INDUSTRY AND ENERGY DEPAHTMENT WORKING PAPER INDUSTRY SERIES PAPER No. 36 Free. Trade Zones in Export Strategies December 1990 Th Wrl Bn Idutr ndEnrg Dprten, R FREE TRADE ZONES IN EXPORT STRATEGIES December i990 Yung Whee Rhee, Katharina Katterbach and Janette White Industry Development Division Industry and Energy Department Policy, Research and External Affairs TABLE OF CONTENTS Page No. L INTRODUCTION ............. ................................. 1 IL DEVELOPMENT STRATEGY AND FREE TRADE ZONES .... .......... 2 A. Macro Aspects of LDC Exports ............................... 2 B. Micro Aspects of LDC Exports .2 C Initial Conditions of LDCs and Role of FIi In Generating Supply Response ................................. 2 1. Lack of Capacty to Eport ................................ 3 2. Equal Footing Export Polices .............................. 4 3. Equal Footing Infastructure ............................... 5 D. Sequencing or Complementing Measures ......................... 6 E. Supply ofFDI ........................................... 7 F. Human Resource Development ............................... 7 IlL GLOBAL AND REGIONAL OVERVIEW .. 9 A. Global Overview .............. ............................ 9 B. Regfonal Overview ............ ....................... 9 1. Newly Industrialzing Economies (NMs) in Asia ................. 9 2 Non-NIEs in Asia ...................................... 11 3. Africa ............................................... 11 4. Canbbean ........................................... 12 5. Non-Caribbean Latin American Countries ..................... 12 6. EMENA Countries ..................................... 12 IV. FREE TRADE ZONES IN THE DOMINICAN REPUBLIC ..... .......... 13 A. Aggregate Performance .................................... 13 B. Sample Survey .13 C Contribution of the FlZs to the Process of Industrial Development In the Dominican Republic .15 1. Export Development ..15 2. Human Resource Development ................ ........... 18 3. Private Sector Development ..22 The authors are grateful to managens of Dominican Republic free trade zone companies interviewed and officials of the public and private agencies visited for the firm-level study of Dominican Republic free trade zones. Arelis Rodriguez (consultant) organized the sample firms survey for the study and coflected data including part of the firm-level questionnaires. Word processing support was provided by Wilson Peiris and Anna Maranon (IENIN). Editorial assistance was provided by Stephanie Gerard. The views presented here are those of the authors. Table of Contents (Contd.) Page No. D. Equal Footing Export Policies and Infrastructure in the Dominican Repubic Fl .................................. 25 1. Motivation of Enterprises Entering D.R. FM ..... ............. 25 2. Equal Footing Export Polcies .............................. 25 3. Equal Footing Infrastructure ............................... 28 E. Innovative Approaches of the D.R. FlZs: Private-Public Mixes in FIZ Development and Administration .30 F. FuturL Strategies of the D.R. FM. .31 1. Deepening of Industrial Structure .32 2. Deepening of Export Marketing .35 V. SELECTED CROSS-COUNTRY COMPARISON OF F s. . 37 A. Mauritius .37 B. Malavsia .40 C. Chin .41 D. Mexico .41 E. Taiwan .43 F. Korea .44 VL CONCLUSION ....... ........ ........................ 45 A. Sequencing of the Industrial Development Proces .45 B. Sequencing of Industrial Development Policies .46 C Construction and Management of Infrastructure, Zone Site, and Factoly and Service Buildings for FIZ .... .... ...... 47 D. FIZ Investor Inducement .47 REFERENCES ANNEX I Table 1 Free Trade Zones Worldwide Table 2 Principal FTL Sectors (by employment) Table 3 Investor Nations Table 4-A Number of Employees Tabh 4-B Number of Enterprises ANNEX II Table 1 Dominican Republic Free Trz,de Zone Profiles Table 2 Dominican Republic FPZ Infrastructure Data Table 3 Estimates of Labor Productivity Equations of D.R. F1Z Firms Table 4 Dominican Republic Monthly Real Wage Rates ANNEX III Dominican Republic FTZ Investment Promotion I. INTRODUCTION 1.01 lbis paper provides a perspective on the role of free trade zones in industrial development strategies of low income countries with unfavorable initial conditions. 1.02 Without fim level studies of various FTZs--and parallel micro studies on alternative foreign and domestic collaborations in LDC export activities-we cannot provide indepth analysis of the major development issues related to FM'Zs. We are planning such F1Z studies. In the meantime--given interest in FlZs by least developed countries and international agencies--we are presenting an overview. This overview summarizes cross-country trends in the level and growth of FMZs, their employment numbers, and their exports-based on secondary sources; and provides interim results of our study on the Dominican Republic FPZs. 1.03 Chapter II discusses the analytic framework for examining the role of FlZs in the development strategies of LDCs Chapter III presents global and regional overviews. Chapter IV summarizes the interim results of the Dominican Republic F1 Z study. Chapter V presents a cross-ountry comparison of the leading FlZs in six developing economies. Chapter VI presents conclusions. - 2 - II. DEVELOPMENT STRATEGY AND FREE TRADE ZONES 4.01 The wisdom of an LDC punuing an outward-oriented dewelopment strategy to earn scarce foreign exchange, generate GNP and employment growth, and speed up the industrialization process has Wb -v. -. £ rw wge I_ _, Y"-* wewp uss* vi ' 4' Le four dc adca (/Iassa 1989, Ihagwati, 1987). Free trade zones nit. one of vazious Instruments available to LDCs for pursuing outward. oriented development. A. Macro Aspects of LDC Exports 2.02 A critical macro constraint most LDCs face in the early stages of development is their balance of paymentL To meet import needs-raw materials, intermediate inputs, capital goods and basic necessities-and the associated external debt seivce payments, export earnings are critical. Thus, most primary goods-producing L=>s have experienced mounting pressure to increase their industrial exports. 2.03 Industrial exports can overcome the limitations of smaller domesdc markets. But macro- level symmetrical treatment of the sources of growth, in terms of domestic and external demand, tends to overlook the critical micro aspects of the lack of symmetry between the two markets. External economies stem from successful penetration of the world markeL Ye.t, entering the external market is difficult, and the export supply response to internal policy reforms often does not occur automatically. 204 The usual cost-benefit analysis focuses on FlZ.s contribution to foreign exchange earnings, GNP and employment generation. However, the often overlooked micro and dynamic aspects of LDC exports are more Important in getting a proper perspective on the role of FMZ in an LDCs outward- oriented development strategy. B. Micro Aspects of LDC Exports 2 05 Industrialization is a dynamic process, much of which occurs on the factory floor and in the salesroom. The East Asian experience presents convincing micro evidence that manufactured exports can provide an Impetus for this process-through effective technical and marketing skill acquisition, learning- by-doing, and eventual world market competitivenessLY 7 no Ngn nnPi dliqm td th!e mam nntd gtatb' hiti"fit@ ant4 mt 14 yn a om benefits, from manufactured goods exports for LDAL However, the best means to initiate entry into the world market and to generate a supply response is an area of concern. In fact, this is the most critical question related to LDC exports; most macro and trade theoretical analyses have overlooked it. The micro and dynamic aspects of export supply responses in low-income LDCs and maximizing the externalities stemming from countries' entry into the world market will be the focus of our disussion of F1Es CO Initial Conditions in LDCs and FlZ's Role In the Supply Response 207 Many LDCs are at a significant competitive disadvantage in entering international markets for industrial goods: e firms lack know-how and nacessary information See, for example, Rhee, Ross-Larson, and Puiseli (1984). .3- * internal policy environments fail to assure firms equal footing with foreign competitors, and * institutions and infrastructure are inadequate for export and related trade and production activities 1. Lack of Capaity to Epor 2lo8 LDC firms' attempting to enter world markets would typically lack:. * technical, marketing and managerial know-how critical for starting up the manufacture of exportable industrial goods; * 'capacity to package the technical, marketing and managerial know-how with domestic and external resources; * adequate access to information and links to world jarkets; and * adequate capital goods and factory facilties 2.09 If a shortage of capital were the only constraint to the manufacture of exportable industrial pods, firms would be able to resolve the constraint through loans If a lack of technical, marketing, or ma rial know-how of certain production processes or external markets were the discrete constraints, firms could ry on consulting senrices. Critical access to the overseas market network could be resolved through subcontrcting 2.10 However, if a firm lacks the 'capacity to paclage the technical, marketing and managerial know-how-put i all together-with domestic and external resources, and if a firm lacks an overseas market etwork, the only way to enter the world market is through collaboration with foreign firms that have such capabilties (Rhee and Belot, 1990). 2.11 Often, only foreign firms that have had long and successful experience in manufactured exports can bring LDCs the capability to pacdage export know-how in combiation with capital and local resources. Along with access to an established market network, these finns bring their experise to LDCs through direct foreign investment (DPI) or through technical, marketing, and managerial agreements.P DPI resolves the LDC' capital shortage by bringing in foreign capitaL For these reasons alone, it is essential iu£0 W w puluu, wiiaboraiuu with apabic ioreign enierpriss Taee FrY is one oK mue struments designed to prvide 'equal footing' export policies and infrastructure, two factors requied to induce foreign and domestic enterprises into export activities in L1. Besides direct foreip investment, domestic firm collaboration with foreign firms through technical and marketing afreements or subcontracting without foreig equity should not be ruled out. AIL ~ ~ iDuiumg ihe capaciy w exporn manufacturea goous normauly is pioneerea oy catalysts: foreign enterprises that have the capacity to package the know-how for entering world markets, using capital and lcal resources, and with access to the extemal market networr and domestic entrepreneurs who take initiatives for foreign collaboradon (Rhee and Belot, 1990). These foreign enterprises and local entrepreneurs can bring in the crucial elements through direct foreign investment, joint ventures, technical and marketing agreements, or subcontracting arrangements inside or outside FM7. If DDI involves foreign equity, technical and marketing agreements do noL -4 2. Equal °ooUn Export Policies 2.13 The most Important policy constraints in LDCs' failure to assure exporters "equal footing' with foreign competitors are: * unrealistic real exchange rates, * restricted access to raw materials and intermediate inputs (and capital goods) at world market prices, * Inadequate and difficult access to short-term trade financing at world or domestic market interest rates, and * difficult access to investment licensing and financing for the creat on of export production capacity. 2.14 ProviAing ee trade or re tade stus for export activities is the most important element of the equal footing export policies acceptable to the GAIT and to importing economies. Imports and exports should be free of import and export and foreign exchange restrictions as well as taris and indirect taxes. There are five key methods of achieving free trade or free trade status for export activities: * free trade * free trade zones (F1!s) - bonded manufacturing warehouses (BMWs) - automatic import lienses and duty exemptions and * automatic import licenses and duty drawbackl 2.15 FMZs Y are designed to assure "free trade' for designated areas. The BMW, duty exemption scheme, and duty drawback system are designed to provide 'free trade statuse for export firms outside FTZs. Efficient administrative arrangements and effective implementatioo are critical for the achievement of free rade status For many low income LDCs, it will take a long time to implement schemes for ensuring effi- cdent free trade status outside FIZa Therefore, in ensuring free trade or free trade status for export activities within a reasonably shon period, the FT7Z often is the most feasible firt step for low income LDCs. Hlowever, creation of an FIZ does not guarantee free trade or free trade status. The F1Z administration must be streamlined, modern and efficient and backed by strong goverment commitment, if FMZ are to represent a positive first step. 2.16 Ensuring access to short-ternm export trade financing at market interest rates and ensuring free trade status for export activities are the cornerstone of equal footing ernort policies. Without such financing, even opportunities to earn foreign exchange based on confirmed export letters of credit may be lost. The four modes of trade financing are: bank credit; company credit; bank loans; and seYf-financing, (Rhee, 1989b). ai As the term implies, FIZ has two meanings: (i) free trade and other equal footing export policies, and (ii) zone designation. The term F1Z represents the zone designation for both (i) equal footing export policies and (ii) equal footing infrastructure for export processing. In other words, our F1Z is an *export processing zone (EPZ) with free trade and other equal fo iting export policies.' This eliminates potential confusion over the term EPZ because there are many EPZs in LDCs with neither free trade nor free trade status. 5- 2.17 Foreign firms--inside or outside FZa--can rely on company credit or bank credit in meeting their trade financing needs, through their overseas affiliated banks and company connections. However, most domestic enterprises, inside or outside FMZs, must be able to have easy access to local bank loans under the mechanisms supported by public or private authorities--or must resort to self-financing. A fcreign currency loan scheme is most critical for meeting the import financing needs of domestic enterprises. The only exception is international subcontracting since domestic expot L enterprises, whether inside or outside FMs, usually rely on foreign firms' advance supplies for necessary imported raw materials, and intermediate inputs. 2.18 Other key elements of equal footing export policies ase access to investmen licensing, and investment fina'icing. Investment licensing is usualy easy for firms entering FMZs. For foreign companies, investment financing can be resolved in the same manner as trade financing. However, for domestic companies access to investment financing remains difficult. 219 These equal footing export measures are transitory--to fill the gap until free trade, competitive money markets and foreign exchange markets are achieved for the LDC economy. Equal footing policies of exports are only the first step in sequencing policy refcrms for the entire economy-equal footing incentives for the whole economy through free trade and free market mecbanisms. o220 The F1Z provides equal footiag export policies to those foreign and domestic firms within designated geographical areas. In addition, income tax incentives and extremely liberal foreign exchange regulations are offered in most FM7s as additional incentives to firms to engage in export activities. 3. Equal Footing Infrastructure 2.21 Insufficient institutional and physical infrastructure for supporting export and associated trade activities in LDCCs reflects the infancy of export development. Lack of funds and human resources to deal with externalities and scale economies are hindrances. LDCs need to sequence the necessary infrastructure build-up efficiently, just as they need to sequence policy refors 2.22 To draw foreign and domestic enterprises into industrial export activities, strategic development of ports, transport and communication facilities, and factory buildings, near selected export processing zones (EPZs), with or without the F1l policy regime, can be useful in filling infrastructure gaps. 2.23 Often, the common mistakes in infrastructure investments related to FlZs--in the form of inadequate location, inadequate physical design-are seen as inherent shortcomings of FTZs as policy instruments. Yet, such mistakes frequently occur even outside FlZs. Adequate infrastructure is needed for export development whether or not related to FP1Z Mismanagement of infrastructure-building related to an I 1 4 wictic may stem trom tnadequacies m government commitment or in bureaucracies, should be separated from evaluating FIZs as a policy tooL 2.24 Often neglected, but among the most critical elements in deciding the location for an FTZ, are the source of labor supply and access to sea or air transport for imports and exports. Such infrastructure facilities as ports and transport facilities require public investments, due to the externalities as well luml;niess ot capitaL However, riT-L site development and factory construction normally can be managed effective .y by private enterprises. Private sector management of export manufacturing facility development based on marKet rents has been effectively used in Singapore and Hong Kong, as weUl as more recently in the Dominican Republic and Mauritius FTZs (Chapter IV). The private sector approach to FTZ site development, factory construction, and zone management would be an effective way to minimize past mistakes in FTZ development and management. -6- D. Sequencing or Complementing Measures 225 Table 1 summarizes alternative sequencing measures for Ll)Cs in which firns lack thc capacity to export and where the intemnal policy environment and infrstructure fail to ensure equal footing with foreign competitors. These alternatives can be taken as a general order of sequencing or as complementary, depending on thq, capability and development stage of an LDCY However, it would be advisable for most LDCs to implement the free trade status regime outside FM from the beginning of the rstablishment of the FIZ regime, even though the effective implementation of the former may occur much later due to their Umited administrative ca-pacity. Table 1: SEQUENCING OR COMPLEMENTARY MEASURES AND FIZM PolNy Regm Actiites (a) To msolve lack of (b) To rsohv lack of (c) To resolve lack of capacity to apolt equal footing policies equal footing infra- with foreign stn cture With forip compeito competitors (i) FIZ Regime All Activitis * FDI4oint venture of FrPe tade and other equal Basic in6faructure and in$de FZ foreign manufacurn footing epoit pics (and fwo buildings with pso additional incenties) for per rents. * TechnicaWsnarketing both dometic and foreg agreement with foreign firms enterprises * Subcontract with fored- p enterprises (il) Free Trade Sta- All Export Value Added * FDtqoint venture of Free trade status and other Basic inrastructure tuS Rqpm and Saks Activities foreign manufactures equafootingaportpolicies Outitde FTZ for both domestic and * Technicallmarketing foreign firms under agreement with forign enterprises * BMW, duty exemption, dutvdrawback schemes * Subcontract with forei- gn entpris * Ttade finance and other (iii) Free Trade All Acttvities in the * Domestic enterprises * Free trade and other Basic infrastucture Regime Economy have acquired capaciy free and competitive to export light moqy capita, forei manufactured goods achae maAni moca before this phas m * Fbreign and domestic firms are ree to enter into all economic activities 2.26 The free trade regime is the ultimate goal of most LDCS. Therefore, the role of the FF1- has to be understood withiin the context of the dynamic process from the first regime to the last At the same time, the sucress of FMZ5 also depends on the success of the complementary measures (free trade status regime), because such complementarity is a key to integrating the gains from FtZ activities with the 41 See Rhee (1989a, 1989b) for equal footing export policy sequencing in the East Asian NIEs. -7 rest of a country's industrial development. Here we deal only with the equal footing export policy and infrastructure measures as applied to all production and sales activities that generate export value-added in the FI. But In policy sequencing in a broader context, the free trade status regime would include more acive marke: development and gradual liberalization measures in trade, finance, and foreign exchange related to non-export value-added activities as welL E. Direct Foreign Investment Supply 2.27 An LDCs demands for direct foreign Jnvestment in FIZs have to be matched with the supply of investment available from developed countries and newly Industrialized economies (NIEs). Obviousl;, potential foreign investors carefully evaluate various locations-including their home bases--before deciding to Invest inside or outside the FMZ of LDCs. Since equal footing export policy and infrastructure regimes are critical factors that determine DFI, an LDC must aim to offer the most attractive, efficient regime among potential competitors for DFL 2.28 Another critical factor in wttracting DFI is an LDCs competitive edge in real wages as measured in foreign currency and converted to labor productivity ufnits Therefore, mainaining a realistic exchange rate (which was pointed out in paragraph 2.13 as one of the equal footing export policy elements) and a reasonably free labor market is important, even though the quality of an LDCs unskilled labor in terms of literacy and discipline cannot be improved in the short run. - 29 Yet another kcy factor is access to export markets-including restrictions on the part of importing countries, as well as market distance and transport costs. Fledbility in allowing the domestic sale of some FIZ products would help offset this constraint, but a low level of purchasing power in an LDCs domestic market may not make much difference in many instances. 