1. Export processing zones in historical perspective

How do they operate?

Most EPZ-operating countries offer the same package to investors, consisting of:

• financial incentives such as tax holidays, duty free imports and exports
• dedicated infrastructure
• abundant and relatively cheap labour
• strategic location and market access (e.g. quotas under the Multifibre Arrangement)

The incentive package is promoted by a government agency responsible for investment, and the zones are normally administered by a zone authority. The zone authority has offices at national and zone level which typically contain a number of specialized departments, including a department for labour relations. The involvement of other government departments in zone administration varies enormously. In all cases the customs authorities are directly involved because of the duty concessions in force, but beyond that the zone authority in many countries is largely self-sufficient, drawing only occasionally on other departments such as labour. In some cases however, the cooperation extends beyond labour to include agencies responsible for welfare, social and women's affairs. The zone authority normally offers a one-stop shop to investors, allowing them to deal with just one office (instead of 20-30) in obtaining the approvals and completing the procedures required to set up operations.

Investors in the zones are often organized into manufacturers' associations according to their sector (garments, electronics) and according to their country of origin. The sectoral associations may have subcommittees dealing with issues such as human resources.

Physically an export processing zone is like any other industrial estate or park. Most of the zones visited by ILO officials in preparing this report disposed of better facilities than those available in the domestic economy. The infrastructure was generally more modern and substantial than outside the zone, and factory premises were designed as such and generally appropriate to the activity being conducted. In countries where the development of private parks is encouraged, the disparity between the conditions inside and outside the park is often dramatic. Typically, zones are fenced off for customs and security reasons, but increasingly countries are offering zone privileges to stand-alone plants and many zones have no fences at all. ILO missions visited high-tech zones and science parks which were not enclosed in any way. At the other end of the spectrum were enclave zones where ILO missions had trouble getting past the security at the main gate, despite the fact that the visit had been authorized by the zone management. In China zones are often of city scale and resemble any other modern business complex (see below).

The Dominican Republic provides a classic example of a zone-operating country. Legislation providing for the establishment of free zones was passed in 1968 (Act No. 299) and the first zone was set up in La Romana in 1969 by the multinational enterprise Gulf and Western. Free-zone legislation was subsequently consolidated, together with other laws and regulations, into Act No. 8-90 adopted in January 1990.⁽²⁾ In terms of this law foreign direct investment (FDI) in free zones does not require any authorization from the Directorate of Foreign Investment or registration with the Central Bank. Incentives include exemption from corporate income taxes, taxes on construction, mortgage, registration and property transfers, municipal taxes, VAT on goods and services, and import and export duties. These exemptions are available for a renewable period of 15 years from the first day of production. Additional incentives are available to free-zone companies which are located in the Dominican-Haitian border region, including a 20 year tax exemption (instead of the normal 15 years) and a rental subsidy.

Act No. 8-90 tries to promote backward linkages between zone and local enterprises, particularly with regard to local materials. A Dominican enterprise supplying a zone investor may import materials for processing without paying import duties, putting them on a more equal footing with products that the zone investors could import directly. Private development of zones is permitted and some 35 zones are now in operation, 15 of them public, 18 private and two under mixed public/private administration. There are significant differences between the zones. The Itabo zone, for example, only targets Fortune 500 companies and has mainly pharmaceutical and electronics firms located there with only 4 per cent of investors from the textile and garment sector, while the Cotui zone is 100 per cent comprised of textile and garment plants.

Free zones in the Dominican Republic have succeeded in their goal of attracting investment and generating employment. The largest investor is the United States, with 48 per cent of the total in 1996. The garment sector is the principal recipient of foreign direct investment, with 65 per cent; it in turn accounts for 65 per cent of zone employment, 60 per cent of which is female. Table 1.2 shows that the zones in the Dominican Republic are following a development trajectory which many zone-operating countries exhibit. The number of zones increases, as does investment, but the number of plants and jobs decreases. This is because increasing competition in international markets, and increasing costs, encourage investment which is more capital-intensive.

Table 1.2. Zones, employment and investment in the Dominican Republic

Source: National Council of Export Processing Zones, 1996 report; ILO/UNCTC: Economic and social effects of multinational enterprises in export processing zones (Geneva, ILO, 1988).