THE ROLE OF EXPORT PROCESSING ZONES
IN EAST ASIAN DEVELOPMENT:
SOUTH KOREA, TAIWAN, CHINA AND THAILAND
by
ZHU Ying
Department of Geography
Thesis submitted in fulfilment of the requirements for
the degree of Doctor of Philosophy at the University
of Melbourne
July 1992 PREFACE
In accordance with the requirements for the submission of a
Ph.D. thesis at the University of Melbourne, I here make the
following statements:
(a) STATEMENT OF ORIGINALITY
The results presented in this thesis are derived from research
carried out by the author. Where reference is made to the work
of others this is acknowledged in the text and, where
relevant, in the bibliography.
(b) LENGTH OF THESIS
With the exclusion of the figures, tables, maps, appendices
and bibliography, the length of this thesis is less than
100,000 words.
(c) CONFIDENTIALITY AND COPYRIGHT
I understand that my Ph.D. thesis entitled The Role of Export
Processing Zones in East Asian Development: South Korea,
Taiwan, China and Thailand will be lodged with the University
Library, will be made available to any persons entitled to use
the Library and may be photocopied or microfilmed by or on
behalf of the Librarian for use for research or private study
pursuant to the provisions of the Copyright Act 1968. I agree
that any person to whom a copy is furnished under such
conditions may, subject to acknowledging the source of the
quotation, quote extracts from the thesis in any paper or
i written work prepared by the user by may not without my permission publish in a paper or other written work extracts which in total would constitute an infringing copy for the purposes of the Copyright Act.
ZHU Ying
July 1992
ii ACKNOWLEDGMENTS
It is extremely valuable and privilege to have an opportunity to study in the University of Melbourne, Australia. I thank
God's blessings and the support from various people and organisations.
First of all, I am grateful to my supervisor Professor
Michael Webber, whose direction and comments have significantly improved my research skills. Without his encouragement and financial support, this study could never been completed. I must also thank Mr. Geoff Missen in the same
Department, for his enlightenment on the theories of economic development. The comments and suggestions on benefit-cost analysis received from Dr. Sisira Jayasuriya in the Department of Economics, La Trobe University, were also most helpful and much appreciated. Other members of the Department have also provided great support at various time.
I am also indebted to the University of Melbourne. Under the scholarship granted by the University, this study was undertaken and completed smoothly. Meanwhile, I am also grateful to the research centre in comparative Australian-
Asian Development organised between the Department of
Geography and Environmental Science, Monash University and the
Department of Geography, Melbourne University for their generous financial support for my overseas field work in South
Korea, Taiwan and Thailand.
iii My field work in South Korea, Taiwan and Thailand received generous help and support from both administration and individual friends. As for South Korea, I am grateful to the
Administration Office of Masan Free Export Zone and Lucky Ltd for their warm welcome and reception. I also appreciate the discussions with Dr. Jungho Yoo, a senior fellow in Korea
Development Institute. As for Taiwan, I am thankful to the
Ministry of Economic Affairs, Export Processing Zone
Administration, especially Ms. Margaret Hsueh and Mr. Fu-Rung
Chang, for their reception and friendship. I also appreciate the discussions with Dr. Jia-dong Shea and Dr. Jenn-hwa Tu in
Institute of Economics, Academia Sinica for providing useful insights about direct foreign investment in Taiwan. As for
Thailand, I am indebted to the Industrial Estate Authority of
Thailand and Dr. Suwattana Thadaniti at Chulalongkorn
University, for their help in collecting information and warm reception. In addition, I thank my old colleague and friend
Ms. Li-yun Zhang for her kindly support by providing the data which I need about Shenzhen Special Economic Zone.
Furthermore, I also received support from some international organisations and individual professionals. I thank International Labour Office, United Nations Centre on
Transnational Corporations, the World Bank and the World
Export Processing Zone Association, Dr. Bailey in ILO, Dr.
Keesing in the World Bank, Mr. Bolin in WEPZA, and Dr. Healey, in Economics Department, the University of Adelaide, for their kind support of this research.
iv Finally, I am most indebted to my family for their love, support and encouragement.
v TABLE OF CONTENTS
Page Number
.PREFACE i
.ACKNOWLEDGMENTS iii
.TABLE OF CONTENTS vi
.LIST OF FIGURES Yi
. LIST OF TABLES xv
.LIST OF MAPS XXI
PART I
CHAPTER 1 RESEARCH AIM AND THESIS STRUCTURE 1
CHAPTER 2 THE DEVELOPMENT PROCEDURE AND PRESENT
SITUATION OF EPZS IN THE WORLD 9
2.1 The evolution of EPZs in the world 9
2.2 The definition and characteristics of EPZs 12
2.1.1 The definition of EPZs 12
2.2.2 The characteristics of EPZ 16
2.3 The difference between EPZs and
other special economic areas 19
2.3.1 Enterprise Zone 20
2.3.2 Offshore Industrial Factories
(Bonded Factories) 27
2.3.3 Science Parks 30
2.4 The present situation of EPZs in the world 34
vi Page Number
2.5 Summary 43
CHAPTER 3 THE DEBATE OF DEVELOPMENT AND EPZS 44
3.1 The economics of development theory 45
3.2 The state and industrialisation strategy 56
3.3 EPZs 67
3.3.1 Direct foreign investment 67
3.3.2 The debate about EPZs 83
3.4 Conclusion 103
PART II CASE STUDY OF FOUR ZONES 110
CHAPTER 4
BACKGROUND AND INVESTMENT ENVIRONMENT 112
4.1 Introduction to my overseas field work 113
4.2 Background of the establishment of the four zones 113
4.2.1 The earliest EPZ -- Kaohsiung Zone 114
4.2.2 The establishment of Korean EPZ -- Masan Zone 117
4.2.3 The establishment of Shenzhen Zone in China 120
4.2.4 The establishment of Lat Krabang Zone in Thailand 125
4.2.5 Comment 128
4.3 Geographic environment 130
4.4 Infrastructure facilities 138
4.4.1 Land and factory building 138
4.4.2 Industrial facilities and supporting services 145
vii Page Number
4.5 Administrative structure and investment approval
procedures 151
4.6 A comparison of incentives 165
4.6.1 Exemption from customs duties 165
4.6.2 Tax incentives 165
4.6.3 Other incentives 169
4.7 A comparison of restrictive regulations 173
4.7.1 The structure of ownership 173
4.7.2 The ratio between export and domestic sale 174
4.7.3 The time limit on enterprises 177
4.7.4 Others 179 4.8 The differences between EPZs and other industrial
areas 182
4.9 Summary 198
CHAPTER 5
THE CAPITAL STRUCTURE IN THE FOUR ZONES 204
5.1 The investment structure 205
5.2 The sources of foreign investment 212
5.3 The structure of investment by industry sector 217
5.4 The development of investment in the past 224
5.4.1 Total investment in the past 225
5.4.2 Number of firms and the adjustment of capital 239
5.5 Summary 254
CHAPTER 6
THE LABOUR STRUCTURE IN THE FOUR ZONES 256
6.1 The employment situation 257
viii Page Number
6.1.1 Total employment 257
6.1.2 Gender, age group, recruitment and
mobility of labour 272 6.1.3 The educational level and training of labour 284
6.1.4 Employment by industry sectors 290
6.2 The working condition 301
6.2.1 Wages 301
6.2.2 Working hours and shifts 326
6.2.3 Other welfare 329
6.3 Unionisation 332 6.4 The management between foreigners and local people 339
6.5 Summary 340
CHAPTER 7 THE PRODUCTION STRUCTURE IN THE FOUR ZONES 350
7.1 The output of products 351
7.2 The structure of imports and exports 366
7.3 The output per unit of investment and productivity 389
7.4 Summary 405
PART III
IMPLICATIONS 408
CHAPTER 8
THE BENEFIT-COST ANALYSIS 409
8.1 The components of benefit-cost 410
8.2 The benefit-cost of Masan Zone 418
8.3 The benefit-cost of Kaohsiung Zone 421
ix Page Number
8.4 The benefit-cost of Shenzhen Zone 425
8.5 The benefit-cost of Lat Krabang Zone 430
8.6 Summary 433
CHAPTER 9
CONCLUSION 436
9.1 Summary of the results 436
9.1.1 General review of the thesis 437
9.1.2 The results of the thesis 439
9.1.3 The life cycle of the zones 445
9.2 Reflection on theoretical and practical approaches 456
9.2.1 Reflection on theoretical approaches 456
9.2.2 Reflection on practical approaches 469
9.2.3 Reflection on the results 478
9.3 The future of the four zones 484
BIBLIOGRAPHY 489
x LIST OF FIGURES
Page Number
CHAPTER 1
1.1.1 Thesis outline 3
CHAPTER 5
5.3.1 The investment proportion of industry sector
in Masan Zone 217
5.3.2 The investment proportion of industry sector
in Kaohsiung Zone 218
5.3.3 The investment by industry sector
in Lat Krabang Zone 219
5.3.4 The average percentage of investment in different
items in Shenzhen Zone from 1979 to 1988 220
5.3.5 The proportion of industry sector in Shenzhen Zone 222
5.4.1 The investment in Masan Zone in $US, YEN and WON 226
5.4.2 The investment in Kaohsiung Zone in
$US, YEN and $NT 229
5.4.3 Foreign exchange rate, YEN, WON and $NT per $US 232
5.4.4 The investment of industry in Shenzhen Zone
in $US, RMB and YEN 234
5.4.5 The investment in Lat Krabang Zone
in $US, BAHT and YEN 237
5.4.6 The number of participating enterprises
in the four zones 240
5.4.7 The value of capital per firm in the four zones 241
xi Page Number
CHAPTER 6
6.1.1 The employment structure by industry sector
in Masan Zone 258
6.1.2 Employment in Masan Zone from 1971 to 1990 259
6.1.3 The employment structure by industry sector
in Kaohsiung Zone 262
6.1.4 Employment in three EPZs in Taiwan, 1967-90 263
6.1.5 The employment structure by industry sectors
in Shenzhen Zone 265
6.1.6 The number of industrial employment
in Shenzhen Zone 267
6.1.7 The employment by industry sectors
in Lat Krabang Zone 269
6.1.8 Employment by industry sectors
in Masan Zone, 1973 and 1985 291
6.1.9 Employment by industry sectors
in Kaohsiung Zone in 1969 and 1990 293
6.1.10 Employment by industry sectors
in Shenzhen Zone in 1984 and 1989 294
6.2.1 The monthly money wages and real wages
in Masan Zone 303
6.2.2 Money wages and real wages between
Masan Zone and Korea since 1971 305
6.2.3 The monthly money wages and real wages
in Kaohsiung Zone 306
xii Page Number
6.2.4 Money wages and real wages between
Kaohsiung Zone and Taiwan since 1967 308
6.2.5 The monthly money wages and real wages
in Shenzhen Zone 310
6.2.6 The money wages and real wages
in Shenzhen Zone and China 312
6.2.7 The monthly money wages and real wages
in Lat Krabang Zone 313
6.2.8 Money wages and real wages between the four zones 318
6.2.9 Money wages and real wages between the United
States, Japan, Masan Zone and Kaohsiung Zone 321
6.2.10 Money wages and real wages between
Shenzhen Zone and Hong Kong 323
CHAPTER 7
7.1.1 The output by industry sectors in Masan Zone 352
7.1.2 The value of output in Masan Zone since 1971 354
7.1.3 The output by industry sectors in Kaohsiung Zone 356
7.1.4 The value of output in Kaohsiung Zone since 1967 357
7.1.5 The output by industry sectors in Shenzhen Zone 361
7.1.6 The value of output in Shenzhen Zone since 1979 362
7.1.7 Comparison of total output in the four zones 365
7.2.1 The value of import and export in Masan Zone 368
7.2.2 The structure of import from overseas and
the domestic market in Masan Zone 370
7.2.3 The value of import and export in Kaohsiung Zone 372 Page Number
7.2.4 The imports from overseas and the domestic
market in Kaohsiung Zone 376
7.2.5 The distribution of import and export market
by region in Kaohsiung Zone 378
7.2.6 The value of imports and exports in Shenzhen Zone 380
7.2.7 The balance of trade in three EPZs 386
CHAPTER 9
9.1.1 Pattern of EPZ life cycle (I) 446
9.1.2 Pattern of EPZ life cycle (II) 448
9.1.3 Pattern of EPZ life cycle (III) 451
9.1.4 Pattern of EPZ life cycle (IV) 453
xiv LIST OF TABLES
Page Number
CHAPTER 2 2.2.1 The evolution of terminology 16
2.4.1 Export Processing Zones in developing countries in 1970 and 1989 36
CHAPTER 4
4.2.1 The manufacturing capacity utilisation rates in
Taiwan in 1959 115
4.3.1 The industrial districts of Shenzhen Zone 134
4.3.2 The area of the four zones 138
4.4.1 The lease of standard factory building in Masan 139
4.4.2 The price of standard factory building in
Kaohsiung Zone, 1967 and 1990 140
4.4.3 Comparison of land rental in the four zones, 1990 142
4.4.4 Comparison of the price of standard factory
Building in four zones 143
4.4.5 Official exchange rates 144
4.4.6 Comparison of power and
water supply in the four zones 151
4.5.1 The structure of Masan Zone's Administration Office 152
4.5.2 The structure of Kaohsiung Zone
Branch Administration 155
4.5.3 Industrial investment related institutions in
Shenzhen Zone 158
4.5.4 The procedures of establishing an enterprise
in Shenzhen Zone 159
XV Page Number
4.5.5 Organisation Chart of Industrial Estate
Authority of Thailand 161
4.5.6 Process of permission for manufacturing
in the Industrial Estate 163
4.6.1 A comparison of main incentives in the four cases 172
4.7.1 A comparison of main restrictive regulations
in the four zones 181
1.8.1 The Industrial Estates and Export Processing
Zones in Thailand, 1989 197
CHAPTER 5
5.1.1 The ownership structure by number of firms in
Shenzhen Zone, 1989 209
5.1.2 A comparison of investment in the four zones 210
5.2.1 The main foreign investment sources
in th€ four zones 213
5.3.1 The structure of investment in Shenzhen Zone 221
5.3.2 Comparison of investment by manufacturing
sectors of the four cases 223
5.4.1 The investment by industry sector
in Masan Zone in 1979 and 1989 243
5.4.2 The adjustment of capital in Taiwan's EPZs 246
5.4.3 The investment by industry sector
in Kaohsiung Zone from 1970 to 1990 247
5.4.4 The proportion of industry sectors
in Shenzhen Zone from 1980 to 1989 249
xvi Page Number
CHAPTER 6
6.1.1 Labour and capital intensity in Masan Zone 261
6.1.2 Labour and capital intensity in Kaohsiung Zone 264
6.1.3 Labour and capital intensity of
Shenzhen Zone's industry since 1979 268
6.1.4 Employment, labour intensity and capital
intensity in Lat Krabang Zone since 1987 270
6.1.5 Comparison of employment and labour intensity
in the four zones 270
6.1.6 Employment by gender in Masan Zone since 1971 272
6.1.7 Employment by gender in Kaohsiung Zone since 1967 273
6.1.8 Comparison employment by gender in the four zones 274
6.1.9 Labour age in Kaohsiung Zone since 1967 275
6.1.10 Employment by age group in Shenzhen Zone 276
6.1.11 The average age of employees in the four zones 277
6.1.12 Labour turnover in Kaohsiung Zone since 1982 280
6.1.13 Labour sources and turnover in the four zones 283
6.1.14 The average educational level in Kaohsiung Zone
in 1968 and 1990 285
6.1.15 The educational level in Shenzhen Zone 286
6.1.16 The average educational level of employees
in Lat Krabang Zone 288
6.1.17 Comparison of educational level in the four zones 289
6.1.18 Labour intensity by industry sector
in Masan Zone in 1973 and 1988 292
6.1.19 Labour intensity by industry sector
in Kaohsiung Zone in 1969 and 1990 294
xvii Page Number
6.1.20 Labour intensity by main industry
sector in Shenzhen Zone in 1989 295
6.1.21 Labour intensity by industry sector
in Lat Krabang Zone in 1990 296
6.1.22 Employment by industry sector in the zones 297
6.1.23 Comparison of labour intensity by industry
sectors in the four zones 298
6.2.1 Comparison of the rate of wage increase
in the four zones 315
6.2.2 Annual increase on wages in different regions
in the 1970s and 1980s 322
6.2.3 Labour cost in different location, 1988 324
6.2.4 The relevance of wages to PPPs in different region 325
6.2.5 Working hours and shifts in the four zones 328
6.3.1 Comparison the union movement in the four zones 336
CHAPTER 7
7.1.1 Comparison of capital, employment and output by
industry sector in Masan Zone, 1989 353
7.1.2 Output value by industry sector in Masan Zone 355
7.1.3 Comparison of capital, employment and output by
industry sector in Kaohsiung Zone, 1990 358
7.1.4 Output value by industry sector in Kaohsiung Zone 359
7.1.5 Output value in Shenzhen Zone 360
7.1.6 Output of foreign capital firms by region
in Shenzhen Zone 360
7.1.7 Output by industry sector in Shenzhen Zone 363 Page Number
7.1.8 Output value in Lat Krabang Zone since 1987 364
7.2.1 Comparison of export performance between
Korea and Masan Zone since 1971 367
7.2.2 Imports by industry sector in Masan Zone 369
7.2.3 Overseas sale and domestic sale of
Masan Zone's products 372
7.2.4 Comparison of export performance between
Kaohsiung Zone, three EPZs and Taiwan since 1967 374
7.2.5 Overseas sale and domestic sale of
Kaohsiung Zone's products 377
7.2.6 Comparison of export performance between
Shenzhen Zone and China 381
7.2.7 The structure of imports in Shenzhen Zone 383
7.2.8 The constitution of exports in Shenzhen Zone 383
7.2.9 Overseas sale and domestic sale of
Shenzhen Zone's products 384
7.2.10 Imports and exports of the four zones 387
7.3.1 Efficiency of production in Masan Zone and Korea 391
7.3.2 Productivity by industry sector in Masan Zone 392
7.3.3 Efficiency of production in
Kaohsiung Zone and Taiwan 393
7.3.4 Productivity by industry sector in Kaohsiung Zone 394
7.3.5 Efficiency of production in Shenzhen Zone and China 396
7.3.6 The industrial productivity level in Shenzhen Zone 397
7.3.7 Efficiency of production in
Lat Krabang Zone and Thailand - 398
xix Page Number
7.3.8 Output per unit of investment and output per firm in the four zones 399
7.3.9 Comparison output and investment per firm in the four zones 400
7.3.10 The productivity level by industry sectors in the zones 401
7.3.11 Comparison of the productivity and wage level in different location 402
CHAPTER 8 8.2.1 Annual components of benefit-cost in Masan Zone 419 8.2.2 Results of benefit-cost analysis in Masan Zone 420
8.3.1 Annual components of benefit-cost in Kaohsiung Zone 422
8.3.2 Results of benefit-cost analysis in Kaohsiung Zone 425
8.4.1 Annual components of benefit-cost in Shenzhen Zone 428
8.4.2 Results of benefit-cost analysis in Shenzhen Zone 429
8.5.1 Annual components of benefit-cost
in Lat Krabang Zone 432
8.5.2 Results of benefit-cost analysis in Lat Krabang Zone 433
8.6.1 Comparison the results of benefit-cost
of the four zones 435
xx LIST OF MAPS
Page Number
CHAPTER 2 2.1 The location of Special Economic Zones in China 15
2.2 Enterprise Zones, Free Ports and Development Corporations in Britain 23
CHAPTER 4
4.1 The location of Free Export Zones and other
Industrial Estates in South Korea 131
4.2 The location of EPZs in Taiwan 132
4.3 The location of Shenzhen Special Economic Zone 133
4.4 The location of Industrial Estates in Thailand 136
4.5 Lat Krabang Industrial Estate and
Export Processing Zone 137
4.6 Investment Promotion Zones in Thailand 188
4.7 The location of Special Economic Zones and
Open Cities in China 195
xxi CHAPTER 1
RESEARCH AIM AND THESIS STRUCTURE
Export Processing Zones (EPZs) are about thirty years old now
(ILO & UNCTC, 1988). Their effects and influence on third world economic development and on international industrial restructuring have been criticised by different literatures. I wish to combine my practical experience of working in Shenzhen
Special Economic Zone for four years, with research to compare four EPZs' development in four East Asian countries and area:
Masan Zone in Korea, Kaohsiung Zone in Taiwan1 , Shenzhen Zone in China and Lat Krabang Zone in Thailand. This intended to explore the effect of EPZs on the economic development of those countries, and to provide a series of comparative data
(especially on the zone of China about which there is little information).
Through the research, I want to clarify several issues.
First, how do development theories interpret East Asian development strategies, especially how do EPZs fit into this issue? This discussion gives rise to more specific questions on the political and economic background of the establishment of EPZs in these countries: on the one hand, why developing
1 Note: I use country instead of area to refer to Taiwan in rest of the thesis in order to simplify the sentence. But I claim here that Taiwan is an area of China. 1 countries want to serve their national goal by establishing
EPZs and how they use EPZs to fit their development strategies. On the other hand, the EPZs' issue is directly linked to direct foreign investment behaviour. Theoretically, how can we explain the phenomenon of direct foreign investment, and empirically, how can we reveal it based on the case study of EPZs?
With regard the above questions, it is necessary to illustrate the trend of industrial restructuring, from developed countries to newly industrialising countries, and then the shift to other developing countries, in terms of the reason and characteristics of the restructuring. After discussing the approaches adopted to the study of development, direct foreign investment and EPZs, attention is concentrated on several key questions: What is the effect of EPZs on the restructuring? What has been the economic structure and performance of EPZs in the four countries? Under the modern production system, what are the labour structure, working and
welfare conditions and union organisations in EPZs? What is
the real effect of EPZs on national development strategies?
Finally, with this information, I can proceed to illustrate
the last questions: Is it worth setting up EPZs to fit the
national development strategies in developing countries based
on benefit-cost analysis? If yes, what is the beneficial term
of EPZs for a host country? I shall compare the four cases to
summarise a classification scheme, use the data to evaluate
2 the viewpoints about the development of EPZs, and to offer policy suggestions for people in authority in these countries to guide government behaviour, district behaviour and enterprise' behaviour.
In tackling these issues, this thesis is divided into three
parts with 9 chapters (see Figure 1.1.1).
PART I
GENERAL
1. Introduction
2. EPZs in the World
9. Literature Review
PART II
CASES
4. Background & Investment Environment
5. Capital Structure
6. Labour Structure
7. Production Structure
PART III
IMPLICATIONS
9. Benefit-Cost analysis
10.Life cycle & conclusion
Figure 1.1.1: Thesis outline
3 Part I concentrates on two issues: the general phenomena of
EPZs in the world and relevant theoretical approaches to development, direct foreign investment and EPZs. The questions, such as how do development theories interpret East
Asian development strategies and how do EPZs fit into this issue can be answered. Part II examines the four cases in terms of political and economic background, policies and physical facilities, and performance of EPZs on investment, labour and production structure. The questions about why developing countries want to serve their national goal by establishing EPZs and how they use EPZs to fit their development strategies can be answered. While, the phenomenon of direct foreign investment, industrial restructuring, labour structure, working and welfare conditions, and production performance in the EPZs can be also revealed. Part III illustrates the benefit-cost and life cycle of EPZs. Meanwhile, the constructive suggestions and conclusion of the debate of EPZs' development are also summarised in this part.
Chapter 2 introduces the development, procedures and present situation of EPZs over the world. It details the history of free trade areas in the world, the establishment of
EPZs and their definition and characteristics, the differences
between different special economic areas, and the present situation of EPZs in the world.
The literature debate about development, direct foreign
investment and EPZs is reviewed in Chapter 3. A general review
4 of the theoretical approaches to development by Neo- classicism, Dependency and Marxism is given before discussing the interpretation of development strategies in East Asia.
Then, the main body of the literature review relevant to EPZs is revealed, which includes the approaches to direct foreign investment in terms of international trade, industrial organisation, the advantage of ownership, internalisation and location. In addition, the theoretical and practical statement about EPZs is also reviewed in this chapter.
Chapter 4 focuses on the historical cases of the four zones to demonstrate the political and economic background of the establishment of EPZs, and their coordination with national development strategies. Attention is then focused on the comparison of the investment environment at both policies and physical utilities aspects. The study shows that the EPZ is a typical outcome of powerful government intervention to coordinate national development by transforming policy from an import-substitution strategy to an export-promotion strategy.
Through the examination of investment structure in Chapter
5, the ownership structure of EPZs' firms, capital sources, investment structure by industry sectors and the adjustment of capital in EPZs are demonstrated. Moreover, the behaviour of direct foreign investment and its role in industrial
restructuring between developed countries and developing
countries can be clarified. These cases show that foreign
investment takes the main role in the EPZs, and the sources
5 are mainly from the local region in East Asia. The examination of manufacturing sectors in the EPZs illustrates that most manufacturing is light industry, and mainly electronics and electric production. The firms in the zones are mainly small and medium size. These characteristics determine the firms' behaviour.
Given the information of employment in the zones, the analysis of labour forces by gender, age group, educational level, recruitment and mobility of labour, the labour structure in the zones is illustrated in Chapter 6. By analysing employment by industry sectors and labour intensity, the characteristics of manufacturing in EPZs are further revealed. Moreover, an important issue of working conditions, which include wages (both money wages and real wages), working hours and shifts and other welfare are also examined in this chapter. Through the comparison of wage levels in EPZs, the host nations and developed countries (mainly investing countries), labour costs in different regions are revealed, which is an element of the industrial restructuring occurring between developed countries and developing countries. In addition, the relevance of wages to purchasing-power-parities
(PPPs) illustrates differences in real incomes and living standards of workers in the different regions. Finally, the sensitive issues of unionisation in the zones and relations
between foreigners and local people are also examined. The summary of this chapter shows that the significant phenomenon of labour forces in the zones is the majority female
6 participation, and the manufacturing sectors are mainly labour intensive production. There is an important contribution by
EPZs which create employment opportunity and share a large percentage of manufacturing employment in the local area. In addition, workers' payment and working conditions have been improved following the EPZs' maturity and trade union movement.
Chapter 7 provides details of the production performance of
EPZs' firms, by illustrating output of products by industry sectors, the constitution of imports and exports, value added and productivity. I also compare these indexes between the four zones, their nation and other developed countries in order to clarify the issue of productive competitive advantage in different regions. The result of this chapter shows that there is a significant impact of the EPZs on their national economy, as they transfer from import-substitution to export- orientation, and the industrial productivity of EPZs has become higher than the national average level following the development of manufacturing in the zones.
Chapter 8 gauges the four zones' overall performance in the context of benefit-cost analysis, in terms of economic and social welfare to the host countries. The research result of this chapter demonstrates that these zones have a definitely positive effect on social and economic welfare to these host countries in the past.
7 Finally, Chapter 9 presents the pattern of life cycle of
EPZs and my conclusion about EPZs' development in relation to different theoretical and empirical approaches. The pattern of the EPZs' life cycle demonstrates that the most prosperous stage appears in the first two decades. After that, the main beneficial indexes have declined, which provides an indication to other countries which are designing or operating EPZs as a reference. Finally, some constructive suggestions towards the development of the four representative zones are also raised.
r
8 CHAPTER 2
THE DEVELOPING PROCEDURE AND PRESENT SITUATION
OF EPZS IN THE WORLD
In this chapter, I want to clarify the history of free trade areas in the world; the birth of EPZs and their definition and characteristics (including preferential policies, restrictive regulations and administrative systems); the difference between different special economic areas; and the present situation of EPZs in the world. Through the clarification, the question of the background of EPZs in the world can be answered.