2.30 Other important factors for DFI are the country risks and the working and living enirom ents. DPI is not a short term commitment investors can redirect easily. Political and social stability as weUl as cultural attractiveness are essential for attracting DFL 2.31 Tremendous imperfec information about the business and other environmaents, as well as business opportunities undermines the ability of many LDCs to attract DFL Imperfect information may be i"e nf 'thbe m^. 0t,inte atol"nact fnvetoglnu, m.F uito 0" A t,m v#*^. TANT., " . r*f' export actities. F. Human Resource Development 2.32 An important micro aspect of LDC industrial exports, stressed in Section B, is that once an LL); succees m entenng ue woria marcet tmrougn toreign enterprise collaboration, it can benefit from the external economies stemming from industrial exports Yet, not much has been known about the potential gains in human resource development which foreign and domestic enterprise collaboration c.n provide. Because this micro, dynamic aspect has been overlooked, most previous FIZ studies, based on a conventional cost-benefit analysis (Wanf, 1983, 1987a, 1989b), have characterized FM as "foreign encla ,es', *exploiting female workers", or having "no technical transfere value. 2.33 Sequencing of policy reforms and infrastructure building is dictated in part by LDCs' shortage of resources and unfavorable initial development conditions. By the same token, sequencing of human resource development, based on strategic priorities, appears critical for LDCs. In fact, nothing req.xues high .r priority than practical human resource development-often best provided thtough on-the- job training of workers under the supervision of foreign technical personnel on the factory floor, and in saies rooms of export manufacturing or trading companies In turn, tne mobtlity Of workers who acquire skills in this manner would provide an impetus for private sector development in an LDC. But this critical aspect of human resource and private sector development can hardly be captured without studying fCrms in several FTMs with different conditions. Our study of the Dominican Republic FMs is the first component of a series of studies on foreign and domestic collaboration In LDC export activities designed to capture precisely such micro and dynamic dimensions; the interim finding are summarized in Chapter IV. -9 - III. GLOBAL AND REGIONAL OVERVIEW A. Global Overview 3.01 The recognition of FMZ as an instrument to attrtv foreign investment for export development emerged the late 1960s and early 1970. According to our prellrnnaqy inquiry and secondary sources of data, a conservative estimate of the number of such zones throughout the developing world now stands at 125 FIZs in 45 countries, with most of the rapid growth occurring since 1985. At least 12 other countries were planning to develop their first FMZ as of 1987 (UNCTC/lLO, 1988). Table 1 of Annex I lists exsting and planned FM as of 1988 and their major characteristics. 3.02 Parallel to the rapid expansion of FTZs In developing economies, F12 employment grew remarkably between the mid-1970s and mid-1989. The number of workers employed in ali zones combined (excluding China) in 1986 was close to 1.3 million, a great increase from the approximately 500,000 in 1975 and 50,000 in 1970 (Froebel, Helnrichs, Kreye, 1987). 3.03 In the mid-1980s, 94.5% of F1Z employment worldwide, mostly consisting of unskilled or semi-skilled workers, was concentrated in 12 leading economies (Mexico with close to 20%, Korea, Malaysia, Ta1wan, Brazil, Macau, Mauritius, Tunisia, Philippines, Dominican Republic, Sri Lanka and Egypt). The remaining 33 economies accounted for 5.5% (UNCTICLO, 1988). However, In recent years other countries have expanded thei FIrZ production. For Instance, the Caribbean Basin free zones employed nearly 150,000 workers at the end of '987, and their number was expected to exceed 200,000 by mid-1989. 3.04 Main industrial branches represented in FMZs are electronics, texiles and garments, footwear and leather products, electrical and optical instruments, toys and sporting goods, etc. One industrial branch tends to be predominant ia each F1Z e.g, electronics In Singapore, garments and textes in Mauritius. A shift in the composition of exports toward higher value-added commodities recently has been observed for some PTZ countries (Holmes and Meo, 1987). 3.05 Most DFI has been from industrialLzed countries, taking advantage of markets and low unit labor costs in FPZL Recently, the NIEs-particularly Korea, Hong Kong, and Taiwan-are beginning to invest in low-income developing countries, particulbrly mainland China, other Asian LDCs, and Caribbean countries (Whitmore. Hyun and Lall, 1989). B. Regional Overview 3.06 The following regional comparison of FMZz in representative economies in Asia, Africa, Latin America and the Caribbean highlights differences in P1Z growth patterns in employment and enterprises up to 1986, and describes recent trends in FIZ production and trade (Table 2). 1. Newly Indusrlaing Eonomies (NEs) In Asia 3.07 In 1986, Taiwan and Korea together had lve FIM, and dte average FIZ eimployment in each economy amounted to almost 60,000 workers. The average number of enterprises was about 180. While these average levels were higher than in other Asian economies, excluding China (i.e., non-NIEs), Africa (excluding Mauritius), Latin America (excluding Mexico), and Middle East and North Africa, their relative importance in NIE exports was actually minor compared to FI2 perfornance in other regions' exports (Table 2). y Taiwan refers to Taiwan Province, China. - 10- TAbkh. REGIONAL COMPARISON OF FREE TRADE ZONES Stu is 1986I Oi hRates S Odf Eaepsia Emplymeat of Oper. do OD AvLOsuwth Aw.O.'mt Region Eoomoa Zom Eafepdm Ephye- bi 19Sb in 1980 MAA 13 pecent-. NIEA (2) 5 Taiwan 3 254 82.437 31 12 (81486) KOr 2 9i 364100 -1.6 2.8 (8146) AVERAGE 176 S9.269 .2.4 Z0 (8146) Noa-NEA (6) 27 Malaysia 269 81,688 33.8 4.0 (8246) ladWb 201 (1967) 17,000 16.2 (8447) 23.2 (8146) Indonesia 18 (1984) 13,000 14.0 (82-86) Philippasa 72 (1982 24.000 (1967) 0.6 (8047) Sri Lanka 91 35,000 16.2 (8047) 15.2 (80-86) Thila 27 (197) 300 25.0 (8247 AVERAGE 113 A.9l1 22.8 11.4 (82 edudla (18.440 -ludlag Malaysia) MAlYsia) Chim (1) 5 2,000 242 (8245) (4) 23 Mautita 406 74.015 28.0 ($186 39.0 (8046) Gaaa Z600 Ubeia 700 Se;ega 7 (1985) 1,00 15.0 (8046) AVERAGE 208 19,629 2.0 27.0 (7 ezldln (IJ0 . disg Mawlddu) MadtitlE) IAC Caribbean & (4) 26 Cestral Ame. Domiica Rep. 166 69.538 41.0 (804r7) 21.0 (81486) Jamaica 25 (197) 000 60 (81486) Haiti 40000 (1987) Coma Rica 29 6.000 (1967) AVERAGE 73 26.0 4L0 443 (27 e_dag (18.000 -deft DoL Repablic) Dm Repubic) Noa,Carrobea (4) 21 Coloma 6.700 2Z0 (8246) Mealco 891 2838 7.S (81486 14.0 (8148) Broziw 63.ODO6.0 (8186) Cile .000 49.0 (8246) AVERAGE 85.022 735 2.8 (23,900 ealacdig (2) 11 Egpt 238 (1987) 2.000 30.0 (8147) kaklsl 19 (1967) 1.500 59.0 (8247) AVERAGE 129 13,250 44.5 ii Al fipre am for 1986 wale ohwlse icawd I Mezio's *auida secuor is mom induwedL St GOwok m ame cakalted bued on data aboa in bbes 4A sa CB of Aaa L Major Somas: Datea cm smber of employees: Kreye, Heladcla. Fro"e (197) Dua on anmebr of eateqrim for Mandtie. Mexleo Doujiakn Republic, S, Kora: see soam for Table 4.A of Anne L Data om number of operating zoes we sowes for Table I of Aa L Other Sme Joamal of Commerce Special Report OcL 29. I98 Commercial Brocues for Doiaiw Republik, Ca Rie. Iaaa Colombia. Egpt MaunduL Inemnaiul Labour OrgnizdoWUnited Natio Centre ce Trnaadoual Coqrorationa (19S8). Eeoai ad Socia Conmiom for Asia ad the Pacific (1985) Baile A. aid D. (kmidis (1984> Woeld Bak (1989 a) Word Bsak (1988 a) Wodd Bank Stl 3.08 In fact, the FTZs in these two economies recorded the slowest employment growth rates in the early 1980s among the regions compared here. The growth rate in FTZ employment for Taiwan and Korea averaged 2% for the period 1981-1986. Similarly, the average rate at which new firms were established-in the FMZs was -2.4%, implying actual divestment on the part of existing firms in these two economies' FlMs. These growth trends contrast sharply with the IZP trends in the other regions. 3.09 The relative unimportance of FlZs in overall NIE exports and the virtual negative growth in Fr1 activities in recent years can be understood in the context of the NIEs' favorable initial conditions, their success with measures complementary to FTZs, underlying rapid exports outside FlZs, along with their good performance in FIZ exports, as elaborated in Chapter V. 2. Non-NIFs In Asia 3.10 The non-NIEs of Asia, namely Malaysia, India, Indonesia, the Philippines, Sri Lanka and Thailand, had a combined total of 27 operating free zones in 1986, with an average work force of nearly 29,000 in each economy. The average number of firns in FTZs per country was 113, with Malaysia the outlier in the region. 3.11 Compared to the Asian NIEs, FPZ growth rates in the non-NIB (excluding China) were strong during the 1984s The average growth rate of new enterprises (excluding Indonesia and the Philippines, due to lack of data), led by Malaysia and Thailand, amounted to almost 23% per year. This expansion also is reflected in FIZ employment growth rates, which averaged 11.4% p.a. during 1980-87. The region profited from the changes in world trade and production patterns-a transition toward more capita1 and technologv Intensive manufacturing in t'he Asi-an NIEs. ThLs resulted in a labor intensive production processes moving to countries with lower unit labor costs and less restricted market access. At the same time, the importance of easy access to industrialized markets in addition to lower labor costs has moved some Asian NlEs to relocate labor-intensive production processes to the Caribbean FrZs.Y (The FIZs in the outliers of Malaysia and special economic zones in China are discussed Chapter V.) 3, Africa 3.12 Countries in Sub-Saharan Africa with FTZs are Ghana, Liberia, Senegal and Mauritius. These four together had 23 FlZs in 1986. Aggregate statistics for sub-Saharan Africa's FM are strongly influenced by Mauritius, the star performer. Mauritius had 408 F1Z enterprises in 1986, Senegal a mere seven. Currently there are 543 enterprises in the Mauritius FTZ, while Senegal has 10 registered firms. For the remainina two countries, data were not available. Total FTZ employment in these four countries amounted to approximately 98,500 workers, of which close to 90o worked in the Mauritius F1Z 3.13 The high degree of regional concentration also is evident in Mauritius' I-TZ employment and in particular the strong expansion of its F1Z sector since 1985 (28% per year increase in enterprises for 1981-86 and 35.8% p.a. in employment during the same five year period, compared to 15% p.a. in Senegal!. Ghana- Liberia and Senegl for reasons including ineffertive imptermntation of FEZ policy regimes, bave not performed well in comparison to Mauritius or other regions. However, several other Sub-Saharan African countries, including Kenya, Madagascar, Togo and Cameroon, are planning FMZs, following the success of Mauritius.7' Success factors for Mauritius FlMs are discussed in Chapter V. The Canbbean Island Community has preferential access to the industrialized country markets under various trade agreements, for example the U.S. General System of Preferences (GSP); the Caribbean Basin Initiative (CBI); the Lome Convention with the European Economic Community (EEC); and U.S. Tariff Schedules (TSUS) 806.3 and 807. 7/ Suppart for these plarm comes from the World Rank Groun. I JSAID/OP!(C and Fiaroneon mitntrei - 12- 4. The Caribbean 3.14 In the 1980s the Caribbean region--represented by the Dominican Republic, Jamaica, Haiti and 'osta Rica--experienced more rapid growth in FTZ activities than any other region, as manifest in 44.5% p.a. employment growth, qnd a 41% rate of new enterprise startups. As of 1986, existing FTZs employed about 26,000 workers in an average of 73 enterprises per country. 3.15 The majority of ihe Caribbean countrics adopted outward-oriented development strategies in the 1970s. By the 1980s they were exhibiting stronger growth patterns in FTZ employment and firm establishment than were tfirst-generation" FTZs in other regions. The number of Caribbean Basin FMZs increased from five in 1975 to 46 in 1989. Up to 20 new zones are being considered, some of them in countries that have not had any FT-Zs (Karp, 1989). This rapid expansion of the Caribbean Basin FTZs is due largely to strategies that are innovative and unique to the region, noteably the tendency to emphasize private zone development and maintenance.F Private sector management has led to greater administrative efficiency and more competitive services and facilities. This approach has proven an advantage in attracting long term DFR from large multi-national enterprises. 5. Non-Caribbean Latin American Countries 3.16 In 1986, there were 21 FTZs in Colombia, Mexico. Brazil and Chile, each averaging around 85,000 employees. Mexico was the leading regional FTZ employer. Employment in the region, a mid-level growth pattern over the period 1981-1986 grew at an average annual rate of 22.8%. The case of the regional outlier, Mexico FTZs, is discussed in Chapter V. 6. EMENA Countries 3.17 In 1986, the North Africa and Middle Eastern region, represented by Egypt and Pakistan in this comparison, had 11 FMZs, with a total of 257 enterprises, the majority in Egypt. They had an average of 13,250 employees, and the region experienced rapid annual average growth in employment, 44.5% over the period 1982-87. For instance, there are currently a total of 19 FIZs with 317 firms in the Dominican Republic. Of these FrZs, 8 are privately owned and operated. and accommodate 24% of all firms. - 130 IV. FREE TRADE ZONES IN TE DOMINICAN REPUBLIC A. Aggregate Performance 4.01 Free trade zones in the Dominican Republic trace their development to the establishment of the private *La Romana" FIZ in 1969. By 1985 four zones were in operation. The tremendous recent take off of FTZ activity is illustrated by the fact that 62% of the 317 firms now in exdstence have been established after 1985 (Table 3). During the last five years, new FMZs have been developed at an accelerated pace; as of June, 1990, there were 19 FT-Zs, with a combined under-roof factary space of 8.14 million square feet. Eight zones are privately owned and operated, seven are publicly owned and operated, and four are publicly owned and privately operated zones. Six new zones are under construction (Table 1 of Annex II). 4.02 In 1980, FTZ direct employment was 18,339, equal to 1.2% of the total labor force. In 1988, FTZ employment comprised nearly 5%, having risen to 85,468; FIZ employment in 1989 exceeded 112,000, as shown in Table 3 and Table 1 of Annex IL F1Z employment rose by an average annual rate of 44% in the decade from 1970-1980 and slowed to an average of 23% during 1980-89, however, since 1986, growth has increased again, to 29% per year. Employment growth has varied across manufacturing sectors For instance, while employment in apparel increased by an average annual growth rate of about 20% between 1980 and 1985, employment rose by 144% annually in eectronic and electrical assembly. For the leather and footwear industry, annual employment growth over the same period was 52%Y 4.03 Relative to the export performance of the D.R. economy, FIZ exports have done exceptionally welL From 1975 to 1988, the value of FIZ exports grew by an average of 26% per year, while exports excluding FIZ goods rose only about 1.3% annually. Non-traditional (mainly manubaturing) exports rose by an average 11% per year. In terms of total export value, the share of FZ exports rose from 3% in 1975 to 12% in 1980--comprising 35% of total exports by 1988 Comparing the relative importane of selected subsectors in FIZ exports over time, Table 3 shows that the share of apparel remained relatively stable between 1981 and 1989 (32.6% in 1981, 33.3% in 1985 and 36.5% in 1989). At the same time the shares for the product categories "eleronics/electric components' and leather and footwear" have increased significantly over the same period: electrical/electronics, 9.5% in 1981, 9.7% in 1985 and 14.7% in 1989, leather/footwear, 9.2% in 1981, 15.5% in 1985 and 14.9% in 1989. B. Sample Survey 4.04 The impressive aggregate performance indicators confirm that the Dominican Republic, along with Mauritius FM7s, now comprise one of the two most successful F1Z schemes in less developed countries. We conducted a sample survey of Dominican Republc F1Z firms in April-May 1990, interviewing the managers of 64 enterprises. Carefully prepared questionnaires focused on foreign and domestic collaboration; export, human resource, and private sector development, and equal footing export policies and infrastructure. This chapter summariz the interim finding of this FEZ firm study.9 line objective ot the study is to learn lessons for other LDCs. The shares of subsetor employment in total FIZ employment In 1989 were: apparel assembly 61%, footwear and leather industry 12%, and electronics and instruments industry 7%. 2/ The details of the findin will be reported in a sepaate paper. - 14. AGORIMAT FBFRMANCE OF DOMICAN REPUBLIC FM 1981 im 196 Number olf 7s 3 4 19 Toa UnderHoot Factoy Spam 1,950 8,140 (in thousands 0f sq. ft) Number of Enteprprem 89 144 317 Number of EmpkWee 20,520 3S,720 1121Z Value of Expotl 128 205 692 (in mIkos of SUS) of which: Appd (%) 32.6 33.3 36.5 ElertzicEcmi (%) 9.3 9.7 14.7 Footwear and Lstbhe (%) 92 155 14.9 Shae of FIZ Expod i Total Nati n ps(%) 3.0 12.0 35.0 W Net Foin Exdchan Earnp 57.6 446 191.0 (USS millios) Wy in 1988 4.05 The sample firms engage In various manufaturig acdvities, the most important bdng apparel assembly, electrical and electronics assembly and component manufacture, and footwear production The criteria for sample selection, In addition to subsector, induded orign of investment, form of ownershlp, fim size, and date of establishment. Abotnt 57% of the sample fims were eAtablished during the lat five years. Investor countries in the sample include, in order of importance, the U.S., the Dominican Republc, Korea, Tawan and Hong Kong, and others (see Table 4). To refect the ovmrall FTZ fims accurtely, the sample includes fully foreip-owned firms, fully domestic-owned frms and joint ventures, acording to their relative importnce in the total FTlZ population. ,Tabb 4: INVESTENT ORIOIN OF DR. FI AND SAMPILE FIRMS (U of 1990) Sampl popultion NO0. I'40. P1M % Fim % 100% U.S. 33 S2 167 53 100% Domh Republc 11 17 74 23 10% NIE yf 12 19 3S 11 Joint venrur 4 f 6 8 3 OQr Nationlity 4 f/ 6 5 2 Nationty uavilabe 2B 9 TOWal 64 100 317 too aJ NI aue }Go, Tiwan, Hon Koo& lY Jont vntum am 5% U.SJ5% HaIti 50% US J0 Domlos 80% US=ZO% Dominion, and 50% TaW&n0% Houg KoG S( NOthe NatoaI' am German, Caadian, PsaaNna and Putao Rkcn - X5- C. Contribution of the VIZs to the Process of Industrial Development in the Dominican Republic 4.06 The focus of the suivey analysis was on the role of FMZ in export, human resource and private sector aeveiopment--aa tini uwuviuupzuci 'iwpyituAou faoiy jooii; and -i "iOiI sales rooms. The objective was to articulate the micro, dynamic aspects of LDC exports as discussed in Chapter 11, based on the FIZ firs' perceptions as well as firm-level empirical data. 1. Export D (a) Exrt Caysts 4.07 More than 40% of the survey respondents are foreign catalysts who have pioneered exports from the Dominican Republic (Table 5). For example, the NIE firms have pioneered exporting such diverse items as tents, sports caps, luggage, mens' suits, and plastic actylc sheets. In tunm, the U.S. firms have initiated exporting such new products as electrl/electronls assemblies, pharmaceuticals, and data processing Almost 80% of the survey respondents indicated that FI'Z companies couid not have exported their products without critical inputs at the firm-level from foreign and domestic collaborations. This confirms strongly the export initiating role of FMZ5, providing an empirically proven answer to the most critical development question-what is the best way to initiate eatfy into the world market and to generate a supply response? Table 5: CATALYTIC ROLE OF FOREIGN AND DOMESTIC COLLABORATION IN D.R FIZS IN PIONEERING D.R MANUFACIURED EXPORIS Fum was fint to ort Finns could not have the product it specaia expoted without foreign in frm D.R. and domestic collaboration p/ Equity Ownenbip (No. of firms) (No. of fams) US. 13 26 NIPs 8 13 Domainn Republic 2 3 Other 3 6 TOTAL 26 (42%) 48 (79%) TOTAL RESPONSE 61 (100%) 61 (100%) i Fucaixe; wuaw lIuaL" . ; a fo.%-4ie - pn= an : )-. msenagers who have acquired sis eseas as well as forip technical auluaae asociated with suboontrcts or tun-key plant imporm (b) Catalytic Elements 4.w9 7ar. h Wn & auud MaC ioughly equal importance to: * managerial, technical and marketing know-how, * an established overseas market network, and capacity to combine the export know-how and marketing network with foreign or local capital and local labor resources (Table 6). - 16- One of the most fascinating aspects is the relatively much higher value which FT Z firms attach to these elements relative to capital inputs. The implication is that while the shortage of capital can be resolved by external or internal borrowing, (a) the acquiring of managerial, marketing and technical knowhow, (b) having access to establisbhed overseas market networks, and (c) building capacity to package (a) and (b) with local resources require direct collaboration with foreign companies or individuals who have these export know- how, or networks, and capacity. This provides dynamic, micro evidence for a need to shift the eonventional view on the priorities of LWC development that focuses on capital and commodity flows, overlooking the critical importance of industrial export know-how and capacity (including external market network) building. This also confims the emerging view on the role of foreign firms in the transfer of know-how to LDCs-- a role more important than the transfer of financial resourc= (UN Centre on TNC, 1988). 