been forced to assist with
implementation of basic technology for domestic suppliers. A crucial concern is the the lack of
access to credit for SMEs and the labour regulation which kicks in at 30 employees. This makes
it economically taxing for SMEs to grow beyond de-facto micro enterprises. The implication of
these constraints is that the SME segment is too far behind technologically to supply the
components for the larger firms or to harvest dynamic gains from competition for the position as
suppliers. Furthermore, the low skill levels for the SME labour force and slight correlation
between products and processes does little to prepare workers for switches between the two
segments. The lack of labour fluidity back and forth between large and small enterprises is
especially discouraging for SMEs, who are in dire need of technological upgrades.
The notion of comparative institutional advantage proposes that industries that
benefit from a CME setup, such as engineering and heavy industry, have institutional
complements when operating in an institutional setup that supports coordination and long term
strategic planning. Large firms in Turkey predominantly operates in the manufacturing and heavy
industry and are owned by one of the family-controlled conglomerates. The patriarchs of these
have near-autonomy on operations and strategy, which allows for great strategic manoeuvrability.
This provides a potential edge relative to competitors in developed CMEs where industry
collaboration has to consider a variety of stakeholders. Similarly, comparative advantages toward
developed LMEs can be derived where firms are subject to arduous anti-trust legislation. The
stock of human resources in Turkey is low, but the state provides generous tax subsidies for
training and education. This benefits the conglomerates, which has both the patient capital for
investment and intimate knowledge to inform curricula. Lastly, membership of the European
68
Customs Union provide Turkish industry with a huge export market, with has plenty of room for
exploitation due to the comparably low unit labour cost, which makes up for the still-developing
nature of Turkish industry. As accounted for above, the domestic market for SMEs is scarcely
utilized. Furthermore, the exporting part of the segment is primarily engaged in agricultural
products where growth potentials are limited.
A large and low productivity sector employing the bulk of the working population
is common for most developing countries. For a developing country, the transitional capabilities
and interplay with the high productivity sector is a major component of growth in the private
sector. Attempts to address some of the components of the ideal-types which have been identified
as lacking by this paper is currently under way: in 2012, as part of a major overhaul of the
educational system, the Turkish government increased mandatory education to 12 years. A range
of initiatives in the 2000s seeks to increase access to credit and knowledge for SMEs. EU
accession talks stress empowerment of unions and employer organisations. The effect of these
initiatives have yet to play out.
Firms in Turkey operate in two distinct institutional setups. The gap between the
two warrants further investigation of possible adjustment paths for the Turkish political economy.
Identifying the adjustment path for Turkey should correspond to an analysis of the most effective
institutional setup to produce high growth rates. This paper has mapped the institutional setup
facing firms. To fully inform such an analysis further studies would be needed, both comparative
as well as of institutions not covered by this study e.g. political structures and the distribution of
power in Turkey.
Finally, it would be of interest to compare the case of Turkey and a key
characteristic as identified by this paper such as the divided institutional setup, with recently
developed countries that have gone through a similar developmental stage. Economies of interest
that could inform further research agendas are Japan following World War II, South Korea in the
1990’s, China in this century or countries currently at a similar level of income such as Mexico,
Poland or Brazil.
69
8. Conclusion This thesis set out to analyse the institutional setup in Turkey using the theoretical framework of
Varieties of Capitalism. The Turkish institutional setup is characterised by a deep division
between two segments of the economy – SMEs and larger enterprises. The institutional setup
facing firms in each segment lean toward opposite ideal types of the VoC approach. However,
both lack crucial elements in order to be classified completely as either ideal type, and have
barriers blocking fruitful interplay between the two segments.
The SME segment employ the vast majority of workers in Turkey and the main
characteristic is the highly fluid labour market. In all spheres, a predominant feature is the
absence of formal rules or coordinated solutions. Outside the labour market, the functional
equilibria that solve market coordination problems rely on family and relational solutions. While
this setup does resemble the LME ideal type, vital parts are absent: lack of access to credit, very
low general skill levels, serious impediments to knowledge dissemination. In the framework of
the VoC a common LME solution to these problems are improvements to education, well-
functioning financial markets and no regulatory impediments to growth.
Large enterprises in Turkey has much higher productivity than that of the SMEs and
has significant room to grow. The institutional setup for large enterprises rely on coordinated and
formal solutions. Key characteristics are family dynasties and business groups that own or control
a wide range of industries, and the state-regulated labour-market protection that, in the absence of
unions, incentivises long tenures. The former enables long-term strategic investments and the
latter encourages investment in specific skills for workers. The CME ideal type benefits greatly
from collaborative and coordinated efforts by active labour and employer organisations. These
ensure that wide varieties of stakeholders are included in strategic planning. The dominant
industries for large enterprises in Turkey are manufacturing and heavy industries. This is in line
with VoC predictions on comparative advantages that derives from coordinated measures.
The interplay between these two segments is very weak and the LME
characteristics of the SME sector has not succeeded in stimulating dynamic competition nor of
providing technology and higher skill levels. This precludes them from becoming a source of
components for the larger enterprises. The CME segment constituted by large enterprises have
successfully driven the remarkable growth in the Turkish economy, but does not have the
capacity to employ the millions of low skill workers currently employed in the SME sector.
Following the logic of the VoC, Turkey does not display the institutional setup that generates the
70
comparative advantages as described by the original authors but the institutional dualism
provides jobs for the majority of Turkish citizens while the nation builds an internationally
competitive industry.
71
9. Appendix 1
72
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