2.1 The evolution of EPZs in the world
Looking back in history, the EPZ evolved from Free Port and
Free Trade Zones. The first free area was in Leghorn, a port in the Bay of Genoa, in the north-west of Italy. It was named a Free Port in 1547 (CSEZY, 1983), which is an embryonic form of free port. Since the 17th century, free ports and free trade areas have gradually appeared in some European cities like Hamburg and Bremen of Germany, Copenhagen of Denmark,
Dunkirk of France (CSEZY, 1983). The main capacity of these free trade areas was processing and storage of products, allowing the exhibition, selection, classification and repackaging in the areas, free of duty. But these would not influence the customs goods classification and tax rate. At
9 that time, the foreign trade of super power countries was mainly entrepot trade,• basically transiting other countries' goods. Under this circumstance, the prosperity of commerce in one country did not depend on domestic industry and products for export, but on the level of international trade. During that period, the tax system was overelaborate and subject to many kinds of local legislation in these countries, which blocked the development of international trade; therefore, depending on geographical advantage and the position of international trade, these free trade areas appeared in order to attract foreign goods, expand transiting trade and promote local economic development.
When capitalism developed into the stage of imperialism, apart from free trade areas in these countries, the super powers also set up free trade areas in their colonies. For instance, Britain and France set up free ports in Gibraltar,
Singapore, Hong Kong, Penang, Aden, Djibouti (CSEZY, 1983). In the 1930s, America started to set up Free Trade Zones. During this period, these free trade areas had some new characteristics. They allowed international business people to
process and manufacture in the zone without customs duty, activities that totally change the name, shape, and use of the
products and lead to changes of the customs goods classification and tax rate. They expanded the commercial
activities and developed manufacturing production from the
original free trade areas.
10 The first area with EPZs' characteristics was the Irish
Shannon Free Trade Zone.. In 1959, the Irish government decided to establish a free trade zone in Shannon. International
Airport in order to attract foreign investment and replace the jobs lost due to the business decline of the airport. In 1960, the free trade zone started to operate (ILO & UNCTC, 1988).
This kind of zone is a synthetic body between free trade area and industrial manufacturing area. The organisation was designed to achieve the incentives of a free trade area and the production and management of an industrial manufacturing area. However, the difference between the zone with EPZs' characteristics and the traditional free port and free trade areas is that the former emphasises the manufacturing production activities, and the latter concentrates on transit and commercial activities.
The typical EPZ was born in Taiwan. In 1966, Kaohsiung
Export Processing Zone was established in Taiwan and it was the first use of the formal name of "Export Processing. Zone"
in history (EDEPZ, 1987). Apart from Shannon Zone and
Kaohsiung Zone, there has been a remarkable increase of EPZs
in the developing countries after 1966. In 1970, the number
had increased to 11 located in 9 countries; Asia had five EPZs
in three countries; Africa had one EPZ in one country and
Latin America had five EPZs in five countries (see Table
2.4.1). In 1975, 25 developing countries operated 79 zones
(ILO, WP No.43). Till 1989, EPZs were in operation in 67
developing countries with 222 zones in Asia and the Pacific,
11 Africa, Latin America and the Caribbean, and Europe (see details in Table 2.4.1).
2.2 The definition and characteristics of EPZs
2.2.1 The definition of EPZs
There are several definitions of EPZs. Based on UNIDO (1980), an EPZ can be defined as
a relatively small, geographically separated area within a country, the purpose of which is to attract export-oriented industries, by offering them especially favourable investment and trade conditions as compared with the remainder of the host country. In particular, the EPZs provide for the importation of goods to be used in the production of exports on a bonded duty free basis.
An UNCTAD definition is as follows (FRÖBEL, 1980):
an enclave within a national customs territory, usually situated near an international airport and/or port, into which foreign capital goods, components and materials are brought without being subject to customs requirements. The imported products are processed within the zone, then exported elsewhere, without intervention from the customs authorities of the host country. The payment of customs duties is not required unless these products-or the final goods in which they are incorporated-enter the national customs territory of the host country.
12 The World Bank gave a definition as follows (ANTOINE,
1984):
the export processing zone is a relatively recent variant of the widely used free trade zone. It also provide buildings and services for manufacturing, i.e., transformation of imported raw and intermediate materials into finished products, usually for export but sometimes partly for domestic sale subject to the normal duty. The EPZ is thus a specialised industrial estate located physically and/or administratively outside the customs barrier, oriented to export production. Its facilities serve as a showcase to attract investors and a convenience for their getting established, and are usually associated with other incentives.
In this thesis, I define EPZs as:
In order to attract foreign investment, governments delimit a separated area from their countries (or, if small, include the whole country) to practise preferential policies and provide concessions to investors with the aim of promoting manufacturing development and export. The zones are normally located close to the international finance, trade and transport centres. But some of EPZs are sited backward regions in order to change the level of development.
I offer this definition of a zone based on the case studies of the thesis. For example, for economic and political reasons, China decided to delimit several separated areas to establish Special Economic Zones in 1979. It adopted many economic preferential policies and provided all kinds of
13 convenient and infrastructure facilities for foreign investors to draw foreign capital, technology and equipment, and management experience. The government chose Shenzhen, Zhuhai,
Shantou and Xiamen because the four sites are close to international finance, trade and transport centres or have close relationship with overseas business people (see Map
2.1). For instance, Shenzhen is near Hong Kong, Zhuhai is near
Macao, Xiamen faces Taiwan, Shantou was chosen because it is a major hometown for overseas Chinese. These four sites are easily separated from the mainland because they are located at the border. In 1984, Shenzhen had already established a second custom border between Shenzhen and the mainland. Hainan Island
is one of the most backward places in China. It is an agricultural society: natural economy and semi-natural economy
take an important position. In 1986, Hainan's per capita
output of industry and agriculture was only 5.27% of the whole
country's level (XIN BAO, 1988). In 1987, China decided to
establish Hainan Zone because the government wanted to learn
from Taiwan's experience to develop the economy of the second
big island of China. Other countries also have similar
characteristics, like Mexico and Philippines. In addition,
some relative small countries like Mauritius and Tonga carry
out EPZ conditions over the whole country (see the notes of
Table 2.4.1).
Based on the definition, this kind of production site may
have a different name in different countries, but with the
same purpose and capacity. Table 2.2.1 demonstrates the
differences of terminology. Generally speaking, "export
14
processing zone" now has the majority of users, against the
second most widely used term, "free trade zone".
Map 2.1: The location of Special Economic Zones in China
{...-' ■ ) 1. ' l....,7 1,L ZHEJIANG ti 1 U v(L ~ ~r L, „ ~ J f.f ~y .-' -"" ? HUNAN ? .-.1 ‘../ JIANGXI .. .? ÿ v-. i f 5 GUIZHOU 1''. l''7 FUJIAN if ~~1•`~7 r' r Ì ..~ ~ l ,~ \F "l ) ~~,..~~~ ( i.> t'-- t r r y. ,. Ì~ ~ ~(' -r. 4 I .~..1 r r -1 ) GUANGDONG SHANTOU I. SEZ GUANGXI fr Guangzhou / • i 4o• C %Hong Kong :Macau
SOUTH CHINA SEA
0 150 300 km
Source: Author's redrawing based on The Developing Economics,
March, 1985.
15 Table 2.2.1: The evolution of terminology
Term Main users and date of first use Free trade zone Traditional term since nineteenth century Foreign trade zone India (1983) Industrial free zone Ireland (pre-1970), UNIDO (1971), Liberia (1975) Free zone UNCTAD (1973), Cyprus (1975),USAID (1982), Costa Rica (1981), United Arab Emirates (1983)
Maquiladors Mexico (early 1970x) Export free zone Ireland (1975), UNIDO (1976) Duty free export processing zone South Korea (1975) Export processing free zone UNIDO (1976), UNCTAD (1983) Free production zone Starnberg Institute (1977) Free port zone Israel (1969) Export processing zone Taiwan (1966), Philippines (1977), Harvard University (1977), APO (1977), WEPZA (1978), UNIDO (1978), World Bank (1978), Pakistan (1980), Singapore (1982), Thailand (1982),UNCTC (1982), ILO (1983) Special economic zone China (1979) Investment promotion zone Sri Lanka (1981) Free export zone South Korea (1983) Free export processing zone (OECD, 1984)
APO Asian Productivity Organisation ILO International Labour Office OECD Organisation for Economic Co-operation and Development UNCTAD United Nations Conference on Trade and Development UNCTC United Nations Centre on Transnational Corporations UNIDO United Nations Industrial Development Organisation USAID United States Agency for International Development WEPZA World Export Processing Zone Association Source: author's compilation based on ILO k UNCTC, 1988 and author's survey.
2.2.2 The characteristics of EPZ
The EPZ's characteristics are mainly revealed in several aspects, such as comprehensive infrastructure facilities, preferential policies, restrictive regulations and less red-
tape administrations.
16 Infrastructure facilities include several items: land and factory buildings, power and water supplies, warehouse and transport services, telecommunication services, financial services and recreation facilities.
The main preferential policies include:
-- full exemption of duties and taxes on the raw materials, components, machineries and equipment which are required for production activities in the zone;
-- low income tax or exemption of 5 to 10 years;
-- a special period of holiday or reduction of rates on other direct and indirect taxes, surtaxes and surcharges etc.;
-- freedom from foreign exchange controls with a guarantee of the same status in the future, and with the assurance of free repatriation of earned profits up to a certain fixed annual rate;
-- preferential financing facilities, such as the provision of short, medium and long term loans with advantageous rates of interest;
-- preferential tariff rates on transport costs between the zone and the sea-or-airports of arrival or departure in the country, as well as on the cost of utilities, ground rents and
17 buildings, common and general services charges, etc.;
-- possibilities of renting or purchasing pre-constructed standard factories and office buildings or spaces, according to the wishes of the industries.
In order to guarantee the interest of both parties (host country and foreign investment), there are also restrictive regulations. Most clauses include the following:
-- the ratio of the export and domestic sale of products which are produced in the EPZ. Some countries require 100% of the products to be exported to the international market. Some countries allow a certain part of EPZs' products to be sold in the domestic market with customs duty;
-- the time limit on running enterprises (some countries may not have the time limit on running enterprises, but use contracts with investors, which have a time limit so that the government can adjust production in the zones, as in Korea);
-- other restrictive regulations, such as depreciation terms, pollution and re-investment in certain manufacturing.
The main effects of the administration of EPZ are to provide all kinds of services to the enterprises in the EPZ in order to do away with red-tape and bureaucratic procedures.
■ The EPZ administration is working together with other
18 government agencies to provide one-stop services, such as: custody of goods and state-owned property, receipt of revenues within the EPZ and contracts for lease of land and standard factories, licensing and supervision of supporting firms, management of utilities and welfare facilities, industrial accident insurance services, labor-employer cooperation services, safety management, receipt and processing of applications for authorisation of foreign investment, receipt and processing of applications for technology inducement, export and import licenses, matters pertaining to export promotion, export and import inspection, and matters pertaining to temporary carrying out goods from the zone.
Most of the administrations of EPZs have not only these services and functions, but also the authorities and responsibilities to supervise administrative agencies stationed in the EPZ, such as the Customs Office, Immigration
Office, Post Office, Labour Office, Fire Station and Police
Station.
2.3 The difference between EPZs and other special economic
areas
Apart from Free Port, Free Trade Zone and Export Processing
Zone, there are other special economic areas existing in
developed countries and developing countries with different
styles, such as Enterprise Zones, Science Park and Offshore
Industrial Factories (Bonded Factories).
19 2.3.1 Enterprise Zone
Enterprise Zone (EZ) was first introduced by British geographer, Professor Peter Hall at the British Royal Town
Planning Institute annual conference in June 1977. His idea is
essentially an essay in non-plan, small, selected areas of inner cities
would be simply thrown open to all kinds of initiative, with minimal
control. In other words, we would aim to recreate the Hong Kong of the
1950s and 1960s inside inner Liverpool or inner Glasgow (HALL, 1982)
to solve the problems posed by high unemployment of the older
workers and young people who are lacking education and
industrial qualification, and to take the challenge of the
high competition in the world economy. He suggested that:
Enterprise Zones would first have to be outside United Kingdom
exchange control. All goods could be imported and sold free of
customs duties and taxes. There would be free movement of
labour and capital; overseas business people would be free to
come. Secondly, the areas would have to be zones of fairly
shameless free enterprise: the areas would be outside the
scope of United Kingdom taxes, social services, industrial and
other regulations. Thirdly, residence would be based on
choice: existing residents would be free to stay or to leave.
The transformation of the idea of EZs to practical activity
started in 1978 when Geoffrey Howe, the Conservative
20 opposition economics spokesman, first spoke about EZs in public and the Conservative Party planned to practice something similar to Hall's original model in United Kingdom.
The difference is that EZs were to be on a larger scale and local authorities were to use their own powers to plan for industry's need, not in non-planning. The basic features of
EZs as recommended by Howe were as follows (BUTLER, 1981):
a) An area of a square mile or so in the most depressed part of a city would be selected, and designated as an EZ;
b) Planning controls of any detailed kind would cease to apply within the zone. Any building that complied with
very basic anti-pollution, health and safety standards,
and was for a legal purpose, would be permitted;
c) City councils owning vacant land, or abandoned property, would be required to dispose of it to private bidders by
auction in the open market;
d) New developments in the zone would be free from rent
control;
e) Entrepreneurs who moved into the zone would be granted a reduction or exemption from property taxes, and there
would be a reduction in capital gains tax on development;
■ f) Businesses in the zones would be guaranteed that public
21 laws affecting investment, depreciation, etc. would not be changed to their disadvantage. But no special government grants or subsidies would be payable to any enterprise in the zone;
g) Wage and price controls would not apply in the zone;
h) All the above conditions would be guaranteed for a stated and "substantial" number of years.
When Margaret Thatcher became Prime Minister in 1979, Howe was Chancellor of the Exchequer. At the same time, the details of the exact specification of EZs were considered. In March
1980, the proposed measures were announced; they were similar to the recommendation of Howe. However, the items (g) on wage and price controls and (c) on ways of selling government-owned land and housing were not included. The designation of EZ status will last for a minimum of 10 years, but will be renewable. Another two items were included in the announcement but not included in Howe's speech: government statistical enquiries will be kept to the bare minimum, removing much of the form-filling routinely demanded of business; and the government intends to speed up the processing of requests for customs warehousing in the zones (BUTLER, 1981). 11 EZs were designated by the government between June 1981 and April 1982.
4 of these have since been extended and a further 14 created between mid-1983 and mid-1984. At the present, there are 26
■ EZs in the United Kingdom (See Map 2.2). A further zone has
22
Map 2.2: Enterprise Zones, Free Ports and Development
Corporations in Britain
• Enterprise Zones
• Freeport
• Invergordon Development Q Corporations
Tayslde, 0 20 40 60 80 100120140160 km I i i i i i t ~ ~ 0 20 40 60 80 100 miles Inverclyd • Clydebank
Prestwick
Tyneside •\ J Londonderry Hartlepool Allerdale 7C. BelfastI Middlesbrough
• Glanford (Humberside) North-east Lancashire Salford/Trafford Scunthorpe • Liverpool ( Merseyside) • 11\\s— Wakefield • Speke Rotherham Delyn ~1
%.) *Telford Dudley • •Corby Birmingham •Wellingborough
Milford Haven Waterway Swansea i Isle of Dogs London Docklands• /~_~ • Cardiff b North-west Kent
Southampton
Source: Reference Services, Central Office of Information,
London, 1989.
23 been designated at Sunderland in the north-east in 1989 (DE,
1989). The implemented incentives are as follows (DE, 1989):
-- Exemption from rates on industrial and commercial property;
-- Initial allowances for corporate or income tax purposes of
100% of capital expenditure on construction, extension or improvement of industrial and commercial buildings;
Preferential service to firms for certain customs facilities, and relaxation of criteria that normally apply to decisions on private customs warehouses;
-- Exemption from levies and requests for information from industrial training boards;
-- Benefits are available for a ten-year period from the date of designation to both new and existing industrial and commercial enterprises within a zone. Each zone has a plan prepared by its local authority setting out types of development which are deemed to have automatic planning approval. Certain conditions are built into the plan which ensure that health, safety and pollution standards are met, and where individual planning permission is required, the process of approval is accelerated.
At the end of the 1970s, the concept of EZs also was introduced to the United States. In early 1979, the original
24 British plan was introduced in the Illinois legislature and gained wide support. This concept also attracted strong support in Congress. In May 1980, Representative Jack Kemp of
New York presented his first version of the EZ to Congress. A great deal of support came from groups and individuals on the liberal side but not from the conservative fellows of Kemp. A second version of the bill was introduced in June by Democrat
Robert Garcia of the South Bronx. The Kemp-Garcia Urban Jobs and Enterprise Zone Act became the candidates policy which focused on solving the inner city problem. In early 1982, it became the proposal of the Reagan administration for new urban economic development. The latest version of Kemp-Garcia would designate a large number of urban and some rural areas as enterprise zones. In the zones, capital gains taxes associated
with new investments would be eliminated. Employers would receive tax credits for each eligible resident (basically low
wage, unskilled and non white) they hired. In deference to the
unions, no deregulation would be pursued. Some different and
new extensions of the proposal from the original British plan
had been put forward (BUTLER, 1981):
-- Suspension of minimum wage laws because overwhelming
evidence has been provided to demonstrate that minimum wage
laws create unemployment among the young and unskilled by
pricing them out of the labour market.
-- A turnover trigger point was established to prevent the
misuse of an EZ by a major corporation, and to target the
25 incentives more accurately to new and small companies. Below the trigger point a business would enjoy all the tax incentives specified in the zone. But when the turnover moved past the trigger point, the business would become subject to an increasing portion of taxes on the excess.
-- Applying the status of Free Trade Zone to EZs (which mainly offers the advantage of duty-free import of goods to be processed and exported). This would attract new kinds of business into the inner cities (warehousing and assembling) and it would lead to an inflow of foreign capital. This would add to the capital available in the area, and create new types of industry, rather than creating businesses which might be in competition with firms elsewhere in the city. The type of labour required in assembly factories tends to be unskilled or semiskilled, fortunately the kind of labour that is readily available in the central cities.
-- Innovative action on housing. The key to solve urban problems is not only to create new jobs, but also to provide rehabilitation for people. There are a number of ways: First, rent control must be phased out in the inner cities, to allow
property owners to gain sufficient revenue to maintain and improve their buildings, and to make investments in rental
property once again economic. Second, reducing property tax and increasing the capital gains deduction on property
appreciation within an EZ would stimulate rehabilitation by
improving the returns available from residential buildings.
26 Similarly innovative strategies could be applied to commercial property in order to enable new businesses to start in low cost buildings.
The differences between EPZs and EZs are revealed in several aspects. First, EPZs have been set up in developing countries as a tool to achieve their goal of export-led industrialisation since the middle 1960s, but EZs have been promoted in developed countries in response to industrial decline and rising unemployment in inner-city areas (mainly old industrial towns) in the late 1970s and early 1980s.
Second, the characteristics of EPZs and EZs are different. The former offer more comprehensive infrastructure facilities and more favourable incentives to the investors than the latter.
Third, the administration of EPZs is more powerful than EZs: the former is empowered by the central government more than the latter.
2.3.2 Offshore Industrial Factories (Bonded Factories)
Offshore Industrial Factories are one kind of export-oriented manufacturing estates which produce products for export and enjoy incentives similar to those of EPZs. There is an argument about the difference between EPZ and Offshore
Industrial Factories at present. Some studies suggest that the
EPZ concept should be widened so as to include other types of offshore manufacturing facilities which have some features in common with the narrowly defined EPZ (ILO & UNCTC, 1988).
27 Their reason is these other types of offshore facilities represent, in terms of employment and output, approximately half the weight of EPZs proper.
There are some common features of EPZs and other types of offshore manufacturing facilities, especially incentives.
There are good examples like Barbados and Fiji to prove the difference between the two areas.
There are no geographically demarcated export-processing zones in Barbados. However, offshore manufacturing companies which are located in the normal industrial estates can enjoy preferential policies similar to EPZ conditions. They are granted a tax holiday from 6 to 10 years. During the tax holiday, enclave companies may import duty free plant and equipment, spare parts and raw materials from outside the
Caribbean Common Market if these items are not available at prices and qualities and adequate quantities within the Common
Market. An approved enterprise which is not an enclave industry may import these items duty free with a license.
These offshore manufacturing companies also enjoy export allowances and other incentives (BEPC, 1989). In Fiji, there is no EPZ but offshore manufacturing factories (their standard is over 95% export-oriented) are granted a tax holiday for 13 years and duty free imports of materials (FTIB, 1989). These kind of offshore enterprises in both countries and other countries enjoy conditions similar to EPZs and their development aim is similar to that of EPZs. From this point of
28 view, offshore manufacturing facilities have the same important effect as EPZs. Yet a survey of these countries indicated that the authority of these countries do not recognise that there are EPZs in their countries but just Offshore Industrial Factories.
In some countries there are free-duty areas, and at same time there are several offshore industrial estates located inside these areas. For instance, the situation in Mauritius,
Hong Kong, Singapore and even in Shenzhen. As an island,
Mauritius offers EPZ conditions in the whole country; meanwhile, there are several offshore industrial estates located in the different areas. Hong Kong is a free-duty area.
The industrial estates are located in 14 different areas.
Singapore is similar to Hong Kong, with 22 offshore industrial estates around Singapore City (ILO & UNCTC, 1988). There are also several offshore industrial areas located inside the
Shenzhen Zone (SIIG, 1988). However, when we calculate them, we chose each one as an individual zone without separating them into several zones.
The differences between Offshore Industrial Factories
(Bonded Factories) and EPZs are obvious. From the geographical angle, EPZs emphasise the separated area which is delimited from the country (or the whole country, if the country is quite small) under the conditions of EPZ. In this area, they carry out the different policies and methods from other places
in the country or other countries. Therefore, it can be called
29 as a special Zone. But Offshore Industrial Factories can be located at any place in the country, even inside an EPZ; they are industrial plants and do not need the whole design of a zone and have no management duty for a zone. An EPZ is a macrostructure and an offshore facility has only a mini- function.
2.3.3 Science Parks
Science Parks started in the early 1950s in areas of existing
high-tech industry in the United States, like Boston and San
Francisco in order to create an attractive environment for
relocating existing institutional research facilities and
expansion of new high-tech enterprises out of old garages and
mill buildings (COX,1985).
A Science Park is a property-based initiative which has
formal operational links with a university or other higher
educational institution, as a major centre of research; which
is designed to encourage the formation and growth of knowledge
based businesses and other organisations normally resident on
site; and which has a management function which is actively
engaged in the transfer of technology and business skills to
the organisations on site. Meanwhile, a significant
characteristic is that the authority also offers preferential
policies to attract investors, similar to EPZ's conditions
(COX,1985).
30 Science Parks play a diverse change of roles when it comes to fostering a setting for successful high-tech endeavours. By the early 1970s, there were at least 82 Parks in the United
States (COX, 1985). The Science Parks also spread to Asia and
Europe.
In Asia, Japan started to design Tsukuba Park in 1963, and started to purchase land in 1966. The first organisation was located in the Park in 1974. Additional Science Parks were established in Japan since the 1980s: Hiroshima, based on the
University of Hiroshima; Kumamoto, Oita and Nagasaki in Kyushu
Island, and some scientific areas in the City of Osaka
(LAFFITTE, 1985). In Taiwan, a science and industrial park was established at Hsinchu in 1980, which mainly developed electronic industry, precision instruments, new style materials industry, energy and aviation industry (SIP, 1989).
The Korean government set up the National Research
Laboratories at Dae Dok which is 200 km south of Seoul.
Gradually, the Dae Dok Science Park has been developed as a comprehensive high technology area. The functions include not only research institutes and higher education but also
advanced technology industries developed by both government
institutes and private organisations (LAFFITTE, 1985). In
Singapore, the Singapore Science Park is sited next to the
National University of Singapore by using the area and
technology environment to develop an "innovation centre" and
high technology industries (LAFFITTE, 1985). The Asian
Institute of Technology launched Bangkok Science Park Zone in
31 Thailand with the aim of involving the outstanding training and research institute in the new role being adopted by higher education establishments (LAFFITTE, 1985). Shenzhen Science and Industrial Park was established inside the Shenzhen
Special Economic Zone in 1985 as a joint venture between
Shenzhen government and China Science Institute. This park will depend on the science and technology capacity of China
Science Institute and foreign investment to develop new technology industries (SSEZY,1987).
In Europe, the concept was developed in several countries.
In Britain, the two original Science Parks at the Universities of Cambridge and Heriot-Watt were open for business in the early 1970s (Jones & Dickson, 1985). By the end of 1986, there were 28 Parks in operation and seven new parks were under construction (Sunman, 1987). In the Netherlands, Science Park
Groningen was established which has close ties with the
University of Groningen and the Academic Hospital. By the end of 1985, there were 3 Parks in the Netherlands (WITHOLT,
1985). In Italy, Tecnopolis Novus Ortus has been established
in Valenzano, an agricultural village with 500 researchers
working there. Other Parks like Tecnocity (Turin), Genoa and
Naples have been set up gradually with the basic aim of
stimulating technological entrepreneurship (ASCIONE, 1985). In
the Federal Germany, a series of innovation centres and
science parks have been set up since the early 1980s. For
instance, Aachen Technology Centre, Berlin Technology and
■ Innovation Park, Berlin Innovation Centre, Bonn Commerce and
32 Technology Centre, Dortmund Technology Centre, Kasel Ventrue
Park and Heidelberg Science Park. By 1985, there were 18 parks and innovation centres in Federal Germany (ALLESCH, 1985). In
1980, France had 3 parks which were large scale industrial estates with an emphasis on attracting larger and existing research based corporations. By 1985, the number had increased to 8 parks (SUNMAN, 1987). In the early 1980's, there were four parks set up in Belgium. By the 1985, the number increased to five parks (SUNMAN, 1987). In the beginning of the 1980's, Sweden had a special arrangement for university- industry cooperation, such as innovation centres, and Science
Parks were set up by linking with 11 universities and institutes (McQUEEN & WALLMARK, 1985).
In Australia, the Technology Development Corporation was established in South Australia in 1982. This Corporation is a specialised economic development agency charged with the fostering of high technology enterprise. Now the Corporation owns and operates Technology Park Adelaide, Science Park
Adelaide and Adelaide Microelectronics Centre (TDC, 1989).
The difference between EPZs and Science Parks is obvious.
The former mainly develops labour intensive low-tech
manufacturing for promotion of exports, but latter is
established to accommodate high-tech industries. Under this
circumstance, the incentives in the latter are more favourable
than in the former to the investors.
33 2.4 The present situation of EPZs in the world
In 1989, EPZs were in operation in 67 developing countries and areas with 222 zones in Asia and the Pacific,• Africa, Latin America and the Caribbean, and Europe. The rate of increase of
EPZs from 1975 to 1989 is 181%. In Asia and the Pacific, there were 80 EPZs in operation in 24 countries and areas. This region has 36% of all EPZs. In Africa , there were 22 EPZs in operation in 11 countries and areas (10% of the total number of EPZs). In Latin America and the Caribbean, there were 77
EPZs in 24 countries and areas. This region has 35% of EPZs in the developing countries. In Európe, there were 43 EPZs in 8
European developing countries and areas, and it takes 19% of total EPZs (see Table 2.4.1).
As for the ownership structure of EPZ enterprises, based on the survey in EPZs of 13 countries by the ILO-UNCTC, 36.8% firms are foreign owned, 24.8% are domestically owned and joint ventures share the largest percentages with 38.3% (ILO &
UNCTC, 1988). In the mid-1980s, theré were about 2,000 enterprises in EPZs in developing countries, of them three- quarters were either foreign owned or affiliated in a joint venture with a local. partner. In addition, among the total foreign investment, the Third World MNEs represent a minimum of 16% and maximum of 22% in such zones (ILO & UNCTC, 1988).
As for the generating effects of EPZs on direct employment, about 1.3 million jobs existed in the EPZs of the developing
34 countries in 1986; nearly 95% were created after 1970. Of them, about 500,000 were created between 1970 and 1975, and
another 750,000 in the 1975 and 1986 period. This is a significant performance with average 9% rate of increase per
year between 1975 and 1986, under the world-wide economic
recession. On the other hand, employment in the EPZs of
developing countries consists of relatively low-paid unskilled
jobs performed for the most part by young females (ILO &
UNCTC, 1988).
