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Export Competitiveness: Economic Zones and Industrial Clusters

Export Processing Zones (EPZ) 

Industrial Clusters

Export Processing Zones (EPZ)

There are over 3,000 EPZs or other types of Free Zones around the world, accounting for $400 billion of total trade. Two issues merit the attention of policymakers. First, EPZs are increasingly developed and run by the private sector as opposed to the State, which is calling for new applications of public-private partnerships. Second, the implementation of WTO-consistent policy and incentive frameworks is shifting the emphasis from tax benefits towards infrastructure and regulatory frameworks, particularly in middle-income countries.

Experience shows that the success of EPZs will depend on the extent to which these zones are integrated with their host economies through backward and forward linkages, the transparency and responsiveness of the regulatory framework, as well as infrastructural efficiency. Improvements in the latter often call for the decentralized provision of utilities, such as electricity, water, and telecommunication services. Moreover, largely diverging frameworks and incentives can lead to market distortions, so that harmonization of conditions across various industrial zones is often helpful.

Although EPZs are not explicitly mentioned in the WTO agreements, the Agreement on Subsidies and Countervailing Measures (SCM) prohibits subsidies that are conditional on exports. If EPZ incentives are limited to firms that produce for exports, these subsidies could potentially be subject to legal challenges from other WTO members; therefore, affected countries will need to amend their incentive regimes. However, the WTO subsidy disciplines apply only to WTO members who have a GNI per capita of more than USD 1000.


Papers



Case Studies
  • EPZs in Latin America and the Caribbean: Challenges in a Globalized World, Jaime Granados, Integration and Trade, Inter-American Development Bank, 2006
    In LAC, EPZs were conceived as instruments to promote reforms that would reduce anti-export bias. Despite some criticisms, EPZs have helped export growth and diversification, foreign investment, and job creation in many LAC countries. The positive impact is particularly apparent in countries that are geographically closer to mass consumer markets. However, countries urgently need to complement EPZs by implementing soft and infrastructure-related incentives that allow EPZs to attract investment.

  • EPZs: Has Africa Missed the Boat? Peter L. Watson, World Bank Africa Region Working Paper Series, No. 17, May 2001
    With an exception of Mauritius, the African attempts to use EPZs as an instrument for economic development have been less successful compared to Asian and Latin American. This paper examines the export zones in Mauritius, Tangiers, Panama and the Dominican Republic for insights into the outlooks of the investors, developers and the government officials. The author finds that many export zones have suffered from lack of socio-political and economic management skills that have not made it possible to appropriately address the multiple challenges of EPZ establishment, such as providing high quality infrastructure, government services, and human capital.

  • Comparing Bangladesh, India, and Sri Lanka, Aradhna Aggrawal, Indian Council for Research on International Economic Relations (ICRIER), Working Paper No. 155, March 2005
    This study reaffirms that zones cannot be insulated from the broader economic contexts, and emphasizes the need to specialize in selected sectors depending on the comparative advantages of the country. Through a comprehensive analysis of the FDI inflows and export performances, this analysis concludes that issues related to physical infrastructure, tax benefits and labour laws are more critical in functioning of EPZs than generic subsidies and institutional aspects.

  • A Closer Look at Bangladesh, Fatima Shah (Project Leader), FIAS (Foreign Investment Advisory Services) and SEDF (South Asia Enterprise Development Facility) of IFC, June 2006
    The study recommends Bangladesh to pursue EPZ reforms that leverage the benefits of public-private partnerships following a strategy that combines three elements: First, rehabilitate and commercilize the existing publicly-managed EPZs on a transitional basis; second, develop new zones based on public-private partnerships; and third, create a master plan reflecting integrated planning practices.


Websites

  • WEPZA is the private non-profit World Association of Economic Processing Zones and Free Trade Zones and was founded in 1978. It produces a regular journal on EPZs as well as gives contact details of the EPZs around the world who are its members.

  • World Free Zone Convention held in Malaysia in November 2007 highlighted key issues on EPZs including policy and legal preconditions, spatial issues, logistics and supply chain issues, etc.
Industrial Clusters
Clusters are concentrations of firms in one or few industries, benefiting from synergies created by a dense network of competitors, buyers, suppliers, and service providers. Clusters often include producers of complementary products, providers of specialized infrastructure, specialized training and education, information, research and technical support, and standards-setting agencies. Such clusters make investment more efficient, strengthen domestic markets of service provision, and increase returns via spillovers.

