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Export Competitiveness: Economic Zones and Clusters

Export Processing Zones (EPZ) 
- Papers
- Case Studies 
- Websites 
Issue Brief: Special Economic Zones (pdf)
Industrial Clusters
- Papers 
- Case Studies 
- Websites 

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.

A Review of the Role and Impact of EPZs
Author: Dorsati Madani
Source: WB Policy Research Working Paper, No. 2238, November 1999

This review concludes that under certain conditions EPZs can play a dynamic role in a country's development, but only as a transitional step in an integrated movement toward general liberalization of the economy. In fact, countries should use EPZs as tools for reform and should not support isolated EPZ projects in unreformed or postreform economies.

EPZs as Catalysts
Author: Helena Johansson and Lars Nilsson
Source: World Development Vol. 25, No. 12, pp. 2115-2128, 1997

A potentially important indirect effect of export processing zones (EPZs) is the catalyst effect. Foreign affiliates attracted to the EPZs could stimulate local firms to begin to export by showing them how to produce, market, sell and distribute manufactured goods on the world market. The results of this research indicate a significant catalyst effect in Malaysia.
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Benefit-Cost Appraisals of EPZs: A Survey of the Literature
Author: Kankesu Jayanthakumaran
Source: Development Policy Review, Vol. 21, No. 1, pp. 51–65, 2003

Export zones in South Korea, Malaysia, Sri Lanka, China and Indonesia seem to be economically efficient and generate returns well above estimated opportunity costs. On the other hand, the heavy infrastructure costs involved in setting up the zone in the Philippines resulted in a negative net present value. The zones have been an important source of employment in all cases and have promoted local entrepreneurs in some.

Performance, Lessons Learned, and Implications for Zone Development
Author: Bearing Point
Source: Report prepared for FIAS, November 2004

This report looks into the policy and logistical issues that often cause failures of EPZs. Offers key guidelines and best practices on tax and fiscal incentives, regulatory and institutional frameworks, and physical development and management of EPZs.

Case Studies
EPZs in Latin America and the Caribbean: Challenges in a Globalized World
Author: Jaime Granados
Source: 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?
Author: Peter L. Watson
Source: WB 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
Author: Aradhna Aggrawal
Source: 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
Author: Fatima Shah (Project Leader)
Source: 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.


Useful Web sites
WEPZAis 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 Conventionheld in Malaysia in November 2007 highlighted key issues on EPZs including policy and legal preconditions, spatial issues, logistics and supply chain issues, etc.

Comite de Zonas Francas de la Americas

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).

Clusters and Value Chains in Latin America
Author: Elisa Guiliani, Carlo Pietrobelli and Roberta Rabellotti
Source: World Development Vol. 33, No. 4, pp. 549–573, 2005

Clustering helps local enterprises compete in global markets. However, more attention needs to be paid to external linkages of clusters and to the role played by global buyers to foster quality upgrading at cluster levels. This case study contributes to this debate specially with a focus on the analysis of the relationships existing between clustering, global value chains, upgrading, and sectoral patterns of innovation in Latin America. It finds that sectoral specificities matter and influence the mode and the extent of upgrading in clusters integrated in global value chains.
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Clusters as a Driving Engine for FDI
Author: Etienne B. Yehoue
Source: IMF Working Paper, WP/05/193

By developing a game theoretical perspective, this paper shows how the combination of setting up a cluster and implementing policy reforms will be key engine for attracting FDI. Based on agglomeration externalities, the paper shows that the very emergence of clusters can make investment so profitable that investors can even afford to tolerate more policy-induced distortions than otherwise.
Coordination Failures and Clusters
Author: Andres Rodriguez-Clare
Source: IMF Working Paper, WP/05/193

This paper offers an economic rationale for the Latin American countries to engage in selective interventions aimed at discovering new profitable activities (horizontal policies) and at creating innovation clusters (vertical policies). The paper discusses how such a strategy could be implemented especially since the appropriate mix of these policies depends on a country's stage of development.
Industrial Clusters and Networks: Case Studies of SME Growth and Innovation
Author: Khalid Nadvi
Source: UNIDO Small and Medium Enterprises Program, October 1995

This is a study of five selected SME clusters from Latin America and Asia that have demonstrated technical innovation, international competitiveness, and sustainability. While each case reflects the collective efficiency advantages of SME clusters, they also indicate that there is a case for the "benigh neglect" by the State in cluster intervention. The Latin American clusters indicate greater degree of public intervention compared to the Asian clusters; but in both cases, public intervention have been relevant only when there is an active involvement by the participating firms and their buyers themselves.
Coordination Failures, Clusters and Microeconomic Interventions
Author: Andres Rodriguez-Clare
Source: Inter-American Development Bank Research Papers, June 2005

This paper conceptually explores the causes of market failures among SMEs and discusses whether clusters help deal with such failures. Clare's main argument is that although one may think of clusters as resulting from agglomeration economies, the notion of coordination failures is more useful to derive appropriate policies to encourage clustering. He makes two important points to distinguish 'agglomeration economies' with 'coordination economies': First, innovation policies that aim to increase innovation across the board are likely to be inferior to policies that take a more selective approach, by trying to induce the development of innovation clusters in areas of comparative advantage. Second, by the same principles, offering of blanket public subsidies to clusters only invites misallocation of resources; policies should aim at fostering cooperation in sectors where the economy is already showing comparative advantage.
The Triple C Approach (customer-oriented, collective and cumulative clusters)
Author: John Humphrey and Hubert Schmitz, IDS, University of Sussex
Source: World Development, vol. 24, no. 12, pp 1859-1877, 1996

The European experience on SME clusters suggests that local and regional governments as well as the joint public/private sector initiatives can play an important role. The examples of network promotion in Denmark and in Chile show that specialization and cooperation between SMEs can be promoted through public institutions. More policy insights on SME clusters are emerging from experiments in developing countries themselves. The additional challenges developing countries face regarding, both public institutions and cluster initiatives, however, indicate that public interventions on SME clusters in developing countries will be relevant only if they give sufficient attention to the Triple-C requirements, namely, being guided by customer-orientation, being collective in terms of reducing transaction costs and mutual learning; and achieving cumulative improvements in competitiveness.
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Upgrading in Clusters and Value Chains in LAC: What is the Role of Policies?
Author: Carlo Pietrobelli and Roberta Rabellotti
Source: Inter-American Development Bank, Sustainable Development Department Best Practices Series, January 2004

This three-dimensional analysis is based on the collection of original data from eleven new clusters in Latin America, which shows that clusters and value chains belonging to different groups of industries tend to follow systematically different patterns of collective efficiency, modes of chain governance, and upgrading. While external economies are easier to achieve in most clusters, it is difficult to achieve sectoral diversity. Only in traditional industries, upgrading is achieved thorugh signals received from large global buyers; in complex production systems and in natural resources industries, this has been difficult to achieve. While process and product upgrading ae more common, functional upgrading is only rarely achieved.

Case Studies

Africa: Knowledge, Technology, and Cluster-Based Growth
Author: Douglas Zhihua Zeng
Source: 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
Author: Marco Antonia Vargas
Source: 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
Author: Henry Wai-Chung Yeung; Weidung Liu; and Peter Dicken
Source: 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.
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EU: Clusters in the EU-10 New Member Countries
Author: Christian Ketels and Orjan Solvell
Source: 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?
Author: Keijiro Otsuka
Source: 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
Author: Michelle Clara
Source: 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.

Web sites

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.

Last updated on Sep 10, 2010

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