35 Table 2.4.1: Export Processing Zones in developing countries in 1970 and 1989
Country or 1970 1989 Area Asia and the Pacific 6 80
Bahrain * 2 Bangladesh 1 2 China 2 5 Democratic Yemen 3 1 East Timor 4 1 Hong Kong 5 1 India 6 1 7 Indonesia 7 2 Iran 8 Israel 9 3 Jordan 10 3 Korea, Republic of 11 2 Lebanon 12 3 Macau * 4 Malaysia 13 2 18 Pakistan 14 1 Philippines 15 4 Singapore 16 1 Sri Lanka 17 3 Syria 18 6 Thailand 19 2 Taiwan 20 3 3 Tonga * 1 Turkey 21 4 United Arab Emirates 22 1
Africa 1 22
Cote D'ivoire 23 1 Djibouti 24 1 Egypt 25 4 Ghana * 1 Liberia 26 1 Mauritania 27 1 Mauritius 28 1 1 Morocco 29 1 Senegal 30 1 Togo 31 1 Tunisia * 9
Latin America and the Caribbean 5 77
Aruba 32 1 Bahamas 33 1 i Bolivia 34 1 Brazil 35 1 10 Chile 36 3 36 Colombia 37 1 6 Costa Rica 38 6 Dominican Republic @ 1 5 Ecuador 39 1 El Salvador 40 1 Guadaloupe 41 1 Guatemala 42 1 Haiti * 1 Honduras * 1 Jamaica * 2 Mexico * 23 Netherlands Antilles 43 2 Nicaragua * 1 Panama 44 2 Puerto Rico * 1 2 St. Lucia * 2 Trinidad and Tobago * 1 Uruguay 45 2 Venezuela 46 1
Europe 43
Cyprus 47 1 Gibraltar 48 1 Greece 49 3 Hungary 50 16 Ireland 51 1 1 Portugal 52 1 Romania 53 1 Yugoslavia 54 19
Total 13 222 Source: author's compilation based on ANTOINE, 1984; ILO & UNCTC, 1988; KAI XIN, 1986, MTIRK, 1989; UNSP, 1989; XIN BAO, 1988; CSEZY, 1983; and the author's survey.
Note on sources:
* ILO & UNCTC, 1988.
@ Autoine, 1984 and ILO & UNCTC, 1988.
1. There are two EPZs in Bangladesh: Dhaka and Chittagong (Letter from the
High Commission of Bangladesh in Australia).
2. In 1980, China established four Special Economic Zones in four relatively small cities of two provinces. In August 1987,the People's
National Congress of China decided to establish Hainan Province and at the same time it became a Special Economic Zone (CSEZY, 1983 and Xin Bao,
37 1988).
3.Democratic Yemen is a free trade area. Duties are levied on tobacco and its manufactures, intoxicating liquors, motor spirit and aerated waters when entered for local consumption (UNSP, 1989).
4.There is a free area at Baucau airport, East Timor. There is a tax-free store selling tax- and duty-free merchandise to passengers travelling abroad (UNSP, 1989).
5. Hong Kong is a free port and there are no customs tariffs. EPZ conditions available area-wide with 14 major industrial areas. I chose it as one EPZ as whole (UNSP,1989 and ILO & UNCTC, 1988).
6. There are 7 zones in India: Kandla FTZ, Santa Cruz Electronics EPZ,
Flata EPZ, Madras EPZ, Noida EPZ, Cochin EPZ and a new EPZ--Vishakhapatnam
EPZ (Letter and introduction from Indian Investment Centre in Singapore,
20/9/1989).
7. There are two EPZs in Indonesia: Batam Island and Pt. Bonded (Letter from the Embassy of Indonesia in Australia, 1989).
8.The government of Iran considers the port of the Iranian Kish Island as Free Trade Zone (Letter from the Embassy of Iran, 30/10/1989).
9. There are three Free Port Zones in Israel: Eilat, Haifa and Ashdod.
These Free Port Zones in Israel operate within the scope of the Free Port
Zones Act, 1969 and all the pertinent Regulations, as well as additional
Regulations passed with regard to the Port of Eilat in August 1985 (Letter and introduction from the Ports & Railways Authority of Israel, 20/1/1990).
10. There are three EPZs in Jordan: Aqaba, Jordan-Syria and Zarka (CSEZY,
1983).
11.Based on the information from the government of The Republic of Korea, there are only two EPZs (Masan, Iri) in South Korea (MTIRK, 1989).
12. There are three zones in Lebanon: Beirut Export Processing Zone, Port
38 of Tripoli Free Zone and International Airport of Beirut Free Zone (Letter from the Embassy of Lebanon in Australia, 24/8/1989).
13.There are 18 EPZs in 5 States and Territory of Malaysia: In the State of Malacca, there are 8 EPZs: Air Keroh, Alor Gajah, Batu Berendam, Bukit
Rambai, Merlimau, Sungai Udang, Tanjang Kling and Tanjang Kling/Tanga Batu;
In the State of Selangor, there are 3 EPZs: Ampang/Hulu Klang, Telok
Panglima Garang and Sungai Way/Subang; In the State of Penang, there are 4
EPZs: Bayan Lepas, Prai, Prai Wharves and Pulau Jerejak; In the State of
Johore, there are 2 EPZs: Senai and Pasir Gudang; In there Federal Territory (Sabah), there is one EPZ: Labuan (Letter from the Consulate of
Malaysia in Australia, 29/9/1989).
14.There is a EPZ in Karachi, Pakistan since 1980 (Pakistanische Zollfrei
Zone Wird Attraktiver; Belieferung des Inlands markets ist Moeglich,
Problemloser Kapitaltransfer, 1989).
15.There are four EPZs in Philippines: Battaan, Mactan, Cavite and Baguio.
And there are also 12 EPZs under construction (Letter and introduction from the Embassy of Philippines in Australia, 30/1/1990) .
16. Singapore is a duty-free area with 22 offshore industrial estates around Singapore City (ILO & UNCTC, 1988). Here, I chose Singapore as one duty-free zone.
17. There are three EPZs in Sri Lanka: Katunayake, Biyagana and Weilisara
(CSEZY, 1983).
18. There are 6 EPZs in Syria: Damascus, Adra, Lattakia, Tartous, Aleppo and Jordan-Syria (ILO & UNCTC, 1988 and UNSP, 1989).
19. There are two EPZs in Thailand. One is located in Lat Krabang
Industrial Estate, another is in Northern Industrial estate (MET, 1988).
20. There are three EPZs established in Taiwan: Kaohsiung EPZ in 1966,
Nantze EPZ in 1968 and Taichung EPZ in 1970 (EPZA, 1986).
39 21. There are four FTZs in Turkey: The FTZs of Mersin and Antalya are within easy access to the largest and best equipped Turkish ports on the
Mediterranean Sea. Both ports play a major role in Turkish trade with
Europe and the Middle East. Mersin in particular is a major entry point for products destined for Iran, Iraq and the Arabian peninsula. The FTZs of
Adana (Yumurtalik) and Izmir (Nemrut), the latter being located at a particularly advantageous location on the Aegean Sea, will be opened as
Free Industrial Zones in the not too distant future (Introduction from the
Embassy of Turkey, 1989).
22. There is a Free Trade Zone in Dubai, United Arab Emirates: Jebel Ali
Port (CSEZY, 1983).
23. Cote D'ivoire has a free area in Abidjan (CSEZY, 1983).
24.This territory is a free area (UNSP, 1989).
25. There are four free trade zones in Egypt: Al Ameria, Nasr City, Port
Said and Suez (UNSP, 1989).
26. A Free Trade Zone exists in the port of Monrovia, Liberia. Movements of goods between the rest of the customs area and the Free Trade Zone are treated as special trade (UNSP, 1989).
27. The customs area comprises the geographical area except for a free trade area which exists in the northern part of the country - the entire area to the north of the parallel passing one kilometre to the south of
Bir-Moghrein (UNSP, 1989).
28. EPZ conditions available country-wide (CSEZY, 1983).
29.There is a Free Trade Zone in Tangiers, Morocco (UNSP, 1989).
30.There is a FTZ in Dakar, Senegal (ILO & UNCTC,1988 and CSEZY, 1983).
31. A free area is located in Togo Port (UNSP, 1989).
32.There is a free zone in the port of Oranjestad, Aruba (UNSP, 1989).
33.There is a free port at Grand Bahama (UNSP, 1989).
40 34.In Bolivia, there is a free zone located in Cobija in the Department of Pando. This commercial and industrial zone was established in 1983 as a decentralised public institution under the principle of extraterritorial customs. Merchandise entering the free zone are not subject to the usual national, departmental or municipal taxes. They are only subject to the
Free Zone Administration's service valuation (UNSP, 1989).
35.There are 10 EPZs in Brazile: Aracaju-Sergipe, Barcarena-Para, Ilheus-
Bahia, Joao Pessoa-Paraiba, Fortaleza-Ceara, Natal-Rio Grande Do Norte,
Parnaiba-Piaui, Sao Luis-Maranhao, Suape-Pernambuco and Tocantins-Goias
(Letter from the Embassy of Brazil in Australia, 9/10/1989).
36.There are three EPZs in Chile: Arica, Iquique and Punta Arenas (Letter and introduction from the Consulate of Chile in Australia, 6/9/1989).
37.There are six EPZs in Colombia: Barranquilla, Cartagena, Cucuta, Santa
Marta, Buenaventura and San Andres Island, Providencia Island, Palmaseca,
Leticia and Amazonas (Letter and introduction from the Sonsulate of
Colombia in Australia, 24/8/1989).
38.There are six free zones in Costa Rica: Cartago Industrial Park -- Free
Zone (Zeta Group), Alajuel Industrial Park -- Free Zone (Zeta Group),
Alajuela Industrial Park -- Free Zone (Saret Group), Metropolitan Industrial Park -- Free Zone, Moin Industrial Park -- Free Zone and
Puntarenas Industrial Park -- Free Zone. The first zone Moin Free Zone was created in December, 1981 by Law No. 6695, and modified by Law No. 6951 of
February 14, 1984 (Letter from the Consulate of Costa Rica in Australia,
27/9/1989 and the information from Corporacion Zona Franca de Exportacion in Costa Rica on 23/4/1990).
39.There is a free zone in Esmeraldas, Ecuador (UNSP, 1989).
40.There is one EPZ in El Salvador: San Bartolo (CSEZY, 1983).
41. In Guadaloupe, there are no customs services on St. Barthelemy and St.
41 Martin of Guadaloupe, which are, in fact free areas. The movement of merchandise between the rest of the customs territory and the free trade areas is treated as special trade (UNSP, 1989).
42.There is one EPZ in Guatemala: Santo Tomas de Castilla (CSEZY, 1983).
43. In Netherlands Antilles, a free trade area comprises the islands of Saba, St. Eustatius and St. Martin (Netherlands part). Another area is called "free zone", in the port of Willemstad, Curacao (UNSP, 1989).
44. There is a free zone in the city of Colon, Panama. There is also no customs in the area of the Panama Canal (UNSP, 1989).
45. At present, two Free Areas are operating in Uruguay. Each of them covers an area of 100 ha., and they are located near the cities of Colonia and Nueva Palmira, on the west coast of the Uruguayan territory
(Introduction from the Embassy of Uruguay, 1989).
46. A free port exists at Estado Nueva Esparta on Margarita Island (UNSP,
1989).
47.There is one zone, namely "The Larnaca Industrial Free Zone". In 1975, they established The Free Zones Law which making provision for the establishment and maintenance of the Free Zones (Introduction from the
Ministry of Commerce & Industry of Cyprus, 1989).
48. Gibraltar is a free area, but a small number of goods are subject to duty when entered for local consumption (UNSP, 1989). .
49. There are three free ports in Greece: The Free Port of Piraeus,
Thessaloniki and Heraklion-Crete (Letter from the Greek Government
Commercial Office in Australia, 28/8/1989).
50. In Hungary there are 16 free trade areas, which can be found in 8 municipalities: Budapest, Sopron, Gyor, Kiale, Szabadbattyan, Miskolc, Pecs and Mohacs (UNSP, 1989).
51.There is a Customs-Free Airport at Shannon (UNSP, 1989).
42 52.There is an industrial duty free area in Sines, Portugal (UNSP, 1989).
53.There is a free port in Sulina, Romania (CSEZY, 1983).
54. There are 19 Trade Free Zones in Yugoslavia: Beograd, Bar, Koper, Rijeka, Kardeljevo, Ljubljana, Maribor, Subotica, Zagreb, Zadar, Sezana, Novi Sad, Aerodron Osijek, Sabac, Bosanski Samac, Nova Gorica, Skopje,
Split and Varazdin (Letter from the Trade Commissioner of Yugoslavia in
Australia, 7/9/1989).
2.5 Summary
Since the first free port was born in 1547, duty-free areas in the world have existed for over 400 years. They offer initial storing and transferring duty free goods to processing and manufacturing products under the duty free package. EPZs are a typical symbol of the latest development. The definition and characteristics illustrate the phenomenon of EPZs. The other special economic areas, such as Enterprise Zones, Offshore
Industrial Factories and Science Parks have some common conditions to EPZs; however, they also have their own specific purposes and characteristics. The impact of EPZs in the world, especially in the Third World countries, has become more and more important, with a large share of direct foreign investment from MNEs and with a high level of employment. The number of EPZs in developing countries is still continuing to
increase. These significant phenomena occurred in the last three decades, and its strong development trend summons me to do more concrete research on this issue, especially on some
specific EPZs in East Asia.
43 CHAPTER 3
THE DEBATE OF DEVELOPMENT AND EPZS
The development of EPZs occurred as part of economic development strategies--export orientation in developing countries. Meanwhile, it offered an opportunity to restructure manufacturing between developed countries and developing countries and promoted the process. In this thesis, the cases of EPZs are located in East Asia, which also involve the claims of government intervention and development strategies in this region. I here review some of the theoretical views on these issues. First, I generally review the economics of development theory, which focuses on the development issue from three main schools: Neo-classicism, Dependency and
Marxism. Second, I examine the theoretical and empirical claims about the state's effect and industrialising strategies in East Asia relevant to development theory. Third, the main
body of the literature relevant to EPZs is reviewed: approaches to the phenomenon of direct foreign investment
(DFI), from the international trade viewpoint, industrial organisation approach, ownership, internalisation and locational advantages. In addition, the theoretical and
practical issues about EPZs are also reviewed. Finally, I comment on these theoretical and practical approaches and
raise the main issues with which the thesis is concerned.
44 3.1 The economics of development theory
For orthodox economists, development means economic growth, which is measured by aggregate indexes such as per capita gross national product (GNP), gross domestic product (GDP) and national income (NI) on an annual rate of growth basis. People try to summarise the phases of development: for example, the stages of economic growth were raised by Rostow, based on the characteristics of economy and society (ROSTOW, 1960). He summarised the five stages of economic growth: the traditional society, the preconditions for take-off, the take-off, the drive to maturity and the age of high mass-consumption.
However, other people believe development means not only economic growth, but also something additional. One claim was made at the start of the United Nations' First Development
Decade in U Thant's phrase, "development equals economic growth plus social change" (GOULET, 1973). Another outlook on development is the French school, which focuses on ethical values. Their position stresses qualitative improvement in all societies, and in all groups and individuals within societies
(GOULET, 1973).
Development thinkers offer models to measure development. A simple view about capital as a source of growth is revealed in the Harrod-Domar model, which formulates a mathematical
relationship between the proportional growth rate of output,
savings and capital-output ratio in terms of dynamic
equilibrium (SAMUELSON, 1976):
45 A g = s x OK where Q = the net output of the economy; K = the accumulated stock of capital; g = the proportional growth rate of Q (=AQ/Q); s = the proportion of Q which is saved.
There are three concepts of growth in the model. The first is warranted growth: the rate of output growth at which firms believe they have the right amount•of capital and do not feel it is necessary to increase or decrease investment, given their expectations of future demand. The second is the natural rate of growth, which corresponds to the increase in the labour force: if the labour force rises, growth must rise to maintain full employment. The third is actual growth: the change in aggregate output that finally materialises. The conclusion of the model reveals that the economy does not naturally find a full-employment, stable-growth rate, which is similar to Keynes' model (though that is a static equilibrium analysis).
The neo-classical growth model is represented by figures such as Solow (1956) and Samuelson (1976). It concentrates on the mathematical relationship between the output of a firm or economy and inputs used to produce that output, called the production function: 0=f(K, L); where the input factors are capital (K) and labour (L) (technology, land and entrepreneurship being embodied in 'capital'). It assumes constant returns to scale in K and L and positive but diminishing marginal products in the two factors of production. An independent impetus to growth, such as
46 technical progress, is needed to maintain the momentum. A feature of the neo-classical theory is the assumption of rational individuals (a single human being or a group of human beings such as a household) as the basic atoms of economic knowledge. Productivity is increased by individuals specialising in the production of particular commodities, that is by a division of labour. Then there is an apparent separation between the individual as consumer and producer.
The necessity that individuals exchange through markets determines economic development, with relative rates of exchange or prices determined by the relative utility derived by individuals from the consumption of goods. The decisions to consume and produce are coordinated using a special talent, entrepreneurship, through which productive inputs are combined in order to fulfil demands. In such an environment, the interests of the individual are reconciled with the wider social interest. Therefore, the theory emphasises economic freedom, such as a free market and free trade, and rejects active government intervention in the economy (COLE, CAMERON &
EDWARDS, 1989).
A typical representative of such views is revealed in the annual World Bank Development Report. From the beginning, it criticised trade blocks and protectionism of international
trade (WORLD BANK, 1979). Meanwhile, by comparing the better
performance of outward economies with inward economies in
developing countries, it encouraged the development of export
and free market economies (WORLD BANK, 1979-1981). It also
47 prefers governments to mainly focus on creating an ideal investment environment in which private sector can develop production. The World Bank disagree with the government intervention in markets directly, which can address a number of shortcomings in markets, such as limited competition, limited information available to buyers and sellers, and uncertainty in general business conditions (WORLD BANK, 1987).
In contrast, one contradictory theory to neo-classicism is dependency theory. Dependency theory focuses on the issues of economic development in developing countries and tries to clarify the nature of the unequal relationship between developed countries and developing countries, and from that to explore the development strategy of developing countries.
First, dependency theory believes that, since the system of colonialism started, the world was divided into two sides: the metropolitan countries (the industrialised countries) as the centre and the satellite countries (less developed, or
backward countries) as the periphery (WEAVER & BERGER, 1984).
The development of the metropolitan countries has occurred and still does occur at the expense of underdevelopment in the satellite countries. The latter are dependent on the others,
in that they cannot experience any self-sustaining growth, or
expansion, but can only grow and change as a reflection of the expansion of those countries that dominate them (the
metropolitan countries) (FRANK, 1967).
48 Second, dependency theory claimed that the underdeveloped countries are kept underdeveloped by virtue of unequal exchange with the developed capitalist countries. Through the trading relationships between developed countries and underdeveloped countries, the former actually earn production
profits in the latter. The theory of unequal exchange examines the transfer of potential profits from the periphery to the centre. The most influential versions of this theory are
represented by Emmanuel's model and Amin's model (EMMANUEL,
1972; AMIN, 1974 & 1980).
Emmanuel seeks to demonstrate that unequal exchange forms the basis for uneven development among countries in the world economy. He argues that unequal exchange is the elementary transfer mechanism; it enables the central countries to begin
and regularly give new emphasis to the unevenness of development that sets in motion all the other mechanisms of
exploitation, and fully explains the way wealth is
distributed. He treats real wages as fixed, with those in the
underdeveloped countries fixed at a lower level. Therefore,
production in the advanced countries (with high wages) would
be more expensive than in the underdeveloped countries and
profits would tend to be higher in the periphery. This would
spark a capital movement from the centre to the periphery.
However, labour is not mobile on an international scale, so
that rates of surplus value may differ between countries,
which is interpreted by Emmanuel as being the same as
different national wage rates. The organic compositions of
49 capital (c/(v+s)]1 in the two countries are equal, though the wage rates (the rate of exploitation) are different. The resulting increase in output in the periphery would cause
prices to fall there and the decline in output in the centre
would lead to an increase in prices there. This process would
continue until the rate of profit equalised across countries.
Hence, when exchange takes place between developed and
underdeveloped countries, it must be an "unequal" exchange.
The wage differential ensures that more labour time is
expended in the production of those commodities in which the
periphery specialises than is used to produce the goods from
the centre for which they are exchanged (EMMANUEL, 1972).
Amin accepts Emmanuel's theory of unequal exchange.
However, he adds his own explanation of unequal specialisation
of production on a world scale. Amin argues that international
trade is not characterised by complete specialisation. The
same commodities are often produced in and traded by both low-
wage and high-wage countries. He believes that unequal
exchange can occur whenever the difference in wage rates is
greater than the difference in labour productivity between
countries. Since wages are low in the periphery, profit rates
tend to be higher there. As capital moves from the centre
seeking higher profits, profit rates are equalised and unequal
exchange occurs. He claimed that pre-capitalist relations of
production in the periphery are maintained by capital in order
1 Note: c represents constant capital; v represents variable capital; and s represents surplus value. 50 to ensure a continued supply of cheap labour. In terms of his
view of capitalism, if labour power is reproduced under pre- capitalist relations, then the costs of reproduction of labour force will be lower, and labour will be cheap (AMIN, 1974 &
1980).
Third, based on the previous judgements, dependency
theorists suggested a pattern of development for
underdeveloped countries. They believe the fundamental way out
for the periphery is to change from a dependent economic
system into an independent, self-reliant and autarchic
development pattern, which needs to cut off the links with the
metropolitan countries and practice an import-substitution
economic strategy. The condition for realising national
development is carrying out a social revolution (BERNNER,
1977).
However, Marxists look at development as development of the
forces of production, and this kind of development has been
taking place in many developing countries. Their critique of
dependency theory is that it ignores the material side of
development, the development of the forces of production such
as industrialisation, mechanisation, increases in productive
capacity and advances in technology.
Marxism believes that in the transition from pre-capitalist
to the capitalist mode of production, the notion of primitive
accumulation has been very important and "this primitive
51 accumulation plays in Political Economy about the same part as original sin in theology" (MARX, 1963). Primitive accumulation is a revolutionary transformation of the social relations of production and the whole structure of society. It can be seen as the separation of direct producers from the means of production and the formation of two classes (one that owns the means of production and another that transforms the means of production). Labour power is contained in commodities that can be freely exchanged and are brought together in the production process by capitalists. Like any other commodity, labour power has both an exchange value and a use value and the important key for profit -- the surplus value is the difference between the use value and exchange value of labour power. Marx claimed: "Nature does not produce on the one side owners of money or commodities, and on the other men possessing nothing but their own labour power... It is clearly the result of a past historical development" (MARX, 1970). Therefore, the circulation of production is demonstrated as M-C...P...C'-M'2
(MARX, 1970), where the money capital advanced, buys commodities (the means of production, and labour power), which through the process of production, are transferred into the value added commodities and money by surplus value. It is labour power which is the source of surplus value and it is the process of primitive accumulation which is the source of the coercion necessary for the surplus value to be extracted.
2 Note: M represents money capital advanced; C represents the commodities of the means of production and labour power; P is the process of production; C' represents new value added commodities produced through the process of production; and M' represents money with surplus value. 52 I
Under capitalism, workers must sell their labour power and work hard in order to survive and capitalists are forced to innovate and expand production (by expanding absolute surplus value and relative surplus value) in order to avoid losing in competition (MARX, 1970). Hence, capitalism is far more dynamic than other modes of production, and once capitalism developed in some countries, and not in others, it was inevitable that the capitalist societies would outstrip the others (WEAVER & BERGER, 1984).
Marxists claim that a theory of development should explain
why some countries are developed and others underdeveloped and how countries do develop. They criticise dependency theory for
not explaining such phenomena as the early development of
Japan; the fact that Korea, Taiwan, Hong Kong, Singapore,
Brazil and Mexico also developed and became newly
industrialising countries; and that Malaysia and Thailand are
now industrialising. In contrast, some developed capitalist countries such as England and America are declining at the
same time. They consider this as uneven development at work
(EDWARDS, 1985).
Marxists believe the real barriers to development now are
the forces of production (in terms of technical aspects of
production, such as know-how, technology and organisation of
production) and the relations of production (the patterns of
property ownership and appropriation of surplus) existing in
the underdeveloped countries. They argue that the relations of
53 production are backward and the process of primitive accumulation has been blocked in the underdeveloped countries.
The agricultural sectors dominate the society and provide only a limited market for capitalist production. It is impossible to raise relative surplus value by increasing the productivity of labour in the country. In these underdeveloped countries, it is necessary, at the very least, for them to experience a complete transformation of their agricultural sectors and pay the same social cost all developed capitalist countries have paid. Unlike dependentists, who argue that external influences dictate the internal structure of the underdeveloped countries, Marxists believe that the nature of imperialist
penetration was largely determined by existing social relations within these countries (CORBRIDGE, 1986; WEAVER &
BERGER, 1984).
Marxists argue that foreign trade and financial capital
from the developed countries to the periphery may have
provided an impetus to the transformation of social relations
in the periphery. After the Second World War, the new
phenomenon of direct foreign involvement in the production
process in the underdeveloped countries, labelled the
"internationalisation of capital", has a great impact on
reorganising both the forces and relations of production in
the underdeveloped countries. Many underdeveloped countries
can and will experience successful capitalist development,
often with the help of foreign capital (WEAVER & BERGER,
1984).
54 On the other hand, Marxists and neo-Marxists (including dependency theorists) all pay attention to the impact of the state on the process of development. They see an active, interventionist state as a vital instrument and emphasise the planning role of the state in directing production enterprises
(COLE, CAMERON & EDWARDS, 1989). They believe that economic development in the underdeveloped countries should rely on economic plans. The basis is:
1. The market system in the underdeveloped countries is incomplete, and it is impossible to depend on the market to adjust distribution;
2. By using a plan to adjust production and distribution in the underdeveloped countries, they can fully utilise
production resources and benefit the balanced development of
national economy;
3. Given little infrastructure facilities and social services, it is necessary for the state to make a big push, through
comprehensive and multiple development projects (GAO, 1987;
BROOKFIELD, 1975).
In summary, the differences in the views of the three
schools on development are obvious. Neo-classicists emphasise
economic growth. This kind of growth is based on individual
development and economic freedom. The function of government
55 is only and should be limited to create this kind of development environment (COLE, CAMERON & EDWARDS, 1989; WORLD
BANK, 1987). In contrast, dependency theorists pay particular attention to clarify that since the establishment and evolution of colonialism, only developed countries can develop and this development occurs at the expense of underdevelopment in the developing countries. They believe that the economic growth described by neo-classicists is impossible in developing countries (FRANK, 1967; BERNNER, 1977). Marxists are different from the previous two schools. They believe that development is really the development of the forces of production and this kind of development needs appropriate production relations. The fact of underdevelopment in developing countries is just because of the backward production relations, which hinder the development of productive forces. However, to promote development is to change the old production relations, and thus the developing countries can develop (CORBRIDGE, 1986; WEAVER & BERGER,
1984). The three schools pay particular attention to different aspects. There are additional arguments about state effects and industrial development strategies relevant to the interpretation of economic growth and development patterns in
East Asia.
3.2 The state and industrialisation strategy
The theoretical arguments about the state's role and
industrialising strategies are revealed in the different
56 explanations of the development pattern of East Asia. The debate is mainly argued between neo-classical side and Marxist political economy side. Dependency theory does not very well fit the interpretation of East Asian development, and it is basically ignored.