4.09 In response to a question about foreign management expertise, our survey found that there were 37 foreign managers (i.e., general managers directing the whole company operation) and 10 Dominican Republic managers at the time of the establishment of 47 FIZ firms. Most Dominican RepubUlc managers had acquired management skiUs in enterprises overseas or within local FMZs before taking over current management tasksli3 There were on average seven foreign technical personnel per Dominican Republic- owned FfZ firm and nine foreign technical personnel per foreign.owned FIZ firm at the time of establish- ment. These managers and technical personnel are the agents for pioneering industrial exports and for human resource development. Table RELATIVE eIPORTANCE OF ELEMENTS BROUGHT IN FROM OVERSEAS IN PIONEERING EXPORTS FROM D.R. FrZ FIRMS Relative Importance Elment (percnt) A (a) Managerial, technkal and marketing bow-how 32 (b) Established oveseas market network 30 (C) Capadty to "packge (i.e.. put together) items (a), (b) and (d) with loci entrepreneurial talents and labor rsourcm 28 (d) Capital 10 TOTAL 100 a/ Relative frequency of given element In the total frequendies of elements (brought in from oveuas) indicated by the sample auvey respondents as most important In pioneering epous from their oampanls (total frequenles are 105 from 53 , 4 " (c) Dominican Republic Capital and Management 4.10 About 20% of the F1Z firms in the Dominican Republic are 100% locally-owned and managed (Table 4). Table 7 summarizes the origins of 11 sample Dominican investors in the FMZs. 10,' Another interesting aspect is the incidence management expertise across nationalities. Of 42 foreign companies, 13 employed foreign or native managers of a nationality d.fferent from the equity owners. - 17 - 4.11 In about half the cases, switching Investments from the partial export, import substitution, or non-tradable output brought opportunities for Dominican Republic managers to switch to the 100% axport sector or to bring in Dominican Republic managers who had acquired management skills in foreign companies. In abeut half !be a% 1nn1 manPern with acquired export management skills have played a pioneering role in establishing 100% domestically-owned export enterprises in the FMZs. In all cases, domestic enterprises in the FM7s have played a catalytk role in mobilizing domestic management, capital and labor resources in an outward-oriented diretion. Tbis strongly suggests that allowing 100% domestic ownership in FMs is a desirable policy both for inducing domestic capital and management resources into export activities, and for increasing local management skill acquisitionL Table 7: ORIGIN OF SAMPLE DOMINICAN INVESTORS IN D.R. FM Number of finns Percent (I) Switcig from parta upo (wnder law 6S% import subtiutiop, or non-traable stor to 100% por (with sne managers or DX managers wih foretp company prne in upi) 5 (45%) (-l) Purd fm foreign companies in D.R FlZs by formae D.R. manars 4 (36%) Q(U) Newly esthalds by former DR. mangrs of foreg companies in D.R FTA or forcig counties 2 (18%) TOTAL 11 (100%) (d) Exprt Marketing 4.12 Most U.S. rms in the Dominican RepubUc FM sell to parent companies, implying that ftW_5tMam In coutrst, NI fiLrmc have hres emnee in arnii leneth trade with wholesalerlretalas or import traders, through intermediaries that are subsidiaries of parent companies located in US (Table 8). T*hi I RELATIVE IMPORTANCE OF DIFFFRENT TYPES OF BUYERS a/ Both whoteaim 1oth whoksaler Capita Wholalr/ Import Parent Sub- retalaer aw. retailer and owmship tailr trader Cow contctor Impo :4 subcontaaing Total Llom. c 20% 80% 100% U.S 9% 73% 9% 9% 100% NIM$ 29% 57% 14% 100% *I Number of firr wJtling to given buvyes as perntage of the niumber of firms. ITe total number of respondents is 33. . 18 - 4.13 U.S. companies rely mainly on their parent companies for product specifications, brand names, and inputs (Table 9) while Dominican Republic subcontractors depend on U.S. buyers providing product specification, brand names, and inputs. For NIE companies, the role of buyers appears to be most influential in product specification and brand names; however, arms-length trading arrangements and their parent companies are the main sources for raw materials and Intermediate inputs. Therefore, the fact that the internal structure of a stability of foreign firms' established marketing network (which was critical for these firms' DPI in and quick exports from the D.R. FMN) accompanies a rigidity (i.e., non-arms-length trade elemeni) needs to be clearly understood. The difference between NIE and U.S. and Dominican Republic companies in sourcing will be discussed, along with the weaknesses in FrZ firms' export marketing, in this chapter. Table9 RELATIVE. MPORTANCE OF SOURCES FOR PROr'¶CT SPECIFICATION, BRAND NAMES, AND INPUT SOURCES A Parnt Co. Arms length FIZ Co. Parent Co. Byer Subcontractor and buyer purchase Total Product specification U.S. Company 0% 63% 25% 0% 13% 0% 100% NIE Company 0% 7% 64% 0% 29% 0% 100l DI. Compay 9% 0% 0% 91% 0% 0% 100% Bmand name US. Company 0% 79% 14% 0% 7% 0% 100% NIB Company 06% 8% 77% 0% 15% 0% 100% DII Company 9% 0% 0% 91% 0% 0% 100% Inputs US. Company 0% 81% 13% 0% 6% 0% 100% NIM Company 0% 36% 7% 0% 29% 29% 100% D.R Company 9% 0% 0% 91% 0% 0% 100% Number of firms using the given primasy source as percentage of the number of fims in a group. The total number of respondents is 63. 2. Human Resurce l)evelonment (a) Elements of Human Resource Development 4.14 Most respondents feel that the FMZs' contribution to acquiring technical or management know-how in the Dominican Republic is high or considerable (Table 10). About 35% feel that the FlZs' contribution to acquiring marketing know-how or cpacitv to narkagve. the -r-ti -lmPnte for etering the world market is high or considerable. The first results refute the usual argument that there is very low skill acquisition and no management training in FMZs. The findings confirm the contention (in para 2.33) that in sequencing of human resource development in LDCs with unfavorable initial conditions, nothing requires higher priority than human resource development through on-the-job training and learning-by-doing of managers, technicians, and workers under the supervision of foreign experts on the factory floor and in the salesroom of export manufacturing companies. - 19- _Table I DEGREE OF FlZs' CONTRIBUTION TO HUMAN RESOURCE DEVELOPMENT IN ACQUIRING KNOW-HOW AND CAPACITY TO PACKAGE J Capacity to package Management Technical Marketing elements tieeded to know-2wW know-how know-how csport with local resourcea Firm's perception on Its contribution: HIgb 13% 33% 2% 22% Considerable 63% 51% 33% 13% LwW 19% 13% 31% 48% None 4% 2% 33% 13% Not applicable 2% 2% 2% 4% Total response 100% 100% 100% 100% (Number of firms) 54 55 55 23 Reltciw freqrewy ( nti degree of i ntributlon in the total frequendce for each category of know-how and capacity. (b) Labo Prductvity Learnin Curve 4.15 One of the best indicators for measuring human resource development in labor skills is a learning curve that measures the change in labor productivity LI as production experience accumulates. Our estimated learning curves U' for the sample FIZ firms are presented in Figure 1. (Estimated equations 'v are in Table 3, Annex IL) The estimated asymptotic productivity lines (Le., the maximum attainable producing levels) for the sample NIE and non-NIE firms are presented in Figure 1. Productivity growth rates based on the estimated learning curves for NEIs and non-NIEs are in Table 11. 4.16 The estimated learning curves in Figure 1 confirm that there is significant labor skill formation particularly in the early years of Dominican Republic FIZ firms' start-up of production, as measured in labor productivity growth rates calculated in Table 11. It is interesting that the asymptotic level of producthivty in the estimated learning curve-the maximum attainable productivity--for non-NIE firms (mostly U.S. and D.R. firms) is 84% of the best practice labor productivity in U.S. factories. For NIE firms it is only 69%o of the best practice labor productivity in NIE factories4 jjY Labor productivity is measured as percentage of the best practice or norm-level labor productivity in the U.S. (for U.S. and D.R. firms) or NIEs (for NIE firms). IN1 The learning curve estimates based on our sample data (90 observations) are reasonable in light of the fact that on average 80%o of the current skilled workers formed skills in their current companies after they were recruited (mostly at the time of firms' start-up of production) from a pool of unskilled workers outside the FrZS D3J Takafumi Ueda estimated these equations. 14/ The fact that the maximum attainable productivity of foreign or domestic firms in the D.R. FMZs cannot reach the U.S. or NMi iwvci rufl=6 'tu labus aul;;iy tiiciia Ie4 i. csc enOEmics. It is surprising that the estimate implies that the long-run productivity of NIE firms is 15% lower than that of U.S. and Dominican Republic firms. However, industry experts suggest that the best practice labor productivity in NIEs is about 15% higher than that in the U.S. due to the relatively high standards of NIEs. Therefore, it would be reasonable to assume no gap between the asymptotic level of labor productivity of NIE firms and that of non-NIE firms in the Dominican Republic FTZs. In other words, the learning curve and the asymptotic line for NIE firms shifts upward to merge with those for non-NIE firms, if all the sample survey firms, including NIE firms, reported their labor productivity as a percentage of the best practice labor productivity in the U.S. This is equivalent to adding 15% to the reported productivity of NIE firms. E;timatec of Labor Productivity Learning Curves of D.R. FTZ Firms XJ100 _ _ - E 0 Z 80 . to- 60 a ±60 40 - v 20 0 L.. o 0 I I I I I I I I I I i I I I -o 1 2 3 4 5 0 7 8 9 10 11 12 13 14 15 16 17 18 Year of Firm's Operation Non-NI-'s @ NIE's - Asymp. Line non-tilEs Asymptotic Line NiEs Figure 1 - 21 - Table 11: ESTIMATED PRODUCTIVITY .,J GROWT i RAlTE AN'D PRO(DICTIV11lY l.EVEI AS PERCENTAGE OF ASYMPTO'IIC LEVt5L PRODIt11VITY Non-NIEs NIFs *of % of Annual Ayrnptotic AmAkual Asymnptotic Productivity b/ Growth Rate Lfvwl Proia'wmr, b/i orowth Rate Level Year (%) (%) (84.333) (%) (%) (69.1.34) 1 44 72 53.02% 2952 42.69% 2 64.52 44.30% 76.51% 49.33 67.11% 71.35% 3 71.13 10.23% 84-24% S5.93 13.39% 80.90'* 4 74.43 4.64% 88.26% 59 23 S.90Jq 85.67% 5 76.41 2.66% 90.60% 61.2i 3.:34% 8R.54% 6 77.73 1.73% 92.17% 62.53 2.16% 90.45% 7 78.67 1.21% 93.29% 63.47 1.51% 91.81% 8 79.38 0.90% 94.13% 64.18 1.11% 92.84% 9 79.93 0.69% 94.78% 64.73 0.86% 93.63% 10 80.37 0.55% 95.30% 65.17 0.68% 94.27% 11 80.73 0.45% 95.73% 65.53 0.55% 94.79%/Z 12 81.03 0.37% 96.09% 65.83 0.46% 95.22% 13 81.29 0.31% 96.39% 66.09 0.39% 95.59% 14 8i.36 ri.;770 96.6~% v vo.2oc' e, I .ku u.i 15 81.69 0.23% 96.87% 66.49 0.28% 96.18% 16 81.86 0.20% 97.06% 66.66 0.25% 96.42% 17 82.00 0.18% 97.24A% 66.80 0.22% 96.63% 18 82.13 0.16% 97.39%^> 66.93 0.19% 96.S2% I Estimated productivity is based on the estimated productivity equation (Equation 2-4 of Annex If Table 3). b/ Productivity is defined as level of labor productivity as percentage of the best practice labor productivity in NIEs or non-NIEs. 4.17 Within five years of a U.S. firm's establishment in an FTZ, labor productivity grew from 53% to 90% of the "maximum attainable productivity level of U.S. or D.R. firmn in the D.R. FMZs" (i.e., 84% of the best practice labor productivity in U.S.) This meant about 44%, 10%, 5%, and 3% annual growth rates in labor productivity in the seond, third, fourth, and fifth year. At the same tiw.r, for NIE firms over six years, labor productivity grew from 43% to 90% of the "maximum attainable productivity of NIE firms in the FZs" (i.e., 69% of the best practice labor productivity in NIEs). This meant about 67%, 13%, 6%, 3% and 2% annual growth rates of labor productivity in the second, third, fourth, fifth, and sixth years. 'Ibese labor productivity growth rates are measures that refute the argument that skill formation in FMTS is insignificant. (c) On the job Training and Learning by Doing 4.18 One major factor underlying the high productivity growth rates that sample FIZ firms achieved in their early years was the on the job training (OJM) of unskilled workers and subsequent learning- by-doing (LBD). Survey respondents reported that, on average, after 2.3 months OJT, unskilled workers need about three months learning by doing to become semi-skilled workers, who in turn need about six months LBD to become skilled . -rkers. It is likely that this intensive on-the-job training and learning-by- doing resulted in the extremely hig. growth rates between the first and second year of a firm's start-up ef production in an F1Z -22 4.19 On average. 85% of the D.R. PFZ's skilled and semi-skilled workers have been recruited from the country's unskilled workers' pool. Further, statistics suggest that without the oi r and LBD, these workers would be either unemployed or earning wages about 40% less than current wages of unskilled workers in the F1Z companies. These remarkable private returns to skill formation in FMZs refute the argument tbat Fl Zs exploit teinale worIcers.JA! (d) SiU Formaton of Managers and TecnIcal Personnel 4.20 There were 20 native Dominican Republic managers in the 64 sample firms in 1990.0 At the time of these fis' estabflshment, there were only 10 Dominican Republic managers (see para 4.09). Doubling the number of managers in a short period reflects their skill formation inside the FMZs as well as new personnel from overseas. Table I TRFND OF REPLACING FOREIGN WItH DOMINICAN TECHNICAL PERSONNEL IN SAMPLE D.R. F1Z FURMS Al the rSe of EsabUshmsent 1n 1990 Avge no. of Avuge no. of Averap no. of foein techical foreig techical Dominican -nd p-d technl Domlnkan Firm 7 1 21 9 Noo-Domincan Frm 9 6 16 4.21 The average number of foreign technical peronnel in sample FTZ firms decreased between the time of firm establishment and 1990 (Table 12). During the same period, the average number of local technical personnel increased significantly from virtually none. This replacement of foreign with Dominican Republic technical personnel was a result of the very impressive skill formation achieved through OJT and LBD untder the supervision of foreign technical personneL 3. PrF ate Sector Devlopment 4.22 Surveyed firms in the Dominican Republic FTMs were asked to give their views on skUled workers' inward and outward mobility in building international competitive capacities. Figure 2 indicates a pattemn in the responses as presented in Table 13. Dominican Reoublic firms. more so than foreign firms. point to the more significant impact of the inward mobiity of skiled workers for enhancing firms' capacity to compete in the world market. Foreign frms attach more importance to the outward mobility of skilled workers from the foreign companies to other firms, in terms of competing in the world market. NIE firms' responses were mostly in the category of *not applicable," due to the very insignificant inward and outward mobilty of their workes This was confirmed by other data. NIE firms' emphasis on their own OJT and LBD program applied exclusively to their own recuitment of unskilled workers, and their experience of no outward loss of skilled workers appear to be a result of their strategy to achieve productive efficiency through discipline, loyalty and job task continuity. j.~/ See also Rodriguez (1990) for the field interview results corfirming that the wages of FTZ female workers are significantly higher than those of workers outslde H-Ls. 6/ Stiglitz (1989) argues that finding good managers may be one of the most important development tasks in LDCs. .23- Figure 2 Figure 2 Contrlbution of Skilled Worker Mobility (inward vs. Outward) to Firms' Internatlonal Competitiveness 100% 90% 80% S 70.0% 70%- 60% 833 tp 70 hh 53.3% C60% 39.3%/ gx 40% -33.3% 30%- 20% <° 16.7% 10.0X 10% U.S. :IEs D.R. Per ontage of firms Indicating significant or m. -erate Impact of Inward mncbility Pere t' .,age of firms Indicating significant or n- erate Impact of outward mobility , 24 - Table 13: CONTRIBUTION OF SKILLED WORKER MOBILITY TO PRIVATE S' CrOR DEVELOPMENT 'Me impact of skille worker mobillty (in own firms) to incresing the competitiveness of own or other fin Significant Moderate None I Do ht know Total (Iward Mobility) U.S. films 7% 32% 61% 0% 100%t NIE. Orms 0% 10% 90% 0% 100%. D.R. firms 60% 10% 30% 0% 100% Others 14% 14% 71% 0% 100% (Outward Mobility) U.S. firms 8) 23% 37% 10% 100% NIB. firms 8% 8% 50% 33% OOo D.R. firms 22% 11% 67% 0% 100%l Others 0% 14% 71% 14% 100% W Includes wnot applcable" category stemming from no company tperience in skilled workers inward or outward mobdity. 4.23 Further, only one out of 11 Dominican Republic firms that responded to our questionnaire has depended exclusively on its own OJT and LBD program and to its own recruitment of unskilled workers in mee.ting its skilled worker demands. On the other hand, six out of 14 NIE firms (i.e., 43%) and nine out of 32 U.S. firms i.e., 28% show depending exclusively on their own (Mi ana bizJ tor mneir slcnea worKer supply without inward and outward mobility of skilled workers. 4.24 Responses to a related question reveal that, on average, 66% of the skiled workers in the Dominican Republic firms have formed their skiUs exclusively at their current companies, while for the NIE and U.S. firms that figure is 80% and 85%, respectively. These two sets of data are consistent with the pattern shown above. It appears that skilled workers in the Dominican Republic FTZs have contrt)utea to private sector development through their mobility from foreign and local companies to new Dominican Republic companies in the FlZs. However, that impact does not appear to extend to the private sector outside FM7. This is likely due to the better business opportunities and environment inside the FMZs. However, as pointed out below, skilled workers' outward mobility to private firms outside the FlZs would be important in deepening the future industrial structure of the country. - 25 - D. Equal Footing Export Policies and Infrastructure in the ,3rominican Republic FTZs 1. Motivation Behind Enterprises Entering FVZs 4.25 Figures 3 and 4 show the relative importance of the reasons--given by survey respondents--to invest in the Dominican Republic FMZs by foreign and domestic companies.X" For foreign investors, the dominant motivation was low real wages.'W The second important reason was easy market access to the U.S. stemming from the proximity and the various initiatives and incentives offered to Caribbean countries and off-shore processing activities. 4.26 For Dominican Republic investors, equal importance was given to acquiring foreign know- how, easy access to the external market, and the equal footing export policies and infrastructure in the FTZs. Because of the authorities' failure to provide equal footing export policies outside the FTZs, it is understandable that local investors consider such policies one of the most important incentives for entering the FMZs. The fact that foreign investors attach relatively less emphasis to equal footing export policies and infrastructure does not imply that the effectiveness of FT7.s in ensuring such policies is not essential for foreign investment. Rather, the responses (Figure 3) imply that, since equal footing export policies are a precondition for any direct investment in export activities anywhere in LDCs, they are, taken for granted. Furthermore, even with equal footing export policies and infrastructure regime, foreign investors would not be interested in the Dominican Republic if the advantages of low wages and market access were uncertain. 2. Eqsa! Footing V-Fnrt PnlsIrei 4.27 The majority of responding firms was satisfied with the speed of investment licensing administered by the National Council of Free Zones (NCFZ)I! for application to install a new firm in the D.R. FMZs. About 92% said the review process was either *excellent* or nadequate" as Table 14 indicates.&' 12.1 These figures are based on the relative frequencies (percent) of given reasons for investment indicated by the respondents as most imponant in the total frequencies. The total frequencies for Figure 2 are 84 from 51 companies; the total frequencies for Figure 3 are 14 hWm 8 companies. J/ -s Table 4 of Annex II shows, the Dominican minimum wage expressed in US$ decreased from 1986 to 1988, but increased by an average 12% per year since then, as the average peso wage growth rate has exceeded the average devaluation rate of the peso-dollar exchange rate. Dominican Republic labor is known as easily trainable, and there is no labor union formed in the FTZs. Therefore, the FIZ firms can exceed 50% of the maximum attainable labor productivity (which is about 84% of the U.S. labor productivity level), within one year ot O0 i and Lki), as shown in lanie it. j9/ The NCFZ is the main regulatory agency for FM7s. Besides licensssg new FIZ firms, it reviews applications for the establishment of new zones, negotiates inte'i,ational agreements pertaining to FIZs (e.g., textile quotas), and allocates quotas among firats. Other institutions not mentioned elsewhere in this report which play a role in the FTZ program are the Dominican Expon Promotion Center (CEDOPEX) which administers the schemes designed to provide free trade status tor export activities outside FMZs and the Association of Free Zones, a group aserting the interests of FTZ investors. IQ/ The D.R. FTZ legal framework governing lt-Z enterprises and developers in the Dominican Republic is 'Law 8-90: Encouraging the Establishment of New Free Zones and the Growth of Existing Ones," passed by the National Congress at the end of 1989, consolidating and streamlining the separate laws and decrees that governed the FMZs previously. v 26 - Relative Importance of Reasons for FDI in D.R. FTZs Market Access 21.4 AEQ t - Equal Footing 11.9 Figure 3Othrs Low Wages 57.1 < Relative Importance of Reasons for Domestic Investment in D.R. FTZs Equal Footing MArkRt ArGr A 8.28.9 28.9 - / - \Othe~~Othrs 14.4 Figure 4 Know -How 28.8 - 27 - Table 14: EFFECTIVENESS OF EQUAL FOOTING EXPORT POLICIES IN D.R. FMZs Export policy element Percentages of respondents indicating given export policy element is 'excellent' or 'adequate" (or not "inadequate") e a. Rapidity of imestment licensing procedure 92 b. Forign exchange control and profit repatrIation 100 C. income tax incenthies 98 d. Accesm to foreign exchange for imports of raw matcrials and- machinery 96 C. Access to imported capital equipment without duties and delays 75 f Acce to imported raw materials without duties, complex procedure, nrd deyra 67 g. Acce. to Iimestment finance 63 h Labor Code 84 L Acoe. to locally produced Inputs at wuid market prices without compex procedures and delays 59 J. Access to non-tradable Inputs at competitive prices 45 k. Quality of expatriate workers living conditions 89 sI Total number of the sample survey respondents is 64. 