what challenges are in their way for making good products within their own market? What challenges exist to work as outsourced development teams? After reading this I would think twice about hiring someone from turkey.
First and foremost, Turkey is a country of 80 million people. There is a significant amount of variety from person to person, but the tax codes and business rules are not IT friendly relative to other businesses. There is still a non-trivial tariff on computers and electronics, making supplies more expensive than in other countries. From what I vaguely understand it is easier for other companies to evade taxes than IT services, all of which increases the cost of business and makes outsourcing less economical compared to other Eastern European nations. (AKP, the ruling party, is thought of as business-friendly, but I haven't seen any work to really tackle their tax issues.)
Second, Turkey's government is censorship-happy. Nothing like hacker news or reddit would work there, much less something like yelp. (every comment would have to be read, lest someone gets trialed for "insulting Turkishness."
Finally, they don't have a great way for capitalization of projects. Also, the people with money seem risk-averse to new ideas.
Turks themselves are very entrepreneurial, and the few of them that I've known who were developers are generally rather sharp. I wouldn't try to outsource there, however, at this point in time. (Unless I end up there for a few years with a bit of cash and can poke at loopholes. Then, watch out for my new product! :)
I'd like to add that something similar to Urban Dictionary has existed for a very long time now (10+ years): eksizosluk.com. They had their fair share of trouble with litigation but mostly managed to protect free speech. In fact it is so successful that it spawned many clones, which themselves became very popular websites.
Content is the main bottleneck. Something like UD exists because it generates its own content, whereas HN or Reddit clones don't exist because there isn't enough Turkish material on the web. A good part of population doesn't understand English, and the ones who do, choose to assimilate in the more interesting English space (ahem).