The neo-classical side continues their development ideology which was reviewed in 3.1, has two main views that refer to development in East Asia. One view claims that East Asian countries do better than others because the state interferes hardly at all in the working of the market. They believe that the basic cause of success in East Asia on the policy front, can be traced to the lessening of government interferences in the market economy during the export-oriented phase, a liberal trade regime (FEI, 1983). They believe that the free market environment of the Asian NICs provides the necessary mechanism to gear the economies towards their optimal points on the
production possibilities frontier (CHEN, 1979). The successful
performance of East Asian economies has depended greatly on
getting their prices right by employing free market policies
(LITTLE, 1979; PATRICK & ROSOVSKY, 1976). Another view
concludes that the governments of East Asia did more than liberalise markets and lower distortions, but also intervened
more positively to offset other distortions, such as import controls and segmented financial markets. They believe the
governments simulated afree market. The active
interventionist attitude of the state has been aimed at
applying moderate incentives which are close to the relative
57 prices of products and factors that would prevail in a situation of free trade (BERGER, 1979). The intervention of government can be illustrated as offering information for investment overseas and export promotion incentives to domestic producers (SAXONHOUSE, 1985; BHAGWATI, 1988). This is a neutral trade regime, different from "liberal trade" approach. A neutral trade regime may go with some government intervention, such as protection of the domestic market. The purpose of incentives is to protect sales toward the domestic market and to promote exports. That is a large part of the reason why they have been so successful (BHAGWATI, 1988).
The common sense of the story told by the neo-classical approach about East Asian development is free market policies as essentials. They understand the philosophy of comparative advantage with the reality of poor resource endowment but abundant unskilled labour in this region, which called for economic growth based on manufacturing activities. The liberalisation of restrictions is necessary for the unhindered operation of economic forces. Balassa claims that the limited domestic market could not provide opportunities for further import substitution, hence industrial expansion had to be sought in exporting. The policy of outward-orientation is the solution to the above philosophy and reality (BALASSA, 1985).
Comparing the results of inward-oriented policy in Latin
America, the outward-oriented economy in East Asia seems to be
more successful: especially when facing external shocks, outward-oriented economies have been better able to overcome
58 negative effects than countries pursuing an inward-oriented development strategy. Balassa believes that outward-oriented development strategies have favourable effects on productivity and economic growth. These effects operate through resource allocation according to comparative advantage, greater capacity utilisation, the exploitation of economies of scale, and technological improvements in response to competition abroad. Furthermore, exports under outward orientation may break the foreign exchange bottleneck that hinders economic growth. Finally, in the case of labour-surplus economies, employment increases as exports generate demand for domestic products, while higher employment is supported by savings of capital (BALASSA, 1985).
Krueger provides further analysis of the superior performance of export-oriented economies over import- substitution (KRUEGER, 1985). She believes that a successful export-oriented development strategy does three things. First, it permits countries to take better advantage of the technological opportunities available to them. Poor countries generally have relatively small domestic markets for most manufactured goods. When protection makes profitability dependent on selling in the domestic market, production runs and capacity are often of such small size as to be uneconomic.
By orienting production toward exports, producers in developing countries are able to construct manufacturing facilities of efficient size. In addition, an export-oriented strategy permits poor developing countries to use the
59 international market to exchange their own relatively labour-
intensive commodities for capital-intensive goods. They are thus able to take advantage of the division of labour and of specialisation. Second, an export-oriented strategy prevents them from making some of the costly mistakes often associated
with inward-oriented, restrictive trade and development
industrialisation strategies. Export-oriented strategies rely on incentives to guide economic activity and so avoid direct controls. Under import substitution, there appears to be an almost irresistible pressure on policy-makers to regulate
domestic markets using interventions in all aspects of economic life to fight the market: policy-makers are
attempting to induce individuals to undertake unprofitable
actions or to refrain from taking profitable ones. It becomes
impossible to ascertain the degree to which relative prices
and costs are distorted. By contrast, under an export
orientation, policy-makers cannot intervene quantitatively to
the same extent. Incentives, whether they are embodied in a
realistic exchange rate or in favourable treatment of
exporters, are relatively uniform among exporting firms. The
measure of success is export earnings rather than physical
units of individual export commodities. Moreover, the stop-go
aspects of macroeconomic policy associated with periodic
foreign exchange crises under import substitution are avoided.
Third, an export-oriented strategy forces policies upon
governments that generally lead to better economic performance
by the private sector. Individual firms must compete in the
international market, which tends to make firms more
60 efficient. Growth takes place not only through an across-the-
board expansion in output and cost reductions, but also through a shift in resources toward the more efficient producers. The absence of competition and the fixity of market shares under import-substitution are undoubtedly important in explaining the much slower growth of factor productivity and higher capital/output ratios in countries under import- substitution than under export promotion (KRUEGER, 1985).
Therefore, Krueger states the prerequisites for an open, outward-oriented economy: the government's policy cannot be
half-oriented toward import substitution and half-oriented
toward export promotion; an outward-oriented strategy is
possible only if quantitative restrictions on trade are
removed (KRUEGER, 1985).
From this neo-classical view, a report to the Australian
Government on economic growth and structural change between
Australia and Northeast Asia by Garnaut suggests that the
lesson for Australia is to follow a free market system,
diminish tariffs, deregulate, and participate in international
competition (GARNAUT, 1989).
The political economy side, however, believes that the role
of the state in the development of East Asia goes far beyond
the moderate intervention summarised by neo-classical
economists. Their ideology as reviewed in 3.1, believes that
the state's effect and class structure dominate the
development pattern, which is also applied in East Asia.
61 Hamilton studied the capitalist industrialisation in Korea based on a theoretical, historical and empirical analysis as a process of capital accumulation for industrialisation and class structural change. The government used land-reform to satisfy most of the peasantry based on the principle of land- to-the-tiller, and forced landlord capital into commerce and industrial production. The government practiced import- substitution and later export-promotion policies to conform to its ideas of economic development by using the coercive power of the state over business. Agriculture was forced to provide surpluses to support industrial growth, and the working class was suppressed so as to ensure that the surplus provided by agriculture was not eaten up by real wage rises. He argues that the modern history of South Korea demonstrates that the rise of industrial capital is as much a political as an economic process. The influence of the state at every major conjuncture has been apparent (HAMILTON, 1986).
Mason and his colleagues summarise Korean government and business relations as a matter of government-directed development in which the principal engine has been private enterprise. The relationship between them is: central direction by government for economic development and a highly dynamic private sector (MASON, 1980).
The political economy side believes that the successful economic performance of East Asia is due largely to a
62 combination of: high levels of productive investment; more investment in certain key industries; and exposure of many industries to international competition; through the direction of government policies, such as incentives, controls and mechanisms to spread risk. These policies enabled the government to govern market processes of resource allocation and the policies have been permitted or supported by a certain kind of organisation of the state and the private sector
(WADE, 1990). Wade cites empirical evidence of Taiwan's development: land reform, control of the financial system and keeping economic indicators stable in order to promote industrial capital accumulation and maintain long-term investment, protecting the domestic economy from foreign competition, encouraging exports, technology transfer from
Multinational Enterprises (MNEs) and establishing national technology system. So Wade argues that the impact of the state in East Asia is on a large scale and active intervention as a
"big leadership" or "big followership", rather than the neo- classical theories' "small followership" (WADE, 1990). Similar empirical evidence of Korea's development provided by Amsden
(1989) demonstrates state control at various periods: government intervention to protect local industry from foreign competition by using tariffs, quotas, export subsidies, subsidised credit; special treatment to favoured industries by offering low interest rates through the banks under the control of government; domestic prices and foreign exchange
rates were manipulated by the government to stimulate domestic
industries and meet the need to export. Amsden summarises that
63 the state in late industrialisation has intervened to
establish multiple prices in the same market; so the state
cannot be said to have gotten relative prices "right" as neo-
classical's claim, but has set relative prices deliberately
"wrong" in order to create profitable investment opportunities
(AMSDEN, 1989).
With regard to the claim by neo-classicists that the
economies of outward-oriented show a better performance than
countries pursuing an inward-oriented development strategy,
the political economy side, based on historical and empirical
analysis, again has a different story. Hamilton finds a
contrary situation to the general notion in his study: there
has been continuous import-substituting industrialisation in
the light as well as heavy manufacturing industries during the
export-oriented period in Korea (HAMILTON, 1986). Amsden
estimates that even in the middle 1980s, after tariffs were
considerably lowered under the liberalised trade policies,
protection was still at an average rate of 30% (AMSDEN, 1989).
Hou would rather use the term of export-expansion than
outward-looking to describe Taiwan's development strategy,
because he believes that the historical and empirical evidence
proves an import-substitution strategy was also adopted along
with export expansion and has never been dismantled in Taiwan
(HOU, 1988). They conclude that the economic growth pattern is
characterised by simultaneous export promotion and import
substitution. Over the years, East Asia has had in fact a
mixed orientation development strategy.
64 A recent complementary view has been offered by Woo (1991), who claims that most of the scholars who research on East Asia development focus on economic judgements, but ignore the conjoining of comparative and international politics (WOO,
1991). She believes that the political logic of the financial structure in Korea offers the best explanation of the origin and development of the state. First, security concerns can be utilised to mobilise resources for development. America has historically been willing to pump financial resources into the country (Korea). Then, with the perception of the decline of the United States as an hegemonic power, the political and security concern pushed Korea into heavy industrialisation associated with the goal of national self-sufficiency. The state's power was used to influence investment patterns and guide sectoral mobility (the Big Push). For example, the state used interest rate subsidies, preferential lending, and other devices to fuel the growth of the chaebôl (the large firms) and the heavy industries. However, following the change of both internal and external factors: the chaebôl become strong enough to contend with the state and made a public plea to end state interventionism, eliminating secondary taxation and eventually granting full autonomy to the financial sector; and pressure from international community (e.g., OECD) on the issue of import and financial liberalisation. So the economic liberalisation in Korea became a correction of the policy of the Big Push (WOO, 1991).
65 On the other hand, dependency theory does not very well fit the interpretation of East Asian development. In fact, East
Asian development pattern is far beyond the principle of dependency theory, which emphasises a self-reliant and
autarchic development pattern to cut off links with the
metropolitan countries, though East Asian countries developed
a certain stage of import-substituting strategies in history.
Some dependency colleagues claim that the relatively successful development in East Asia occurred because they have fewer links with developed countries (EVANS, 1987). But the
development pattern in East Asia is far beyond that approach.
Therefore, among the illustrations of theoretical analysis and
empirical research on East Asian development, dependency
theory is basically ignored.
In summary, the interpretation of East Asian development
between the neo-classical side and political economy side is:
the former emphasises that a liberalised free trade and free
market system has determined superior development, via export-
oriented economic strategies that use comparative advantages;
in contrast, the latter reveals that effective state
intervention dominates successful performance, by promoting
changes of class structure to create more advanced production
relations in order to practice industrialisation and realise
their political goal. In terms of the state and
industrialising strategies in East Asia, the neo-classical
side has had a certain influence on East Asian development
patterns, especially on the pattern of export-oriented
66 strategies with the trend to liberalisation of government policies. In terms of using economic levers to adjust economic development, the neo-classical side is relatively convincing.
However, Marxism analyses these issues more deeply. It not only analyses and interprets the phenomenon of development and transformation, but also pays more particular attention to illustrate the social structure and production relations which involve development and transformation. Moreover, Marxists devote much attention to the effect of the state on promoting the transformation of social structure and the development of productive forces. In contrast, dependency theory does not very well fit the interpretation of East Asian development and the development pattern in East Asia is far beyond the approach of the dependency theory. However, I am sure that the
East Asian development model would not be a suitable or mono- type for other developing countries, which may have a different situation and characteristics.
3.3 EPZs
The question of the growth of EPZs has two aspects. First,
EPZs contain much DFI. So it is necessary to examine different theorists' views about to why, how, where and when DFI occurs.
Second, direct theories about EPZs and the practical phenomena of EPZs will be reviewed.
3.3.1 Direct foreign investment
67 There are a few viewpoints about DFI offered by Marxists and the neo-classical school, and the dependency theory does not shed much light on this issue. However, the main theoretical approaches about DFI are provided by the cost of production economists, and they are represented by industrial organisation theory, international trade theory, and 'eclectic theory' (based on ownership, internalisation and locational advantages).
The main viewpoint of Marxism is that capitalists are forced to innovate and expand production to search the maximum profit, because if they fall behind they will be driven out of
business by their competitors. In these terms, DFI is a part of survival and competition (MARX, 1970; WEAVER & BERGER,
1984). On the other hand, the "internationalisation of capital" has a great impact on reorganising both the forces
and relations of production in the underdeveloped countries.
Many developing countries can and will experience successful capitalist development, often with the help of foreign capital
(WEAVER & BERGER, 1984).
In view of the neo-classical theories, an early explanation
of DFI is offered by Aliber, that DFI is a custom-area
phenomenon or a currency-area phenomenon. The world is divided into different currency areas and there are risk premiums in
international equity markets designed to cover uncertainty
about the exchange risk on shares bought in weak-currency
countries. These premiums do not apply to foreign-owned
68 subsidiaries that operate in soft-currency countries (ALIBER,
1970). He treats the export of direct investment as a means of financing foreign capital expenditure. Forsyth added to this theory by claiming that a higher capitalisation rate will be applied to the profit stream of "foreign-owned subsidiaries
than is applied to the income of host-country firms, whose
liabilities are denominated in host-country currencies"
(FORSYTH, 1972). That reflects the strong tendency of
international equity markets to favour equities issued in the
country where the corporation is headquartered against
equities issued in the host country. However, the empirical
evidence shows that DFI is not only a means of financing
foreign capital expenditure, but rather a channel by which an
enterprise transfers nonfinancial resources between countries,
and controls the use of such resources once transferred
(DUNNING, 1988). Moreover, the principle that premiums only
apply to operations in hard-currency countries may be true in
some cases, but it is by no means universally so: especially
in recent years, some Multinational Enterprises (MNEs) have
continued to grow despite the weaknesses of their respective
currencies, e.g. US, UK and Australian (BHP) MNEs. More
generally the approach could not explain the widespread cross-
investment between Europe and the US. Nor could it account for
either the investment of US firms within the dollar area, or
multinational investment in LDCs where capital markets may be
nonexistent and foreign exchanges highly regulated (HOOD &
YOUNG, 1979).
69 Then, Kindleberger's early explanation of DFI resulted from both the expansion of a firm's market and its use of internally generated funds because of national and international market imperfections (KINDLEBERGER, 1969). These imperfections permit a multinational firm to acquire a monopoly advantage in its domestic environment and to exploit this through foreign production. Market imperfections occur because: firstly, there is product differentiation in goods markets, such as brand names, special marketing skills or collusion in pricing; secondly, in factor markets, there are special managerial skills, differences in access to capital markets and technology protected by patents; thirdly, imperfect competition may be reflected in the existence of internal or external economies of scale; and finally, government policies in respect of taxes, tariffs, interest rates, exchange rates and so forth may also create imperfect markets (HOOD & YOUNG, 1979). This argument holds that when firms attempt to maximise their sales' growth rates, they have to set up plants wherever large markets exist. The internally financed growth argument says that these funds are cheaper than externally raised funds and should be used for expansion abroad (HYMER, 1979).
A significant contribution to DFI is the industrial organisation approach raised by Hymer. He claims that MNEs are a substitute for the market as a method of organising international exchange (HYMER, 1979). He also focuses on the
■ creation of market imperfections, but he argues that the
70 previous three approaches were inadequate to explain international capital movements, especially direct investment abroad. He claims that the corporations' desire to control foreign operations was the central motive for direct investment. He viewed control by the foreign investor not merely as a desire to determine the prudent use of assets but as a strategic move to eliminate competition between the investing enterprise and enterprises in other countries. Alternatively stated, control is necessary in order to appropriate fully the returns on certain skills and abilities that the investing enterprise possesses. He is the first to suggest this reason for international capital movements. He also notes that MNEs do not operate under conditions of perfect competition, but some firms have advantages over others (HYMER, 1979).
On the other hand, the early claim of DFI within the body of international trade theory, is under the premises of the
Heckscher-Ohlin theorem which was an attempt to explain why individual countries possess a comparative advantage in the export of given products. Based on the assumption of two- countries, two-commodities and two-factors, capital and labour as the location specific endowments, a country will have a comparative advantage and will export those products in which its most abundant factor is used relatively intensively; conversely it will import the commodities which incorporate factors with which the country is poorly endowed (HOOD &
YOUNG, 1979). The theory becomes more relevant to
71 international investment when the assumption of factor immobility between countries is relaxed. If restrictions on trade exist between countries, then factors of production would be transferred internationally in response to differences in factor prices. In a capital abundant country, for example, capital would be exported to take advantage of higher returns available abroad; this would raise the price of capital in the capital exporting country and contribute to the equalisation of factor prices (OHLIN, 1933). However, there are problems with this approach. First, it is hard to extend the Heckscher-Ohlin model to more complicated and large models by adding countries, commodities and factors. When there are many factors of production, it is hard to say that one factor is the abundant factor in a particular country. It is also hard to say that a particular commodity is intensive in one factor (KENEN, 1985). Second, the theory does not illustrate the reason why capital should be transferred between countries in the form of direct rather than portfolio investment. If firms are in the capital deficient country, they can borrow cheaper capital abroad for injection into their own enterprises. In transferring and subsequently utilising the capital, the firms in this capital-deficient country are at no competitive disadvantage compared with companies in the capital-abundant area (HOOD & YOUNG, 1979).
To develop the theory of DFI from the standpoint of international trade, Vernon gives up the main assumption of
■ the traditional Heckscher-Ohlin model, concerning the identity
72 of production functions in all countries, and explains DFI by reference to the product cycle theory. He claims that the production technology of a new product improves as time passes. The maturing of technologically advanced products, therefore, tends to press enterprises (the leading firms first) toward the establishment of overseas production units, a move necessary to protect or prolong a position that was originally based on a technological lead in those markets.
With a decline in the importance of the technological lead, the relatively straightforward calculations of least cost begin to play their familiar role (VERNON, 1976). The evidence is fairly persuasive that the product cycle hypothesis had strong predictive power in the first two or three decades after World War II, especially in explaining the composition of US trade and in projecting the likely pattern of DFI by US firms (VERNON, 1979). However, it is criticised by people such as Kojima, who claims that the product cycle approach can not explain the behaviour of DFI by Japanese firms, which are trade oriented (KOJIMA, 1978).
Kojima's approach is based on the "factor endowments approach". He believes that DFI should originate in the investing country's comparatively disadvantaged industry
(KOJIMA, 1982). The recipient country can develop or strengthen a comparative advantage in the same industry. This type of industrial transplant helps reorganise the international division of labour, increasing production and consumption gains from trade for both countries. Hence, DFI
73 works in a complementary fashion to create and increase international trade. However, if DFI moves out from an industry in which the investing country has a comparative advantage (the maturing technologically advanced products, claimed by product cycle approach) without prospects of developing a comparative advantage in the same industry on the part of the recipient country, it causes a loss of efficiency: such DFI substitutes for and decreases international trade
(KOJIMA, 1982). Ozawa also completed this approach by substituting for it "marginal production (or economic) activity". The Japanese-type DFI was originally dominated by labour intensive industry with simple technology transplanted from Japan to developing countries. In this type of industry, while big Japanese firms may maintain a strong comparative advantage and continue to export, small and medium firms, being marginal, inevitably lose competitive power and must go abroad. Even within a given process of production used by a firm, those labour intensive segments with simpler technology can be transplanted abroad where labour is cheaper (OZAWA,
1979). Hence, to transfer technology or to transplant industry to the host country by starting with both marginal activities and marginal firms in the investing country is easier and more efficient because of the smaller gap in technology between the two countries (KOJIMA, 1982).
The explanations from the standpoint of international trade and industrial organisation theories have not led to a general consensus emerging on the issue of DFI. Other economists, such
74 as Dunning, therefore, try to reconcile the controversy by offering an 'eclectic theory' which states that firms must
have three advantages, i.e. ownership, internalisation and locational advantages, in order to determine whether, how and
where to invest (DUNNING, 1977, 1979 and 1988). The theoretical surveys include Caves (1982), and Graham and
Krugman (1989).
Since no markets are perfect in the sense that information
and transaction costs are zero, the transaction costs in the
market are high. Therefore, Dunning exploits the theory of
multinational enterprises by assuming that the costs of
transferring knowledge and coordinating economic activities
from research and development and finance via production to
marketing and after-sales service are lower inside firms than
in market exchange between independent firms. In other words,
these are the incentives of firms to internalise activities,
which leads the MNEs to spread over the globe.
Dunning summarises his theory as: the international
competitiveness of a particular country .depends on the
ownership endowments of its enterprises, on its locational
endowments, relative to those of other countries; and the
transfer costs in moving goods and services from one country
to another. The locational advantages will be the key
influence on where production takes place, that is, the form
of international involvement. The origin of ownership
endowments rests on internalising economies; these may also
75 influence the location of enterprises (DUNNING, 1977).
Therefore, this is an eclectic theory embracing a theory of location and ownership endowments.
This theory distinguishes three kinds of ownership-specific
advantages. First, firms may have advantages over others
producing in the same location: such benefits may lie in
access to markets or raw materials not available to competitors; or in size which may both generate scale economies and inhibit effective competition; or in an exclusive possession of intangible assets, such as patents,
trade marks, management skills, which enable it to reach a
higher level of technical or price efficiency and achieve more
market power. Second, a branch plant of a national enterprise
may have advantages over an existing enterprise breaking into
a new product area, again producing in the same location.
Third, the multinationality of a company may be an advantage:
because such an enterprise operates in different economic
environments, it is better placed to take advantage of
different factor endowments and market situations.
This theory also interprets locational advantage in three
components: the resources which can only be used by
enterprises in the locations in which they are sited;
unavoidable or non-transferable costs such as taxes,
government constraints on dividend remission etc.; and the
costs of shipping products from the country of production to
the country of marketing.
76 However, the defects of the theory are obvious. For example, since there is no observable external market, it can not be examined by empirical evidence; In addition, in recent years, many newly industrialising developing countries have sent direct investment to developed countries such as in the
United States; this contradicts the principle of the theory
(ZENG, 1987). Kojima criticises the theory from a macroeconomic viewpoint (KOJIMA, 1982). First, he claims that the initial eclectic integration did not unify general equilibrium trade theory with the theory of the firm but rather reduced to one commodity analysis, with an absolute comparison of various advantages in activities at home and abroad. It did not provided criteria with regard to the desirability of specific firms undertaking direct investment abroad from a macroeconomic point of view, namely, which firms should and which firms should not do so. Second, by this theory, internalisation is efficient and beneficial only for the giant enterprises that maximise their profit on a global scale; but it is harmful for both national and international economies, for it creates another form of market imperfection.
He asks why no scholar has recommended how imperfections or failures of market mechanism be corrected, instead of multinationals' internalising their activities. Finally, he believes the eclectic theory, and especially the internalisation approach, was developed only for the sake of enhancing the private company's interest and can not properly deal with the macroeconomic effects of DFI on both the
■
77 investing and host countries, especially on developing host countries (KOJIMA, 1982).
In view of the discussion of DFI, we can see from the birth to the later development of the theory, the argument between different schools has a significant mutually complementary effect. In fact, every individual school infers why, how, where and when DFI occurs, but in a relatively narrow sense.
Recently, some theorists (Dunning, Caves, Graham and Krugman) have raised the "eclectic theory", which tries to make up this defect. Since there are always new investment styles occurring and the international investment environment has always changed, new theoretical approaches with a more complete analysis are necessary.
To summarise so far, I raise my own comment. I believe that
DFI is explained by Marxists, who claim that capitalists are forced to innovate and expand production to search the maximum profit, because if they fall behind they will be driven out of business by their competitors. In these terms, DFI is a part of survival and competition, expanding from one location or country to several locations abroad. This is the basic principle -- the internal cause of DFI. Other factors, such as how, where and when DFI occurs are all determined by the conditions of specific firms, economic situation and investment environment. According to the size of firms and the structure of their industry sectors, different types of firms
78 practise DFI by using these external conditions in different ways, and their behaviour is not immutable.
The empirical evidence in EPZs shows that the majority EPZ firms are small and medium size with investment under $US0.5 million (see Chapter 5); as for the structure of industry sectors, they are mainly labour intensive and simple process manufacturing (see Chapter 5, 6 & 7). This kind of firm is losing its relative production advantage in its home country and has to transfer production abroad, such as to EPZs in developing countries. However, the evidence shows that large
MNEs invest in EPZs (such as SONY, SANYO, SHARP and PHILLIPS in the EPZs of Korea and Taiwan), but their goal and behaviour are different from small and middle size firms. The DFI of large MNEs is not because they have lost competitive advantage in their home countries, but as part of their global development strategy. Most production technology transferred by large MNEs is higher than that of small and middle size firms. Not only the transfer of technology is different between them, but also the control system between headquarter and subsidiaries is different. Large MNEs have gradually given up the traditional tight control between headquarters in their home countries and the subsidiaries abroad; but this is still practiced by the small and middle size firms. By using new management systems, the headquarters allow the individual subsidiaries abroad more independent power to develop, such as self-determination on research and development, production and marketing. Therefore, the issue does not only lie in the
79 pattern of either the anti-trade-oriented American-type or the trade-oriented Japanese-type; rather the size of firms and their production structure determine their investment behaviour. Therefore, DFI is not limited to large MNEs which have a lot of competitive advantages, but also occurs in small and medium size firms within different industrial sectors. Not only do developed countries' MNEs invest abroad, but also newly industrialising countries such as Korea, Taiwan, Hong
Kong and Singapore; even developing countries such as Malaysia and Thailand have DFI activities abroad, though they may have a different transaction behaviour. Till now, theoretical research to explain DFI has stayed at an incomplete stage: neither international trade theory nor industrial organisation theory nor eclectic theory have provided a satisfactory solution. However, the nature of DFI accords to the size of firms and their production structure, which determine the firms' direct investment behaviours: DFI is to be revealed in different boundaries, rather than explained generally.
On the other hand, these theories start mainly from the angle of investors to explain why, how and where DFI occurs.
They neglect the other side -- the invested countries. DFI needs permission from the host ahead of time. Therefore, the host countries' stance and behaviour to DFI is also important.
Now, I consider this issue only in so far as it relates to DFI in developing countries.
80 The importance of the host countries' (here, developing countries) stance and behaviour has been revealed by a significant change of forms of DFI since the late 1960s. The postwar period stands out in the history of international investment on at least two counts. First, the volume of international investment in developing countries has grown very rapidly (OMAN, 1984). Second, the form of this investment has been predominantly direct private investment (OMAN, 1984).
The rapid growth of MNEs through the establishment of wholly or majority-owned subsidiaries in developing countries during the 1950s and 1960s has been the clearest manifestation of these trends. However, since the late 1960s, a variety of new forms of international investment has come to play an increasingly important role in this context. The term, new forms, is explained by the OECD as international investments in which foreign investors do not hold a controlling interest via equity participation, such as joint ventures in which foreign-held equity does not exceed 50%; various international contractual arrangements which involve at least an element of investment from the foreign firm's viewpoint but which may involve no equity participation by that firm whatever, as is frequently the case with licensing agreements, management, service and production-sharing contracts, and occasionally with sub-contracting and turnkey operations (OMAN, 1984).
These new forms are coordinated with the change of the host government's policies relevant to foreign trade and investment.
81 One interpretation, labelled the 'defensive-reaction' hypothesis summarised by Adams, regards the postwar evolution of North-South investment trends largely as a result of changes in host governments' trade and investment policies
(ADAMS, 1980). These policy changes include: the establishment of government boards for screening and registering foreign investments, the imposition of local integration and export- performance requirements, limitations on profit remittances, the demarcation of sectors or industries where foreign investment is forbidden or restricted, the control of foreign takeovers of local firms, etc.. They believe that state intervention does not necessarily discourage foreign investment, but changes its forms (OMAN, 1984).
Policy changes reflect the fact that developing countries became independent and made policies to construct a national economic development strategy. In the 1950s and 1960s, most host governments pursued import-substituting industrialisation. Policies such as tariff and non-tariff protection for the import-competing industries were practised in host countries, which forced MNEs to seek a way to gain or retain access to foreign markets. Later, since the late 1960s, some host countries changed the strategy from import- substituting to export-expansion; so the relevant policies have changed too. Now, host governments offer incentives such as tax holidays, tariff free or tariff reduced imported raw
82 materials, no limits on profit remittances3, and public provision of infrastructure facilities. An EPZ is a typical and most comprehensive model. In order to guarantee the DFI activities following the development of a national export- oriented strategy, the host governments also use restrictive regulations to control the situation, such as requiring a certain export performance of DFI firms, the demarcation of industry sectors, limits on running time and pollution standards, etc. (See details in Chapter 4, for both incentives and restrictive rules.) These policy changes affect the form of DFI. The goal of the host countries is to create a suitable investment climate to absorb foreign investment and use its technology, equipment and management skill to develop their national economy and realise industrialisation and modernisation. Therefore, the host governments' stand and behaviour are another important factor that determine the form and behaviour of DFI.