4.28 Regarding the foreign exchange regulations and repatriation of firms' profits from FTZs, 100% of the respondents expressed satisfaction. In fact, firms are permitted to deposit all foreign currency earnings from export activities in foreign accounts. However, domestic costs must be covered by local currency converted at the official exchange rate. 4.29 Regarding other factors, such as income tax and other tax incentives and access to foreign exchange for importing foreign equipment, raw materials and intermediate inputs, most of the sample survey respondents indicated that the procedures and implementation were excellent or adequate. However, about a third of the respondents were not fully satisfied with the speed of the procedure for "free trade" inflow of imported inputs and machinery, is surprising since these procedures and practices in the FMZs have the rupuaiiuun of being efficient. This may reflect foreign investors' demands for C;cn hlgrhc d s dar.4a.^ of import processing. To improve the speed with which Customs handle the clearance of imported goods destined for FMZ, the Dominican Republic's new F1Z law has created a subdivision of inspectors within the department to service FMZs exclusively.1Y Ij Once imported inputs have been deared by Customs, they are shipped to the relevant Customs office in the zone of destination, and their contents are verified by inspectors. In a departure from earlier provisions of the law, Customs officials no longer have the authority to seiz. such goods in case of discrepancies between the shipping documents and the container contents. They report such incidents for follow-up action by the Customs Department. -28 - 4.30 Overall, the national labor code, which fully applies to F1Z firms, did not seem to represent a problem for the majority of responding flrms (84% responded "excellent" or "adequate").ZY 4.31 Relatively more unfavorable reaction (41% of the firms) was registered with respect to the avn£la!Htl etnr"llv, "P t "puts 4life t- tho -nm!v eA relured t, ob!?in inptuts (manufactured under free trade status) and their uncompetitiveness compared to inputs available in world markets. Similarly, more than half the managers were dissatisfied with the quality and/or price of needed non-tradable inputs, such as utilities, etc. Complaints were voiced about the energy supply in particular, due to frequent power outages, most FTZ firms operate their own generators anywhere from two to eight hours per day, a costly necessity. Occasional shortages or delays in delivery of diesel oil to power these generators often aggravate the situation. To alleviate this problem, the new FTZ law permits private power plants in the FTs. 4.32 Finally, regarding the role of the Dominican Republic FMZs in ensuring equal footing export policies, all (100%) respondents thought these policies could not have been possible without the FTZ approach. They cited the authorities' lack of capacity to administer any schemes to ensure free trade status and other equal footing export policies effectively in the short run. Equally, all who answered this question stated they would not have invested in export activities in the Dominican Republic if the existing FTZ policy regime had not been in place. This outcome confirms the role of the FIZ in inducing direct foreign investment in LDCs' export activities. 3X Equal Footing Infirastructure 433 Regarding physical infrastructure (Table 15), respondents stated that the condition of airport and port facilities fully satisfies their needs; delays were perceived most commonly as due to bureaucratic practices rather than to the volume of incoming and outgoing merchandise the facilities could handle. Road transport was judged adequate overall as well; only a small number of respondents complained about truck unions striking or the congested highway from the Santiago FIZ in the center of the country to the airport on the coast. Z/ Companies in the FIZs have to comply with the national labor code. Under the provisions of the various laws relating to labor matters, the training period in which workers may be paid a special minimum wage, is three months for all FTZs except for the special-incentive zones on the border with Haiti, in which the training period is six months. The FIZ Law specifies that workers who svp laid off n eftpr thp initial tra".ina o4 A"d - re later reh!t_red b the saye firm mz not be treated as apprentices again. Q/ To this end, the government has recently issued a policy statement that asserts that mechanisms would be implemented that would enable private suppliers to exchange peak loads and share transmission lines with the national electricity company. The national pI wer system is currently also being upgraded with a loan from the World Bank (19388, and the project is likely to benefit FTZ users within the next few years. -29- Table S: EFFECrENESS OF EQUAL FOOTING INFRASTRUCTURE IN D.R. FMh Paretag. of mupoodents incating pewn ftuatuce ement Is 'Excellent or 'Adequate' in nutrture clmnts toa samPle respondents A- a. Air tanspoil 100 b. Port facflities 97 c. Road trmnsport 86 d. Communkation 94 c. Storagehazchousing 90 C Bank servkes 94 g. Worker anport 50 b. Encrg and water supplies 19 Bt Total number of the sample sure nupondents is 64. 4.34 According to the results of the survey, the national telephone network satisfies the needs of the majority of FIZ users. Simnlarly, 90% of the respondents replied that storage and warehousing facilities are adequate; few firms rely on such services anyhow as most firms either maintain their own warehouse/storage space or are not in need of any. As Table 15 shows, in the area of banking services, the majority of respondents are also fully satisfied. 4.35 Transporting workers from major population centers to the FMIZs, which often are located at the outskirts of urban areas, poses a bigger problem to FIZ firms. Appmximately half the respondents stated that the public transportation system is unreliable and its capacity insufficient. The new FIZ law addresses the problem by exempting vehicles imported specifically for worker transportation from previously prohibitive import duties. This measure-by allowing firms to provide their own transport for their workers more economically or by enabling a private service to supply worker transport-should alleviate some of the bottlenecks. Some private zones, such as Itabo, already offer worker transport as part of the services to aheir tenants; companies that operate night shifts similarly provide their own transportation. The duty-free acces to FitZ worier transporn venicies is an exampie ot tne new provision ot tne riwt law that extends free tade status to zone development and management activities. 4.36 While infrastructure bottlenecks have occurred, the designation of new site location has so far avoided overloading of the country's overall infrastructure, despite the enormous proliferation of FlMs in the Dominican Republic over the last five years. In addition, where shortages have arisen that affect r iL euime-pri- negativeiy, ine prooiem nas been addressea on tne nauonal policy level, because most infrastructure elements are not specifc to a particular FIZ - 30 - E. Innovative Approaches In D.RL FlZs: Private-Public Mixes In FIZ Development and Administration 437 As showa in Table 1 of Annex 11, there arm currently 19 FMs dlsperscd over the whole country. Of these, eight are private, seven are public and the remainder are publicly ownedlprivately managedL These zones range in size from about 20,000 sq. ft. to 2,500,000 sq. ft. of under-roof factory space and currently accommodate between two to 80 enterprises each. 4.38 Private FMY in the Dominican Republic curently account for roughly 29% of total FTZ under-roof facto!y space, or 24% of all FIZ firms; they employ 28% ui al FIZ worken, and in 1989 exported 34% of total FIZ exports (Table 1 of Annex 11). In terms of the firm characteristics and sectoral orientation of private FM7s, the biggest, Itabo and San Isidro, target Fortune 500 companies, principally pharmaceuticals, and large electronics and data processing companies. 4.39 In the Dominican Republic FTZ developers' and operators' tasks have been to construct and wanage only zone site and factory and senrice buildings, while basic infrastructure-airports, sea ports, major road transport, and major communication facilities-is not zone-specific and under the public sector in terms of construction and management. Private zones were created as a real estate venture in response to the continuing demand for industrial F1Z space that arose after the devaluation of the peso in 1985. The principal reason for the local business community's involvement in F1Z development was to hedge against inflation with a real estate portfolio and to generate foreign exchange. 4.40 The country's pubUc zones, administered by a govermenit agency, Corporacion de Fomento IndustriaL were established with the objective of generating employment in densely populated areas and to contribute to regional industrial development. Thus, existing public zones and intended zones are located in differtnt provinces of the country and along the border with Hait, while private zones tend to be concentrated in the vicinity of the capital, Santo Domingo. 4.41 For-profit operation of FiZM has added a high-quality, comprehensive range of new services, such as around-the-clock customs administration, worker recruitment, health services, worker transportation, landscaping, ew. Our survey results indicate that most of the firms in private FMZs are willing to pay premium rents because the private zone environment corresponds better than public zones to their production needs.& In the manufacture of pharmaceuticals, for instance, facilities and maintenance in P&Ivate ZC= -40 -- _ 4...* - L- e*-- V T C . TN ... Th... A =_ M"'tv tV" -wAt" ^ rswsevz .v6w..v W.Y w/ s _._. . uvu "ax. -U) b.' v4lb . tion possible. Other firms stated that private zones reflect their corporate image better, some decided on private zones because they anticipated more continuity in zone management. Public zones may run the risk of disruption, due to potentially oonflicting policies toward the FIZ program as governments change. 14 Puerto Plata FfZ is actually an exception in that it is mixed ownership; the government owns the land the zone was developed on, and a private investor developed the facilities and infrastructure. j/ The rent in private zones !s at least three times that of public zones (rental rates vary from USS 0.20/sq.ft/mo. to US$ 0.50/sq.ft./mo.), but is still only a small fraction of total operating costs. Rents in public zones have been lower than those in private zones; rental rates in public zones range from USS0.05/sq.ft./mo. to USS0.29/sq.ft/mo., depending on zone and length of rental contract (Table 2 of Annex 11). The D.R. FfZ development practice is the construction of factory building only after obtaining long-term contract. with investors. In response to the survey question of whether tenants in public zones were satisfied with services and facilities in public zones, 65% of respondents stated that the zrnes fulfilled their needs. The remainder voiced complaints about maintenance and less responsi-e management in general. - 31 - 4.42 Thus, private zone developers have been able to attract multi-national companies that make firm investment commitments. Westinghouse, located in the private Itabo FT7, for instance, own, rather than leases three of the factory buildings in which it operates and is a shareholder in the zone itself. 4.43 FinaUly, there are four zones that are either publicly owned/privately managed or of mixed ownership, i.e., a private investor developed the infrastructure and manages the zone, but the land is owned by the government.N The creation of these non-profit FlZs is due to the government's attempt to involve various provinces' most outstanding entrepreneurs in the development and promotion of the FIZ program22. 4.44 In oDnclusion, the unique diversity of F1Z facilities and services in the Dominican Republic has come about in response to the somewhat fragmented demand for FTZ space. Our survey results indicate that some flrms' production needs are satisfactorily met by facilities offered in public zones, while other firm- find it worthwhile to pay premium rents in the private sector zones. The concept of private FiZs could be very appealing to many LDCs because it would reduce the risk of mismanagement of public FMZs. However, there are examples of private zone failures also. In fact, success depends on the quality of management, whether private or public. The private sector-oriented approach to FTZ site development and management is possible, but only if the basic infrastructure, both inside and outside FTZs, is handled by the public sector on a national scale. Finally, it is a good po:icy to extend equal footing export policies to FIZ site and factory and service building developnment and management activities. 4.45 Besides the unique diversity of FMZs in the Dominican Republic, another innovative aspect of the country's FTZ program is its investment promotion scheme, which is discussed in detail in Annex III. F. Future Strategies of the D.R. IrZs 4.46 As discussed previously and here summarized by Figure 5, FIZ firms attach roughly equal importance to (a) managerial, technical and marketing know-how, (b) overseas market network, and (c) the capacity to package the critical elements needed to enter the world market brought to FMZs by foreign collaborators. In terms of the actual performance in human resource development, firms appear to place a higher weight on the FM7s' contribution to acquiring technical know-how and managerial know-how than on acquiring marketing know-how or capacity to package the critical elements for entering the world market. Such perceptions on the relative contnbution of FTZ operation to human resource development ar' IulmtnriA7M in Fioure 6.W 4.47 A quick comparison of Figure 6 with Figure 5 reveals the relative weakness of the current process of acquiring elements critical for manufactured goods exports. This suggests a direction for future strategies for the Dominican Republic FMs. The learning potential in external markting is judged to be roughly only one-tenth of the importance of the external market network Also, the relative weakness in 2ennofrin the anskwitv to nackage the various elements neeifrA to enter the world marknet can he deteeted The latter weakness is not unrelated to the weakness in the whole export marketing area. ~/ In terms of their rental structure, these zones are in a middle range between private and public zones (depending on zone and length of contract, rents range from US$0.10/sq.ft./mo. to US$ 0.40/sq.ft./mo.) and are operated on a break-even basis, i.e., non-profit. 27/ In the case of the Bani FlZ, it was the regional business community which requested the government to establish an FTZ and committed itself to subsequently manage the zone for the benefit of the province. 2/ Figure 6 is based on the relative frequency data underlying Table 10. - 32 - 4.48 On the positive side is the remarkable progress being made in human resource development in technical and managerial know-how related to manufactured goods production. The first important step, learning production and management know-how for light manufactured goods' final processing activities, has been taken successfully. But what next step Sihould the country take? Future strategies designed to deepen the industrial structure are discussed below, followed by some points designed to deepen export marketing. 1. Deepening of Industr'al Structure 4.49 The impressive growth of the FIZs in the Dominican Republic will continue. One projection is for about 17% annual growth rate in the demand for zone floor space. However, the speed with which the FTZ industrial structurc is deepening, in terms of increasing the value-added ratio and replacing imported inputs with downstream production activities, is uncertain. At the same time, there is an encouraging trend of diversifying export products in the FMs. (a) Backward Unkages 4.50 Currently there are no FTZ exports' backward linkages with local production activities outside the FMZs. Survey responses reveal that the main reasons for not using more domestically-produced inputs are: (i) materials not available (about half the total responses); (ii) materials not suitable, due to high prices and low quality (37% of the total responses); and (ili) companies prefer imported materials in order to receive the U.S. import duty reduction incentives under item 807 of the Tarff Schedule of the U.S. (11% of total responses). 2' 4.51 One of the major reasons for the failure outside the FMs to produce intermediate inputs for FTZ export production is the lack of equal footing export policies for indirect exporters. The effectiveness of assuring free trade status for all export activities outside the FMs has to be improved as a complementary measure to the free trade regime within the FTZs (para. 2.25 and 2.26) In the meantime, the new FIZ law includes streamlined procedures for duty exemptions for indirect exporters supplying inputs to FTZ flrms.l3 g/ Item 807 of the Tariff Schedule of the U.S. grants an import duty reduction to garments that are assemoiea in the Dominican Repubiic with fabric made in me U.S. unaer S07, duties are assessed only on the value added in the Dominican Republic, i.e., primarily the labor components and not on the value of the U.S. inputs. 0Q/ "Enterprisec established in the Dominican Republic territory shall be fully exempt from the payment of import duties and related taxes on the importation of raw materials destined for transformation into iinisied or semi-iinisihu produuc which are exporeu inLo she Free Zuncb, bubje:t iu the prior approval of the National Free Zone Council and the Directorate of Industrial Development" (paragraph II of Article 17 of Law 8-90). Another new provision of the FIZ law allows FIZ firms to sell in the local market up to 20% of their production subject to: (i) payment of 100% duties on imports; (ii) the product contains 25% or more local contents; (iii) there is no competing local products. A World Bank loan approved in 1989 for the D.R. F1Z development includes a technical assistance component designed to support the formuiation of st;Lgics for increasing backw-ard linkages. . 33 - Relative Importance of Elements Brought in by Foreign FTZ Collaborators Capacity to Package 27.8 Market Access e~9. Figure 5 Capital 1 0 32.4 Relative Importance of FTZ for Human Resource Development Marketing Skills ^ ~~~3.'.' kCapacity to Package Technical Know-How 58.1 Figure 6 .\ ._ X - Management Skills 'V 22.8 -34- (b) Integrated Production 4.52 Another major reason for the failure to produce indirect export items is local firms' lack of production know-how. Therefore, just as in the case of final stage processing, a feasible way to start production activities designed to deepen the industrial structure wou!d be to rely on direct foreign investment in an FTL In other words, integrated production activities initiated by foreign companies in the FM would deepen the industrial structure and add to the process of acquiring technical and management know-how.2Y 4.53 There are several sons why more integrated production activities with more down- stream processing have not been introduced in the Dominicar. FMZ. As shown in Table 9, FTZ companies rely on imported inputs from the U.S. under exclusive subcontracting arrangements. In turn, U.S. companies rely on mostly U.S. inputs supplied by parent companies or buyers in the U.S. while NIE companies tend to rely on arms-length imports from the international market as well as their parent companies. 4.54 One of the major reasons for the very extensive reliance on U.S. fabrics by garment makers in the FMZs is the U.S. tariff schedule 807 or 807A, (the latter is known as "Super 807.")I More than 40% of all garments exported from the Dominican Republic to the U.S. are assembled from U.S. materials and exported under 807 or 807A. In particular, Dominican Republic firms do not have much choice, since they are mostly subcontractors. Therefore, fob U.S. and D.R. firms in the FlZs, incentives to replace imported inputs with those produced in the FM under integrated production facilities may be less than for NIE firms. 4.55 On the other hand, for NIE firms aiming at the U.S. market, the small quantity of quota avzilable under the so-called "Specific Limit* is a major constraint that impedes installing integrated production facilities (Specific Limit has no specific provision as to where the goods are cut or where the materials come from). This is because the quota is not big enough to merit the initial investment required for integrated mills.-' 4.56 Therefore, market diversification would be an important strategy for deepening the FTZ industrial structure, by introducing integrated production activities. The opening of the European market under the Lom6 Convention which became effective in 1990 for the Dominican Republic, is very encouraging for such a strategy. ~.j/ Currently, there is only one FIZ firm from a NIE that operates integrated production activities for knitting and garment making, in two separate factories, in two separate FMZs. SJ Super 807 offers both duty reduction and special access for garments made from piece goods of U.S. origin that are cut in the U.S. and assembled in the Dominican ReDublic. As is the case for 807 imports, goods imported under 807A are subject only to duty on the value added. However, 807A products also benefit from more generous access to the U.S. market. 