An export processing zone, or EPZ, is simply an area set up to boost commercial and industrial exports by encouraging economic growth through investment from foreign entities. Incentives such as tax exemptions and a barrier – free environment are the main attractions of an EPZ.
The concept of the EPZ may have originated from free trade zones created in major ports such as Hong Kong, Gibraltar, and Singapore during the nineteenth century. Some of the first free trade zones allowed imports and exports free from custom formalities so that goods could be re-exported quickly.
According to reports, the EPZ has been used by developing nations since the 1930’s to boost foreign investment. The mechanism is called EPZ is some countries, while it can also be called Free Trade Zone (FTZ), Special Economic Zone (SEZ) and maquiladora, such as found in Mexico.
Some of the first EPZ’s were found in Latin America, while in the US, the first free trade zone was created in 1934. However, right from the 1970s, developing nations have leveraged EPZ’s as a way of stimulating their economies by encouraging investment from the developed world.
According to statistics, by 2006 alone, 130 countries had established over 3500 EPZ’s within their borders, with an estimated 66 million workers employed in those EPZ’s. Some EPZ’s are single factory locations, whereas some, such as the Chinese Special Economic Zones, are so large that they have a resident population.
EPZ’s are expected to have some resources that can attract investment such as natural resources, cheap skilled labour, or logistical advantages. Nations can also encourage investment in the EPZ by offering expedited licensing or building permits, minimal customs regulations, duty – free tax incentives, such as a ten year tax holiday, and developing infrastructure to investor’s requirements.
With over 130 nations providing EPZ’s within their borders, the advantages of creating EPZ’s appear to be very clear for developing countries.
What are the Benefits of Export Processing Zones?
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Foreign Direct Investments (FDI) Inflow
The privileges and exemptions offered by EPZs attract foreign investors into the region. Reports shows increase in foreign direct investment in some countries after adopting EPZ policies. Note that the importance of foreign direct investment goes beyond the provision of needed capital (financial and machinery) into the economies of developing countries to stimulate industrialization.
The investment of foreign capital and technology act as a catalyst that shows domestic firms and employers good practices and in some cases results in joint business ventures encouraging local entrepreneurs in developing countries.
Increase in national exports and export diversification
Have it in mind that the establishment of EPZs can lead to a significant growth in national exports and industrialization in developing countries. Reports from various statistical researches indicated a substantial growth in the volume of EPZs gross exports as a share of national exports.
Export diversification is another potential advantage of EPZs since many developing countries are disadvantaged by a mono – culture economy and rely on the exports of a limited number of commodities in the primary sector. EPZ – induced industrial manufacturing have proved to result in diversification of exports in certain countries.
However, growth in the volume of exports in an EPZ operating country is not necessarily directly linked to the creation of the zone but can be related to economic reforms and changes in the global market. Also note that that any EPZ that offer fiscal exemptions from some or all export taxes can encourage firms operating in the zones to source their raw materials and intermediate inputs from known or cheaper international suppliers.
Note that even though some countries have achieved a high level of net exports, others have not been able to close the gap between gross and net exports. Howbeit, high gross export volume can also result in high firm profits that can be reinvested into new activities in the host economy to encourage industrialization.
Employment Effect on National Economy
Another primary objective for establishing zones by governments is employment generation, which in turn can help increase the income of people and encourage domestic savings and investments into industries. EPZs, for the most part, have initiated creation of jobs. A more important contribution of zone employment is the creation of jobs in relation to a situation of high unemployment rate and high levels of poverty.
Note that the feminisation of employment in most zones also offers a source of income for families and increases savings potential. Many economists on the contrary have concluded that employment in EPZ means low wages, high work intensity, unsafe working conditions and suppression of labour rights.
Foreign Exchange Earnings
Another primary benefit of creating EPZ is the generation of foreign exchange earnings to enable governments to acquire imports needed for the rest of the economy. Note that this helps developing countries to import goods and materials needed to improve the industrialization of domestic firms and increase government revenue for development.
Foreign exchange earnings from exports always tend to depend on the source of inputs since most EPZ firms are usually involved in the labour intensive part of the production process. Benefits are greatest where backward linkages have been developed like in Korea and Chinese Taipei, but such effects have been much more limited in other countries.
Linkages to the Domestic Economy
As a tool for industrialization, one of the direct contributions of the zones to development is the linkages it creates with domestic companies. Aside the fact that it helps in the transfer of technology and know – how to local industries, it also provides forward and backward linkages in the host economy.
Also note that the former exists when the outputs are sold to domestic market, while the latter when inputs are acquired from or subcontracted to domestic firms. In addition, linkage between EPZ firms and local firms facilitates the industrialisation process of developing countries.
But then again, reports have it that there are no significant differences between EPZ and Non – EPZ based export – oriented firms in terms of technology transfer because most of the activities in the zones are characterized by low added value with no access to advanced technology.
Human Capital Development
There has no doubt been a massive deal of knowledge spill-over effect from the creation of EPZs in developing countries. According to reports, managerial training and skills acquired through employment in EPZ firms can be beneficial in the industrialisation process of the host.
By extension, these improved skills and productivity boosts workers’ income earning capacity when transferred to domestic firms outside the zones. Therefore, domestic entrepreneurs and workers benefit from observing and copying the traits that make the zone firms successful exporters.
The main benefits of EPZs are growth from foreign exchange earnings through non-traditional exports, creation of jobs to assist in income generation, developing labour skill sets, the attraction of direct foreign investment, and fostering of transfer of technology.
However, government should consider all available policy options through a cost – benefit analysis and bear in mind that successful zones depend strongly on external factors like private investment and the international market, which are unpredictable and as such endeavour to minimize upfront cost whenever possible.