November 1998 Insights Issue #28

Back to "Zones are blooming"

When the government of Costa Rica wanted to diversify away from coffee, bananas and garments, it did so by persuading Intel to set up a $500 million plant producing Pentium II processors using 35 percent local content. In a normal year the exports from that plant are equal in value to coffee and bananas combined. Key factors in the deal were government pledges to supply skilled personnel and cheap power. The Economic and Technical Development Zone in Dalian (northeast China) is another that has succeeded in attracting hi-tech investment, promoting reinvestment and local sourcing. Its success is owed again to high quality human resources being on call along with thousands of local firms able to supply foreign direct investors setting up factories in their zone.

Despite these encouraging examples, however, only a few countries have been able to upgrade production activities in their zones by adopting such strategies. This shortfall is partly due to the production chains that allocate functions according to the perceived capacities and strengths of the various zones, locating high value-added and knowledge-intensive activities in developed countries and low value-added labour intensive ones in developing countries. The incentives offered by most zone-operating countries also contribute in that they provide for duty-free imports and exports and so encourage zone enterprises to import all their components rather than developing more integrated manufacturing operations using local inputs. However, even in countries that offer incentives for local sourcing the zone enterprises frequently find that local suppliers cannot meet their scale, speed, quality and cost standards so they continue to rely on tried and trusted international networks.