807A exports are governed not by 'Standard Access Level (quotas), but by a higher negotiated "Guaranteed Access Level" (GAL). GAL is a special provision for countries who are members of the Caribbean Basin Initiatives (CBI) Program. The CBI gives duty-free treatment for eligible goods from CBI countries. Textiles and apparel, canned tuna, petroleum and petroleum products, certain leather products and footwear, and certain watches are not eligible for CBI; 35% of the value of the product must come from CBI countries, or a combination of CBI countries Due to these requirements, about 90% of the D.R. FIZ exports might not quality for CBI incentives. 13J Sptcific Umit has 6% annual growth. The new quota agreement entered into force on June 1, 1988 and will end on May 31, 1992. Fourteen categories of apParel are currently subiect to Quota. In 1989, ;ibout 85% of total apparel exports were under quota. - 3S - (c) SkW Transfer to Local Firms Outside FTZ 4.57 In order to deepen the countrys industrial structure, the private enterprises outside the FMZ must strengthen their capacity to compete in the world market as well. One of the most effective ways to acwhieve this is through the mobility of skilled workers, technicians, and managers who have acquired such capacity in the FlMs. However, currently the active mobility of these human resources appears to occur mainly from foreign firms to D.R. firms inside the F1. In fact, skilled workers, technicians, and managers who are employed in industrial enterprises outside the FIMs appear to be moving into the FlMs, due to the higher wages and better opportunities inside the zones. For the time being, such inward mobility into the FMZs would be good because of the switch from partial export or import substitution to 100% export However, in order to increase the industrial e1iciency of the country, some outward mobility of these human resources into private enterprises outside the FIZ under the rationalization measures of non-FIZ industries will be needed in the next round of industrial development. (d) Resea Task 4.58 In designing strategies to deepen the industrial structure the experience of Mauritius would be a useful modeL However, no information exists on what actually has happened at the firm-level while progress was being made in their integrated strategies to deepen the FIZ industrial structure. This is one of the reasons why a proposed firm-level study on Mauritius FlMs would complement the ongoing FIZ research in the Dominican Republic 2. Deepening of Export Marketing 4.59 Exporters in NEs relied heavily on foreign manufacturers, trading companies, or buyers for their export marketing at the early stages of their export development.a' That FTZ export marketing for Dominican Republic firms is done mainly by foreign companies is not surpring. The challenge is: how can exporters speed up the process of learning export marketing so as to involve themselves more actively In export marketing channels? 4.60 Joint ventures: As of now, the learning opportunities for export marketing appear to be much smaller than those for production processing and factory management. This is mainly because the curent export marketing channels of the FMs are dominated by foreign companies relying on non-arms- length trade and buyers. A strategy may be needed to encourage joint ventures with foreign firms that do not rely on captive marketing networks dominated by affiliates, buyers, or subcontractor companies overseas.e 4.61 Arms-length Trade. Switching gradually from subcontracting to arms-length deals for exporting finished goods and importing raw materials and intenmediate inputs would not only increase firms' profitability but increase the opportunities to learn export marketing. Initially, such a switch would require marketing agreement-type collaboration with foreign companies. 4/ see Ktiee, Ross-Lason ana rurseii (i9W4) and Knee (1Ny). 1/ While 10 out of 11 sample D.R. firms in the F1Z rely exclusively on subcontracting from U.S. firms, this provides the least opportunity to learn external marketing, even though technical learning about final stage manufacturing and factory management are substantial. However, there is one encouraging case in our sample, a D.R. firm that does not rely on subcontracting apparently involves itself considerably in the export marketing channels. *36- 4.62 Integrated strategy. In designing a strategy to switch over from subcontracting-based exporting to arms-length deals for exporting flnished goods and imponing Inputs, an integrated strategy would be critical. First, importing inputs would require an effective foreign currency short-term import financing system. Second, for textiles, sourcing non-U.S.-made inputs may result in the loss of the 807 or 807A exemptions if the export market is U.S. Therefore, market diversfflication should be a key part of an Integrated strategy. It may sound ironical to stress market diversification as a strategy to deepen export marketng, but dealng with wider markets would be the best way to choose the most suitable marketing channels Third, for effective arms-length trade, the country must develop effective private agents, trading companies S/ See Rhee and Soulier (1989) for the effectiveness of Hong Kong trading companies in deepening Hong Kong's export marketing. - 37 - V. SELECTED CROSS-COUNTRY COMPARISON OF ETZs 5.01 Stwe It is not possible at this time to present micro results on FMZs other than for the Dominican Republc, this chapter compares the development of Mf7s in other selected economies, based on aggregate data and indirect information. The examples chosen are the other most successful LDC FTZ (Mauritius), the non-NIE Asian F1Z outlier (Malaysia), the non-NIE Asian giant with special economic zones (China), the Latin American FIZ outlier (Mexico), and the two most successful East Asian NlEs (Taiwan and Korea). While some argue that FM7.5 tend to evolve in a similar fashion across countries (UNIDO, 1988), the pattern of development actually depends on FTrZ policies and management and on the parallel export and foreign and domestic enterprise collaboration policies pursued by governments. The pattern of development also depends on initial domestic and international conditions that prevail while an economy is setting up an F7Z Our discussion will focus on growth patterns in F1Z employment and exports, the importance of FM7s for each country's exports, the pattern of ownership of FfZ enterprises, and the underlying equal footing export policies and infrastructure both inside and outside FlZs. Table 16 provides an overview of these indicators as of 1986 Comparable indicators (as of 1986) for the Dominican Republic are included in this table, even though they are discussed in Chapter IV based on our firm-level study and current data. A. Mauritius 5.02 The evolution of the Mauritius Free Trade Zone took place in three distinct phases. With the Export Processing Zone Act of 1970, the sector began to expand rapidly in a generaly favorable economic environment. By the end of 1976, 84 F1Z units were established, mainly in the textile industry. The second phase, from 1977 to 1982, was characterized by a slowdown in zone growth, attributable to the worldwide recession after the second oil price hike and the resulting decline in external demand for 'Mm products. In addition, the macro-economic policies and resulting wage increases made FZ exports less competitive. By the end of 1982, 118 firms were operating under the FIZ scheme. In phase three, starting in 1983, F1Z activites regained momentum, reinforced by integrated strategies begun by the government in 1979. The total number of enterprises operating in the Mauritian Ff7 by late 1989 was 543. The Mauritius exort processing sector has contributed significantly to the transformation of the Mauritian economy, which until a decade ago was characterized by high unemployment, inflation, and a substantial balance of payments defciL 5.03 Mauritius' scheme differs from other LDCs' FM7 in that 100% exporting firns located anywhere on the whole island enjoy equal footing export poLlesi, indluding free trade status based on the duty (and indir. ,t tax) exemption system (Taiwan and Korea also have this status for 100% and non-100% exporters). Nearly a third of the FfZ enterprises are located in industrial estates developed and managed publicly or privately (in 1987, approximately 20 public estates in addition to 11 major private estates). Many other esport manufacturing firms operate their factories in both urban and rural areas TOj L& COMPARISON OP SELECTED REWRBEN`AWIVE FM f Denemt Stwd + Ried& Inmkmpute. N6W of EoMo7 PIZ labiAl. FMi Eakupb _t O_ mnvaubmgl. omMp ftmm VIZ ofi of Eqd i A% of Totdl ONP per Fu VIZ Zts in Type of (I Tom zemma Capu Popud Taui,Wh Joist Da_c E9pi EMmmY FblMed OpBraas _eee ZU all 1le Eaplapud US1E MD md Guimt uEbcteo,i oB OECD Nib Veat. Osmebp M EiJ"i Mawi. 3973 23 PIZ 460 5203 780 Imb I 166% Ihmetuoad 26% 26% 2.0% 50,0% 35.8 35.5 (pl. beda (s3) j 21% NN) ma3a_ia 3971 n Vz 1.679 14.0 230 1, 1635 14.2% 7.% NW eW 2.6% 35.% 95% Q0S 5.0% 4DM (1M46 (11 (199 (119) ieanumme/ 17% (ISw ~~~~~~~~~~~~bon ,- ,~ , 190 FrM m 3 $ I U 11 gS IQ* tS.r33 *.. t a0 W* WS 143 7ff* 1_mlak. 3691" 13 m 321 "A% no0% 4 &9 61.3% 4.5% letw Pr 120* 464% 17.4% 5.0% 1132% 21.4% l330 (1965) (3I96) e"o 7.0% - 5.0% Taken to" 3 ViZ 24 4% S11 m0 G sU , _ ,S 1i (1396) iput.k i_70 2 Fm 60 21% 69* 3f30 431 WA0% 5% met 17.0% no% 28O% its 9.7% mabat 9.0% (1910) (139 Iocr Los UdJ mamA bdirm, " Inlet 3966 _ b t 6w 3_28. sfON mm - vm seiwVm* a be 110116K inks s*#W bodb 1, mU - Sued as data iputd Is TaWme 4-A .d ofB Aimacm L 11mm Jes-I of Cesumms Spede Repout, DO 20. 1968 raewd bmdeem 6w bmiema EAWAed. MUwidum Dab at VIZ Ipu,m I - mamdeWbtf md f1a' bdIu: Ial"el.ie Lab.. OMWUriWie Nations Cafteos Taammsdoada Cogrpdorea jIlli Emba - amule of .peat f beimmas ade OM of- blbed anTAk I oi Ammai L DIb m ON? p. apit mU popdhie 'elm mum WSi &A (3969 I) - 39 - 5.04 The predominant manufacturing in the Mauritius FTZ is in textiles. Garment and textile production currently accounts for 88% of total FIZ production (up from 52% a decade earlier, but relatively unchanged since 1986, see Table 16), followed by watches, jewelry and precious stones. Mostly due to the FTZ, the manufacturing sector now contributes 25% to GDP, compared to 15% in 1982. 5.05 Manufacturing employment in the Mauritius FTZ has exhibited an upward trend for most of the scheme's existence and has amounted to an average growth of 21 A7 per year over the period 1980- 87. Approximately 30% of the total labor force and 78% of the industrial labor force are employed in F1Z enterprises (as of 1986); at the end of 1987 this amounted to close to ",000 workers, of which over 80,000 were employed in the textile sector. In contrast to an unemployment rate of 23% in 1979, quasi-full employment has recently been attained and has resulted in average real wage increases of nearly 10% for the last two years. 5.06 FIZ export' earnings have grown from a share of 3% of total export eamings in 1971 to 15% in 1976, 37% in 1983, and 52.6% in 1986. In that final year the F1Z sector surpassed sugar production as the most important foreign exchange earner. Knitwear and garments have been the most dynamic indt3stries and acmunt for the majority of export earnings (80% of FTZ exports in 1986). Gross export earnings in 1987 amounted to USS540 million, up from US$460 million the previous year. 5.07 Preliminary evidence indicates that foreign enterprises played an important role as catalysts in Mauritius by bringing in production technology and mn agerial know-how embodied in foreign technicians and managers, in addition to capital inflows (Lim Fat, 1987). A possible indication of the skiUl acquisition by local workers and enterprises is the extent of equity ownership in the Mauritius FIZ This can be explained partly by the movement of former FTZ employees from foreign enterprises--where they received on-the-job training and gained experience--to small companies of their own. Encouraged by the public support scheme for small businesses, since 1984 most small-scale trading and industrial ventures providing inputs for FTZ firms have been owned locally. With respect to overall FlL investment, local equity holdings account for 50% of total equity capital, which is high compared to other countries' FTZ. A significant number of firms sta;ted out as joint ventures but subsequently came under local ownership. 5.38 There are also signs of positive trends in backward linkages. Such inputs as thread, knitted fabrics, and cardboard boxes have been supplied to the export processing sector by local firms, and some ancillary industries (producing buttons, ribbons, zip fasteners, etc) have sprung up. To accelerate the process of vertical integration, two weaving mills and two denim factories are undet zonstruction. Further vnucihilitiec enYit in the area of machine works maintenance. which is still orovided to most enterDrises from overseas. 5.09 Unfortunately, a clear understanding of the process by which foreign enterprises are instrumental in the transfer and diffusion of industrial know-how in Mauritius or elsewhere does not exist (ILO/UNCTC), 1988). Also, we need to know the micro level data on the ongoing process of extending hoArird lin2nGpe Thic oan necesitates further in-denth research tn examine firm-level dvnamic processes that underlie the impressive aggregate and structural performance summarized above. 5.10 To ensure equal footing export policies and infrastructure for all export activities on the whole island, the government has developed and implemented carefully prepared integrated strategies (Bheenick and Schapiro, 1989). The Mauritius Export Development and Investment Authority (MEDIA), 1,VPoinnmont Rank nf Mainnctin (MflR), Fim rrt CrediG uarantee Scheme. and Fxnort Credit Insurance Scheme are some of the institutions involved in the implementation of such strategies. Also, the government has encouraged private sector initiatives in FTZ development and management through such measures as the Industrial Building Investment Scheme. 5.11 Integrated strategies also have aimed at maidmizing the gains from foreign collaboration and !radi"a the industrial structure in a diversified and more skill-intensive dirertion (Financial Times. Julv 25, 1989). For example, the Export Services Zone Scheme of 1981 aud a recent offshore banking center -40- were designed to diversify F1Z export industries. The new Industrial Training Strategy aims at speeding up industrial skill acquisition. 5.12 The government's policy of wage restraint since the early 1980s, its macro stabilization policies, and an easilv trainable labor force with a verv hi-h literacv rate have contributed to maintaining very competitive real wages, measured in foreign currency. This is one of the critical factors for attracting foreign investment. In turn, duty- ana quota-free access to the European market (through such facilities as the Lom Convention) has resolved the external market access problem, which is another usual concern of foreign and domestic investors in export activities. Finally, the ethnic affinty of Sino-Mauritian with Hong Kong investors has contnbuted to the continuing inflow of investment. B. Malaysia 5.13 Malaysia's FMZs were legislated into existence by the 1971 Free Zone Act and thus belong to the first wave of FIZ establishments worldwide (along with those of Korea, Taiwan and Mauritius). In 1986, there were 11 FM7.s operating in Malaysia with a total of 269 finms. 5.14 Following the pattern of FIZ domination by one or two industries, the Malaysian F1Z sector has been dominated by the electronics industry. It accounts for roughly 75% of total FTIZ production, followed by the textile and garment industry with approximately 14%. 5.15 Malaysia is one of the leading countries for which the role of PlZs in their industrial exports is very significant. According to one source, the FTM' manufacturing exports accounted for more than half of total manufacturing exports (Waff, 1987) and 14% of total merchandise exports in 1982. FTZ employment as a share of total manufacturing employment has grown from &8% in 1982 to 23% in 1986. The FIZ share of new employment !n the manufacturing sector is estimated at more than 60%, higher than in all other countries with FIa. This dominant role of FMZs in Malaysia's exports is evidence of the FITZ administration's success in attracting DFI by providing equal footing export policies and supportive infrastructure. 5.16 As of 1988, most DFI in Malaysia's FlZs originated from Japan (M$1.2 billion), followed by Taiwan (with an investment of MS816 milion) and Singapore (MS533 million). The presence of foreign investors in Malaysian FTZs remains strong. In 1986, 45% of all enterprises in the zones were foreign- owned, while 50% were joint ventures, and only 5% were domesticaly owned. This contrasts with the higher .w-f 9* _ _- I. .-s --A*4XS^ -8X,. a" 5.17 Although the industrial export initiating role of Malaysia's FTZs has been remarkable, the tremendous externalities associated with manufactured exports have not been fully exploited.37 This is due to Malaysia's failure to design and implement complementary equal footing policy and infrastructure measures outside FTZs and its insufficient efforts to maximize the gains from foreign collaboration. The g>_._ ^C ~' ,95Mcn L r g-tcn1u I -trus IvIdb ir'4 iiutautnuu Ult= proviems. ii proposea policy reforms to provide equal footing export policies for non-FlZ export activities and promote backward linkages, domestic skill formation, and effective acquisition of foreign technology (UNIDO, 1985). ,2/ The lack of backward linkages is evident, for instance, in a domestic input usage rate of only 3.6% for 1982, implying that the majority of raw materialq and mpnitAl goxs were imported. Value- added in 1982 was 22% in the electronics industry, the predominant industrial sector in Malaysia. - 41 - C. China ' 5.18 China's Special Economic Zones (SEZs) were established by the government in the 1980 as an integral part of the post-Maoist open-door economic policy reform (late 1970s). Four SEZs now exist: the three cities of Guangdong province (Shenzhen, across from Hong Kong; Zhuhai, close to Macao; and Shantou) and Ziamen in Fujian province (on the coast directly opposite Taiwan). These locations iuidicate the special relationship between the Chinese SEZs and the two NIEs, Taiwan and Hong Kong. 5.19 Chinese SEZs differ from conventional free trade zones in that they are geographically wider economic enclaves, experimental in character, where free-market mechanisms operate under the control of a socialist state and in an otherwise heavily distorted policy environment. China, with a population of over a billion and the lowest per capita income of the seven economies included in this comparison, found it necessary to open its economy to reverse the country's slow economic growth. SEZs, through DFI, were seen as a means of providing a limited opening for international economic and technical cooperation. They would provide a demonstration impact on the rest of the nation. In turn, the SEZs would play a key role gathering information from industrial countries. Production of Industrial goods for export is only part of the SEZs' activities, unlike most FTZs in other developing countries. For instance, in Shenzhen, the largest SEZ, only 13% of DFI was in the manufacturing subsector in 1984, while two-thirds was in real estate development and tourism projects. 5.20 In 1988, approximately 2,500 foreign enterprises were operating in the four SEZs with a combined investment of I JSS v 4 hillion. This constitutes approximately one-quarter of total DFI in China. DFI originates primarily from Hong Kong and Taiwan, and much of it constitutes investment by Chinese nationals living abroad. Common forms of foreign business cooperation include joint ventures (approximately 50%), contractual investment, subcontracting, and compensatory trade. Hong Kong and Taiwan also represent important export markets, and in some instances there has been effective relocation of labor-intensive production processes from Hong Kong and Taiwan to the Chinese SEZs, where labor unit costs are significantly lower. For instance, industrial parts may be manufactured in Hong Kong, exported to Shenzhen for assembly, then re-exported to Hong Kong. 5.21 SEZ exports amounted to U3$2.8 billion in 1988, corresponding to approximately 5% of China's total merchandise exports. Industrial branches represented in China's SEZs include electronics assembly, apparel, leather and footwear, metal, plastics and toys. These are similar to the low-technology, liobt mantilfctIlrino indtLstries set un in Korea. Taiwan and Hone Kone in the 1960s. Thus, China, along with other low-wage LDCs that more recen!ly have adopted the F1Z approach, are taking on the production of labor-intensive exports while Taiwan, Korea and Hong Kong are moving into export products requiring higher levels of technology, such as engineering, aircraft assembly, etc. 5.22 China's attractiveness to foreign investors comes from the low wages in the SEZs, which ro a frai.tinn of w:ees in NIEs. However. energv shortages. inadenuate telecommunications. and an inadequate policy environment are constraints. In particular, the policy regime, which is not so liberal as in Mauritius or the Dominican Republic, for instance, and the lack of private enterprise initiatives in FTZ development are hindering the further rapid development of SEZs and manufactured exports in China. D. Mexico 5.23 Approximately 90% of Mexico's Fls, called maquiladras, are in immediate proximity to their most important export market, the United States. In 1986, there were 1,076 firms, the majority located along the US/Mexican border. These enterprises employed close to 300,000 workers, which represents 3/ Note that unly the four SEZs are treated here; excluded are the 14 coastal cities and Hainan Province. - 42 - spectrum of ecDnomets in terms of the importance of FTZs to the domestic manufacturing sector, with a higher share than in Korea and Taiwan but a significantly lower share than in Mauritius. 