3.3.2 The debate about EPZs
The issue of the development of EPZs in developing countries is also argued by neo-classicists, Marxists and dependency theorists.
3 Note: The hypothesis of the 'defensive-reaction' is incorrect at this point, which mentions the host government does limit on profit remittances. It is not common sense in developing countries anymore now. 83 The neo-classical theoretical analysis of Duty Free Zones and Export Processing Zones started in the 1970s. Hamada
(1974) first raised this issue in the context of the two- sector Heckscher-Ohlin model of international trade. A small, labour-rich developing country exports a labour-intensive commodity and imports a capital-intensive one. If the developing country imposes a protective tariff on imports, this impairs its economic welfare because it is too small to improve its terms of trade. If MNE capital were to flow into the developing country's domestic economy, it would simply shift the output mix toward the import-competing capital- intensive good, leaving the private incomes of domestic factors of production unchanged but the country as a whole worse off because the government would no longer collect customs duties on the displaced imports. If the MNEs' capital instead enters the Duty Free Zone, it leads labour out of the domestic factor endowment instead of adding capital to it, with the same unfavourable effect on welfare. It seems that the Heckscher-Ohlin model, with pure competition and all factors of production fully employed, captures little of the institutional setting of a developing country's economy.
Later, Hamilton and Svensson (1982 & 1983) tried to improve the theory by making capital sector-specific in what is otherwise the same simple two-sector model. An inflow of MNE capital to the developing country's export sector then will improve the developing country's economic welfare, and an inflow to a Duty Free Zone may do so, but the outcome depends on some hard-to-interpret technical conditions. The general
84 conclusion of these models is that inflow of MNEs into a Duty
Free Zone reduces rather than increases economic welfare of
the countries establishing the zones. The conclusion is based on a series of assumptions4 , but some of them do not reflect
the real characteristics of EPZs.
Wall (1976) states the basic economic logic of using EPZs
as a policy instrument: the recognition that policies for
industry and trade that are geared to the needs of the domestic market and tempered by domestic political
considerations can distort the forces of comparative advantage
in such a way as to restrict the flow of resources (both
domestic and foreign resources) into the export sector. Thus
the logic of EPZs is the creation of an area in which domestic
policies do not hold and in which, therefore, a government can
implement policies designed to enable individual firms to
invest profitably on the basis of the country's comparative
advantage. He believes that there are several reasons for
investment in EPZs: for example, suitable location, industrial
estate factors (adequate and secure provision of utilities),
capital savings (non-payment of customs duties), and reduced
4 The theoretical models include the following assumptions (HAMILTON & SVENSSON, 1982 & 1983; BALASUBRAMANYAM, 1988): a. There are two goods and two factors of production in the economy. b. Good 1 is an importable good and good 2 is exportable. c. Good 1 is labour-intensive and good 2 is capital-intensive. d. Both goods are produced in the post-tariff situation. e. Both factors of production are fully employed. f. When the host country sets up a Duty Free Zone, labour, but not capital, is mobile between the domestic economy and the zone. 85 red-tape concerning both the original license to invest and day-to-day affairs (WALL, 1976).
Balasubramanyam summarised the neo-classical theoretical approach in 1988 (BALASUBRAMANYAM, 1988). It is the availability of relatively cheap and easily trainable labour that attracts DFI to labour-intensive production in developing countries. He tries to answer the questions such as: Why is there a need for EPZs hived off from the economy? Why cannot the developing countries attract DFI into the labour-intensive sectors located in the economy? The answer to these questions is that the presence of a heavily protected sector producing importable goods, intensive in the use of capital, necessitates the establishment of EPZs. In the absence of
EPZs, DFI is likely to be attracted into relatively capital- intensive production, protected from international competition by tariffs, with highly profitable domestic markets in the host country. The relatively labour-intensive exportable production is unlikely to enjoy a high degree of protection, save in cases where it attracts an export subsidy. If the imported inputs and components required for the production of exportable goods are subject to a tariff, the degree of effective protection afforded to them could be relatively low or even negative. Therefore, the inclination of profit- maximising foreign firms would be to invest in the importable capital-intensive good to take advantage of the relatively high rate of effective protection it enjoys. Under these circumstances, countries pursuing inward-looking policies are
86 driven to establish EPZs in their bid to promote exports of manufactured goods with the assistance of foreign private capital and technology. Balasubramanyam concludes that EPZs are a second-best method of attracting DFI into the export industries for host countries wedded to protecting their import-competing industries. The first-best method is the adoption of a liberal foreign trade regime bereft of tariffs and quotas on imports: DFI would then be attracted to the labour-intensive exportable industries to take advantage of the relatively cheap labour of these countries.
Neo-classicists claim that EPZs in East Asia are part of
government policies toward a liberalised export-oriented and
free trade strategy and DFI. During the post-colonial period,
government policy (here, in Taiwan and Korea) began by
discouraging DFI in order to promote a new industrial
entrepreneurial class. Subsequently, DFI opportunities were
liberalised, along with the lessening of other restrictions,
in the early sixties. The EPZ effort was a real departure in
policy (KRAUSE, 1985). EPZs were extremely helpful as a
transitional device. It was important for both export
generation and job creation. They represent an important
"switching device" between the primary import-substitution and
primary export-substitution subphases and were heavily
populated by foreign firms at the outset (RANIS & SCHIVE,
1985). Once full employment was reached, the raison d'être of
the EPZs ended (KRAUSE, 1985).
87 However, the political economy side believes that East
Asia's openness and outward orientation have not been based on free trade, even the creation of EPZs (WADE, 1990). The government has intervened in trade so as to promote certain sectors, raise government revenue, reduce foreign exchange deficits and strengthen interstate alliances. Hence, the volume and composition of imports have not simply reflected domestic demand in relation to international prices. And exports have been promoted by both price and nonprice means.
Export growth has normally been generated by using export incentives and other forms of assistance, such as subsidies, in the context of macroeconomic stability (WADE, 1990).
Moreover, the establishment of EPZs is also a political tool to coordinate the national goal (WOO, 1991).
In contrast, the dependency critics have discerned either negative or negligible positive effects of EPZs on the host economy. Fröbel and his colleagues claim that EPZs represent a new element in the international division of labour, being production sites for the industrial utilisation of the labour- forces of the developing countries for the purpose of world market oriented production. The factory of the EPZs is the world market factory (FRÖBEL et al, 1980). Their study divides the EPZ issue into four aspects: first, to present empirical material, chiefly taking the example of EPZs to show how the tendency towards a new international division of labour is revealing itself as a partial process of industrialisation in the developing countries; second, to show that the actual
88 development of the world market for production sites intensifies the tendency towards a new international division of labour by means of the supply of new sites onto the world market, and through the competition between these sites; third, to illustrate the conditions for investment and working in EPZs; and finally, to analyse some of the effects which the process of world market oriented industrialisation under consideration has on the socio-economic development of the developing countries. Comparing the working conditions in the industrialised countries, they claim that working conditions in the EPZs, especially wages, were often insufficient to cover the basic costs of living. Workers also suffered from long working hours, shift work, few holidays, social insecurity, insufficient pensions, the absence of unemployment benefit, and inadequate provisions for safety at work. The
'super-exploitation' was maintained by various instruments, particularly prohibition of trade unionism. The main viewpoints of Fröbel on the impact of EPZs can be summarised as: (1) Export-oriented industrialisation as it is now developing in EPZs does not solve the problem of unemployment.
Although it might appear as if industrialisation of this type could assist in solving the problem of unemployment, in fact, apart from a few countries, the creation of specific job opportunities in export-oriented production cannot be equated with a general reduction in unemployment. The enclaves of EPZ give rise to internal migration by the working population, in particular on the part of young workers. As a result, unemployment in the new industrial sites is in most cases not
89 reduced. (2) The training of skilled workers and the transfer
of modern technology through world market oriented production
in EPZs is very limited in scale. In EPZs, the labour-force is
predominantly unskilled and has only been trained to perform
specific operations. The content of training is therefore
restricted to a few relatively limited tasks. (3) The zones
actually foster dependent and uneven development of the
developing countries, and especially worsen the situation of
structural unemployment in developed countries (FRÖBEL et al,
1980).
Besides these theoretical approaches, some empirical cases
study about EPZ have been offered in different viewpoints.
First, Keesing (1989) and Healey (1989) claim that the
practical needs of manufactured exports met by successful EPZs
and spillover benefits from EPZs. Keesing summarises the
needs: tax-free access to imported inputs, rapid and low-cost
customs clearances for exports and imports, suitable low-cost
labour, well located industrial . sites, suitable infrastructure, less red-tape administration, conveniently
available services as a package. He also claims there are
three major categories of spillover benefits from manufactured
exports: learning by locally owned firms, training and know-
how acquired by individuals, and positive benefits from
requirements for locally produced inputs and services
(backward linkages). Backward linkages to local industry lead
to similar benefits but their growth depends on superior
90 policies, particularly in regard to the customs and drawback system, so as to foster indirect exports. When superior
policies are attained, EPZs are less needed (KEESING, 1989).
Healey also provides more details about backward linkages and
their impact on social and economic welfare based on the case
study of Korean zones (HEALEY, 1989). He claims that the whole
burden of an export-oriented policy cannot be laid on an EPZ,
but the zone must form part of an overall country-wide export-
oriented development strategy. The backward linkages are an
important part of the strategy. The linkages can be revealed
in several aspects: the utilisation of domestic raw materials
for EPZs' firms as indirect exports, EPZs' products sold in
the domestic market, outzone processing (subcontracting
arrangements) and employment generation inside and outside the
zones (HEALEY, 1989).
Second, Antoine (1984) summarises the different attitudes
of host countries toward foreign investment, and the strategy
of both MNEs and host country for development. He claims there
are at least five types of attitude of host countries, from
the widest possible opening to foreign investment in most
liberal countries to less opening and more control in most
central planning countries. He believes the attraction of
export-oriented foreign investment can never be an end in
itself and the policies resorted to in furtherance of this
aim, whatever the instruments they use (EPZs), are entirely
governed by circumstances of time and place. Although there is
no EPZ model that might be generalised, so-called "open" EPZ
91 formulae should be encouraged. In addition, joint ventures,
including local interests, should be encouraged to set up in
EPZs and there should be some relaxation of exports by EPZ
firms to the domestic market, subject to payment of
appropriate customs duties, in order to make an EPZ location
attractive (ANTOINE, 1984).
Third, the practical issues of EPZs in specific regions.
Fitting (1982) compares EPZs in Taiwan and China. For Taiwan,
he concludes: Economically, given the options confronting the leadership in Taipei in the 1960s, the decision to establish
the zones was an astute political move. Faced with an
inadequate resource base and the cut-off of U.S. aid,
development of an export-oriented economy was seen as the key
to rapid economic expansion. The EPZs played an important
role, such as improving balance of payments, acting as
training ground in some key skill areas, and stimulating the
growth of satellite industries. Politically, the zones were a
means of attracting support for Taipei in foreign capital.
Considering Taiwan's international position, the political
effects of the zones have been most welcome. Socially, the
impact of EPZs has been negative in many ways, committing
government to support a system characterised by the repression
of the interests of labour. At the same time, the export-
oriented growth represented by the zones has been responsible
for Taiwan's phenomenal growth rate and rising standard of
living. For China, economically, the zones can be seen as one
of the ways Beijing has adopted to finance technology imports
92 in its efforts to skip the stage of reliance on labour- intensive industry. Politically, the zones reverse Beijing's avoidance of international ties and evince a willingness to sacrifice a certain degree of central authority for the sake of accelerating the process of economic growth. Since the zones are located in some of the most underdeveloped areas, people in the areas have had little experience with the demands of urban life (before the establishment of the zones, many had never even seen a factory), and so the social system will find it hard to adjust to the zones and the adjustment is likely to be a long process (FITTING, 1982).
Botchie (1984) illustrates the cases of EPZs in Liberia and
Ghana with details of establishment background, location, role of EPZs in local areas, structure of investment, direct and indirect employment effects of EPZs, characteristics of employment, working conditions and labour relations in the
EPZs. His study shows that the impact of the zones is very small. The employment structure and labour force composition in the zone show particular features which. are very different form those found in EPZs in other countries, in particular
Asian EPZs. A main explanation of this difference, he believes, is the nature of the industry involved (BOTCHIE,
1984).
Long's (1987) study focuses on the employment effects of
MNEs in EPZs in the Caribbean. His preliminary findings include: (1) Majority-owned affiliates of MNEs predominate
93 EPZs' enterprises; (2) Net transfer of resources abroad is high if a comparison is made between inflow of equity capital in foreign exchange and outflow of profits and dividends; (3)
Net foreign exchange contribution from current operations of
MNEs was found to be negative (for 1980); (4) Benefits of EPZs are associated with high costs including low wages, failure to generate inter-industry linkages, negative net foreign earnings. Finally, he raises some suggestions: an appropriate review of incentives package should be made in order to ensure that enclaves are not oversubsidised; efforts should be made to ensure that the net foreign exchange contribution of MNEs to the national economy is at least positive, for example, through the use of local inputs and reinvestment of profits locally; and MNEs should be encouraged to play a more active role in skill generation and in the transfer of technology by encouraging research and development locally (LONG, 1987).
Kumar's study is based on Indian EPZs (KUMAR, 1987). He divided EPZs' firms into four categories: majority foreign partners, minority foreign participation, marketing (buy-back) arrangements, and domestic units. In terms of employment- weighted value-added performance, the foreign controlled units have clearly performed better than other units. In contrast, purely domestic units yield the lowest level of value- addition. He believes the welfare effects of EPZ activities are unambiguously positive only under two conditions: (1) EPZs are used as first and partial steps towards complete liberalisation and opening up of the domestic economy with the
94 clear objective of integrating it with international division of labour and production; (2) in the absence of such an objective and development strategy, as is the case in India, only if the zones attract DFI, generate employment and yield some backward linkages with the domestic tariff area. He concludes that foreign investment should surely not be discouraged and foreign equity investment in EPZs should be preferred. EPZs are best suited as instruments for exporting surplus labour embodied in manufactured components or assemblies, ideally combined with net private foreign investment flow (KUMAR, 1987). Dror (1984) illustrates the special status of EPZs in respect of labour law in four countries: Mauritius, Pakistan, Philippines and Sri Lanka. The main points of his view are: (1) Most EPZs do not enforce labour laws, for instance, they prohibit trade union activity in the zones. Several governments have given in to the anti- union pressure of the MNEs, fearing that it would be easy for the latter to relocate their operations to the EPZs of other countries ("footloose" industries). However, Dror points out there is no evidence that such moves have actually occurred.
(2) Actually, the working conditions inside the zones are generally better than outside the zones. (3) Although labour practices in the EPZs may differ from outside the zones, Dror still recommends that labour laws should be enforced in the zones so that the production in the EPZs can be operated to the benefit to both labour and industry (DROR, 1984).
95 One comprehensive study of EPZs' development has been done by ILO and UNCTC (1988), which ranges from the general setting of EPZs in the world to the details of empirical cases. The study summarises three different types of EPZ development models: The first, which probably comes closest to what the pioneers of the EPZ idea had originally envisaged, is one characterised by a high percentage of net exports relative to total exports. For example, EPZs in Korea, Taiwan, Mauritius and Indonesia. The second model is that total exports may be very substantial, but net exports remain a small fraction (in the 5% range) of total exports. Imports tend to be exceptionally high as a result of large purchases of foreign machinery, as well as of basic stocks of raw materials, spare parts and semi-finished goods. EPZs in Malaysia and Sri Lanka belong to this model. Mauritius, like Sri Lanka, is a textile monoculture, but its net exports are comparatively high, contrary to those of Sri Lanka. And Malaysia with its electronics monoculture, has a low net export ratio, unlike
Korea which belongs to the first group of countries with a very large EPZ electronics industry. The net export performance of EPZ industries has little if any connection with the types of industries operating in the EPZs, but probably has a lot to do with government policy and with the presence of a pre-existing industrial basis in the host country. The third model is illustrated by Brazil: the EPZ is in fact an import processing rather than an export processing zone. Net export ratios are therefore meaningless since the function of the zone is not to export, but to import semi-
96 finished goods, and transform them for subsequent sale on the domestic market (ILO & UNCTC, 1988).
The study also claims the most dynamic and successful EPZs tend to be found in the most dynamic newly industrialising countries. The effective contribution of EPZs to industrial development seems to depend in large part on the size of the
EPZs relative to the rest of the national economy. The big
MNEs of American and European origin are largely underrepresented in EPZs. There are two reasons: One is that these firms were already multinational, and had manufacturing subsidiaries throughout the world, long before EPZs started expanding in the 1970s. Another is that their foreign investment decisions tend to be governed by their global market strategy, rather than simply by the labour cost advantages that can be offered by an EPZ. On the other hand, the most dynamic and most numerous of the Third World investors in EPZs come from Hong Kong. Possibly, this foreign investment proclivity of Hong Kong firms is related to, the political uncertainties concerning the area's future after
1997 (ILO & UNCTC, 1988). The study reveals the most successful EPZs have generated large amounts of new manufacturing employment, but contrary to initial expectations, do not appear to have had any significant impact on overall unemployment levels, or unemployment in the manufacturing sector. Finally, the study claims that all EPZs tend to go through the same type of life cycle. In the first few years, one major industry rapidly comes to be the dominant
97 industry, and its relative importance declines rather slowly as the years go by. This process of maturation is also marked by the relative decline of fully owned foreign subsidiaries and by the gradual increase of sales by EPZ firms on the domestic market. The fact that these general trends appear to be common to a large number of EPZs is probably due to the fact that most EPZs were conceived along the same lines, and operate in a competitive international environment (ILO &
UNCTC, 1988).
The opposite criticisms have reassessed the disadvantages of promoting growth and employment by developing EPZs. For example, Sricharatchanya (1983) studies that MNEs' behaviour in EPZs and its influence, Rondinelli (1987) describes EPZs and economic development in Asia, and Clifford (1990) criticises the employment costs in Korean zones.
Sricharatchanya believes that the MNEs attracted to EPZs are usually "footloose". They seek out cheap labour, require low- skilled workers, pay relatively low wages, base their production on high import content and generate low domestic value added. Being mobile, they are able to exert maximum pressure on governments by threatening to pull out unless maximum benefits are provided (SRICHARATCHANYA, 1983).
Rondinelli claims that the development of EPZs has advantages and disadvantages, but the disadvantages are stronger. He claims that EPZs' stimulative effects on local and regional economies tend to be weak or nonexistent. Although EPZs in some countries have generated impressive macroeconomic
98 benefits, they also have potential detrimental effects on local economies in areas where they are located. In the short run they can create social and economic problems for localities and exacerbate intra- and inter-regional economic disparities. In addition, the domestic value added by the zone's industries has been low -- less than 25% of the value of gross exports in most countries. Although the rates of return on investment in EPZs have generally been positive,
EPZs owned by governments seem to have lower rates of return.
Moreover, industrial productivity in the zone is about 35% below the national average. EPZs may attract investment by providing a source of supplementary income for poor households with young female members. But, EPZs do not make much impact on reducing unemployment among young males, nor necessarily on reducing overall unemployment in the region in which they are located. Conversely, he also claims if EPZs' industries later decline or move to other areas or countries, that could do great damage to large numbers of people who have been employed in EPZs. He points out that EPZs have few backward or forward linkages with local economies and provide few benefits for the development of domestic industries. EPZs have also transferred little technology to indigenous industry. Experience indicates that EPZs accelerate urbanisation in the areas in which they are located. Often growth occurs at a rate beyond the capacity of local and national governments to meet demand for housing, services and transportation and to absorb migrants into the workforce. Finally, he concludes that when the country becomes more successful at export promotion, the zones become less
99 effective instruments for attracting foreign investment
(RONDINELLI, 1987). Clifford's recent criticism concludes
"goodbye to all that (EPZs' functions)". He states that the higher costs are to take their toll on Korean EPZs: wage rates have increased rapidly in EPZs from the investors' point of view, which damages their comparative advantage in unit-labour costs (CLIFFORD, 1990).
Finally, some have measured the costs and benefits of EPZs to the host countries. The most useful research has been down by Warr, who analyses four EPZs' benefits and costs: Jakarta
(Indonesia), Masan (Korea), Bataan (Philippines) and Penang
(Malaysia) till 1982 by using ex-ante evaluation (WARR, 1983,
1984, 1987a, 1987b, 1989a and 1989b). His finding, in brief, is that EPZs can make a limited contribution to the growth of exports, especially in the early stages of industrialisation.
However, a much more effective strategy is to create a liberal economic environment conducive to export-oriented development.
A notable feature of the firms producing within the zones is their international mobility. The rate of turnover of firms is high and firms leaving an EPZ in one country often migrate to an EPZ in another, where conditions are more favourable. The zones contribute significantly to the employment of unskilled and semi-skilled workers. Moreover, the foreign exchange required to pay domestic workers adds to the host countries' foreign exchange earnings. This amount of foreign exchange is what determines the host country's net foreign exchange earnings from the EPZ. Indirectly, EPZ workers and other
100 domestic factors of production are being paid in foreign exchange and in this respect EPZs are similar to the direct export of labour. In addition, EPZ firms have made little contribution to tax revenue because of tax holidays have been granted to the firms. The benefit-cost analysis shows that different countries' EPZs have different results. For example, the Bataan EPZ in Philippines shows that limited benefits from
EPZs can be extremely costly. The infrastructure costs of constructing the zone in the isolated site chosen were very high. In addition, to attract foreign firms into the zone, the government granted EPZ firms preferential access to the
Philippines' capital market at subsidised interest rates and with government guarantees of loans. The subsidy that was implicit in this policy led to a heavy social cost for the
Philippines. In contrast, the example of Malaysia shows that
EPZs can be established and operated at much lower cost than was the case in the Philippines. Both the Malaysian and Korean examples show that EPZs can yield acceptable social rates of return as public investments. The conclusion made by Warr is the EPZs can provide an efficient and productive means of absorbing surplus labour in the early stages of development.
As industrial development proceeds, and the surplus labour which characterised the earlier stages of industrialisation is absorbed, interest in EPZs has tended to wane (WARR, 1989a & b).
In summary, the neo-classicists believe that EPZs are part of a liberalised export-oriented and free trade strategy
101 (KRAUSE, 1985). But it is still a second-best method of attracting DFI into the export industries for host countries wedded to protecting their import-competing industries
(BALASUBRAMANYAM, 1988). They believe the first-best method is the adoption of a liberal foreign trade regime bereft of tariffs and quotas on imports: DFI would then be attracted to the labour-intensive exportable industries to take advantage of the relatively cheap labour of these countries. However, the political economy side believes that the creation of EPZs has not been based on free trade (WADE, 1990). The government has intervened in trade: the volume and composition of imports have not reflected domestic demand in relation to international prices; exports have been promoted by both price and nonprice means in the context of macroecnomic stability
(WADE, 1990). Moreover, the establishment of EPZs is also a political tool to coordinate the national goal (WOO, 1991). In contrast, the dependency critics basically have opposite attitude toward the development of EPZs in developing countries. They believe that there are mainly negative effects to host countries by establishing EPZs. The problems include: workers in the zones as being 'super-exploited' compared with those of the industrialised countries; EPZs would not induce industrialisation but would intensify the uneven and dependent development of developing countries; EPZs worsen the situation of structural unemployment in developed countries (FRÖBEL et al, 1980).
102 Considering the EPZs' effect, I do not believe it is a liberalised tool for developing countries to apply free trade and free market ideology viewed by the neo-classical theory.
Actually, the host country of EPZs would rather ask other countries be liberalised and open the market to EPZs' products than opening its own domestic market to these products. The limits on domestic sales are typical evidence. On the other hand, I also doubt the suitability of the methodology by the dependency critics, such as Fröbel and his colleagues, who employ a horizontal comparison of working conditions in the industrialised countries and the developing countries, while ignoring the vertical comparison of history, to prove 'super- exploitation' and the intensification of uneven and dependent development of the developing countries by EPZs' development.
3.4 Conclusion
I here raise my general commentary toward the different theoretical and practical approaches about the development strategy in East Asia and the phenomenon of EPZs. Finally, I summarise the questions which I would like to clarify in the thesis.
Regard to development, the neo-classical side emphasises economic growth, individual development and economic freedom.
The interpretation of East Asian development has been focused on a liberalised free trade and free market system, via export-oriented economic strategies that use comparative
103 advantages. EPZs in East Asia are part of government policies toward a liberalised export-oriented and free trade strategy and direct foreign investment. In view of the impact of the neo-classical theories, they have had a certain influence on
East Asian development patterns, especially on the pattern of export-oriented strategies with the trend to liberalisation of government policies. In terms of using economic levers to adjust economic development, the neo-classical side is relatively convincing.
However, Marxism analyses these issues more deeply. It not only analyses and interprets the phenomenon of development and transformation, but also pays more particular attention to illustrate the social structure and production relations which involve development and transformation. They believe that development is really the development of the forces of production and that needs appropriate production relations.
The government intervention can speed up the transformation from the backward production relations which hinder the development to more advanced production relations which suit the development of advanced productive forces. Marxists devote much attention to the effect of the state on promoting the transformation of social structure and the development of productive forces in East Asia. The government policies enabled the government to govern market processes of resource allocation and promote changes of class structure to create more advanced production relations in order to practice
104 industrialisation and realise their political goal. The phenomenon of EPZs is a typical empirical cases to show that
EPZ is not a liberalised tool for developing countries to apply free trade and free market, but through the government intervention and incentives to coordinate the national goal, such as political stability, raise government revenue, reduce foreign exchange deficits.
In contrast, dependency theory does not very well fit the interpretation of East Asian development. Although East Asian countries developed a certain stage of import-substituting strategies in history, they are far beyond the principle of dependency theory, which emphasises a self-reliant and autarchic development pattern to cut off links with the metropolitan countries. Some dependency colleagues claim that the relatively successful development in East Asia occurred because they have fewer links with developed countries (EVANS,
1987). But the development pattern in East Asia is far beyond that approach. Therefore, among the illustrations of theoretical analysis and empirical research on East Asian development, dependency theory is basically ignored. However, the dependency critics do criticise the development of EPZs mainly harm the host countries' benefits. They claim the negative effect: workers in the zones as being 'super- exploited' compared with those of the industrialised countries, and EPZs intensify the uneven and dependent development of developing countries and worsen the structural unemployment problem in industrialised countries.
105 To consider now the development model and the approaches
about EPZs, I am sure that the East Asian development model
would not be a suitable or mono-type for other developing countries, which may have a different situation and characteristics. As a relatively new phenomenon of
international production and investment activity, theoretical
analysis and empirical research of EPZs have not reached the stage of real direct argument between different schools. On the one hand, most of the theoretical analysis is based on assumptions which do not fit the real situation of EPZs.
Hence, the reliability of their solutions is doubted. On the other hand, most of the empirical research relies on limited
data-base case studies to raise some scrappy viewpoints.
Therefore, some representative cases, with relatively complete
empirical data-bases that summarise the EPZs' development in
the past three decades, would be a significantly contribution.
That is why I chose this study.
In planning the research, following issues need to be
clarified from the literature review:
I firstly want to clarify what the role of state on the
economic development is via the establishment of EPZ and what
the patterns of development strategy are by setting up EPZ in
these countries, regard to the argument between the neo-
classical side and the political economy side on these issues.
From this study, I can complete the absence of the
106 illustration of East Asian development, state and industrial strategy, and EPZs, which is lacked in present literature.