The core contribution of the industrial clusters lies not really in scale economies but more in generating the solutions for Marshallian externalities (Rodriguez-Clare, 2005b), such as technology and infrastructural and standards-related externalities, which often remain unaddressed in developing economies due to coordination failures.

The recent experience on industrial clusters is optimistic about the possibility of fostering competitiveness through local organizational efficiency. However, unless they respond well to the demands of global value chains, their competitiveness will remain in question (Humphrey and Schmitz, 2000). This is a difficult cycle to break, in reality. Temptations of ‘hard’ industrial policy interventions such as cluster subsidies and fiscal incentives must be avoided. Specific interventions such as matching grants or infrastructure investments might be more useful in addressing specific local-global coordination failures in clusters.

Evaluations show that, in addition to market agents, large firms in the clusters are significant elements in themselves in most Southern industrial clusters, because they absorb the social and productive capital generated through inter-firm collaboration (Nadvi, 1995).


Papers

Case Studies
  • Africa: Knowledge, Technology, and Cluster-Based Growth, Douglas Zhihua Zeng, WBI Development Study, April 2006
    A set of 11 case studies from Africa ranging from the cut flower and textile cluster to computer hardware. A focus on the knowledge and technology aspects.

  • Brazil: Forms of Governance, Learning Mechanisms and Upgrading Strategies in the Tobacco Cluster in Rio Pardo Valley, Marco Antonia Vargas, IDS, University of Sussex, Working Paper 125, 2001
    How are the cluster's local organisation and innovation paths influenced by the global tobacco chain? What are the long term prospects of this cluster considering the power assymetries associated with the cluster's production and knowledge systems.

  • China: Transnational Corporations and Network Effects in a Telcom Cluster, Henry Wai-Chung Yeung; Weidung Liu; and Peter Dicken, World Development, vol. 34, no. 2, pp520-540, 2006
    Examines the formation in Beijing, China, of one of the world’s few mobile telecommunications manufacturing clusters. Shows how Nokia, the lead firm in the local industrial cluster, is able to create non-cluster external economies for its key suppliers co-locating in this purpose-specific industrial cluster.

  • EU: Clusters in the EU-10 New Member Countries, Christian Ketels and Orjan Solvell, Europe Innova Cluster Mapping, 2005
    The EU-10 are the group of ten countries that have joined the European Union in 2004.They have a cluster specialization profile that remains distinct from more advanced economies. The EU-10 still has a far stronger natural resource-driven sector. And the EU-10 have a much stronger bias towards labour-intensive and manufacturing-driven cluster categories, while being relatively weak in advanced services and knowledge-intensive cluster categories.

  • Is the East Asian Experience Good for Africa? Keijiro Otsuka, Foundation for Advanced Studies on International Development (FASID), 2006
    Using the examples of garment and motorcycle clusters in China and Japan, this powerpoint makes a case that industrialization is initiated by merchants and engineers which is later followed by the quantity expansion phase of immitation and quality decline. Since merchants are society-specific, industrial trajectories are bound to be so. An East Asian model of cluster-based industrial development is then further explored for any relevance it might have for African industrialisation.

  • Italy: Parma and San Daniele Food Processing Quality Consortia, Michelle Clara, UNIDO/Italy Program for SME Development, April 1999
    The Italian foodstuff industry, especially the MSME producers, are increasingly under pressure to follow the certification of origin and standards. Growing number of products is being sold at a significant price premium with a guarantee concerning its origin, characteristics, and quality. This case study attempts describes how two largely successful governance institutions - the Consorzio del Prosciutto di San Daniele and its Parma counterpart - were formed. These helped the Italian ham producers organize into consortia to be able to meet the growing demand for certification of origin and standards.


Websites

  • IADB's Competitiveness and PSD program looks into the role of business climate and regulatory reforms, privatization and public-private partnership in achieving global competitiveness. Its work on SME networks and clusters is comprehensive. A multilateral investment fund has been launched to support exports using innovative systems in Peru, Uruguay and elsewhere in the Latin America.

  • UNIDO Develops an Export Consortia Program to promote medium- to long-term strategic cooperation among firms, and it organizes joint activities to facilitate access to foreign markets. UNIDO supports the creation of export consortia in different sectors; offers training for the public or private sectors; promotes a favorable institutional and regulatory environment for the development of export consortia; and offers benchmarking of international practice. See UNIDO guidebook on creation of export consortia.
 



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