5.24 Tne ownership structure of maquildora firms reflects a typical pattern, comparable to other ecouioudes in uded i is comparison, with th exception of Korea and Taiwan (where domestic partcipation In equity is higher): 44% of maquia d rms are entirely foreign-owned, while 18% are joint ventures of forcign and Mexican investors, and 30% whoiLy Mexdcan-owned (World Bank, 1988). Most direct foreign Investment is of US. origi Attracted by very low labor costs, U.S. manufacturers have moved labor-intensive parts of their production activities to Mexico to take advantage of U.S. tariff secions 8063,W07. These allow duty-free re-entty for the US.-manufactured value of the maquiadora goods. For 197, 41.4% of Mexdcan exports to the U.S. are believed to have fallen into this category, up from 29% in 1985 (Ehrenthal and Newman, 1968). 5.25 The predominant maquildora industries are clecrical machinery and transport equipment. As with Korea and Taiwan at an earler time, the trend is from the assembly of components to increasingly high-tech manufacturing processing, thus providing better exposure to more sophisticated industrial production activities (World Bank 1988b). Furthermore, there is evidence that foreign technicians and managers are increasingly being replaced by Mexicans as the Istter accumulate experience in the FMZs. Similarly, there has been a movement of Mexican engineers and manages from the maquiladora into the domestic manufacturing sector. 5.26 Even though the Mexican FIZ contribution to the rest of the economy in terms of employment is smaller than is typical for many other economies with FM7, its impact has been considerable for export earnings: in 1987, the maquiadara sector accounted for almost half of Mexico's exports to the United States; and its contribution to the balance of payments, with net aport earnings of USS1.8 bDllion in 1986, exceeded that of one of the two historically predominant foreign exchange earners, namely tourism. 5.27 Low and falling unit labor costs in real terms sin e 1977 (except for 1981/82), compared to high and rapidly rising wages in such economies as Korea, Hong Kong and Taiwan over the same time, plus adequate Infastructure and direct proximity to the U.S., have made Mexico a very attractive location for U.S. investmenL In addition, recent growth in the maquildora sector can be attributed to such policy reforms as libelation of foreign exchange retention (1983) and domestic ownership requirements (1984). Furthermore, the Mexican government passed a law (1983) that allows the sale of up to 20% of maquila- produced manufactures to the domestic market, under the condition that the goods contain at least 15% itiai wate.LL Tis- opens up an important marxet to u.s. manutacturers. In addition, debt-equity swaps have been permitted since 1986, resulting in an increase in DFI Inflows to the maquila industry (Ehrenthal and Newman, 1988). 5.28 Traditionally, local resourcing has been minimal (1% in 1986), but there appears to be evidence of backward Unkages developing between the domestic manufacturing and the maquiladora sectors. L uc govemment fas taken steps to rationalize the non-FrL export policy regime, giving local industries incentives tO become involved in production activities related to exporting from the maquiladora. A 20% domestic sales allowance for commodities produced in border FMZ might also lead to increased reliance on domestic inputs. This is because a 15% local input coatent clause applies to such sales. To promote the further integration of the FIZ sector into the domestic manufacturing industry, the government is encouraging the movement of maquiladora firms from the border to the interior of the country, where strctural unemployment as historically much higher (in 1967 a mere 11% of F1Z firms were located in the interior states) and wages much lower. As border maquiladoras ba started the transition into more sophisticated industrial processing (assembling computer parts and other high-tech components using state- of-the-art production equipment in some cases), the unskilled or semi-skilled labor-intensive production processes might effectively relocate to the interior. * 43. 529 The Mexican government's recent proposition to enter into a free-trade agreement with the U.S. may in part reflect the confidence gained and export capability acquired through 25 years of maquilado.a experience. E. kiata 5.30 Tahwan Provine, with three F -Kaoshing, Nantze, and Taichung-and one Science Park, (Hsinchu, establshed I 1980), was one of the fist developing economies to use FIz as a policy instrument for outward-oriented development Its first FlZ was establshed In 1966; by 1987 there were 254 enterprises located in the three Fl7i employing approximately 94,500 workes 531 Electronics and textles/garments were the predominant industrial sectors in Taiwan's FlMs. Within these industries, Taiwan progressed from cheap labor-intensive assembly to sophisticated manufacturing particularly in electronics. The science park at Hsinchu is evidence of the new emphasis on research and development as welL 532 Increasingly high-tech industrial actity is reflected indirectly in the growth rate of FTZ employment: 1.2% anzsualy from 198146. Thuw, Taiwan shows the slowest F1Z employment growth of the wcoomks oompared in this sectio This late Is also idicative of the relocation cf labor-intensive production prooes to FT in lwer-wage countrie, such as China and Malaysia, in the 1980s. 5.33 Talwan'i FMT wem part of a package of equal footing export policy and infrastructure measures implemented in the late 195Ss (the sclled 19-point reforms) aimed at instituting an outward- oriented development strate8y. Tle intention was to solicit foreign enterprise involvement for export producton and sales, primarily as direct investment. Howver, unlike most LDCs attempting to initiate entry into the world market, Taiwan already had considerable capacity for exporting manufiacurwd guU& Ths was beuse merchants and Indusialbts had acquired industrial skldls during the Japanese colonial period, when Taf".e was initiating its outward-oriented deelopment strateg (Rhee, 1989a). By 1962, four years before the first FIZ eisted, Taiwan's share of manufactured products in total exports had reached 50%, from less than 10% in the early 19506. Two years after the Nantze and Taichung zones were established, the share of industrial exports in the country's total exports had climbed to 80% (C-Mh Hou, 1987). 5.34 When Taiwan established the FMZs as part of Its equal footing export policy and infastructure measures, It was not lnown how effective other equal footing export policy measures-that is, outside the FIMs, such as BMWs, duty exemption and duty drawback schemes=-would becoe It turned out that these other measures were indeed effective in ensuring equal footing objectives. Foreign col- laboration in export activities other than direct inmvstment in FMT has been effective as well In turn, susful industrialiation based on Ught manufactured exports has pushed the economy's export structure in a more technology-intensive direction. Consequently, in contrast to some other countries, Taiwans FI zs have acieved their original objecives successfully-despite the share of FIZ exports in total manufactured exports being relatively small (6.4% in 1987). The proportion of FIZ employment in total manufacturing employment in the mid-1980s was compartively low as wel, 4.8%. 5.35 Taiwan provides an example for achieving significant backward Unkages through both FTZ and non-FIZ expors. This has to be seen in the context of the economy's maturing industrial development under the equal footing export policy and infrastructure regimes-for aU export activities. Such policies ensured the internatonal competitveness of domestic production of Inputs for export production, both inside and outside the FITs. Evidence of the existence of ;backward linkages comes from the indirect employment effects: It Is believed that for evefy five jobs created in the FIs, one job was created in the local supply industries (International Textile, Garment, Leather Workers Federation, 1983). - 44 - F. Korea 5.36 Uke Taiwan, Korea established two free trade zones in the early 197uk, Masan (1970) and Iri (1974), as part of its DFI promotion and as a result of its equal footing axport policy and infrastructure measures of the mid-1960s. Typically, one industrial sub-sector prevails in each FIZ In Masan, the predominant Industry is electronics and electric goods, while in the Iri FIZ garment and textile enterprises are predominant. In Masan, investment is mostly of Japanese origin (83% of total investment), with Korean ownership second (11%), U.S. investment third (4%), and the remainder from other sources. Joint ventures comprise 16% of total investment. For the hi FTZ, domestic equity participation is higher: as of 1986, 57.5% of cumulative FrZZ investment was of Korean origin. In both zones combined, the share of domestic investment in total FI1Z investment had reached 26% as of mid-1985 (Healy and Luetkenhorst, 1989). 537 Employment in the zones in 1986 was close to 36,000, less than 1% of Korea's total manufacturing employment, making the FIZ contribution to employment rather negligible compared to other eonomies included in this review. Total manufacturing exports from the zones in 1986 amounted to US$460 million, representing 2.8% of Korea's total manufacturing exports. This also provides evidence of the minor role the FIZ sector has played in the countrys outward-oriented industrial development compared to some other economies. As a point of reference, the share of FIM in total manufacturing exports in Mauritius was 52.6% in 1986 and that of the Dominican Republic 44.6%. With an average annual growth rate of 186% in the decade after 1975, export growth of the Masan F7Z, for instance, has lagged behind the national manufacturing export growth rate of 24% per year over the same period. This also distin- guishes Korea from other developing countries in which the FTZ manufacturing sector has been the engine of export growth. 5.38 Also like Taiwan, the relatively minor role of Korea's FM in its export growth was ensured a a r;sult of Korea's already favorable export conditions, its successful equal footing export policy, its supporting infrastructure, and Its successful Ught manufactured export-oriented growth. Similarly, Korea already had considerable export capacity because of its collaboration with Japanese industrialists during the colonial period. Korean entrepreneurs also had picked up expertise through contacts with the U.S. military ifter 1945, at the time Korea was initiating its outward-oriented development strategy. Foreign collaboration in Korea's export activities has taken diversified forms other than direct investment in the FMZs. Korea's outstanding economic performance has resulted in the structural transformation of its industry and export base to a more technology-intensive mode, making FTZ-type processing less attractive. 539 Due to Korea's success with Its equal footing policy and infrastructure regimes--for all export value-added-generating activities (including those of indirect exporters)-FTs in Korea have not remained isolated enclaves with respect to the formation of backward linkages. Domestic sourcing of raw materials amounted to iore than 30% in 1985, and subcontracting arrangements, as measured in the outzone processing ratio,V to an average 21.4% in 1985 (UNIDO, 1989). Despite the absence of local content requirements, the local value of production for the Masan vJZ, for instance, measured more than 50% of the total export value. This is outstanding compared to the performance of other economies' FMZs. 5.40 Thus, because their initial conditions were more favorable than are those of most LDCs currently, FTZ development in both Korea and Taiwan has differed greatly from the experience of others reviewed here. For examples, for the period 1981-1986, Korea had growth in FIZZ employment of 2.8%, while that of Taiwan was even lower, at 1.2%. Korea's exports from F1Ms grew at a rate of 9.7% over this same penoa compared to the more rapid growth of over 10% for other economies with FMZs. Finally, it is worthwhile to reaffirm that the minor contribution of the FIM of Korea and Taiwan toward their export growth, compared to other LDCs, was not because these zones were ineffective. Instead, other, parallel, instruments were effectively used for export growth, supported by the legacies of collaboration with foreign enterprises that bro'ight in industrial skills. 39/ The outzone processing ratio is defined as the share of outzone labor payments in total labor payments by F1ZZ firms. - 45- VI. CONCLUSION 6.01 Review of the available aggregate data on cross-country trends reveals that since the mid- 19Stb there h!vs been S qioniff'nt increase in LDC interest in FMz as well as F-centered foreign and domestic collaboration in manufactured exports. Tbis trend is an encouraging sign despite the continuing frustration of many LDCs because of their failure to start the significant supply responses needed to enter the world market for industrial goods. 6.02 The interim findings of our firm-level study-in-progress of the Dominican Republic FMZs confirm our earlier conmiction that the only way to determine the role of FM in industrial development is to analyze the development process at the factory floor-level and in the export salesroom of several successful and unsuccessful FM. Thus, we have to wait for the completion of a proposed study on a few more FMIZ (and other types of foreign and domestic oDllaboration in LDC export activities). The following are preliminary lessons gleaned from the interim findings of the Dominican Republic FIZ study as well as the review of aggregate data on FM. A. Sequencing of the Industrial Development Process 6.03 Forenp coflboraton. One of the feasible ways for an LDC to achieve the short-term objective of increasing foreign exchange is through early collabortion between foreign and domestic enterprises in an FIZ Various forms of collaboration for export production and sales in FIX include (i) 100%i0 DFI; (ii) joint ventures; (iii) 1O00 domestic investment with subcontract agreements; and (iv) 100% domestic investment with technical, marketing, or managerial agreements. Most foreign collaboration in the Dominican Republic FMZ has involved (i) and (iii). In fact, allowing 100% foreign or domestic investment in FMZz is a desirable policy for LDCs. 6.04 Start-up of manuftured expot Many foreign export catalysts (in FIM) have been able to pioneer manufactured exports from LDCs because of their many years of experience in parent companies and in the world market. Futher, the catalytic elements brought in by foreign collaborators, and which are equally important for ma t expors, are: (a) managerial, technical and marketing know-how; (b) established oversea market networks; and (c) the capacity to package (a) and (b) with foreign or local capital and local labor resources Foreigl equity invoWlvement is good for a capital-poor country but can be considered less critical tha (a), (b), and (c). 6.05 Humn rusowee development. Significant human resource development in FMZz occurs in the management offices and on the factory floors (and export sales rooms but only in a moderate way). This occurs through foreigl coUlaboration, on-the-job raining, and learning-by-doing, Empirical evidence for human resource development is confirmed by labor productivity learning curve estimates and the Dominican Republic's impressive records of replacing foreign personnel with local managers and technical personnel. iYAulUV¢A, bk&W WU4JA& "b ut UOn OA' oarclga 'A AAW IU 4" Ua..W :a' *^.O4.S., private enterprise development by enhancing private firms' capacity to compete in the world market 6.06 Intial stge of lndusi development. The above sequence-of foreign collaboration, start- up of manufactured exports, and human resource and private sector development in final-stage processing of light manufactured goods-has been the first stage of industrial development in most industrialized cuunuicb and h4E. One diffeieiiw between thse countries and low-income LDCs appears to be that the former followed a similar sequence without relying extensively on such instruments as the FTZ and their transition to the next stage was rapid. In any event, in assessing the contribution of the FIZ to an LDCs development, this aspect of initiating industrial development in an outward-oriented direction should be seen beyond the short-term objecive of earning foreign exchange and generating employment. .46- 6.07 Deepening the Industrial suure and e3port Maketg One challenge for succssl FM7, such as in the Domincan Republic, is how to deepen the industrial structure through bakard linkages, inWgated production activities, and skill tramsfr to boal fims ouside the PZLs Effecte ImplmentatIon of equal footing export polcies for all export activities (dit and indrect) ou the FTZl market dfverification (to such markets as the EEC). and r on of domstic IndustrfIs are some of the measures needed. Another chalenge is how to deepen the expor marketg stucture, wch is dominated by forcign companies subcontractng to loal firms in the FTZ7 To shift from the position of subcontrators to that of arms-length trade in exports and Impo an integated sue Is needad encouragliag joint ventures with foreign companies that rel on arns-ngh trde, ~tAbdfg Import financang for export production, achieving market divscatin ad developing trding companles 1 Sequendcig of Industral Development Policies 6.08 E_ua boti export polides Inside Ff. Such poLcies make up the minmly required policy enironmeat for export activities and foreigl Investment. For many LD, the F1Z may be the most feasible tument to ensure free trade within a short perod. Comparig the effeaiveness of the various cIcwfus of lhe equal footing expot policies in the Dominan Republic F7 with those in othe FMl is vehy Instructive. The most effectie element in the lominin Republic P1Z appeas to be the =o4f*e. foreig eang_ e _mhms (except bfr the loal cost components) Fim ae allowed to deposit al forei curen earings in foreig aCcounts (whicsh iequialet to atiat of proft). On their domestic costs have to be conved Into local auncy at the offal excha rate Many FM in other LDCs do not appear to enjoy a similarly lberal regime Other export poLces that appeal to investors in th Domima Republic are: speed of mvement lcnsing length and level of tax incentives, and reasonable labor code. Surprisingly, some exporters complain about the speed of the procedures for the re trade ifow of imported mateal and outflow of eport mmodities Even thugh the Domini Republcs administative procedures have the reputation for beig among the most moden and streamlHed of any FIZ the complaints may refect foreig ivestors' demands Or ev higher standards of import 6.09 For domestic fims, however, no system has beea established to esure equal footiag for orein urency import fincag and for access to foreign echange to impor raW materiL Curetly, due to cal fims' exclusive reliance on subcontacting arrangements, the impact of these deftinde is minimal !-tno r :12M.4: e b aow.- th-at in the Dominican RepubUc, the laure to provid equal foodt export polics outside the FI7s, compounded by poor local power gneratin be mate ft diMcult for FIZ fims to obtain locally produced tladable inputs and non-badable inputs at wrid maet prices. These diffcutis appear to be quite common in most FM in other LDQ as we (except for the Mauritlus FFZ) 6.11 Equa fooig export pdkies outme M The Dominican Republic ha readced the point - ...".. prioriyW toi ioplcmcaUIi(uUa-Dl aPuK pw>m kw an epr activities outide FM1 effciently. Th. Is the area in which there has been a madrd difrce bet NIB FI and the Fl; in many LDCsI The NIs' suces in the effective implementatiof the equal footing export policies both inside and outside the FM, dght from the beginning of their FM2s, haS boee a{tical Ibr the extensive backard linkages from FITZ and non-FrZ exps and for the success of their outward-oriented develpment strategies Hower, providing an equal footing export poliy regime at least inside FIT "*h e1 shor: pcro le d4- i;i an LDCk of admnstaIve efv- --y mTs it difcult t implement a similar regime for export activities outside FM Immediately. - 47- C. Construction and Management of Infrastructure, Zone Site, and Factory and Service Buildings for FTZ 6.12 The concept of an equal footing ifrastructure for FIZ firms (discussed in Chapter 11) means that an exporter, whether inside or outside an FIZ, would find it difficult to compete in the world market unless infrastructure and services are equivalent to what foreign compedtors receive. Our study of the Dominican Republic reveals that such basic infrastructure- airports, sea ports, major road transport, and major communrmatdon faciUties, which are critical for shipping export commodities and input materials on a timely basis--is not zone-specific in terms of construction and management. In choosing locations for FTZs (whether public or private), the proximity of these facilities, as well as worker population centers, has been the most important factor. FTZ developers' tasks have been to construct only zone site and factory and service buildings. Even the power supply comes from outside the FTZs. Thus, current serious deficiencies in the energy supply to FrZ factories are a national problem that affects all export activity. 