Secondly, regard to the claim by Balasubramanyam that using
EPZ method to attract DFI is the second-best method for the host country, and the first-best method is the adoption of a liberal foreign trade regime bereft of tariffs and quotas on imports; DFI would then be attracted to the labour-intensive exportable industries to take advantage of the cheap labour, I want to clarify that the impact of import-substitution strategy and export-expansion strategy toward EPZs and economic development in East Asia, and the reasonable way for their development.
Concerning the specific characteristics of EPZs' investment environment analysed by people and organisations, such as
Wall, Keesing, and ILO and UNCTC, I desire to illustrate how more useful and effective can be for investment in EPZ by practising the incentives, the infrastructure facilities and the efficient administrative system.
In accordance with the claim by Sricharatchanya about the
MNEs in EPZ are footloose, which tend to move easily to other areas or countries where offer more favourable conditions, it is necessary to reveal the behaviour of DFI in EPZs, which includes the phenomenon and impact of investment sources, ownership structure, the size of firms and their mobility.
107 In view of the different approaches about DFI by different schools which were reviewed in 3.3.1 and the unreasonable assumption toward the establishment of EPZs by the neo- classical economists, some significant questions should be answered in order to illustrate the industrial restructuring occurring between developed countries, newly industrialising countries and developing countries. For example, what kind of industries are transferred into EPZs (revealed by industry sectors)? What is the manufacturing level in EPZs (revealed by the level of labour intensity and capital intensity, productivity level)? What are the differences of labour cost, productivity level and living standard between these regions?
Regard to the criticism of the dependency theorists about the development of EPZs, for example, workers in the zones as being 'super-exploited' compared with those of the industrialised countries; EPZs would not induce industrialisation but would intensify the uneven and dependent development of developing countries; EPZs worsen the situation of structural unemployment in developed countries (FRÖBEL et al, 1980); I clarify these issues through employing not only a horizontal comparison of working welfare in the industrialised countries and the host developing counties of EPZs, but also a vertical comparison of history on the issues such as the structure of labour forces (age, gender and educational level), the working conditions (e.g., wages, benefits, working hours), the mobility of labour, the effect of union activities ■ in EPZs, and economic performance on exports and imports and
108 productivity. Through the study, working conditions and workers' welfare in EPZs can be further exploited and the approaches of the dependency theory can be criticised.
Finally, from the angle of social-economic welfare to host country, Warr had analysed four EPZs benefit-cost in
Indonesia, Korea, Philippines and Malaysia till 1982, by using ex-ante evaluation. I gauges the benefit-cost of EPZ till present in terms of ex-post evaluation in order to clarify the question that EPZ is or is not a beneficial public investment project in the past over two decades. Another question, what is the life cycle of EPZ's development in terms of its specific condition, is also necessary to be illustrated in order to provide the EPZ's development trend to other countries which are operating EPZs as well.
Through this comprehensive analysis based on the empirical evidence, making sure that EPZ's effect on national and international economic development. Meanwhile, providing the evidence to examine the criticisms from the literature review are correct or not. Finally, clarifying the questions raised by individual literature concerning about EPZ's development in the past and the future of EPZ.
109 PART II
CASE STUDY OF FOUR ZONES
After reviewing the literature, I now list, compare and analyse the data about the cases: Masan Zone in Korean,
Kaohsiung Zone in Taiwan, Shenzhen Zone in China, and Lat
Krabang Zone in Thailand. Since Shenzhen is a modern city with all kinds of urban capacities, to compare it with the other zones, I only use data on the industrial manufacturing sector of Shenzhen in this comparison.
This part is divided into four chapters. Chapter 4 describes the historical background of the establishment of the four zones, and compares their investment environments: geographic environments, infrastructure facilities, administration structures and investment approval procedures, incentives and restrictive regulations, and the differences between EPZs and other industrial estates in the four countries. Chapter 5 analyses the capital structure in these zones, including the ownership structure of enterprises, direct and indirect investment, the ratio of investment from different countries, the ratio of investment by industry sector and the adjustment of capital. Chapter 6 clarifies the labour structure in the zones, for instance, the employment situation by gender, age, educational level and product groups, wages and working conditions, the structure of labour
110 recruitment and mobility, living standards, management structure between foreigners and local people, and unionisation. Chapter 7 examines the production structure -- the output value of products by industry sector, the constitution of imports and exports, value added and productivity. Meanwhile, I also compare these indexes between the four zones, their nation and other developed countries in order to clarify the comparative advantages of production cost and productivity between these regions.
111 CHAPTER 4
BACKGROUND AND INVESTMENT ENVIRONMENT
The establishment of EPZs is closely integrated with host countries' national economic development strategies. What was the political and economic background of their establishment and what were the goal host countries wanted to achieve through the establishment and development of EPZs are'the main issues in this chapter. Through this analysis, I seek to clarify whether there is any alternative choice for host countries or not, such as Balasubramanyam's (1988) suggestion, and what was the impact of government intervention on development. The chapter intervenes in arguments about development strategy and government effect in East Asia. In addition, according to the definition, special geographic locations, infrastructure facilities, management systems and incentives are the basic characteristics of EPZs: by describing and comparing the basic character of the four representative zones (geographic environments, infrastructure facilities, administrative structures and investment approval procedures, incentives and restrictive regulations, and the difference between EPZs and other industrial estates in these countries), the chapter can provide an overview of the four cases and the common points and differences between them can
be illustrated.
112 4.1 Introduction to my overseas field work
In order to collect the data relevant to the development of
Masan Zone, Kaohsiung Zone and Lat Krabang Zone, I spent 20 days in each zone between the end of 1990 and the early of
1991. During the overseas field work, I had opportunities to interview the administration officers of the zones, investors, management staff and workers. In addition, I had a chance to read their statistics report. Finally, I summarised the result as my overseas field work reports (ASM, 1990; ASK, 1990; ASLK,
1991). Since the information has not been published, I had sent the data to the administration of the zones to confirm the accuracy, and got the reply from them with their correction.
Moreover, I also took the opportunity to visit some academic and research institutions in these countries in order to collect the information about political and economic background and national economic development, such as: Korea
Development Institute, Institute of Economics of Taiwan
Academia Sinica, and Chulalongkorn University in Thailand.
Most of the information have been published and I refer them as the reference.
4.2 Background of the establishment of the four zones
Although the four zones were established at different times, the background of the establishment reveals the host
113 governments' judgement and the patterns of their development strategy. Kaohsiung Zone and Masan Zone were set up earlier than Shenzhen Zone and Lat Krabang Zone. Here, I examine this background, based on this order in history.
4.2.1 The earliest EPZ -- Kaohsiung Zone
Development in Taiwan not only has a strong economic sense, but also has significant political meaning, the survival of the KMT (National Party) regime in Taiwan Island. Like many other developing countries, the government of Taiwan adopted strong import-substitution policies in the early 1950s (HOU,
1988), in order to save foreign exchange and to encourage the development of domestic industries, especially those related to national defence and people's necessities in order to uphold national security and stabilisation. Strict import licensing and high tariff rates were practiced. The exchange rate system was changed from that of a single rate to one of multiple rates, with different rates applied to different types of imports. A tax in the form of a higher exchange rate was applied to imports other than basic raw materials, industrial products financed from U.S. aid and products imported by government enterprises at controlled prices.
Nearly half of the importable commodities were under strict quota restrictions. Under these policies, manufacturing production doubled from 1952 to 1958. However, the domestic market was soon saturated and capacity utilisation rates in a broad spectrum of industries had fallen to a low level (see
114 Table 4.2.1). Meanwhile, the American government indicated that American aid would be terminated soon. Following industrialisation, here had been a mass agricultural labour force move towards industry. The fall of industrial capacity would lead to serious unemployment problems.
Table 4.2.1: The manufacturing capacity utilisation rates in Taiwan in 1959 Item (%)
Rubber canvas shoes 23.3 Electric fans 38.1 Soap 39.2 Insulated wire 40.0 Plywood 46.9 Synthetic fabrics 49.7 Woollen yarn 52.6 Sewing machines 64.3 Iron rods and bars 65.4 Paper 67.4
Source: HOU, 1988.
The government took steps to encourage exports as early as
1955, when it promulgated Regulations for the Rebate of Taxes on Export Products. Import-substitution as a key economic policy was not discontinued, but modified. The government changed the multiple exchange rates into a single exchange rate in 1960 when it devalued the over-valued currency (which had discouraged imports). In addition, tariffs were reduced and strict import controls were eased, especially for imports of materials and equipment to be used in the production of exports. In the same year, the government promulgated the
"Statute for the Encouragement of Investment", in order to improve investment in both export and domestic production.
115 Finally, EPZs were created under this circumstance (HOU, 1988;
EDEPZ, 1987).
Taiwan is an island without natural resources. It earlier had relied on exports of agricultural goods. When the government adopted the industrialisation development strategy, there were two goals: one was to emphasise capital-intensive manufacturing with advanced technology and to set up a heavy industrial base; the other was to develop simple processing manufacturing by importing raw materials and intermediate goods and exporting final goods. The establishment of EPZs was aimed at realising the second goal. The idea was born in 1959, when the government set up an Industrial Development and
Investment Committee which was researching the feasibility of establishing a "free trade zone" or "industrial zone" in
Taiwan (EDEPZ, 1987). The Committee appreciated the success of
Hong Kong's development as a free port. According to the goal of industrial development, the Committee believed that it was feasible to combine the characteristics of a free trade area and an industrial estate as one body to develop export processing manufacturing. Therefore, this kind of area was named an Export Processing Zone. In December 1966, the first
EPZ -- Kaohsiung Zone was inaugurated on a piece of 68 hectares reclaimed tidal land in the Port of Kaohsiung, with the aims such as: creating new job opportunities to solve the unemployment problem, absorbing industrial investment from both domestic economy and overseas, stimulating export- oriented industries and promoting foreign trade, and
116 introducing modern manufacturing and management technologies
(EDEPZ, 1987). (These aims will be examined in the rest of the thesis.)
4.2.2 The establishment of Korean EPZ -- Masan Zone
Masan Zone was established mainly by copying the model of
Kaohsiung Zone. The difference of background from Kaohsiung
Zone is that Korea's national strategy had already shifted towards export-orientation several years before the establishment of Masan Zone (1970).
The economic background of Korea after the Korean War is similar to Taiwan's situation. Economic policies were used to serve the political goal: national reconstruction, security and stabilisation. During the 1950s, industrial policy was inward-looking with an emphasis on reconstruction and price stabilisation. The official foreign exchange rate remained overvalued throughout the 1950s. In addition, the government used both high tariffs and various quantitative restrictions to protect domestic industry. These policies encouraged some import substitution, primarily in the consumer goods industries (MASON, 1980). By 1960, post-war reconstruction and the early stage of import-substitution were complete. Imports of nondurable consumer goods and the intermediate goods used in manufacturing could be replaced by domestic production.
However, problems such as unemployment and inflation began to rise. Meanwhile, the American government announced that
117 assistance would be terminated in the near future. In order to replace the impending loss of foreign exchange, as well as create employment, expanding exports seemed the soundest policy to adopt. The government economic policy clearly shifted from reconstruction and stabilisation to a program of rapid industrialisation based on export-expansion, which was revealed in the First Five-Year Economic Development Plan
(1962-1966). Certain relevant reforms were practiced by the government. In 1962, the government undertook the reform of exchange controls, the national currency, the budget, and tax collection. In May 1964, the Won was devalued by almost 50%, from 130 to 255 Won per dollar (HEALEY, 1989). In March 1965, a unitary floating exchange rate system was adopted. In
September 1965, interest rates on both bank savings deposits and loans were doubled (MASON, 1980). Among the other export incentives provided during this period were: tariff exemptions on imports of raw materials for export production; domestic indirect tax exemptions on both intermediate imports used for export production and export sales; direct tax reductions on income earned from exports and other foreign exchange earning activities; a preferential export credit; a system linking import business to export performance; wastage allowance subsidies; tariff and tax exemptions for domestic suppliers of intermediate goods used in export production. The basic strategy of export-expansion industrialisation was continued under the subsequent Second (1967-1971), Third (1972-1976), and Fourth (1977-1981) Five-Year Economic Plans (HAMILTON,
1986; AMSDEN, 1989). The typical measures were adopted by the
118 government: including additional measures to liberalise imports and lower tariffs in 1967, and two EPZs (Masan and Iri in 1970 and 1974 respectively) (ASM, 1990).
While the government carried out the export-expansion strategy, it never gave up import-substitution, but practiced it in a modified way. This is contrary to the general impression that import-substitution contributed a negligible amount (HAMILTON, 1986). In fact, the Korean trade regime which emerged in the 1960s aimed not only at encouraging export production, but also at protecting domestic capital from the potential ravages of international competition. For instance, quantitative controls over imports were gradually eased as the trade balance improved after the exchange rate reform of 1964. However, the basic tariff rates, as revised in
1957, continued to be imposed on imports, with only minor adjustments (MASON, 1980). Thus, despite the fact that quantitative controls were significantly liberalised, the average legal tariff on imports increased. The exclusion of competitive imports was not the only .way of protecting domestic capital. Certain controls over direct foreign investment were also imposed by the government in order to shield domestic capital from foreign competition: the measures were not only that joint-ventures should be dominated by domestic parties, but also that foreign companies in Korea should be export-oriented so as not to compete on domestic markets (HAMILTON, 1986). Certainly, the EPZs are a most useful tool to coordinate the government's goal, to attract
119 foreign investment and promote exports. And there is the
example of Kaohsiung Zone in Taiwan. Therefore, the Economic
Planning Board dispatched a delegation of some ten people to
Kaohsiung Zone for two weeks in 1969 (LEE, 1989). They studied
not only the EPZ system, but also the problems encountered by
the Kaohsiung Zone's Administration and its solutions. After
this group returned to Korea, the government introduced
legislation based on Kaohsiung Zone's model, but only allowing
foreigners to invest in the EPZs, which is different from
Taiwan's case. The legislation has been changed, allowing
domestic capital to invest in the EPZs since 1980 (MTIK,
1989). The Korean parliament promptly gave its sanction.
Subsequently, two EPZs were established in Korea, with similar
goals as Kaohsiung Zone: (a) attracting foreign investment, (b) promoting foreign exchange earnings, (e) increasing
employment opportunities and (d) facilitating technology
transfer (ASM, 1990).
4.2.3 The establishment of Shenzhen Zone in China
Shenzhen Zone is an outcome of open door policies in China.
Since the Third Plenary Session of the Chinese Communist
Party's Eleventh Central Committee (December 1978), reforming
the domestic political and economic system and re-establishing
connections with the world economy have been the main twin
objectives for China's political and economic development
(SSEZY, 1985). This strategy was based on the lessons from
closing the country to international intercourse for nearly
120 three decades, especially from the pervious ten years
political movement -- "Cultural Revolution". Under Mao's thought, China's economy was damaged greatly and people had
suffered deeply. For instance, China lost production amounting
to RMB100 billion during the Great Leap Forward (1958-59);
more than RMB500 billion during the "Cultural Revolution",
equal to the total value of fixed assets in 1983 in China
(ZHU, 1989). On the other hand, about 15 million people died
due to starvation in the early 1960s, several million people
died of various causes during the "Cultural Revolution" (ZHU,
1989). After Mao died and the fall of the "Gang of Four" in
1976, China faced tremendous pressure both politically and
economically. For example, there was domestic population
pressure: after the "Cultural Revolution" was over, almost 100
million people suffered from a shortage of foodstuff and
clothing. In the urban areas, wages were not raised for more
than 10 years. The national economic performance could not
continue because people lost interest in production; they were
not motivated: there was a political crisis in the leading
group of the Communist Party: the struggle between reforming
and conservative leaders. Outside, China was challenged by
some Asian countries and areas, in particular, Taiwan and Hong
Kong, during the 1970s, which had experienced rapid
development and become newly industrialising countries.
Moreover, the gap between China and developed countries was
getting wider (ZHU, 1989).
121 In order to solve the contradiction between backward social production and the increasing material and cultural demands of the people, production had to be developed on a large scale and economic construction had to be treated as the centre of the government's task. The traditional economic system was failing but it still fettered the economic development.
Therefore, a series of reforms had to be practiced and China could not afford to carry out isolationist policies anymore.
The process of reform started in rural areas. Giving up the
People's Commune system, the private system that replaced it, was called the "responsibility system" (ZHU, 1989). Nuclear peasant families were allocated a portion of formerly collective land for a period (15 years per term), depending on how many people in one family, in exchange for meeting certain tax and crop delivery obligations to the state. Any excess after deliveries to the state and their own consumption could be sold on the free market. Then, the fiscal system was reformed. Before reform, state-owned enterprises were expected to return the whole of their profits to the state. The government decided investment levels for each enterprise. The main reform was that state-owned enterprises have had authority to make investment decisions based on post tax profits. In addition, a new banking and financial system was introduced. Pre-reform, there were no real banks and financial companies in China. Banks were one pocket of the Treasury
Ministry, and this situation was described as "large treasury ■ and smaller bank". The reform established a new banking system
122 which included a central bank, commercial banks, investment banks, financial companies and some new local money markets in several provinces. Meanwhile, a market-determined price system was introduced into the traditional central planning system, so two prices (one from the government and another from the market) ran parallel. The employment system and the social security system also had been reformed. The significant action was to break the "iron bowl", which means that the government no longer guaranteed everyone's job and salaries; at same time, a relevant social security system would cooperate, providing unemployment benefit, retirement, educational and medical benefits. Finally, the main policies to open up the economy were to stimulating international trade and foreign investment in China by establishing Special Economic Zones, and later, opening all of the east coast parts to trade and foreign investment (see below) (ZHU, 1989). Another political consideration in establishing SEZs is that Hong Kong and Macao will be returned to China after 1997 and 1999 respectively under the design of "one nation with two systems (socialism and capitalism)". By practicing a certain. capitalist mode in
SEZs which are close to Hong Kong and Macao, China can get the effect of "killing two birds with one stone": China can become familiar with the operation of capitalist production and learn to deal with it; Hong Kong and Macao can get a certain confidence about the fact that socialist China is trying to tolerate capitalist development inside the nation (SSEZY,
1985).
123 Therefore, in 1979, Guangdong and Fujian Provinces were authorised to promote foreign trade and investment as pioneers, including the establishment of special export zones similar to EPZs in other countries. In September 1979, the
State Council declared that Special Economic Zones were to be established in Shenzhen and Zhuhai, near to Hong Kong and
Macao (SSEZY, 1985). In December 1979, the Guangdong
Provincial People's Congress passed a draft regulation about
Special Economic Zones. Based on the 15th National People's
Congress's approval of this regulation in August 1980,
Shenzhen Zone was established officially with other three zones in Guangdong and Fujian Provinces. The goals of the zones are: attract foreign investment, earn foreign exchange by exporting, import foreign technology and management skill and acquire efficient production. Later, the government summarised the effect of Shenzhen Zone as "One Window, Two
Coverings of Fan", which means that through this window, China can know the outside world, and foreigners can understand
China; the two coverings of the fan have radiating capacities: one is radiating to the outside world by joining the international production, trading and financial system; another is radiating to the domestic economy by introducing foreign capital, technology and management skill (SSEZY, 1985-
89).
124 4.2.4 The establishment of Lat Krabang Zone in Thailand
The establishment of Lat Krabang Zone is a symbol of the transformation of Thailand's economy into a manufacturing export-led phases of period. Before the EPZ, there were several phases of economic development in Thailand.
Industrial development in Thailand, prior to 1960, was characterised by direct government participation. Many state- owned enterprises were established to produce a variety of consumer products as well as intermediate products through a classic mixture of heavy protection against imports for fledgling industries, and various incentives, including tax
reductions and relief from import duties for components, raw
materials and machinery used by new industries. This action
was called the "industrial revolution" triggered off by Sarit,
the chief of the Revolutionary Party since 1958 (AI, 1985).
Meanwhile, the private sector was not important and private
manufacturing activities were mostly small scale and largely confined to processing of primary products like rice, sugar,
rubber and timber (KOMIN, 1989). In 1961, the government
announced the first National Economic and Social Development
Plan (1961-1966), which stressed the importance of the private
sector in promoting industrialisation and the role of the state was reduced to that of providing the required economic
infrastructure facilities (i.e., roads, ports, power and water
supply) and an environment conducive to private sector
investment and growth.
125 Since then, six consecutive Five-Year Plans have been drawn up, which can be divided into 4 phases. The first two Plans were characterised as an import-substitution period, emphasising the reduction of "dependence" on imports of foreign goods, and protection and promotion of local industries. The 3rd Plan was characterised as an export promotion period. The government's goal was to help reduce the national trade deficit with other countries (IEAT, 1990), which specified promotion of manufacturing exports as an industrial strategy, through the Investment Promotion Act and
Export Promotion Act: taxation on imported inputs to be used in exported activities was exempted, all taxes on the promotion process refunded, and business tax on export products exempted (KOMIN, 1989). However, the policies of import-substitution continued to play an important role as the government's strategy to protect domestic manufacturing. The
4th National Plan was characterised as the big push period, emphasising the promotion of small and medium scale industries to sustain the growth of the industrial sector. From 1983 to the present, which covers the 5th and 6th National Plans, was the transformation of Thailand into a manufacturing, export- led economy. This action was practiced because of the consequence of the current account deficits incurred in the
1970s and the early 1980s, when the level of Thailand's international debt rose significantly. Current estimates put the external debt to GDP ratio at about 36% (UNSW, 1987).
During this period, the government emphasised further export production, industrial regionalisation, implementation of
126 large scale industrial development programs, expansion of basic industries, active mobilisation of foreign investments, increased efficiency of management and utilisation of resources, and increased international competitiveness (KOMIN,
1989).
During the industrial development in Thailand, several social problems have arisen. Environmental deterioration, mismanagement of infrastructure and a scattered distribution of factories with little regard to town and country planning have attended industrial growth. In order to guard against these problem and coordinate the practise of National Plans, the government planned to establish industry estates in suburban areas. In 1969, the first industrial estate was set up in Bang Chan (IEAT, 1987). To improve the efficiency of the industrial estate's management, the government decided to found the Industrial Estate Authority of Thailand (IEAT) in
1972 (IEAT, 1990). With the status of a public enterprise under the jurisdiction of the Ministry of Industry, IEAT executes much of the government's industrial development policy, especially regarding the establishment of industrial estates throughout the country. Since then, several industrial estates have been established around the country under the direction of IEAT (see details below). Furthermore, the government planned to set up EPZs to encourage the production of export goods to compete in foreign markets, so that the trade deficit could be reduced and the use of domestic labour ■ forces encouraged. With such considerations, the first EPZ in
127 Thailand was opened in April 1982 at the Lat Krabang
Industrial Estate (BIAP, 1982). By 1989, IEAT had been
involved in the establishment of five operating industrial estates. At present, there are two EPZs already established by
IEAT, one Lat Krabang Zone and another in the Northern
Industrial Estate, which is located 25 km south of the major
northern city of Chiang Mai. In addition, two more EPZs are in the process of being established by IEAT. One is in Bang Poo
Industrial Estate, which is located in Samut Prakan Province,
30 km from Bangkok Port and 55 km south of Bangkok
International Airport. Another one is in Laem Chabang
Industrial Estate, in Chon Buri Province (MET, 1988).
The EPZ in Thailand has similar goals in Thailand as in
Taiwan, Korea and China: create employment opportunity,
promote exports, earn more foreign exchange, and attract more
foreign investment (ASLK, 1991).
4.2.5 Comment
The background to the establishment of the four zones
demonstrates that EPZs are set up by host governments to
promote their political stability and economic development.
During the import-substitution strategies, domestic manufacturing production increased significantly (saturating
the domestic market), large numbers of people left the
agricultural sector, and the national trade deficit rose, so
the host governments intervened with adjusted strategies. The
128 adjusted strategies were designed considering the absence of capital in the domestic economy, so that attracting foreign investment was the policy to adopt. However, the host countries had not enough experience to deal with direct foreign investment at the early years. In addition, domestic manufacturing production was not strong enough to compete with foreign MNEs. Furthermore, the domestic market had saturated.
The emergent problem appeared: with the aim of promoting exports, how could governments allow direct foreign investment within the nation without foreign firms taking over the domestic market? The situation was to delimit a separated area from the nation for foreign investment, especially joint ventures between foreign and local capital, using foreign capital (and management skill, information and marketing), to lead domestic manufacturers to exploit the international market, and create employment and purchases of domestic raw materials and intermediate goods. Therefore, the legislation on EPZs regulated that EPZs' products were mainly for exports, only limited output could be sold on the domestic market (see the details below). This role obviously reveals the adjusted strategies, characterised by simultaneous export promotion and import substitution (protection). Since the EPZ is delimited from the nation, if there are problems in its development, the negative influence is only partial. For the host government, the establishment of EPZ is in the nature of an experiment.
Balasubramanyam has suggested that EPZs are a second-best method of attracting direct foreign investment into the export
129 industries for host countries. The first-best method is to adopt a liberal foreign trade regime bereft of tariffs and quotas on imports, and to attract direct foreign investment to the labour-intensive exportable industries in these countries
(BALASUBRAMANYAM, 1988). The problem is how governments can protect the weak, recently established domestic manufacturers who face competition from the foreign MNEs, and prevent the foreign MNEs' products from invading the domestic market, which was already saturated. Under the circumstance at that time, I doubt that the host country's manufacturing production could survive if the government had adopted the first-best method suggested by Balasubramanyam.
4.3 Geographic Environment
Most EPZs, according to the description in Chapter 2, are near transport facilities such as port and international airport, close to international trade and financial centres. Most them used to be a piece of wasteland or less developed area. The
EPZs of these four countries have a similar character.
Masan Zone is located in Masan City, Kyongnam Province, on the southeast coast of Korea, about 412 km from Seoul and 60 km west of Pusan, the largest port in Korea (MAFEZ, 1989) (see
Map 4.1). This location used to be a wasteland. When the government decided to set up Masan Zone, this place was chosen to develop. Since the original ground was not strong enough to develop an industrial area, the authority rebuilt a deep
130 foundation of 16 meters (ASM, 1990). The first section
(549,536 square meters) of the zone was developed in March,
1970. The second section was completed in December, 1972 with
264,537 square meters. The total area is 814,073 square meters
(MAFEZ, 1989).
Map 4.1: The location of Free Export Zones and other
Industrial Estates in South Korea
EAST SEA
SEOUL CHUNCHEON --0 • O Korea Export Industrial • INCHEON Corporation e • 0~ E Machinery SUWON 1 Electronics 1 1 eP~~ CHEONGJU • L Steel Free Export Zone eO~, ~C' TAEJEON KUMI • 3 Petrochemicals YELLOW SEA • Er Shipbuilding \~RI • TAEGU • ULSAN—•! JEONJU ONSAN CHANGWON L Petrochemicals 1 .. • • MASAN • P~~ v— KWANGJU • ~ A~~Nomferrous Metals o f • ~ ~7 Machinery OCMfON~L~ ~ ~ï ~ ~ 0ó ~ o ~,~~ ~~ V Free Export Zone KWANGYANG _ Steel LA
0 200 km ~!J I ~ approx.
Source: Korea Trade Office, Melbourne, 1989.
131 Map 4.2: The location of EPZs in Taiwan
,— KEEI.UNG HARBOR
25KM 58 5K 1AS ä117S6 ~$tgit N33t EPZA TAIPEI *411" OFFICE SONS H AN AIRPORT4+IEEI BORA C.K.S. AIRPORT
131KM t4.424 TAICHUNG HARBOR
46KM
{EIRHUALIAN —I6KM+i ?Egk HUALIAN HARBOR
TAICHUNG AIRPORT
193KM
—24KM
gSQ!} lAITUNG
,tïú)p2~ 26KM -.16i TILL KAOHSIUNG 0 50km —7KM HARBOR 1 I approx. KAOHSIUNG AIRPORT
Locations of Export Processing Zones Taiwan, Republic of China
Source: The Administration of EPZs in Taiwan, 1987.
