Foreign Direct Investment and the Unregistered Economy in Turkey

The general attractiveness of a developing country for foreign investment lies in a number of factors, but the unregistered economy requires particular attention. When preparing to enter a specific market, multinational corporations (MNCs) should take into account the potential effects of the unregistered economy into their business plans and, when needed, they should seek to collaborate with governments to curb those effects. Thus, corporations and policymakers must understand the dynamics of the unregistered economy's complex interaction with the larger economy around it. This paper considers the unregistered economy as a key behind-the-scenes parameter affecting foreign direct investment decisions and proposes new frameworks to facilitate understanding of it. One such framework suggests that the unregistered economy is the result of the interaction of institutional, economic, and social factors as well as public and nonpublic actors. Another framework suggests that the consequences of going unregistered are twofold. Unregistered firms destroy themselves by limiting access to resources (the scorpion effect). They also destroy the profitability of registered firms by the unfair competition they create, eventually forcing registered firms either out of business or into the unregistered economy (the infection effect).