6.13 Therefore, one of the major criticisms directed against the F1Z as a poicy tool-noting, for example, the serious infrastructure failures of the Bataan FlIZ in the Philippines-is grossly misplaced.'M The inrastructure deficiency actually stems from overall failure by authorities to provide such services economy- wide. Locating export manufacturing facilities in inaccessible areas has nothing to do with the FlZ as a polly tooL The FTZ is a policy tool ensuring equal footing export policies inside a controlled area, whereas free trade status for fims outside the zones means attempting to provide similar policies cutside a controlled area. But adequate infastructure has to be ensured in both cases. &14 One cf the important lessons from the Dominican Republic FIZ development and operation is the concept of private development of zones and private managementL Construction of a zone site, including factory and service buildings, management of the facilities, and charging market rents and service fees, are a real estate function or service For LDCs this approach would reduce the risk of mismanagement of public F1Z operations, a situation all too frequent in LDCs. Another innovation of the D.R. FTZ development practice is the construction of factory building only after obtaining long-term contracts with investors. FTZ rental preferences are not a factor in attracting foreign and domestic investors-investors are willing to pay market prices for good facilities and good services. This private sector-oriented approach to F!Z site development and management is possible, but only if the basic infrastructure both inside and outside FMY is handled by the public sector on a national scale. Fnally, one of the innovative policies designed to stimulate the private sector involvement in FlI. development and management is to extend the eaual footing export policies to zone development and management activities. D. E Investor Inducement 6.15 The following are the key factors determining the inflow of foreign investment into FM7s: (e, wages (measured in foreign curre-cy) r*f40it 1.nif ef !?- (b) easy access to the external market; (c) equal footing export policies and some additional incentives; (d) equal footing infastructure at proper market prices; (e) low political and other risk taking; (f) good business and working environmenL g,Q/ See Waff (1987a). lTe Bataan FlZ is located in a mountainous area located 100 miles from Manila. Because the zone was unable to handle container vessels, the majority of goods had to be shipped to Manila port by poor road transpot Akc a result, the zinne cnuk not attract many foreign investors. -48- The failure of many FlZs in LDCs to attract foreign investors is more or less related to these elenments. In fact, the faiture to ensure these elements discourages foren collaboration in LDC export activities in any cae, not withstanding the viabiflty of FPus Here aain, it should be noted that such failures are not unique to the FIZ as a policy tooL If any LDC policy-makers considers the FIM - "magic tool to attract forign investor, they should be awe that FM are sucossful only when and if all of the above elements are presentL * 49 - REFERENCES Balassa, BeL~ t1lW, *'?p.nr*^ of Trde for Developing Counies," DRD Discussion Paper. Report No. DRD. Washington, D.C.: The World Bank. Bhagwatl Jagdish (1987). 'Outward-Orientation: Trade Lssues,* in Growth-Oriented Pro Em. Vitorio Corbo, Morris Goldstein and Moshin Khan (ed.) Washington, D.C.: International Monetary Fund and The World Bank. Basile, Antoine and Dimitri Germidis (1984). Investin; in Free Export Processing Zones. Paris: OECD. Bheenick, Rundheersing and Morton. 0. Schapiro (1989). 'Mauritius: A Case Study of the Export Processing Zone,' in: Successful Development in Africa: Case Studies of Projects and Policies. EDI Development Policy Case Series, Analytical Case Studies No. 1. World Bank, Washington, D.C. 'Caribbean Basin FMY Offer Low-Cost Production and Entries to New Markets, TBusiness Latin America. February 2, 1987 pp. 35-37. 'China's Economic Zone Innovators Reassess After Beijing TurmoiV Washington Post, June 29, 1989. Economic and Social Commiion fui A.ia aud tlie Pacir.c (1985). "An Evaluation of the Role of Transnational Corporations and Export Processing Zones in Selected Countries in Asia Working Paper, July 1985. Processed. Ehrenthal, David and Joseph Newman (1988). Explaining Mexico's Maquila Boom'. SAIS Review 8(1988): 189-211. Tne Flagstaff Institute (1986). Journal of the Flastaff Institute No. 1, VoL X March 1986. Foreign Trade Zones Around the World,' (1989). Journal of Commerce Special Rej ort October 28, 1988 p. 1A, 7A, 9A, 11A. rluf., & Vlaw, Juicgeit Heinricbs and Otto Kree (1988). 'Eport Processing Zones in Developing Countries: Results of a New Survey," Working Paper No. 43. Geneva: International Labor Offlce, 1987. Froebel, Folker, Juergen Heinrichs and Otto Krye (1986). 'Umbruch in der WelchafL' Rowoblt Verlag, Hamburg. Grunwald, Joseph and Kenneth Flamm (1985). The Global Factory. Washington, D.C: The Brookings Institution. Harden, Blaine (1988). 'Offshore Jobs Dynamo Offers Model For Africa,' The Washinton Post, October 9, 1989. Healey, Derek and Wilfried Luetkenhorst (1989). Export Processing Zones: The Case of the Republic of Korea.' Industry and Develogment 26(1989): 156. Vienna: UNIDO. Holmes, Paula and Paul Meo (1988). 'EPZs in Developing Countries: A Global View.' The World Bank, December 1988. Processed. Hou, Chi-Ming (1987). "Strategy for Industrial Development.' Industry of Free China. Vol. LXVIII, No. 4. Taiwan: Council for Economic Planning and Development. International Textile, Ganment aud Lealibe Workets Feclwaiiuu, (i983). Smiiiar on Asian FT2Zs, Part 11, Country Reports (Tokyo, ITGLWF, March 1983, mimeo). Investment Promotion Council of the Dominican Republic (IPC) (1988). Investment Opportunity Free Zones in the Dominican Republic. September 1988. Karp, Phil E. (1989). 'Free Zone Experiences in the Caribbean and Central America: Implications for Africa.' Paper delivered at the FLAS Conference on Investment Promotion in Africa. Washington, D.C. September 20, 1989. Kim, Jong-Nam (1986). "Business Activities in the Korean Export Processing Zones." Seoul, Ministry of Trade and Industry. Lim Fat, Edouard (1987). wThe Mauritius Export Processing Zone." Paper presented at the Enterprise Symposium, UNCTAD VII, Geneva. Long, Frank (1987). "'New Exports of the Caribbean to the International Economy,' Development Policy Review Vol. 5, No. 1, 1987 pp. 63-72. Mauritius Export Development and Investment Authority (MEDIA) (1989). 'Mauritius - Your Profit Center." Oborne, Michael '1986). China's Special Economic Zones. Paris: Organization for Economic Co-operation and Developrrent, 1986. Olle, Werner and Nam-Young Choi, Institute for Scientific Cooperation (1988). 'Special Economic Zones in the People's Republic of China: Taking Stock of the Initial Phase 1980-85." Economics, a Biannual Collection of Recent German Contributions to the Field of Economic Science Vol. 38. p. 113. Metzingen: Georg Hauser, 1988. v,r, YungWiii-zW (i39a). -Managing Entry into international Markets: Lessons from the East Aian Experience." Industry and Energy Department Working Paper. Indnstry Series Paper No. 11. Washington, D.C.: The World Bank. Rhee, Yung-Whee (1989b). Trade Finance in Developing Countries. Policy and Research Series, No. 5, Policy, Planning and Research, The World Bank. Rhee, Yung-Whee and Christine Soulier (1989). 'Small Trading Companies and a Successful Export Response: Lessons from Hong Kong,' Industry Series Paper No. 16, Industry and Energy Department, The World Bank. Rhee, Yung-Whee and The:6se Belot (1990). 'Export Catalysts in Low-Income Countries.' World Bank Discussion Paper No. -r. wasnmgton, D. C.: The World Bank Rodriguez, Arelis (1988). 'Impact of the Free Zones on Female Employment and Entrepreneur Development in the Dominican Republic," Tle World Bank. Rubin, Steven M. (1988). Tax-Free Exporting Zones. A User's Mai.ual Special Report No. 1135. London: The Economist Publications, July 1988. - S1 - Spinanger, Dean (1984). "Objectives and Impact of Economic Activity Zones - Some Evidence from Asia Weltwirschaftliches Archiv Band 20, Heft 1 (1984): 64-89. United Nations Center on Transnational Corporations (UNCTC)Ilnternational Labor Organization (ILO) (1988). Economic and Social Effects of Multinational Enterprises in Export Processin-a Zones. Geneva: International Labor Office, 1988 United Nations Industrial Development Organization (UNIDO) (1985). 'Medium and Long-Term Industrial Master Plan - Malaysia 1S!41995.' Vienna: UNIDO. United Nations Industrial Development Organization (UNIDO), Regional and Country Studies Branch, Industrial PoUcy and Perspectives Division (1988). 'Export Processing Zones in Transition, The Case of the Republic of Korea, June 1988 United Nations Center on Transnational Corporations (UNCTC) (1988). Transnational Corporations In World Development. Trends and Prosuec New York: United Nations Press, 1988. Unized Nations Conference on Trade and Development (UNCrAD) (1985). 'Export Processing Zones in Developing Countries: Implications for Trade and Industrialization Policies.' New York: United Nations 1985. Warf, Peter, 0. (1983). 'he Jakarta Export Processing Zone: Benefits and Costs." Bulletin of Indonesian Economics Studies VoL XIX No. 3, December 1983. War, Peter, 0. (1987a). "'Eport Promotion via Industrial Enclaves: The Philippines' Bataan Export Processing Zone,' The Journal of Development Studies January 1987, pp. 220-241. Warr, Peter 0. (1987b). 'Malaysia's Industrial Enclaves: Benefits and Cost,' The Developing Economies XXV-1. March 1987, pp. 30-55. Whiteley, Stark (1988). 'Dominican Republic, Jamaica Lead Way: Economic Growth Follows Development, Journal of Commerce Special Report, October 28, 1988. Whiteley, Stark (1988). 'Latin American Zones Suffering a Tough Year,' Journal of Commerce Special RC October 28, 1988, pp. SA, 12A. Whitmore, Katherine, Sanjaya Lall and Jung-Taik Hyun (1989). 'Foreign Direct Investment from the Newly Industrialized Economies.' Industry and Energy Department Working Paper. Industry Series Paper No. 22. lTe World Bank (1987). 'India - Export Development: A Proposed Strategy." Report No. 6663-IN. TMe World Bank (1988a). 'Jamaica, Kingston Free Zone Expansion Project,' Staff Appraisal Repor. Washington, D.C.: Th(e World Bank, March 4, 1988. The World Bank (1988b). 'Direct Foreign Investment in Mexico: Patterns and Future Strategy.' Report No. 7146-ME. The World Bank (1989a). 'Dominican Republic Industrial Free Zone Development Project,' Staff Appraisal Report, Report No. 7S19-DO. The World Bank (1989b). 'World Bank Atlas.' Washington, D.C: The World Bank. - 52 - - 53- ANNEX I Table 1: FREE TRADE ZONES WORLDWIDE No. of Economies No. of Year Country w/ FlZs Zones Zone Name Established Remarks AFRICA 7 25 GHANA I LIBERIA I Monrovia Ind. Free Zone 1971 LIBYA I Tripoli MALTA Various sites MAURITIUS 20 Various sites 1971 whole island is under free trade tatus SENEGAL 1 Dakar 1976 ZAIRE I ASIA 10 35 BANGLADESH 2 Chittagong 1980 Dacca (reserved) CHINA (4) SPECIAL EC )NOMIC 70NES 1980 (special economic zones) Xiamen/Fuijan Proince 1980 Shantou 1980 Shenzhen 1980 Zhuhai 1980 (14) 14 COASTAL CMES 1984 (coastal cities) Tinjin Dalian Shanghai Guangzhou Ningbo Qingdao Qinhuangdao Yantai Lianyungang Nantong Wenzbou Zhanjiang Behai (3) 3 TRIANGLES (Delta Econ. Areas) (Delta Econ. Areas) Si Fujian Yangtse (Chanjiang) Delta (4) 4 INLAND CMES (inland cities) FUI 1 1988 INDIA 6 Kandla (KAFIZ) 1965 Santa Cruz (SEEPZ) 1973 Cochin MaWdAd Noida (Delhi) Falts (CaIutta) INDONESIA S Tanjung Priok 1973 Central Jakarta 1986 BaLam Island 1978 * Surabaya (resered) * Sabang (reserved) KUKLtA I Masan iv-iu wauic coumny is unue: iree irauc sarus Iri 1974 -54- ANNEX I TA 1: (Contd.) No. at EcBaowi No. of Year Counby WI Fl. Zoneo Zone Name Bstoahed Remah MALAYSIA 11 Peang- Bvan IA_ 172 Peang - Prai 1971 Penng - PM Wh.at 1972 Penang * Pulbu JerJk 1972 Selngor-Ampang Ulu Kong 1973 Sebngor *Sunpi Way Subung 1974 Selngor * Telok Pangilina Gaang 1975 Jobore-Pasir Gudang 1974 Jobore - Senai 2977 Mctaha-Batu Berandm 1973 Mecl - Tanjung KIlm 1973 PHILIPPINES 5 Batson (cental Lazn) 1972 Maan Ilnd (C Vly") 1979 Bagu aty (N Lun) 1979 CaAte 1983 * Dmvao CDay SRI LANKA 2 Byagama EPZ 1977 Katunxske Intnl Alrpn TAIWAN PROVINCE 3 Kacabn 1966 Nantze 1970 Takchung 1971 (I) Hsinchu Science Pa 1960 (siene potk) THAnIAND 3 Minbul1 (Let Kamb") 1982 *LA ChaboS 1990 (1) Northen Re. Ind. eat, LAmplom LATIN AMERICA 19 44 & CARIBBEAN ARGENTINA (15) Barmanquerm (ftre son atus) Buence Aire Conoandia Empedra4o Jujuy I- _ __ _. Mendoza Monte Cameras Paso de lo Ubh Pocitoa Rouaio (tree pon) Salta San Juan ,_3._ c.F . Esiza Intnl Airpnrt BAHAMAS 2 Grad Baama land (2) Freepon Free Zone * N- asu BARBADOS (11) vicu site (induiWl plf) BELIZE I Belize City BERMUDA I eland land (Frepon) BGL&-,w';A I Roaulo BRAZIL (1) Mians 1966 le 1- (Colltd.) No. of Bconomies No. ot Year Counity w/ Fr1Z Zoe Zome Name ElabWied Remairk CHILE 5 ifiqul * ~~~~Arca * Southern Zone Free Perimet * Punta Arem * Noebem Zone Free Perimeter COLOMEIA 10 Banhquila 1979 Buena tu 1981 Cal 1961 Carter"n 198 omte 1913 Santa MarIa 1964 * Aane * Pxrovdencis bland * San AndreB sland COSTA RICA 4 Metro Free Zone 1dti oad Office Part Zeta ndustri Park Crt40 (private) Coto 54 (agrplndustrlal) A6j" rac £Am Gi umu6sN r- ai (ie; - -ig1i,'ia 4e v 11/9) DON. REPUBLIC 19 La Roms 1969 (pivate, corprte San Pedro de Macors 1973 Santio 1974 (prIvat, non-prolit) Puerto Plaa 1983 (mIed) Itabo 1986 (priate, corporte o_nnenbltnat ent) Bani 1986 (prit, noprofit) San d"o 1966 (pivate, coqxte m _ t) La Romana 1 197 ivate corpote Ina t) La Vega 1987 Villa Aitagmcla 1988 8oBa0 1981 VMlla Mea 1918 (private cprate et) Nuam San Pedo de Maorb (Cteutc Free Zm) 1988 (pivate, non-Profit) Eqana 1988 (pivate. cosPMure) Las Ameris &= (pj u s San Fraaio de Maois 1969 Barabona 1969 MBca 1989 Halnamosa 1969 (prvae. Orport EL SALVADOR I San Bartolo 1974 GUATEMALA I Santo Tomas de Calo 1973 HAITI 2 Port-au-Prince Parque hndus Meropogine HONDURAS 1 Puerto Cwre FPZ 1976 (3) Vlianua Idstrl Pak 19S8 (industrial parks) San Podro Sb lad. Park 1968 Continta Iad. Park 1968 (private) JAMAICA 2 Post of Kint 1977 Moatep By 1986 MEXOCO (1) Maquiladoa (US-MEX Brder) (maqulldors) (iv) Faj cajia (utinaa paim) Nueva tLa TSMP Sollora adhuabus Cosataoalcos. (Puerto Mex) Salifua cnz -56- ANNEX I Table 1: (Contd.) t.n nf Economies No. of Year Countqy w/ F1M Zones Zone Name EAtablished Remarks NETHERLAND 2 Curacao ANTILLES Aruba NICARAGUA I Lau Mercedes Airpoti, Managua PANAMA 1 Colon Free Trade Zone PARAGUAY * 5 Concepcion * Encainucon * Asuncion 0 Villeta * Ciudad Presidenwe Stroeuner PERU * (2) Matarina (operations terminated) * Mollendo ST. LUCIA 2 Hewanorra Intn'l Airpoll (FTZ - problems) Vieux Forl Docks TRINIDAD * 4 4 FZ planned (pnv) & TOBAGO Point Lisas Ind Estate URUGUAY * 2 Colonia * Nueva Palmira VENEZUELA 3 Punto Fijo Margarita Island (duty-free for tourists) Paragasana EMENA 9 21 BAHRAIN 2 Mina Sulman * Sitra CYPRUS 2 Umassol (reserved) Lamnaca 1983 EGYPT 9 Port Said 1974 (Free zones) Nast City Public FZ 1974 Adabhya * Marsa * Cairo Alexandria 1974 Suez 1974 Ismailia 1974 JORDAN 4 Aqaba 1973 Zarka 1982 * Queen Alia Apt.(reserved) * laber-Jordan-Syria Border Zone LEBANON * 3 Beruit * Beruit City Tripoli MOKOCCO Dine Ftawutie ic TaMigC±t PAKISTAN 2 Karachi 1980 * Lahore (reeived) PORTUGAL ' I Madeira ROMANIA ' 1 Sulina SYRIA ARAB REP ' 6 Aleppo Tatous Lattakia * Damasus * Damascus Intn'l Airport * Adra * Deraa TUNISIA * 14 Megrine Ben Arous TURKEY 4 Antalya Mersin Adana/Yamutalec lIzmar (Bay on Nemrut) -57- ANNEX I Table 1: (Contd.) No. of Eeonomies No. of Year Country w FrZs Zones Zone Name FtablHshed Remarks UNllED ARAB EMIRATES 2 Jbel Ali (Dubai) 1985 Dubai Intnl Airport YEMEN (PDR) * 1 Aen YUGOSLAVIA * (9) Sezana * 8egrdg * NoA Sad * Kaper * R4JeRb * rZdar * SpJit * Ploec * Bar NORTh AMERICA 1 119 U.S. 119 communities Denotes uncertain operational status; F1Z is not included in total number of zones. () Denuies status diffexcat from Tr La& =rz. Main Souraes Information on FMTs in Afnca was obtained mainly fnm World Bank staf. Data on Latin American and Caribbean FMZs came from P. Karp, 1989, and S. Rubin, 198. Other Sourcm Krey, O., J. Helrichi and F. Froebel (1986). October 28,1988 edition of Joumal of Commerce Special Rept. "Foreigsl Tade Zones Amund the Word. Cammercal brcures from Dombiican Republic, Costa Ria, Saint Lucia, Jamaica, Honduras, Guatemala, Colombia, FPI Egypt, Cpus, Mauritius. Tab PRINCIPAL m S!C RS (by c.ploymet) Pood. Fooeaid PFinit 1msunuuu Year Gafmsb 8qe,g Leulber metal Wor . Tnmpor Rbber Pllic Opca PR Coy of DIgt Tailm Eleconics Tob.oD P wod Jewmby Cbemka1 Prodtt Pama Ptodt as Wasbes Equipset Podueo 00od MacM7 Podt S&om Matun 1965 tA% 21% 26% 1.2% 3.5% Seep 193 Tunisi 1976 "5.0% 120% Cina 1983 s X z Ind 1963 I 2a0 l1dogia 1979 x x x 1983 x KO1e 1966 10.0% 51f0 5.0% 17.0% 1.6% Matqula 1979 14.2% 745% 2.6% 1.3% 37% 1985 , a a a Pkist a ( ap c) PWilippna 1973 13.0% 47.0% 11.0% .0% 193D 43.0% 3.9% 82% 1.7% 102% 32% 1967 * * I SWipaw 1960 X x X 1593 7.0% 3X% Sri lak 1960 S0%* 5.0% 3.0% 1961 19.3% 20% 459% 13% Taiw" PuPce x x a (sp imso V oA pftr) i7Wlad I x I I x x * x Bermu z I s (Pfu_ ti Bmail 19S2 6.5% 401% 42% 102% 20% 6.8% 3.9% Colomba 1960 44.0% 9.0% 19.09* 19 t4 x x I a a x Coau Ris 2966 x x x x Do< ReputbI 1965 01.0% 5.0% 20% 120% S.3 1.6% 17% 1967 9.0% 6.0% 4 0% 10% 4.t% Jinicka 1968 5QSb M amo 160% 30.0% 9.0% 1964 1O.% 54.3% 20% &1% 14.% 1986 7.0% 4.% 20% 210% 28% Pama X X X a a E@pt 1979 x x 1980 '4.0% 190% 16.1% 3.% Joan 1979 a I Monw4* x x I Tobl * of eot ies I t 18 S 6 7 5 5 4 3 3 3 3 2 2 1 % of ounis With EPZ prodcttion in 1.0% 72.0% 3(.0% 320% 323% MO% 2DO% 2D0% 16.0% 1±0% 1I0% 120% 120% LO% 80% 4.0% Now: * desotie prodlction d categorzed imdty in an coa sys EPZ. So Data for Memo 1964 Mulyla 1979. BzIl 1982, M nrdu 1965. Phillipi 1960, Domiae Repubic 1965, Sid lanka 1961 an Epp 1960D we tres iaruafi bo, Lab1 OwIpaitioniUaited Nations Cente o Toubastiol Enterpries (1988). Data m ldia indos, Malqs Paki, k PhitiHi, SrLasa and Tland p stly amonic adbSc Eid Cooimo for Ai athe PaciWUbed Nan Cestre for TmataCrpoation (196). Idfonado on THilnd, Chia, Indonesa: S Rebie (196S). d i g Iffi 1ll ^i .i1 1I i1i 1! ji Ii i8i j iitS 'i i@ Ei - 60. ANNEX Table-3: (Contd.) Year Industriaiized Developing Country Country of Data Country Ineators Country Investors SRI LANKA 1981 Belgium Hong Kong W. Germany Korea UK Japan Netherlands Us TAIWAN 1988 Japan 42%, US 17.5%, Europe Hong Kong 5.1% PROVINCE 8.6% THAIAND 1982 Taiwan 1983 Australia, Europe Jndia, Singapore. Taiwan, Korea COLOMBIA 1979 US COSTA RICA US Koma DOMINICAN 1985 Of 123 sample companies: 7 were from Puerto Rico REPUBLIC 6 from Panama, 5 from Korea J 1987 sham of total DI: Taiwan, Hong Kong, Panama 13.4% US 66.4% Dominican Rep. 11.2% Korea 4.0% EL SALVADOR 1985 Korea JAMAICA 1981 US Hong Kong, India 1985 Of 17 sample companies: 4 were from Hong Kong 1 from India J MEXICO 1979 US PANAMA 1979 US, Japan, UK, France, COt_-m, .i ay, Swinerana EGYPT 1979 France, Italy, US JORDAN 1979 US gW Results of a survey undertaken by ILO\UNCTC; refer to r.ublication cited below. Sources: Data for Malaysia 1982, Philippines 1980, Mauritlus 1985, Dominican Rep. 1985, Sri Lanka 1981, India 1979, Indonesia 1982, Jamaica 1985, Thailand 1982, Pakistan 1982 and El Salvador 1985 was taken from: International Labor Organization/United Nations Centre on Transnational Enterprises (1988). Data for Pakistan 1981, China 1982 was taken from: Economic and Social Commission for Asia and the PacificlUnited Nations Centre for Transnational Corporations (1985). Data for Korca 1986, Taiwan 1988 IB from: S. Rubin (1988). Data for Korea, 1988: UNIDO, 198& Table 4-A: NUMBER OF EMPLCYEES Country Year of D a 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 198! 1982 1983 1984 1935 19S6 1987 1988 19t9 AFRICA Ghba 2,600 Liberia 100 Maruntu 600 13C0 14320 1,4101 18,953 18,010 20,484 20,20S 2250S 22,619 25,495 37,532 53,951 70,704 76,007 SCongal 600 1,000 1,20 ASIA NWEs Korea, Reub1c of 1,200 22,900 34,000 31,200 30,642 33,000 34,700 37,900 32,800 36,100 38,989 Taiwan Province 62,143 79.257 S0,166 73,078 73,62 81,241 77,640 S2,437 &9,112 China 1,873,000 India 6,000 17,000 ldotesia 7,736 I3,000 Marby3 69,757 81,6SS Phillipia 23.0D 24,974 21,729 39,000 24,C0D Sri Lanka 15,000 13,2D0 25,O00 35.000 47,961 Tbaiand 1,067 IATIN AMERICA AND CARIBBEAN Arub 800 800 Babarn $000 8,0 S Barbado 00 0,0 Brazil 46,500 60,e00 63000 _ Chile 600 2000 Colomba 3,700 6,700 Costa Rica ,000 15.00 4500 Dominican Republic 992 2289 3,194 4,801 6,953 8,618 10,910 13,480 16,095 I8,339 20,520 19,629 22,272 27,126 35,720 5UM3 69,53S 8i.468 l1A0.00 El Satador 290D 2,079 2,350 3,500 (iratentala 40 400 Haiti 40,000 55010 Hondurn 2,56 3,500 '-O0 3,0 Jamaica 140 600 1,200 S.000 8,000 I.0 1,000 S,000 Mexico 67,214 80,00 123,879 130,102 122,493 173,128 20,078 217,544 268,388 335,000 Netbrrlan I Antilles 400 Panama 2,058 '1,800 1200 St Lucis 12,000 9,0 1,500 Trinidad .t Tobago xm 907 EMENA Bahrain 2,770 E43TI 3,06! 25,00 17,989 Morocco 852 R97 914 1,048 1,32 t,S29 1.811 2,752 Pakistan 194 1.500 2,000 Syria, Aab Rep. 600 Tanisia 40,0O0 Utited Amb Emirates 10 Soumen: Umited Natios Cenfereve on Tnrde and Drjli pent (1985). Data for 1981 for S Xo va, Phillipiaes, Taiwan, iii Lasb, Mariti^, Se tepL BraziL Itdia ate (romm: Basile, A and 0. GmWidis (1984). Data foe 1986 for EC" Gbana. Libna Senepl Teaniea In4itd ladoe a. Malaysi Paklma, Ps.ipipes, Sr Lanka, Brazi, Ctik Coloebia. El Savador, Hait, Honduras, Janica, Nethetad Atia, Pasm. Trinida &k Toahgoe taken frm: Jeye, 0. 