Kaohsiung Zone was set up in the port city of Kaohsiung, southwest Taiwan, on the tidal land inside the harbor (EPZA,
1986) (see Map 4.2). The total area is 68.3574 hectares which
132 is divided into five sections. Section A is for the construction of standard factory plants; section B is the administration and service units area; sections C, D and E are the areas for investors' self-constructed factories. The major construction projects in the zone were started in July, 1965 and completed in December, 1966 (EDEPZ, 1987).
Map 4.3: The location of Shenzhen Special Economic Zone
Source: Author's drawing based on the information from
Shenzhen Government, 1990.
Shenzhen Zone is situated in the south of China, next to the New Territory of Hong Kong. It used to be a small country town at the south border of China. However, since it became a
133 special economic zone, it has been an important channel for
China's foreign trade and international links via Hong Kong.
Shenzhen SEZ is 49 km from east to west, 7 km from north to south, with a total area of 327.5 square km (SIIG, 1988) (see
Map 4.3).
Table 4.3.1: The industrial districts of Shenzhen Zone
District Name Main Business Area (hectare)
Shang Bu Electronics, light industry 89
Ba Gua Ling Light industry, foodstuff 85
Mei Ling Machinery 108
Huang Gang Foodstuff, light industry 238
Shui Bei Machinery 88
Lian Tang Machinery 65
Hua Qiao Town Electronics, light industry 159
Jian Cai Building materials 177
She Kou Electronics, machinery 137
Nanhai Oil Electronics, oil processing 91
Ma Wan Machinery 199
Sha Tou Jiao Light industry, foodstuff 11
Yian Tian Machinery, light industry 88
Science Industrial Park High-tech industry 320
Total: 1,855 Source: The Government of Shenzhen, 1988 & 1989.
Shenzhen Zone is divided into 5 administrative districts:
Luohu, Shangbu, Nantou, Shatoujiao and Shekou. These districts are constituted by 13 industrial areas, one science industrial
134 park (SIIG, 1988) (see Table 4.3.1) and several residential areas, commercial centres, touring spots, storage areas and cultural centres.
Lat Krabang Zone was opened in April 1982 at the Lat Krabang Industrial Estate (BIAP, 1982), which is located in the northeast of Bangkok (within Bangkok Metropolitan Area, see Map 4.4), 30 km from Bangkok's Klong Toey port and 35 km from Bangkok International Airport. The whole industrial estate is divided into two parts: General Industrial Zone and EPZ (see Map 4.5). The first phase of the EPZ contained 21.12 hectares (132 rai, 1 ha = 6.25 rai) (MET, 1988). At present, the total area is 120.16 hectares (751 rai), fully occupied by 77 factories (IEAT, 1991).
135 Map 4.4: The location of Industrial Estates in Thailand
Source: Office of the Board of Investment, Thailand, 1989.
136 Map 4.5: Lat Krabang Industrial Estate and Export Processing
Zone
Source: Industrial Estate Authority of Thailand, 1991.
Table 4.3.2 shows that Shenzhen Zone is the largest
individual zone among these four. Lat Krabang Zone is second, Masan and Kaohsiung are third and fourth. The difference
between them is: Shenzhen Zone has the capacity of both a large city and a large EPZ; inside the zone, there are
industrial estates, other commercial estates and residential
areas. On the contrary, Lat Krabang Zone is a smaller area, located inside an industrial estate. Masan Zone and Kaohsiung
Zone are similar to an individual zone only with EPZ capacity.
All zones except Lat Krabang Zone are located on the border
137 and coast. Even Lat Krabang Zone is located in the Bangkok Metropolitan Area, which is the most developed area in
Thailand.
Table 4.3.2: The area of the 4 zones (unit: ha.) Masan Kaohsiung Shenzhen Lat Krabang Area 81.4 68.4 32,750 120.16 Source: The Authority of the 4 zones, 1990 and 1991.
4.4 Infrastructure facilities
The infrastructure facilities of EPZs include: land and factory building, supporting facilities such as power and water supplies, warehouse and transport services, telecommunication service, financial services and recreation facilities. An EPZ is like a small society which provides every necessary facility and service for enterprises and people who are working in the EPZs. The infrastructure facilities of the four zones are listed in the following two parts.
4.4.1 Land and factory building
In Masan Zone, land and facilities are not sold to investors, but leased. At present, all of the leasable land (52.5 hectares) is leased. In the early 1970s, the rental of land was Won60.39 per square meter per month ($US0.15, $US1.00=Won398 in 1972). At present, the rental of land is
138
Won95 ($US0.14, $US1.00=Won700 in 1990) per square meter per
month (ASM, 1990).
The factory buildings are divided into two types. One is a
standard factory building. Another is a self-constructed
factory building. The former is built by the government and
leased to investors. The lease charges are listed in Table
4.4.1.
Table 4.4.1: The lease of standard factory building in Masan
1st floor 2nd floor 3rd floor 4th floor Average Year Won $US Won $US Won sus Won $US Won $US
1974 650 1.34 579 1.19 554 1.14 --- 594 1.22
1990 905 1.29 804 1.15 776 1.11 389 0.56 719 1.02
Rents are /square meter/month.
Source: The Administration of Masan Zone, 1990 and Korea Development Institute, 1975 ($US1.00=Won484 in 1974).
There are 7 blocks of standard factory buildings. The lease
contract is for a maximum of ten years and the rental fee
remains fixed for five years. The contract is renewable after
the ten-year period. The total area of standard factories is
88,900 square meter (1 block = 12,700 square meter). The self-
constructed factory building is designed and built by
investors after they rent the plant site (MAFEZ, 1989; ASM,
1990 & KDI, 1975).
In Kaohsiung Zone, the land is public property so that it
can not be sold but only leased. The investors can lease the
land for a term of ten years. After that term, they can apply
139 for renewal. Factories are also divided into standard factory buildings and self-constructed factory buildings. Whatever sort of factory building, investors have to pay the rental of the land. The total leasable land is 55.1794 hectare which has been leased out entirely. The rental of the land was $NT11.5 per square meter per month ($US0.44, $US1.00=$NT26.0) in 1990
(IGEPZ, 1990). However, at the time when the zone was set up, the rental was only $NT1.134 per square meter per month
($US0.028, $US1.00=$NT40 in 1966)(EDEPZ, 1987).
Standard factory buildings are for sale, not for rent. The total floor space of standard factory buildings is 189,334 square meter which, have been sold out entirely (EPZA, 1986).
The cost of a standard factory building in 1967 and now is listed on Table 4.4.2. Since 1967, the average price of the factory building increased over 6 times (based on $US price).
Table 4.4.2: The price of standard factory building in Kaohsiung Zone, 1967 and 1990
1st floor 2nd floor 3rd floor 4th floor Average Year $NT $US $NT $US $NT $US $NT $US $NT $US
1967 1,423 36 1,268 32 1,209 30 • --- 1,300 33 1990 7,234 278 6,717 258 6,201 239 5,684 219 6,459 248
Price per square meter. Source: The Administration of EPZs in Taiwan, 1990.
In Shenzhen Zone, the state-owned land can be used at cost and transferred in three ways. (Actually, the investors just have the right to use land; but the ownership still remains with the government.) These are: mutual agreement, bidding under tender and public auction. The maximum period of use of
140 land is 50 years. A renewal is possible at the end of the period if the investors want to continue. The annual utility fee per square meter of land is RMB1.60 ($US0.34) (SIIG,
1988). The investors can transfer the right to use the land.
The factory buildings are again divided into standard buildings and self-constructed buildings. For the former, the investors can purchase or lease. The average price is about
RMB800 ($US170, based on $US1.00=RMB4.7 in early 1990) per square meter. The rental of factory space is about RMB20
($US4.26) per square meter per month (SSEZY, 1990).
In Lat Krabang Zone, land and factory buildings can be
purchased and leased. This is different from other zones where
land can only be leased, but not purchased. So most investors
would like to purchase land and set up self-constructed
factories rather than leasing land in Lat Krabang (ASLK,
1991). In addition, the scale of standard factory buildings
provided by the authority is quite limited. In 1982, the start
of the zone, the price of land was $US140,000 per hectare.
Leases were available at $US21,000 per hectare per annum with
rent revisions every three years (BIAP, 1982). Standard
factory buildings were available in units of 800 square meters
for rental at $US2.61 per square meter per month. Rent
increases were limited to a maximum of 45% after three years
(BIAP, 1982). At present, the price of land is $US700,000 per
hectare and rental of land is $US35,000 per hectare per annum
(ASLK, 1991). The price of land increased 4 times in the past
141 ten years. On the other hand, the rental of standard factory
buildings is $US4.36 per square meter per month (ASLK, 1991).
The rental of standard factory buildings increased 67% in last decade.
The use of land differs in these four cases. In Korea,
Taiwan and China, the land is state-owned property, which can only be leased but not sold; land can be sold in Thailand. In
Masan Zone and Kaohsiung Zone, the method of using land is similar. The investors sign a contract with the administration office to lease the land and pay the charges. In Shenzhen
Zone, the method is to purchase the right to use land for a limited period (the maximum period is 50 years). In Lat
Krabang Zone, investors can purchase or lease land without any limitation. The comparison of land rents in these zones is listed in Table 4.4.3. The most expensive place to use land is
Kaohsiung Zone. Shenzhen Zone and Lat krabang Zone have similar rents. Rents are cheapest in Masan Zone, since the
great devaluation of the Won in the past two decades.
Table 4.4.3: Comparison of land rental in the four zones, 1990
Masan Kaohsiung Shenzhen Lat Krabang 0.14 0.44 0.34 0.29
Rents are $US/square meter/month. Source: The Administration of the four zones, 1990 and 1991.
In addition, the four zones all provide standard factory
buildings and space for investors to build self-constructed
factory buildings. Whereas Kaohsiung Zone only sells the
142 standard factory buildings but not lease them, the other zones mainly lease these buildings. I cannot compare the cost of building the self-constructed factory buildings because different individual companies have different designs and cost. However, standard factory buildings are provided by the administration of these zones with comparable price. The comparison of the price of standard factory buildings is listed in Table 4.4.4.
Table 4.4.4: Comparison of the price of standard factory building in four zones
In the early At present increase rate stage 1990 (x)
Masan (rent) $US 1.22 (1974) $US 1.02 -16 Won 594 Won 719 21
Kaohsiung (sale) $US 33 (1967) $US 248 651 $NT1,300 $NT6,459 397
Shenzhen (rent) $US 8.42 (1982) $US 4.26 -49 RMB 16 RMB 20 25
Lat Krabang (rent) $US 2.61 (1982) $US 4.36 67
Price per square meter/month. Source: The Administration of the four zones, 1990 & 1991.
Tables 4.4.3 and 4.4.4 show that the increase of price of both land and factory buildings is large in Kaohsiung Zone. On the contrary, the price in Masan Zone has not increased. The main event which leads to this result is the different histories of the foreign exchange rates (see Table 4.4.5). In
Masan Zone, the rental of factory buildings in Won increased
21% from 1974 to 1990 (without deducting inflation); however, since the Won devalued 45% compared to the $US from 1974 to
1990, the rental in $US decreased 16%. On the other hand, in
143 Kaohsiung Zone, because the $NT increased 54% against the $US from 1967 to 1990, the price of plant in $US increased over 6
times, though only 4 times in $NT.
Table 4.4.5: Official exchange rates to $US1.00 Year WON $NT RMB Baht
1966 40.10 1967 40.10 1968 40.10 1969 40.10 1970 315.9 40.10 1971 372.5 40.10 1972 398.9 40.10 1973 397.5 38.05 1974 484.0 38.05 1975 484.0 38.05 1976 484.0 38.05 1977 484.0 38.05 1978 484.0 36.03 1979 484.0 36.03 1.55 1980 659.9 36.03 1.50 1981 700.5 36.85 1.70 1982 748.8 39.12 1.89 23.00 1983 795.5 40.07 1.98 23.00 1984 827.4 39.60 2.32 23.64 1985 890.2 39.85 2.94 27.16 1986 861.4 35.50 3.45 26.30 1987 792.3 28.55 3.72 25.72 1988 684.1 28.22 3.72 25.29 1989 666.7 25.84 3.77 25.70 1990 700.0 26.23 4.97 25.59 Source: IMF, 1990 and EYRC, Annual.
Rents in Shenzhen Zone actually have not changed much. I
list the price in both $US (using official exchange rate) and
RMB. Actually, RMB is the representative currency because it
is very difficult to use $US to show the real value. In
Shenzhen Zone, most investors invest in foreign currency but
do not use the official exchange rate to convert into RMB.
There exist semi-official exchange rates in the Foreign
Exchange Adjustment Centre' and black market rates, and the
1 Note: The Shenzhen Foreign Exchange Adjustment Centre was started in November 1985 (ERHK, 2078/1988). The official value of RMB was appraised too high, which blocked the investment aspirations of foreign investors. Therefore, the 144 RMB will be lower in these markets than in official markets.
So it is hard to use sUS to represent the price based on the official rate.
In Lat Krabang Zone, the price of both land and standard factory buildings is similar as Shenzhen Zone, and Masan Zone has relatively cheaper price of both land and standard factory buildings.
4.4.2 Industrial facilities and supporting services
In Masan Zone, the authority offers electric power, water supply and port facilities for enterprises. There is an electricity station 2 Km from the zone with a capacity of
Shenzhen local government applied for approval from the central government to set up a foreign exchange adjustment centre, to help enterprises and individuals adjust foreign currency and RMB between themselves at reasonable exchange rates and also to reduce the of foreign investors in Shenzhen. Actually, the centre did not provide money for exchange, it just provided a place and opportunity for customers to exchange the currency with official approval. The centre just charged a management fee. Over 90% of customers had already finished negotiations about the exchange rate and amount before they came to the Centre. After obtaining approval from the centre, an adjustment activity could be finished in 20 minutes. At the beginning, due to lack of experience, the Centre limited the top rate, which blocked business. Since 1987, the Centre changed the rules to eliminate the top rate, and the value of turnover was over 8 times that in 1986. In practice, the RMB exchange rate in the centre is much lower than the official rate, closer to the rate in the black market. There are several advantages of the centre: First, it can speed up the circulation of money and adjust the relative surplus or shortage of foreign currency and RMB. Second, it promotes the production toward more export-oriented so that the enterprises can earn foreign currency in exchange for more RMB and make the production more profitable. Third, it can limit the exchange activities in the black market to a certain degree. 145 60,000 KW. The authority can provide 20,000 tons of water for the enterprises every day. The cost of using water is Won
9.42/m3 under the contract volume. The excess charge is Won
89.88/m3. There are harbor facilities in the zone with two 20,000 ton-class-vessel wharfs, 420 m long and 11 m deep. The post office is located inside the zone. Masan Telecom &
Telephone Office is 5 km from zone, which connects to the national telecommunication automation network (MAFEZ, 1989).
Other supporting services include bank and insurance institutions, forwarding, shipping, stevedoring, warehousing, packing, maintenance and repair services within the zone.
Recreation facilities include 4 accommodation buildings, 31 reading rooms, 23 medical clinics, 108 sport facilities, 102 dining and entertainment halls and 18 department stores
(IMFEZ, 1989). Apart from the Masan Zone Administration
Office, the other administrative support services include the local labour office, the customs station, local police station and fire brigade.
In Kaohsiung Zone, the Taiwan Power Company has set up transformer stations inside the zone in order to ensure an adequate supply of electricity to enterprises. The average energy charge is $NT1.60 per KWH. Water is supplied by the
Chen-Chin Lake Industrial Water Works. The average price of water consumption is about $NT8.00/m3. One post office is located in the zone. A telecommunications office was established in the zone. The companies in the zone had already adopted automatic communication equipment (IGEPZ, 1990).
146 Kaohsiung Zone is adjacent to the Kaohsiung Port and 7 km from the Kaohsiung International Airport so that it is convenient for international transport (EPZA, 1986). The Bank of Taiwan and the International Commercial Bank of China have branches in the zone. Banking services include deposit and loans, remittances, trust and treasury. Loans are granted for export, purchasing goods, mortgages on factory buildings and credit.
The warehousing and transport service centre was set up in the zone in 1966. The services include the storage and preservation of materials for import and export, and their handling and shipping (EPZA, 1986). Other service facilities, like health and sanitation (which include an industrial sanitation service), employee health maintenance service and medical service, also exist in the zone. The supplies and services include department stores, dining halls, women's accommodation, cafeteria, beauty parlour, library, sports and transport facilities for workers. The authority will also provide an employment service, customs service, tax bureaus, clean-up services and fire-fighting service (EPZA, 1986).
Since Shenzhen is built up as a modern city, the capacity of infrastructure facilities is larger than in other EPZs. In
Shenzhen, the power supply comes from Guangdong province electric power network and Hong Kong electric system. Shenzhen had a capacity of 400,000 KVA transformer facilities in 1986.
In 1988, Shajiao B power plant with 700 MW capacity was completed. Daya Bay Nuclear power plant will be completed in
■ 1992 when the plant will be able to deliver electricity at a
147 capacity of 1,800 MW. The cost of using industrial electricity is $HK1.00/KWH. Water for industry and household consumption in Shenzhen comes from several reservoirs around Shenzhen with a total daily capacity as high as 250,000 cubic meters. The second water supply system will be completed after 1990, which will provide 864,000 cubic meters a day. Industrial water is supplied at the price of $HK0.675/m3. A program controlled telephone system is used in Shenzhen, which connects with other domestic cities and international cities. Telegram, telex and fax are also available (SIIG, 1988 & SZ, 1988).
In Shenzhen, over one hundred main roads and a number of flyover crossings have been built. This road network is connected to the domestic highway network and Hong Kong New
Territory. The construction of the Hong Kong-Shenzhen-
Guangzhou Freeway is under way. The Guangzhou-Kowloon railway line goes straight through the middle of Shenzhen. It takes 35 minutes from Shenzhen to Kowloon on the electrified train. At present, ocean shipping lines have been opened to more than ten countries and regions. There are 7 ports with 63 berths, among them, 7 berths of over 10,000 tons. The biggest one is
42,000 tons, 12 meters deep. A new international airport at
Huangtian in the west of Shenzhen is under construction (SIIG,
1988; SZ, 1988 & SSEZY, 1989).
The financial activities are directed by the People's Bank of China (central bank). At same time, there are many other
national specialised banks and foreign banks. There are 25
148 foreign bank branches and offices in Shenzhen (SIIG, 1988).
The Foreign Exchange Adjustment Centre has been operated for several years as mentioned before. The first stock market in
China also set up in Shenzhen in early 1988 (ERHK, 2058/1988).
Other service facilities include storage, repair services, insurance, shopping centres and restaurants, petrol stations, clean-up services, and building management. There are 15 hospitals and 225 clinics with over 1,800 patient berths.
About 6,000 people are working for the hospitals and other medical institutions (in 1988). Most companies in Shenzhen provide accommodation for their employees (SSEZY, 1989). The recreation facilities include about 150 hotels with 34,000 beds by 1988 (SSEZY, 1989), several tourist centres and one golf club. The cultural and education facilities include 3 universities, 6 specialised schools, 16 high schools and 10 scientific research institutes. Shenzhen has its own newspaper, TV and radio broadcast stations, city library, museum, theatre and gymnasiums (SIIG, 1988).
In Lat Krabang Zone, electricity is available with 24 kW in three lines (BIAP, 1982). The charge for using electricity, for medium industry as an example, is Baht1.23/kwh ($US0.05,
$US1.00=Baht25.496 in 1989) (KIIT, 1989). Sufficient water is available from wells, with 272 m3 per hour from each of fòur wells. The charge for using water is Baht8.00/m3 ($US0.27/m3 )
(ASLK, 1991). The estate has 250 telephone lines. Transport requires trucking to the port, airport, or rail station. The distance to the Bangkok's Klong Toey port is 30 km, to Bangkok
149 International Airport 35 km, and to the nearest railhead 38 km
(MET, 1988). The Customs Department has established a 4,440 square meters warehouse with bonded facilities in the complex.
1,500 square meters of low-cost housing is available in the vicinity (BIAP, 1982). In the estate, the Industrial Estates
Authority of Thailand (IEAT) also provides postal services, waste treatment, fire protection, security, transport facilities, banking, and hospitals. The Authority assists enterprises to obtain loans from the Industrial Finance
Corporation of Thailand (IFCT). IFCT loans for firms located in an industrial estate are 1% lower than the going IFCT rate for other firms (BIAP, 1982). Inside the zone, the authority does not provide accommodation, transport or other recreation facilities for the workers. Workers have to leave the zone after finishing work every day (ASLK, 1991).
Apart from Shenzhen Zone which has the capacity of a modern city, the other three zones' facilities are quite similar. For instance, they all have complete power and water supply systems; convenient transport facilities like road, railway, port and airport systems; advanced telecommunication system and comprehensive support services like financial institutions, warehousing, health and sanitation services, and other relevant support services and recreation facilities.
Since Shenzhen is built up as a formal city, it has other kinds of urban facilities. Normally, the facilities are larger than in the other three cases. For that reason, it is not significant to compare every item between them. I here list
150
the capacity and cost of using power and water supplies in the
four zones in Table 4.4.6. The capacity of power and water
supplies in Shenzhen Zone is much larger than in other zones.
However, since the shortage of power supply toward the large
demand of consumption, the price of electricity is most
expensive in Shenzhen than in the other zones.
Table 4.4.6: Comparison of power & water supply in the four zones
Masan Kaohsiung Shenzhen Lat Krabang
Power 60 mw 154 mw 700 mw 24 kw Won65.8/kwh $NT2.40/kwh $HK1.00/kwh Baht1.23/kwh $US0.09/kwh $US0.09/kwh $US0.13/kwh $US0.05/kwh
Water 20,000m3/da 7,011m3/da~ 250,000m3/dax 26,000m3/dax Won9.42/m $NT8.08/m $HK0.68/m Baht8.00/m $US0.013/m3 $US0.31/m $US0.09/m3 $US0.32/m3
Source: The Authority of the four zones, 1990 and 1991.
4.5 Administrative structure and investment approval
procedures
Most EPZs' administration offices are small and effective. In
order to attract foreign investment, the approval procedure to
establish enterprises in the zones is a one-stop service
system. This means that EPZs' administration represent the
central government to approve applications and also support
investors who set up enterprises in the zone by related
divisions and services. Investors not only can save time in
transferring their production from overseas to EPZs, but also
they are provided infrastructure facilities and useful
supporting services.
151 In Korea, Masan Zone Administration is under the leadership of the Ministry of Trade and Industry. The main jobs which the zone's administration carries out include: looking after state-owned property, approving investment, providing supporting services for the firms inside the zone and managing utilities and welfare facilities (MTIRK, 1989). The
Administration Office is constituted of five divisions (Table
4.5.1).
Table 4.5.1: The structure of Masan Zone's Administration Office Management Division
General Affairs Division
Director General Transportation Division
Investment & Information Division
Special Planning Division
Source: The Administration Office of Masan Zone, 1990.
The total number of administrative staff is 500. The ratio between numbers of administrative staff and total labour in the zone is about 1:40 (ASM, 1990). (The total number of workers was 21,000 in 1990.)
Based on "Korean Free Export Zone Establishment Act"
(MTIRK, 1989), the procedures for applying to establish enterprises in the zone are as follows. A person desiring to engage in a business in the free zone to manufacture, process
152 and/or assemble goods for export shall obtain approval for such a business from the Minister of Trade and Industry. The investor shall meet both of the following criteria: 1. An industry engaged in manufacturing, processing or assembling goods for the purpose of export; 2. An industry solely invested by a foreigner or an industry of joint venture with a national of Korea. [After 1980, the government allowed Korean nationals to invest in the zone (ASM, 1990).] Actually, the
Administration Office of Masan Zone represents the Minister of
Trade and Industry to approve foreign investment in the zone.
After getting approval, the investor signs a contract with the
Administration Office about purchasing a standard factory building or leasing the land within 50 working days (IMFEZ,
1989).
In Taiwan, during the preparatory stages of setting up
Kaohsiung Zone, an administration was set up in March 1965
(EDEPZ, 1987). However, since two other EPZs were set up later, the Ministry of Economic Affairs established a central management office in January 1973 (EDEPZ, 1987), which is called "EPZ Administration" in order to operate the three zones effectively. At the same time, Kaohsiung Zone Branch
Administration replaced the original Kaohsiung EPZ
Administration. The structure of the Kaohsiung Zone Branch
Administration is listed in Table 4.5.2. In 1990, the ratio between administrative staff and the total labour force is about 1:60 (calculated from MSR, 1990).
153 The investment procedures in Kaohsiung Zone are divided into several steps (IGEPZ, 1990). First, if investors decide to set up firms in the zone, they pay a deposit equal to 5% of the price of the standard factory building which is to be bought; or equal to one year's rental if they want to lease a piece of land to build a self-constructed factory building.
At the same time, an Investment Application and Project Form must be submitted to the Investment Service Division for processing.
Second, the application is considered by the Investment
Screening Panel which was set up by the Ministry of Economic
Affairs, with other related government agencies such as the
Overseas Chinese Commission, Central Bank, Reconstruction
Department of Taiwan Provincial Government and the Director
General of EPZ Administration. A decision is made within one month. If the application is rejected, the deposit will be returned to the investor without interest. If approved, half of the deposit is returned to the investor and the other half becomes a performance bond. At the same time, the investor can prepare to set up the company and register with the
Administration.
Third, if the investor wants to purchase a standard factory building, 30% of the price shall be paid within one month of the approval, and a purchasing contract is signed with the
Industrial Management Division. If the investor intends to
■ build a self-constructed factory building, a plan of the
154 building shall be submitted to the Industrial Management
Division for the allocation of land. The land lease contract should be signed within one month of the allocation of land.
Table 4.5.2: The structure of Kaohsiung Zone Branch Administration
EPZ Administration 1 KEPZ Branch Administration 1 Director 1 Deputy Director Investment Service Division
Foreign Trade Division
Industrial Management Division
Labour Affairs Division
Secretariat
Personnel Office
Accounting Office
Health Station
Supply & Services Station
Fire Brigade
Scavengers Squad
Source: The EPZ Administration of Taiwan, 1986.
155 Shenzhen Government structure is like any urban administrative system. It is unnecessary to list all the departments of the Government. I list the bureaus and offices of government and other institutions which are related to the industrial manufacturing business in Table 4.5.3.
In Shenzhen Zone, three main kinds of enterprises are relevant to foreign investors. [Actually, there are six types of investment in Shenzhen Zone (SZ, 1988), as I will describe in Chapter 5.] These are: wholly-owned foreign enterprises,
Sino-foreign joint ventures and Sino-foreign contractual joint ventures. The last is a special enterprise style existing solely in China, which means that a foreigner provides capital
and technology, while a Chinese partner provides land and labour; they share the profits according to contract, but not
on the input of capital. If the investors choose the latter
two styles, the first thing they have to do is identify a
partner for co-operation and the project for investment. Then,
they conduct a feasibility study of the project, work out the
company's articles and sign the contract. Finally, they
prepare related documents to apply for approval to Shenzhen
Municipal Government. If the investors want to set up a whol-
ly-owned company, they must prepare the application documents
and apply for approval to the Government. The main application
documents include: an application form, feasibility report,
the articles of company (the contract, if it is a joint ven-
ture), names of the directors of the board, the copy of the
investor's business registration certificate and legal repre-
156 sentative certificate, and a statement of the investor's credibility. Normally, the government gives approval or rejec- tion in one month (SIIG, 1988). After obtaining the approval from the government and registering in the Industry and
Commerce Administrative Bureau, the investor starts to establish the enterprise (SIIG, 1988). The procedures for establishing an enterprise are listed in Table 4.5.4.
In Thailand, the Board of Investment (BOI), which is the official investment promotion arm of the Thai government, offers a comprehensive set of incentives for investors.
However, the Industrial Estates and Export Processing Zones are directly managed by the Industrial Estates Authority of
Thailand (IEAT). IEAT was set up in 1972, under the leadership of the Ministry of Industry, to develop areas of land by
providing basic infrastructure and public utilities for the siting of industrial plants (KIIT, 1989).
