Putting it to Work in Developing Countries - Nathan Associates

expedite approvals. Otherwise the approval
process again becomes bureaucratic and inefficient.
19 In short, strategic, carefully planned
streamlining of the administrative framework for
investment can benefit foreign and domestic
investors, but only as an interim measure until
administrative barriers can be removed through
full-scale reform and liberalization of the public
sector. 20
EXPORT PROCESSING ZONES
Nearly every successful export-led growth strategy
in Southeast Asia and throughout the developing
world in the past 40 years has started with
an enclave approach—free trade zones, export
processing zones, bonded warehouses, or special
economic zones, as in China. In solving most
regulatory and other business control problems
in a small area, enclaves represent a politically
savvy approach yielding good results while
approaching the enormous challenge of economy-wide
reform gradually.
Export processing zones (EPZ) have been particularly
popular. 21 More than 3,000 exist in 116
countries and employ 43 million workers, mostly
women. 22 Concentrated in textiles, apparel, and
consumer electronics, EPZs have been used to
stimulate exports of nontraditional goods, generate
employment, and attract foreign investment.
EPZs attract foreign direct investors through tax
concessions, superior infrastructure, reduced
administrative barriers, and duty-free import of
components used in export production.
EPZs have long been built around manufacturing
goods for export but are now incorporating
services in response to the upward trend in efficiency-seeking
FDI in that sector. In such a
zone, workers may provide data processing or
call center services. ICT infrastructure is critical
for these zones, as are productive, cost-effective
workers and managers. Traditional EPZs may
well be useful in attracting FDI for many countries,
but the more labor-intensive zones may
decline in importance given the industry shifts
described in Chapter 4. In addition, the export
subsidies that are the heart of EPZ operations
have been questioned since 1995 as possibly violating
WTO agreements, depending on the hostcountry’s
income level. This is likely to discourage
some future EPZ activities (Exhibit 5-4). 23
In sum, EPZs have helped generate employment
and launch industrialization in difficult economic
environments. But their enclave nature may
tend to isolate benefits. EPZs need to be linked
to the general economy’s industrial and commercial
centers and to a well-educated workforce
to facilitate the spillovers and technology transfers
that motivate the pursuit of FDI. 24
INCENTIVES
Most developing and developed countries alike
provide incentives for FDI. The most common
are fiscal—tax holidays, special tax reductions
and the like. 25 Others include grants and subsidies
and construction of special infrastructure.
These incentives are justified on the basis of the
direct and indirect benefits of FDI and the hope
of creating industrial agglomerations or clusters
of foreign firms that can accelerate development
and attract more investment. But the tradeoff
can be costly. For example, incentives offered
automobile manufacturers in Central Europe
amounted to more than $200,000 for each job
eventually created. 26 When incentives include
cash subsidies and outlays for infrastructure, or
other financial incentives, the price can rise rapidly.
And, whatever their benefit, such incentives
create economic distortions and inefficiencies
that work against local firms that do not qualify
for them.
Given these costs, are incentives an effective way
to attract FDI At least according to conventional
wisdom, tax incentives—in Ireland, Malaysia,
Costa Rica, and Mauritius—seem to have stimulated
FDI. 27 But many multinationals rate a
stable and predictable tax regime as more critical.
28 All things being equal, tax incentives may
marginally affect location decisions for efficiency-seeking,
export-oriented FDI projects. 29 Their
influence on market-seeking FDI may be even
less significant.
64