1. Heinric:b, P. Foebel (1987). Date for 1989 for Amsab Bamas, Baebados. Ccaa Rica, Cwrscaa, 1" aim Repblic, El Salvadc 1i Guatemala, Haiti. Honrans, Jasaic, Panama. St Lucia are takn from Ka, P. (1989) Data for Dominican Reublic 198088, Consejo Narional de Zotn Framas. Table 4TB NUMBE OP ENTERPRS Cou4shy Year of )alt 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1960 1961 1962 1963 1984 19 S 1966 1967 AFRICA liberis Mauuit 10 16 30 43 66 iS 89 Is 94 101 107 115 146 19S D0 4C3 531 ASIA NIEs Xc. Republbk c- 4 22 70 ItS llt 111 113 114 111 10 100 106 99 101 9e 91 96 9g TWa. Pu'aee 297 254 251 Ckiaa jbl Vetsta") so lOD 741 zoo01 tdia 1MS 2D1 1adoect 18 18 mall 4S 84 269 Pfiipm 38 55 72 Sd La1k 37 42 67 91 110 ns} - d 27 LAMN ANERICA AND CAR9EEAN Amba Bahama Bm" Brad DAad. Gbi0 Cou Rica 29 31 Do1iaa RtAW1c 25 30 93 107 125 14t 166 178 El Salvado 9 9 9 Guatmal 3 24 Haid Hasdes hamaIc 25 me. 257 4SS 454 448 443 457 S40 620 605 5tS 600 672 7S 89 1 1,010 Nathatami Aml 75 PuM Si Lode Tridmad a Ta*a 3. EMN hakmis E;1 239 movoeom 23 24 26 26 23 31 34 36 Paw Ab ReF 10 Udsed Amb Emit. gf V.g. f.. 1967 mEIeem maquil Gm in Masy. 1967. Mal Som: Data em Nas tiI z191 Us Pat Pmt97w c.. glont Sep. 19.19S99 Wold Baa. WeUddgc DC. Dta Gm Mauai 196447: MautM E1 .t Deelv_o t and lwstant Aathei (1989) Dano ea Dmicas R_epubl 191.8: WoId Bank (1989 a) Dato e S Kom 197046: Nis A-N. (19t6,. a" lM A1aIu oi O61im of dte Eupon Pmemaias Zoe Data lemM I 1973-67: G4 . (l9i) d N a' deiF Gafla e 1 E_tde b la Maqfltad.aa de E c Jy 9t7. T:ble 1: DOMINICAN REPUBLIC FIZ PROFILES (a) (b) (c Under-Roof Year of OW _ui Space No. of Total Name Eabihment Management Invetor (sq. ft) Entrprie Empment Sectoril Orientation I Bani 1986 private, non- t grup of local entrpreneure 169,000 10 4,000 appareL furniture, footwear 2 Basahona 1989 public gournment 163,000 4 900 apparel 3 Bonao 1988 public govenment 195,822 9 2,000 apparel 4 Fspernza 1988 private Ihe Dominican Sugar Councl 20,450 5 800 apparel, footwear 5 Hainamsa 1989 puivatc group of local entrpreneun 80,600 4 1,260 ewey 6 Itabo 1986 private GTE, Tavares inmatrial and Conde 515,078 13 4,000 dekmronics,pharmwpAtaisprments (contucto ind- group) 7 La Romana 1969 rivate Group FranjUI (US. ivestr) 990,300 21 12,646 apparel, ekcurnic 8 La Romana 11 1987 private Group Frenjul (US. investor) 150,000 12 3,000 apparel, sporting goods 9 La Vega 1987 public government 592,000 26 4,800 appard 10 La Americas 1988 private consortium includig Banco 66,000 5 500 tight manufacuring infomatio Nacional de la Construccion, srvices Codetcl (GTE subsidiaty) 11 Moca 1988 public govenmfent 11,477 9 800 appare 12 Numva San Pedro de Mawri 1988 pvte, an-profit Taiwanese busi_ sman 60,000 5 700 garments, luga fibelas 13 Poerto Plata 1983 mbnd publicpsivac grup of local entrprnetms 193,05 13 3,000 tesiles, footwr, jewety 14 San aitro 1986 pivate Grupo Fmance Nacional (multi- 480,000 11 2,800 information services, nationWal fiandal corporation) Np-technolog assbly 15 San Pedro de Macaria 1973 pubfic g8unment 2,50O,000 8C 34,600 appre, gaments, footwear 16 Santiago 1974 pivate, nofit group A local n cprener 1,800,600 64 35,000 appa, footear, tobecon 17 Villa Af hacia 1968 public Mhe Dominican Suar Councl 110,000 4 800 appard 18 Vla Meb 198 prite local coastruction induies 53.700 2 400 appard group (Parez Bernal) 19 San Fnico de Mgrorb 1989 public government 12,332 2 106 appld TOTAL 8,163,864 299 112,112 cUNDER CONSTRUCTlON> 20 lato Mayor public govenmet 65,000 aoindustry 21 lgey public govnment 75,000 22 Hoag Kong of the Caribbean prate the Monte Crisd Corporation 53,500 23 La Ameria (San Critoba) public govenment 228,000 24 Npu (Santo Domingo) private group of boal entrepreneurs 160,000 25 Pedernlas public goemment Souee IPC (Mard, 1990) (a) Dcmber, 1989 (c) Idustial Free Trade Zones Opeatos (Jume, 1990) -64- ANNEX 11 Table 2: DOMINICAN REPUBLIC F1Z INFRASTRUCTURE DATA Source of Lease Rates Name Labor Supply Transporlatdrn (sq. ft./month) Remarks I Bani Bani (pop. 103,984) *32 miles from port USS0.25 of Haina 3 year term 047 miles from Las Amercs Airport 2 Barahona Barahona (pop. 150,118) *2 miles from port USS0.05-.22 ot Barahona depending on advance *120 miles from port of Haina 'international airport under construction in Barahona 3 Bonso Bonao (pop. 96,346) *45 miles from port US$0.06-0.27 of Haina depending on advance *76 miles from Las from 5 to 137 months Americas International Airport 4 Esperanza Esperanza (10 kms. from *65 miles from port US$0.20 Mao, Valverde; pop. of Puerto Plata 40,000) *207 miles from port of Haina 0213 miles from Las Americas International Airport 5 Halinamosa Santo Domingo (pop. *10 to 15 miles USSO.25-0.33 2,218,360; mainly 4(40,000 from main ports of 4-5 year term in eastern area) Santo Domingo; Haina, Boca Chia, Santo Domingo *11 miles from Lae Americas International airport 6 Itabo Haina (pop. 50,000) San *4 miles form port US$0.45 Cristobal (pop. 316,103) of Haina 10 year term Santo Domingo (pop. *27 miles from Las 2,218,360) Americas 7 La Romana La Romana (pop. '10 miles from post No new sites will be 136,135) of La Romana constructed *90 miks from port of Haina 065 miles from Las Americas International airport 8 La Romana 11 La Romana (pop. '10 miles from port US$0.25; 4-year term 136,135) of La Romana US$0.30; second 4-year *90 miles from port term of Haina '63 miles from Las Americas International Airport -65- ANNEXH Table 2 (contd.) Source of I ea Rates Name Labor Supply Tampoatkn (sq. ft/month) Remarks 9 La Vega La Vega (pop. 189,430) *56 milas fm pou USS0.060.27 of Puerto Piata depending on advance 90 miks from port of Haina 9S miles from La America International Airport 10 Las Americas Santo Domingo eS mies from port USS036 (pop. 2,218,360) of Andres Boca 6 year term Chica *25 miles from port of Haina 032 miles from port of San Pedro *2 miler from Las America International Aiport 11 Moca Moca (pop. 120,182) *97 miles from port US$0.06-0.27 of Haina depending on advance 0112 miles from Ls Americas International Airport 12 Nueva San San Pedro de Macuris *2 mUes from port US$0.40 Pedro de (pop. 188,563) of San Pedro S year term Macoris de Macori 653 miles fmm port of Haina '25 miles from Las Americas Intemational 3 Puerto Plata Puerto Piata '2 miles from port US$0.25 (pop. 93,469) of Puerto Plata 4 year term '145 miles fom port of Hams 08 miles from LA Union Internatonal Airport 14 San Isidro eastern Santo Domingo *S miles from port US$0.4SS0.50 (pop. 850,OX' of Santo Domingo minimun 5 year term *18 miles from port of Haiam *15 r es fmmrlas Amerkas Intemational Abiport -66. xnJj -able 2: (coold.) Source of Leae Rates Name Labor Supply Transportation (sq. ft.month) Remarks IS San Pedr de San Pedro de Maoods 42 mil from port USSO.070.29 Macoris (pop. 188,563) of San Pedro de 4 year tem Macorbs *S3 miks frm port of Hani *25 mile from LA Amem Int_esoa Aft 16 Santiago Santiago 37 mile from poat USSO.10 (pop. 467,460) of Puerto Plata 4 year term *115 mila ffom port of Hadna 040 miles from La Union International Airport 17 Villa Santo Domingo 043 mi from port US$0.07-0.15 Altaracla (pop. 2,218,316) futal of Haina 4 yet term ar (pop. 40,000) *S0 mile form Las Ameriem Intenalbonal 18 Villa McIa northern Santo Domingo 12 mils from pot USS0.33 (pop. 2,218,360) of Hains *10 mile form Las Amerkca International Airport 19 San Frandsoo San Fmra9soo de *85 miks from port US$0.05-0.22 de Macotis Macon ,.) 183, 629) of Puerto Plata l119 miles from port of Haina *124 miles from Las Amerln Inter- natioal Airport Sourow IPC (Match, 1990) Table 3 ESTIMK ES OF LABOR PRODUCTIVITY EQUATIONS OF D.RJ FZ FIRM Equati Depeadent Va able Indepndt Varable Adjusted R' P klg(i') want t IA bo(t) di d2 d3 1-.IMear l. 46.441 2772 030 (2.70) (0.405) 1-2. I with ppd dummy war. x 46.903 2.767 4.787 0333 (3546) (0.408) (3.89) 1-3. I-ea with US dummy var. x 43.437 2.51S 9.0 0371 (2.9") (0.411) P O6) 1-4. LArwith NKB dummy vr. 5328 237 .14.725 0.421 (3.146) (0398) (402S) 2-1. Reaiproal x 81.381 43.484 05S2 (2.611) (4.136) 2.2 Recprocal with appmrd dummy var. x 8Z480 43.448 -2012 054S (3.145) (4.1SI) (3.184) 2-3. Rec3p1m with IIS dummy var. x 75.789 *41.121 9.433 0.591 ( (4126) (074) 2-4. Reiproal with tIlE dummy wr. x 84333 39.618 15.199 0M47 (2393) (3.754) (1) 3.1. Semi-larithan x 42025 16183 0494 (2) (3.723) 3-2. Sei4oprithu with appau d an) wr. x 42.6 16M158 t.11 0m (319S) (1.38) (1M2 3.3. Sewi4oarithu with US d y vwr. a 39316 15.143 1m6 0o519 (2. (1.739) (&M) 3-4. Semi4oprithm witb NIE dummy var. x 48439 14386 -13M 0S69 (2806) (165S) (3.435) w1. La.eLipnml a 4.440 .089 0.547 (0.053) (0.084) 1.2 Logrecproca with a dummy v. x 4.445 4089 .0.010 0542 (0.064) (0.-05) (0.065) 613. Logreciprocal sith US dumty var. x 4330 40.83 0.186 0.8 (0.063) (06) (0.063) 44. Logreciprocal with NI dummy var. x 4.499 m02 40304 0.639 (OA4) (0.077) (0.063) '.1 Doubbkl og x 3A55 0318 0.464 (0.053) (0.036) 5.2 Doubie-log with apparel dummy var. x 3.651 0318 0.007 0.454 (0.067) (0.036) (0.071) 5-3. Double-log with JS dumy var. x 3.602 0.297 0.163 0.485 (0.056) (0.037) (0.071) 5.4. Double4og with V dummy vmr. x 3.786 0281 4.283 0536 (0.059) (0.35) (0.072) P. kvd of labor productity I pemrP-i ge of he bent praaic lador productity in US. (for US. and DR coumpmnies) or NEIs (for NEE wmpanies). t number ofyan m opation sinesabiment (Eablm wt yea t-1). iI: dummy (1) for spped firn. d2: .ummy for US. fnns d3: dummy for NM fitrs. Number of oblevatons - 90 - ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ .- o .2 :ssssssS % i > k S S S S 3 S S S S S S g q n fl 5 § 2 R E ., g S S ES S 3 Sg S | S S S X S AS S S 2 -69- ANNEX III DOMINICAN REPUBLIC FIZ INVESTMENT PROMOTION The main investment and export promotion institution for the FTZs in the Dominican Republic is the Investment Promotion Council (IPC), a mixed public/private agency. The IPC has operated since 1987, with funding initially from USAID. Since the country's entry into the Lomd Convention, IPC has had sponsoring from UNDP and UNIDO for promotion in the European Community. The IPC's objective is to coordinate public and private efforts in promotion and also directly engage in the promotion of direct foreign investment and export activities. The IPC's focus in its promotion activity has been foreign investment in F-Zs.-including shifting production from East Asia, i.e., inducing U.S. companies with subsidiaries in East Asia's NIEs to relocate to the Dominican Republic--and production sharing between Puerto Rico and the Dominican Republic. The Dominican Republic's comparative advantage having been identified as lying in the labor- intensive manufacturing and services sectors, IPC's strategy has focused in the past on the apparel, footwear, electronic assembly and data processing subsectors. IPC's promotion in the ..otwear sector serves as a good example of the agency's activities in promoting exports. As it had been determined that the D.R. offered the best opportunities for U.S. companies already established in the Far East and so-called "936" companies Y in Puerto Rico, a direct mail campaign to all such footwear companies was started. Materials sent to the parent companies in the U.S. comprised a description of the advantages of operating in the D.R., including a sector profile with typical plant and total costs per U.S. standard engineered hour. This opening measure was fuiluwed by utlephone contacts and visits to the U.S. by an IPC investment officer with samples of all the products manufactured in the FlZs. In turn, if a U.S. company interested in sub-contracting arrangements sent its samples to the D.R., the IPC supervised the production of countersamples by the local firm,Y' and in some cases made personal deliveries to the potential client abroad. The above efforts were followed by the participation of IPC representatives and FTZ shoe manufacturers in the bi-annual National Shoe Fair of America in New York. Prior to that event, all shoe manufacturers in the U.S. with offshore establishments were contacted directly and invited to visit the exhibition booths of Dominican Republic manufacturers. This would increase U.S. companies' awareness of the D.R. as a viable offshore production location. The participation of D.R. manufacturers in the fair, i.e., the idea that producers should promote their own product, was considered a key element from a sales/promotional point ot view. The IPC aiso piaced sevwai fuii-pagr. idsiaiLL jVr to a..d during each trade show in Footvwear News, a trade publication widely read inside and outside the U.S. As a follow- up to the trade fair, the IPC sent out firm-speciFc letters thanking firms for their interest and providing supplementary information. Once a potential contractor was identified, IPC was responsible for getting their samples made up and quoted by a firm deemed appropriate by the IPC. Initially, the IPC participated ] Refers to the production-sharing scheme between Puerto Rico and CBI beneficiary countries. Under this scheme, the income earned by a combination of Dominican and Puerto Rican operations (the latter must quality under U.S. IRS Code Section 936) is sheltered from U.S. Income tax as long as the income is not repatriated to the U.S. Upon repatriation to the parent company in the U.S., income earned from the operations in I Dominican Republic could be fully taxed, while the income of the Puerto Rican operation could be fully tax exempt. 2/ In order to strcngthen the local capability to secure contracts, the IPC, through a consulting firm, offered seminars for shoe manufacturers on marketing techniques, quality control, etc. In addition, the IPC helped firms prepare brochures for and in general facilitated their participation in trade fairs. - 70 - ANNEX m in negotiations between the contractor and the local producer. The results of the strategy and activities outlined above are difficult to quantify and attribute primarily to the IPCs efforts; nevertheless, in 198, out of 82 overseas companies identified, 23 sent samples back for quotes and 14 visited the companies identified by the IPC Before the end of the year, five U.S. companies had placed contracts, and two were In the process of installation in one of the FM. The above example of the shoe sector promotion actiities confirms the premise (discussed in paragraph 2.31) that imperfect information about business opportunities, environments, and potential collaborators is one of the major constraints against increasing foreign collaboration in LDOs' export activities. While the IPC promoted public, mbxed and private zones equally, most privately-owned FIX additionally have their own marketing programs. Like the IPC's promotion strategy, the private sector strategy is based on industry-speciflc promotion, (e.g., Itabo and Fortune 500 companies; while San Isidro with large electronics and data processing firms). The private zones' most important promotional tools are the flrms already established in their respective parks, using their firm image (many firms in private parks are Fortune 500 companies) and connections with business executives in the U.S. For instance, San Isidro FIZ uses C;TEs connections on the East Coast to access electronics firm executives, and Itabo FIZ uses Westinghouse and some pharmaceutical companies to help identify potential investors. This strategy appears to be consistent with our sample firms' responses regarding the source of information on the attractiveness of the D.R. FlM. For example, many NIE firms indicated that interest in the FIZ originated from contacts with other NIE firms already in the Dominican Republic. As 936 companies have so far been important customers in private zones, the zones efforts are concentrated in that area; zone representatives visit the 936' conference in Puerto Rico, which takes place once a year, but do not generally visit trade fairs in the continental U.S. Itabo FIZ also intermittenty organizes seminars in Puerto Rico directed toward 936 companies. In turn, some private-sector FIZ developers pay search fees to match-making companies that identify foreign investors. - 71 - INDUSTRY SERIES PAPERS No. 1 Japanese Direct Foreign Investment: Patterns and Implications for Developing Countries, February 1989. No. 2 Emerging Patterns of International Competition in Selected Industrial Product Groups, February 1989. No. 3 Changing Firm Boundaries: Analysis of Technology-Sharing Alliances, February 1989. No. 4 Technolouical Advance and Organizational Innovation in the Engineering Industry, March 1989. No. 5 Export Catalyst in Low-Income Countries, November 1989. No. 6 Overview of Japanese Industrial Technology Development. March 1989. No. 7 Reform of Ownership and Control Mechanisms in' Hungary and China, April 1989. No. 8 The Computer Industry in Industrialized Economies: Lessons for the Newly Industrializing, February 1989. No. 9 Institutions and Dynamic Comparative Advantage Electronics Industry in South Korea and Taiwan, June 1989. No. 10 New Environments for Intellectual Property, June 1989. Nc. 11 Managing Entry Into International Markets: Lessons From the East Asian Experience, June 1989. No. 12 Impact of Technolog;cal Change on Industrial Prospects for the LDCs, June 1989. No. 13 The Protection of Intellectual Property Rights and Industrial TPehnonlov nefvelpnment in Rr;wil, September 1989. No. 14 Regional Integration and Economic Development, November 1989. No. 15 Specialization, Technical Change and Competitiveness in the Brazilian Electronics Industry, November 1989. - 72 - INDUSTRY SERIES PAPERS cont'd No. 16 Small Trading Companies and a Successful Export Response: Lessons From Hong Kong, December 1989. No. 17 Flowers: Global Subsector Studv, December 1989. No. 18 The Shrimp Industry: Global Subsector Study, December 1989. No. 19 Garments: Global Subsector Study, December 1989. No. 20 World Bank Lending for Small and Medium Enterprises: Fifteen Years of Experience, December 1989. No. 21 Reputation in Manufactured Goods Trade, December 1989. No. 22 Foreign Direct Investment From the Newly Industrialized Economies, December 1989. No. 23 Buyer-Seller Links for Export Development, March 1990. No. 24 Technology Strategy & Policy for Industrial Competitiveness: A Case Study of Thailand, February 1990. No. 25 Investment, Productivity and Comparative Advantage, April 1990. No. 26 Cost Reduction, Product Development and the Real Exchange Rate, April 1990. No. 27 Overcoming Policy Endogeneity: Strategic Role for Domestic Competition in Industrial Policy Reform, April 1990. No. 28 Conditionality in Adjustment Lending FY80-89: The ALCID Database, May 1990. No. 29 International Competitiveness: Determinants and Indicators, March 1990. No. 30 FY89 Sector Review Industry, Trade and Finance, November 1989. No. 31 The Design of Adjustment Lending for Industry: Review of Current Practice, June 1990. - 73 - INDUSTRY SERIES PAPERS cont'd No. 32 National Systems Supporting Technical Advance in Industry: The Brazilian Experience, June 26, 1990. No. 33 Ghana's Small Enterprise Sector: Survey of Adjustment Response and Constraints, June 1990. No. 34 Footwear: Global Subsector Study, June 1990. No. 35 Tightening the Soft Budget Constraint in Reforming Socialist Economies, May 1990. No. 36 Free Trade Zones in Export Strategies, December 1990. No. 37 Electronics Development Strategy: The Role of Government, June 1990 No. 38 Export Finance in the Philippines: Opportunities and Constraints for Developing Country Suppiiers, June 1990. No. 39 The U.S. Automotive Aftermarket: Opportunities and Constraints for Developing Country Suppliers, June 1990 No. 40 Investment As A Determinant of Industrial Competitiveness and Comparative Advantage: Evidence from Six Countries, August 1990 (not vet publIshed) No. 41 Adjustment and Constrained Response: Malawi at the Threshold of Sustained Growth, October 1990. %No A) Pvmnrt Finance. - Issues and Dirpetinn- c rqp Stidv nf the Philippines; December 1990 Note: For extra copies of these papers please contact Miss Wendy Young on extension 33618, Room S-4101 - 74 - ENERGY SERIES PAPERS No. 1 Energy Issues in the Developing World, February 1988. No. 2 Review of World Bank Lending for Electric Power, March 1988. No. 3 Some Considerations in Collecting Data on Household Energy Consumption, March 1988. No. 4 Improving Power System Efficiency in the Developing Countries through Performance Contracting, May 1988. No. 5 Impact of Lower Oil Prices on Renewable Energy Technologies, May 1988. No. 6 A Comparison of Lamps for Domestic lighting in Developing Countries, June 1988. No. 7 Recent World Bank Activities in Energy (Revised October 1989). No. 8 A Visual Overview of the World Oil Markets, July 1988. No. 9 Current International Gas TraJes and Prices, November 1988. No. 10 Promoting Investment for Natural Gas Exploration and Production in Developing Countries, January 1988. No. 11 Technology Survey Report on Electric Power Systems, February 1989. No. 12 Recent Developments in the U.S. Power Sector and Their Relevance for the Developing Countries, February 1989. No. 13 Domestic Energy Pricing Policies, April 1989. No. 14 Financing of the Energy Sector in Developing Countries, April 1989. No. 15 The Future Role of Hydropower in Developing roluntries, April 198Q9 No. 16 Fucewood Stumpage: Considerations for Developing Country Energy Planning, June 1989. No. J7 Incorporating Risk and Uncertainty in Pnweir System Planning, june 1ROR No. 18 Review and Evaluation of Historic Electricity Forecasting Experience, (1960- 1985), June 1989. - 75 - ENEgy SERIES PAPERS cont'd No. 19 Woodfuel Supply and Environmental Management, July 1989. No. 20 The Malawi Charcoal Project - Experience and Lessons, January 1990. No. 21 Capital Expenditures for Electric Power in the Developing Countries in the 1990s, February, 1990. No. 22 A Review of Regulation of the Power Sectcrs in Developing Countries, February 1990. No. 23 Summary Data Sheets of 1987 Power and Commercial Energy Statistics for 100 Developing Countries, March 1990. No. 24 A Review of the Treatment of Environmental Aspects of Bank Energy Projects, March 1990. No. 25 The Status of Liquified Natural Gas Worldwide, March 1990. No. 26 Population Growth, Wood Fuels, and Resource Problems in Sub-Saharan Africa, March 1990. No. 27 The Status of Nuclear Power Technology - An Update, April 1990. No. 28 Decommissioning of Nuclear Power Facilities, April 1990. IT 1o T,,a,46%,*1 &u.hIsifi,tn_ anti (h.anapo in 'he W.o a4ermeahn,1I T Tp Pnorm The Case of Cooling and Lighting Behavior in Urban Java, October 1990. No. 30 Regulation, Deregulation, or Reregulation-What is Needed in LDCs Power Sector? July 1990. No. 31 Understanding the Costs and Schedules of World Bank Supported Hydroelectric Project, July 1990. No. 32 Review of Electricity Tariffs in Developing Countries During the 1980s, November 1990. No. 33 Private Sector Participation in Power through BOOT Schemes, December 1990. Nots: For exta copies of these papers please call Ms. Mary Fernandez on extension 33637 in the morning betwvcx 10 ami and 11 am arid ka th*e aLteroon between 1:30 to 2:30 pm. From outside the country call: Area Code (202) 473-3637. FAX No. (202) 477-0560.