TBY talks to Vince Cable, Secretary of State for Business, Innovation, and Skills of the United Kingdom, on British-Turkish business relations, Istanbul's aspirations to be a financial center, and the significance of SMEs.

What is the significance of Turkey to UK business?

It's very important. The relationship has taken a great step forward in the last eight months or so, partly because of the new information partnership and partly due to the state visit of President Gül, and my own visit with a business delegation; I was the first Business Secretary to visit Turkey for 10 years. On the ground, UK exports are up nearly 30% and imports from Turkey up by around 10% in the last year. It's one of the areas of rapid growth of trade and business generally, something that we have committed to strengthening in the future as part of our strategic partnership. We are committed to doubling bilateral trade by 2015 and we're well on track to achieve that.

How would you characterize economic relations between the two countries?

I think you can legitimately criticize the UK for not having paid more attention to Turkey's emergence as a highly successful economy and a very successful democracy. Both of those things are now apparent. While this may not have been fully appreciated in the past decade, a lot of work has been going on to build a relationship with Turkey. The most important issue, which was brought to the forefront by the previous government and is a position maintained by the current UK government, is our support for Turkey's accession to the EU, which hasn't been so popular with other European countries. However, we continue to make the case for Turkey's membership.

“UK exports are up nearly 30% and imports from Turkey up by around 10% in the last year."

What would be the impact of Turkey's accession to the EU for British business?

It would be good for Turkey, and it would be good for the UK. It would remove a lot of trade barriers in tariffed and non-tariff areas-and it would mean that Turkey would be joining the single market, which is a much more integrated grouping of countries with common standards. Trade would increase very rapidly. There would be a big incentive for investment flows. We're already getting British companies investing in Turkey. There's quite a lot of Turkish capital coming into the UK as well. Once economies become integrated through a customs union or a deeper relationship, then trade and investment flows operate much more substantially.

What is the level of integration of British companies in Turkey?

I believe there are more than 2,000 British companies investing in Turkey—not just the big names like BP, Shell, and Rolls-Royce, but many smaller companies have moved in—there are several SMEs within the group. When we speak about British SMEs in Turkey, it is mostly the “M" rather than the “S"—there aren't many one-person companies. We're talking about the medium-sized companies, which in many ways are the basis of growth in our economy and in Turkey. One of the reasons that Turkey is such a successful and growing economy is because of the large numbers of entrepreneurs, initially quite small, but who have gone on to grow very rapidly—not just in textiles and traditional sectors, but also in much more sophisticated industries. It's the medium-sized companies where much of the growth and innovation is. One of the things we've realized in Britain is that compared to a country like Germany we haven't done enough to encourage the SME sector in international trade, and my colleague the Trade Minister Lord Green, who has worked on this issue full time, accepts that an absolutely key part of his mandate is to build up trade involving SMEs.

Which key trade trends and potential areas for investment can you identify for British firms in Turkey?

Turkey is now a very substantially sized economy. When I visited the country the kind of events I attended, like the Tesco Supplier Academy, suggest the Turkish consumer market is booming. I also went to speak at Sabanci University, which was interested in knowledge transfer and high-tech industries such as IT. I also spoke at the Istanbul Finance Summit on Istanbul's aspirations to become a financial center, and so there is scope for collaboration in financial services as well. It's a pretty wide base of interest, which includes energy, manufacturing, energy efficiency, and creative industries like fashion.

What makes Turkey an attractive partner for British business?

Until recently, while Turkey wasn't a closed economy, it was certainly fairly inward looking and protectionist. Over the last decade or so capital barriers to trade and investment have gradually been removed and people have the confidence that this kind of future will continue. The other way that Turkey is attractive as a trading partner is that it is doing a lot of trade with North Africa and the Middle East, and is also looking for partnerships with other developing countries. British companies, not just financial institutions but technical specialists and transport consultants, are working alongside Turkish companies in those countries and this is potentially an area of major business growth. This is very much what I have discussed with Turkish ministers as part of the Strategic Partnership between the UK and Turkey.

Can Istanbul become an international financial center?

These things don't just happen overnight. Britain's financial sector developed over centuries, going back to refugees coming from Europe in earlier centuries and setting up banking institutions in the city. Then you develop a cluster and trust. It's a difficult thing to force via policy. Saying that, two key ingredients are an open market—a willingness to accept free trade in financial services—and effective regulation; not necessarily bureaucratic, but we've seen in the West, and particularly in the UK, the considerable damage that can happen if banks are allowed to get out of control. The openness and freedom in policy needs to be balanced against effective regulation, particularly in institutions like banks that can cause systemic risk.

How can the UK assist Istanbul in achieving its goal?

When I was in Turkey, there was a deputation from the City of London called “TheCityUK," which was putting the Istanbul Stock Exchange and people in the market in touch with people with expertise and building up networks based on contacts that have the best way of helping. The other way this happens is that other British financial institutions, not just banks, but if insurance companies invest in Turkey and then they become part of this financial services sector. I don't see why we won't see an increase of these types of institutions investing in Turkey. Companies want a mixture of things: they want market freedom, a system of regulation that's effective and transparent, and to be part of a successful economy. And Turkey is certainly all that, and there is a role for overseas financial institutions to help build up savings in Turkey, so the key elements are there.

The UK and Turkey have committed to doubling Turkish-British bilateral trade by 2015. What is the strategy to achieve this?

We will have many more visits between the two countries—not just ministers, but trade missions and missions with not just the big names, but with SMEs too. That is the way that as a government we can foster these things. We're also developing our knowledge partnership. The plan is to get more British universities linked up with Turkish institutions and encourage not just commercial innovators, but academics, scientists, technicians, and people interested in innovation and getting more of a transfer going between the two countries—more Turkish people coming to the UK and more British academics and scientists going to Turkey. That is something we are actively trying to promote. We just hope that our respective economies manage their current difficulties and continue to offer good growth prospects. There is a bit of a cloud hanging over Europe generally, but we hope it is properly managed and doesn't get in the way of either Turkish or British growth. The British currency has been flexible, being out of the euro zone. In the short term, there are benefits in being outside the euro, but in 10 or 15 years people may take a different view about euro membership, but definitely in the short term there are benefits and advantages in the flexibility we have by remaining on the outside.

© The Business Year - February 2012