157
Table 4.5.3: Industrial investment related institutions in Shenzhen Zone Municipal Industry Office
Municipal Foreign Investment Office (1)
Foreign Investment Service Centre (2)
Environment Protection Office
Industrial & Commercial Administrative Bureau
Municipal Labour Bureau
Municipal Tax Bureau
Public Security Bureau
Shenzhen Municipal Public Finance Bureau People's Government Electricity Supply Bureau
Shenda Telephone Co.
Kowloon Customs (3)
Wenjingdu Customs (4)
Bank of China, Shenzhen Branch
People's Bank of China, Shenzhen Branch (5)
Source: The Government of Shenzhen, 1988. Note: (1) & (2): The difference between (1) & (2) is that the former is a government office which verifies foreign investment but the latter is an investment service centre which helps foreign investors set up enterprises in the zone.
158 (3) & (4): Kowloon Customs manages the customs border between Shenzhen Zone and Mainland China and Wenjingdu Customs operates the customs border between Shenzhen Zone and Hong Kong. (5): People's Bank of China acts as the central bank in the zone.
Table 4.5.4: The procedures of establishing an enterprise in Shenzhen Zone
Bank Open bank account
Tax Tax registration (Tax Bureau)
Factory Rent/buy factory Building building
Labour Recruit labour (Labour Service Co.) & workers' residence permits (Public Security Bureau)
Water & Apply for water & power Power supplies (Waterworks Co. & Electricity Supply Factory Bureau) building & installation of equipment
Telecom Apply for telecom facilities (Shenda Telephone Co.)
Overseas Entry/exit visa (Public Commission Staff Security Bureau)
Import Apply for equipment & materials import (Customs House) Formal operation
Transport Vehicle import licence (Transport Office, Public Security Bureau)
Source: The Government of Shenzhen, 1988.
159 The organisation structure of IEAT is listed in Table
4.5.5. Lat Krabang Zone is under the leadership of the Governor of the Authority. IEAT provides an approval process
for investors with a one-stop-service which includes permits
to use land, establish a factory and operate a factory (IEAT,
1991). IEAT also provides other related services: providing
information on investment, setting up a company, investment
privileges, sources of loans and the design and proper
construction of a factory (IEAT, 1991).
There are several kinds of business organisation allowed in
Thailand: sole proprietorship owned by one person;
partnerships; and limited companies. A representative office
may also be established to engage in limited "non-trading"
activities (AGIT, 1989).
Normally, a foreign company must apply to the Ministry of
Commerce for an "Alien Business Licence" and obtain
promotional privileges from the Board of Investment (BOI)
(AGIT,1989). However, if the company locates in the Lat
Krabang Zone, it can then apply for its privileges direct to
the IEAT. It will not only gain some extra advantages than in
other industrial areas, but also red tape is less than with
the BOI (BIAP, 1982). For example, since the zone is
considered a bonded area, customs duty does not have to be
paid on imports, and firms will not have to go through the
hassle of claiming duty drawback when exporting, which firms
160 Table 4.5.5: ORGANIZATION CHART OF INDUSTRIAL ESTATE AUTHORITY OF THAILAND B.E. 1987
BOARD OF DIRECTORS
GOVERNOR
CHIEF ENGINEER ADVISER
ADMINISTRATIVE SERVICE SECTION INTERNAL AUDIT AND FOREIGN RELATIONS 8 REPORT SECTION INSPECTION OFFICE GOVERNOR'S OFFICE PUBLIC RELATIONS & SALE PROMOTION SECTION LEGAL SECTION
DEPUTY GOVERNOR DEPUTY GOVERNOR (Development( (Administration)
DIRECTOR OF DIRECTOR OF DEVELOPMENT DEPT. ADMINISTRATIVE DEPT.
TECHNICAL SERVICE PLANNING G DESIGN CONSTRUCTION PROCEDURE ESTATE OPERATION MAP TA PHUT GENERAL AFFAIRS FINANCE ACCOUNTING DIVISION ANALYSIS DIVISION DIVISION DIVISION CONTROL DIVISION OFFICES WATER WORKS DIVISION DIVISION DIVISION DIVISION
COORDINATION 8 DATA COLLECTION 8 SURVEY SECTION REGISTRATION & LAT KRABANG ADMINISTRATIVE PERSONNEL REVENUE SECTION FINANCIAL ACCOUNTINC BIDDING SECTION ANALYSIS SECTION STATISTICS SECTION SECTION SECTION SECTION ARCHITECTURAL DOCUMENTATION & PROJECT SECTION DESIGN SECTION PROCEDURE AND BANG CHAN PRODUCTION SECTION PROCUREMENT PAYMENT SECTION ASSET ACCOUNTING LIBRARY SECTION PRIVILEGE SECTION SECTION SECTION PROJECT ENGINEERING DISTRIBUTION SECTION EVALUATION DESIGN SECTION OPERATION BANG POO BUILDING & PRE-AUDIT SECTION BUDGETING 8 SECTION CONTROL SECTION VEHICLES SECTION INVESTMENT SECTION DRAFTING 8 COST ESTIMATION SECTION NORTHERN REGION FINANCIAL REPORT SECTION
BANG PHLEE
Source: Industrial Estate Authority of Thailand, 1987. in other industrial areas have to do (BIAP, 1982). The company establishment procedures in Lat Krabang Zone are listed in Table 4.5.6. Normally, one application case, from applying for land location to final permission for factory operation, can
be approved in under 100 days.
There are several common points but also differences in the
four cases' administration system and approval procedures.
First, the relationship between central government, local
government and zones' administration is quite different in these four zones. This relationship in Korea, Taiwan and
Thailand is similar. The administration office is led by the central government directly. In Korea, the Administration of
Masan Zone is under the leadership of Ministry of Trade and
Industry. In Taiwan, the Administration of EPZs is one
division of the Ministry of Economic Affairs. In Thailand, the
Ministry of Industry leads IEAT directly, and Lat Krabang Zone
is under the management of IEAT. However, the situation in
China is quite different. In China, the State Council has one
office called "Special Economic Zones Affairs Office" which
adjusts the development of five zones and collects information
from these zones. But these zones are under the leadership of
the Province Government. For instance, Shenzhen Zone
Government is led by the Guangdong Province Government.
Second, there are different relationships between the
administration of EPZs and other government agencies which
162 Table 4.5.6:
PROCESS OF PERMISSION FOR MANUFACTURING IN THE INDUSTRIAL ESTATE
APPLICATION FOR PERMISSION ON LAND ALLOCATION FOR MANUFACTURING (ACCORDING TO 'EAT ACT)
I. DOCUMENTS REVISION 2 DAYS lik 2. CONSIDERATION 15 DAYS IEAT'S CONSIDERATION IEAT FORM 01 3. APPROVAL 5 DAYS 4. INFORM 2 DAYS
I. SIGNING : LAND/BUILDING PURCHASE, HIRE-PURCHASE, LEASE AGREEMENT 2. SIGNING : LAND ALLOCATION AGREEMENT 3 PERMISSION ON LAND ALLOCATION FOR MANUFACTURING
• ~
APPLICATION FOR APPLICATION FOR FACTORY BUILDING CONSTRUCTION ESTABLISHMENT/EXTENSION PERMISSION TEAT FORM 03 TEAT FORM 05 (ACCORDING TO FACTORY (ACCORDING TO BUILDING ACT) CONTROL ACT)
I. DOCUMENTS REVISION 3 DAYS -sr I. DOCUMENTS REVISION 2 DAYS 2. CONSIDERATION 35 DAYS • 2. CONSIDERATION 15 DAYS 3. APPROVAL 5 DAYS IEAT'S CONSIDERATION IEAT'S CONSIDERATION 3. APPROVAI 5 DAYS 4. INFORM 2 DAYS 4.INFORM 2 DAYS
PERMISSION FOR BUILDING PERMISSION FOR FACTORY CONSTRUCTION ESTABLISHMENT/EXTENSION J
APPLICATION FOR FACTORY OPERATION (ACCORDING TO FACTORY ACT)
I. DOCUMENTS REVISION 2 DAYS 2. FACTORY INVESTIGATION 15 DAYS IEAT'S CONSIDERATION IEAT FORM 07 3. APPROVAL 5 DAYS 4. INFORM 2 DAYS
PERMISSION FOR FACTORY OPERATION
Source: Industrial Estate Authority of Thailand; 1991.
163 work for the zones like the Customs Office, Bank, Tax Office and Police Office. This relationship in Masan, Kaohsiung and
Lat Krabang is similar but it is quite different in Shenzhen. In the former three zones, the Customs Office, Bank and Tax
Office are under the leadership of their headquarters. The
relationship between them and the administration of zones is
parallel and cooperative. The Police Office belong to the local Police Administration. Since Shenzhen Government is not only a zone's administration, but also a city government, so
the Shenzhen Government has the all functions of a local
government. The Customs Office is vertically led by the
General Customs Office in Beijing. The national banks are led
by their headquarters but the local banks are under the lead-
ership of Shenzhen Government. The Tax Office and the Bureau
of Shenzhen Public Security (Police Office) are divisions of
the Shenzhen Government.
Third, the approval procedures in these zones is quite
similar. The government sets up a special working group to
provide a one-stop-service to examine and approve investment
applications. Apart from Lat Krabang Zone, where the process
of approval takes about three months, it takes only one month
to pass through the whole procedure. After approval, the
relevant divisions of the administration of the zones help
investors to set up plants in the zones. In Kaohsiung Zone,
investors have to pay a deposit before entering the approval
procedure, but not in other zones.
164 4.6 A comparison of incentives of the four cases
EPZs typically offer special incentives to investors in order
to attract investment and develop manufacturing in the zone.
Most of the incentives are reflected in taxes, remittances,
special loans, and some other subsidies. I here compare the four cases' incentives.
4.6.1 Exemption from customs duties
A full exemption from duties and taxes on raw materials, parts
and components, machinery and equipment required for
production activities in the zone is available in all four zones (MTIK, 1989; EDEPZ, 1987; SIIG, 1988 & TCII, 1990).
However, in Shenzhen, investors' transport vehicles and even
consumption goods for personal use can be imported without
duties. The consumption goods include furniture and electric
home appliances (SIIG, 1988).
Export products of any enterprises in these four zones are
exempted from customs duty (MTIK, 1989; EDEPZ, 1987; SIIG,
1988 & AGIT, 1989).
4.6.2 Tax Incentives
The tax incentive is the most important preferential policy
offered by EPZs. For manufacturing business, enterprises have
to pay income tax, commodity tax, business tax, property tax
165 etc. Some EPZs offer a tax holiday for a limited period, (five
to ten years) or regulate a low rate of tax.
In Korea, Masan Zone tax incentives include a permanent exemption on business activity tax and value-added tax on
imported capital goods. For the first five years, the enterprises can enjoy a full exemption from corporate income
tax, property acquisition tax, property tax (MTIK, 1989); and
for the subsequent three years, the enterprises can also enjoy
a 50% tax holiday (ASM, 1990). Actually, enterprises in the zone can continue to enjoy the incentives for a longer time.
The information provided by Masan Zone Administration shows
that if any enterprise wants to continue the term of the
incentives, it can enjoy these incentives by contract every 10
years; this means that after 10 years development in the zone,
the investor can sign another contract with Masan Zone
Administration by expanding investment and adjusting
production. Then it will be treated as a new firm which can
enjoy another term of incentives (ASM, 1990). So it is not
surprising that some firms which have been operating since
1972 were still enjoying a complete tax exemption in the 1980s
(WARR, 1984).
The Law of Foreign Capital Inducement in Korea has been
changed since 1970 when the original Enforcement Decree was
set up. The articles listed above are based on the Law in
1970. In 1984, the three years 50% tax holiday was eliminated.
In 1991, the five years tax holiday will apply continually
166 only inside the zone but not in other industrial areas (ASM,
1990). I explain the differences between EPZs and other
industrial estates later.
In Taiwan, the enterprises in the Kaohsiung Zone enjoy a
permanent exemption from commodity tax and business tax. If
the investors purchase a new standard factory building in the
EPZ, they enjoy an exemption from deed tax. Five years' income tax holiday is available on products which conform to the
"Categories and Criteria of Productive Enterprises Eligible for Encouragement" (IGEPZ, 1990). Actually, at the beginning
(from 1966 to 1968), all enterprises' products could enjoy five years income tax holiday. However, since the Categories
were set up, over one hundred products can enjoy this incen-
tive, though products not listed in the Categories cannot get
the same treatment. The Categories are adjusted every year.
For instance, at present, most labour intensive manufacturing
products, such as textiles, footwear, clothing, cannot enjoy a
tax holiday any more. The Government wants to use this method
to adjust the manufacturing structure in the zone. Most
manufacturing which can enjoy the incentives now is technology
intensive. Another interesting issue is that if the investor
expands the investment, he can enjoy another four years income
tax holiday. However, if the old product is not listed in the
Categories but the new investment is developing a new product
which is listed in the Categories, the four years tax holiday
incentive is offered to the new product only (IGEPZ, 1990 &
ASK, 1990).
167 In Shenzhen Zone, enterprise income tax on any Chinese- foreign joint-venture, contractual joint-venture or wholly- owned foreign enterprise is levied at a rate of 15% (SIIG,
1988). Enterprises engaged in industry and scheduled to oper- ate for a period of ten years or longer, can be exempted from income tax for two years, commencing from the first profit- making year. They can also be allowed a 50% reduction from the third to the fifth year inclusive (SIIG, 1988). When a foreign investor remits abroad profits distributed to him/her, the remitted amount is exempted from personal income tax. A for- eign investor who invests a share of profits for a period of operation of not less than five years, after approval from the
Shenzhen Zone Tax Authority, will be refunded 40% of enterprise income tax already paid on the reinvested portion.
A foreign investor who invests a share of profits in order to establish or expand export enterprises or technologically advanced enterprises for a period of operation of not less than five years, after approval, will be refunded the total amount of enterprise income tax already paid on the reinvested portion. Foreign funded enterprises are exempted from the local surtax. The products of Shenzhen Zone's enterprises can be sold in Shenzhen exempt of the consolidated industrial and commercial tax. (Normally, in China, when enterprises sell products in the domestic market, they must pay a consolidated industrial and commercial tax. The average rate is about 5% of turnover.) (SIIG, 1988).
168 In Thailand, the tax incentives are based on the promotional privileges for investment in Thailand offered by the Board of Investment (BOI). However, if the firms are located in EPZ, they enjoy some extra benefits. The tax incentives include: 1. Reduction of 90% of business tax on sales of products for five years; 2. Reduction of 50% of corporate income tax for an extra five years after the normal tax holiday (3 to 8 years) given by the BOI or from the year the operations start to make profit; 3. Double income tax deductions on cost of transport, electricity, and water; 4. Up to 25% of the investment in infrastructure will be deductible any time within 10 years from the first earnings flow; 5.
Deduction from corporate taxable income of 5% of the annual increase in income derived from export (excluding insurance and transport cost) (IEAT, 1991).
4.6.3 Other incentives
The other incentives in Masan Zone include a guarantee on overseas remittance of profits and dividends by foreign investors from the first year of business operation.
Remittance overseas of proceeds from the sale of stocks and shares owned by foreign investors is guaranteed up to 20% of the capital subscription every year from the third year of business operation. The firms in Masan Zone, if incorporated in Korea, are entitled to the same export subsides as domestic exporters. In addition to tax concessions, they also receive loans at a substantially reduced interest rate (MTIK, 1989).
169 In Kaohsiung Zone, the Administration also guarantees the overseas remittance of profits and dividends by foreign investors. A preferential factory building loan is also offered by Kaohsiung Zone. For purchasing a standard factory building, a bank loan up to 70% of purchase price is available on 10-year instalment payments. Loans are also available for constructing self-constructed factory buildings (IGEPZ, 1990).
In Shenzhen Zone, during the period of preparing land and basic construction of enterprises (one year for preparing land and two years for basic construction), the charge on land is paid at 30% of the stipulated standard. If the enterprises are permitted to use their own money to fill the sea, the charge on land is exempted for 10 years. The land used by export enterprises or technologically advanced enterprises with foreign investment can be exempted from charges for about 5 years, and half of the cost for another five years. The profit that investors earn after paying company income tax or the foreign staff's income can be remitted out of China through the Bank of China or foreign banks in the Shenzhen Zone (SIIG,
1988).
In Thailand, there are some other guarantees and permission offered by the government to the enterprises. The government guarantees against nationalisation, competition of new state enterprises, state monopolisation of the sale of products similar to those produced by promoted private factory, price controls. The government also offers permission to bring in
170 foreign nationals to undertake investment feasibility studies, to bring in foreign technicians and experts to work under promoted projects, to own land to carry out promoted activities and to take or remit abroad foreign currency (AGIT,
1989).
Thus, all zones practise exemption of customs duty. Apart from this, the incentives on other taxes are quite different in the four zones. Income tax can be exempted for a period in these zones but the tax holiday term is different in the different zone. In Masan Zone, the income tax holiday is 100% for the first five years and 50% for the subsequent three years, and the term can be renewed in 10 years. In Kaohsiung
Zone, the income tax holiday is 100% for the first five years.
If the investor reinvests to produce a new product, another four years tax holiday can be offered. In Shenzhen Zone, normally they offer a low rate of tax. However, there are special treatments to manufacturing enterprises which can enjoy two years 100% and three years 50% tax holiday. In Lat
Krabang Zone, the investors can enjoy up to 8 years tax holiday and another five years 50% reduction. Other incentives are reflected in exemptions of commodity tax, business tax and other tax deductions. However, different zones focus on different subjects.
171 Table 4.6.1: A comparison of main incentives in the four cases
Masan Kaohsiung Shenzhen Lat Krabang L Exemption raw material, same + vehicles, + exemption of import components, consumption of business duties machinery & goods used taxes on equipment by investors imported raw materials & components
Income tax holiday tax 15% tax holiday tax 100% for 5 holiday (special trea- 3-8 years, years, 50% for 5 tment to manu- another 5 for 3 years, years, facturing:tax years 50% 10-year term 4 years holiday 100% reduction renewal holiday for 2 years for rein- 50% for 3 vestment years)
Other permanent permanent permanent exe- reduction of tax exemption exemption mption on sur- 90% of busi- on business on commo- tax & consoli- ness tax on activity tax, dity tax, dated industri sales of value-added business al & commerci- products for tax on impor- tax al tax for fo- 5 years; ted capital reign funded double inco- goods, 5-year enterprises me tax dedu- holiday on ctions on property acq- cost of tra- uisition tax, nsport, ele- property tax ctricity & water; up to 25% of the investment in infrastr- ucture will be deducted within 10 years; dedu- ct from co. taxable inc- ome 5% of the annual increase in income deri- ved from export
Source: Author's compilation based on MTIK, 1989; IGEPZ, 1990; SIIG, 1988; and IEAT, 1991.
172 4.7 A comparison of restrictive regulations of the four zones
Most of the EPZs not only offer preferential incentives to attract foreign investment, but also impose restrictive regulations to rule the development of EPZs according to the development aim of the host countries. The most important regulations are reflected in the ratio of ownership, the ratio
between export and domestic sales, the time limits on running enterprises and others such as pollution, depreciation, repeated investment and penalties.
4.7.1 The structure of ownership
Before 1980, the Korean government allowed foreign investors to set up wholly-owned enterprises in the zone but not Korean
investors. Korean businesses could set up joint ventures with foreign investors in the zone but the shares of Koreans could
not be over 50% (MTIK, 1989). These policies were changed in
1980, when the government allowed Korean nationals to invest
in the zone without restriction. The government of Korea aimed to attract mainly foreign investment in the beginning. After
ten years, when the Korean national economy developed and capitalists had enough ability to compete with manufacturing
products in the international market, the government started
to facilitate domestic investment in the zone (MTIK, 1989).
In Kaohsiung Zone, there is no restriction on the ratio of
ownership. Foreign investors and domestic investors can set up
173 wholly-owned enterprises and joint ventures between each other. The government divides investment into three categories: foreign investment, overseas Chinese investment and local investment (EPZA, 1986). Actually, overseas Chinese
investment should be a part of foreign investment (I will analyse them as foreign investment in the following chapters).
However, the government considered the issue in political terms.
In Shenzhen Zone, foreign investors and local investors can set up wholly-owned enterprises, joint ventures and contractual joint ventures. If an enterprise is a Chinese- foreign joint venture, the share of the foreign party should
be over 25% (SEL, 1978-1984).
In Lat Krabang Zone, both foreign and local investors can set up wholly-owned enterprises and joint ventures between each other (AGIT, 1989).
4.7.2 The ratio between export and domestic sale
In the beginning, the Korean government ruled that the
products made in the zone had to be wholly exported to the
international market. However, after 1980, except for
electronic and electric products, the government changed the
rule so that up to 100% of a firm's products could be sold in
the domestic market (with customs duty). Electronic and
electric products could be sold 5% to the domestic market
174 (ASM, 1990) because the government wanted to protect the
market for Goldstar Ltd which is one of the biggest national
companies in Korea (ASM, 1990). Domestic sales took just 36%
of total output value in 1989 (ASM, 1990).
The situation in Taiwan is similar. Originally, nearly 100%
of EPZs' products had to be exported to the international
market (EDEPZ, 1987). Considering some of the products which
were needed by domestic enterprises and speeding up the
circulation of production in the zone, the government allowed
20% of electronic components and 1% of products which had been
kept in stock over three years to be sold in the domestic
market with customs duty. This policy did not change until
1988. At the end of 1987, the government started to permit 50%
of EPZs' products to be sold in the domestic market with
customs duty (ASK, 1990). At present, the average rate of
domestic sale is about 2.5% of total output (MSR, 1990) (Since
the value of trade between the enterprises in the zone is
small, total output is nearly equal to total export plus
domestic sale.)
From the beginning, the Shenzhen Zone government allowed
30% of manufacturing products to be sold on the domestic
market with customs duty, 20% sold in the zone and 50%
exported to the international market (SSEZY, 1985 & SEL, 1978-
1984). Since Shenzhen Zone is a formal city, the local market
and consumption are relatively larger than other countries'
EPZs. Therefore, the local market in Shenzhen Zone is also
175 important for foreign investors. Another useful condition is
that most accounts in Shenzhen Zone are settled in foreign
currency like $HK or $US, or use a special currency, Foreign
Exchange Certificates2 (FECs) can exchange for foreign currency directly in a Bank in China. By this procedure,
accounts can be settled in foreign currency so the government
allows the enterprise use this 20% products sold in the zone
instead of the part of 70% export ratio because of the firm
can keep foreign exchange balance. Therefore, 50% export ratio
2 Note: the Foreign Exchange Certificate (FEC) is a special currency in China. Since foreign currency is prohibited from circulating in China and Chinese currency "Renminbi" (RMB) can not be exchanged for foreign currency directly, a substitute method is necessary, to help foreign visitors and overseas Chinese purchase goods and pay bills in China; it can also be separated from RMB which is used by Chinese citizens. The government used the Foreign Exchange Certificate as the substitute. In April 1980, the government started to issue them. Foreign visitors and overseas Chinese could buy FECs with foreign exchange and use them in China. Before they leave, they could also sell FECs for foreign currency or take FECs out of China. The exchange rate between FECs and foreign currency is the official rate between RMB and foreign currency. Gradually, FECs have become another currency which circulates in China, used not only by foreign visitors and overseas Chinese, but also by Chinese citizens who can use them buy anything. Although FECs are the same value as RMB from an official angle, actually they have become more valuable than RMB because FECs can exchange for foreign currency directly. In China, there is a huge black currency market. The exchange rate between foreign currency and RMB is much higher than the official rate. For instance, the official rate is HK$ 100.00 for RMB 47.00. But in the black market, HK$ 100.00 exchange for over RMB 80.00 (depending on different seasons and situation. This'is average data in the middle of the 1980s.). However, FECs are still follow the official rate up and down. Therefore, FEC has the same value as foreign currency. In the black market, FEC is no longer the same value as RMB (which it should be by the regulation of government): the exchange rate between FEC and RMB is about 1:1.5 (average data). Now, the government is considering cancelling FECs to adjust the currency market and letting foreign currency circulate in China, by devaluing RMB and allowing RMB to - exchange for foreign currency directly in order to take over the black market and avoid the problems which are caused by the cancellation of FEC. 176 is the real standard in practice (There are some special treatments of products depending on demand in the domestic market.)
In Lat Krabang Zone, companies should export 100% of their products to the international market (IEAT, 1991). This regulation is practised more strictly in Lat Krabang Zone than in other zones. If EPZ companies want to sell some products on the domestic market, they need special permission from IEAT and should also pay customs duty on those products. Actually, if a company plans to sell products on the domestic market, it would be better to settle the factory outside the EPZ but in
General Industrial Zone. Then, it can sell products to both international and domestic markets. For instance, SONY set up a tape-recorder manufacturing plant in Lat Krabang Industrial
Estate, but not inside the EPZ area. 80% of its products are exported to international market and 20% sold in Thailand
(ASLK, 1991). Hence, the market of an individual factory's products is an important factor to deciding to invest in the
EPZ or the General Industrial Zone (Of course, the incentives are different between EPZ and General Industrial Zone.) At present, domestic sales are very limited in Lat Krabang Zone
(ASLK, 1991).
4.7.3 The time limit on enterprises
In Masan Zone, every investor signs a ten-year contract to lease land or factory with the Administration before
177 establishment a plant. This means that the term of running an enterprise is ten years. If an enterprise wants to continue manufacturing in the zone, after the ten-year term, the investor can apply for another ten-year term before the first term finishes. The government carries out this kind of policy based on the following considerations: First, if the authority thinks that kind of business is no longer suitable for development in the zone, it can use this opportunity to close the business; Second, it provides a chance for new investment with more advanced manufacturing than before if the authority wants to adjust the manufacturing structure, because there is not enough space for new enterprises entering the zone; Third, the enterprise can get another opportunity to enjoy the tax holiday incentives offered by the Administration (MAFEZ, 1989
& MTIK, 1989).
In Kaohsiung Zone, there are no time limits proclaimed in writing by the Administration. The enterprises decide their running period in the zone.
In Shenzhen Zone, enterprises are limited to a term of 5 to
30 years. If an enterprise desires to extend the period over
30 years, the employer applies for special approval (SIIG,
1988).
In Lat Krabang Zone, there are no time limits on enterprises. The EPZ's firms make their own decisions (ASLK,
1991).
178 4.7.4 Others
In Masan Zone, when an enterprise comes under any one of the following categories, it shall be subject to penalties: a firm changes the items of goods/materials manufactured, processed or assembled by its business without approval; transfers or leases land or plants or permits other persons to use the land or plants in security without obtaining approval; moves goods/materials from the zone to a duty-leviable area without following the legal procedures; does not submit a report of its business to the Administration Office (MAFEZ, 1989 & MTIK,
1989).
In Kaohsiung Zone, enterprises can not be set up if they have not met the following investment qualifications (IGEPZ,
1990): First, no adverse effect on existing industries outside the zone; Second, no environmental pollution problems; Third, minimum investment $NT20 million ($US770,000); Fourth, added value should be 25% or more of the FOB price of the commodity exported.
In Shenzhen Zone, different manufacturing enterprises and facilities have different depreciation terms. For instance, industrial machinery is from 10 to 15 years, electronic equipment is 5 years (SZPP, 1988). (Note: The regulation on depreciation terms can be treated as an incentive too. Some countries use accelerated depreciation to promote enterprises to change their technology and equipment. I here treat it as a
179 restrictive regulation, since investors use too short term to get back their investment. The government made this regulation to limit the minimum term.) The government reserves the right to refuse repeated investment in the zone if the government
believes the market is already saturated or it would compete
with domestic manufacturing. The government has also legislated to protect the environment, which does not allow enterprises with pollution to set up in the zone (SIIG, 1988).
However,• it is hard to say if the government really restricts
this kind of enterprise in practice. For instance, the
government allowed Zhong Guan Printing and Dyeing Factory to
set up in Shenzhen Zone. It is a very profitable factory but
with pollution.
In Lat Krabang Zone, apart from promoting the export of
wholly products, the authority considers that development of
the EPZ should be compatible with national economic
development. Hence, firms which invest in the EPZ should be
compatible for the industrial policy. The role of investment
has been changed every year according to the need of the
national economic strategy. For instance, new investment in
textiles production is no longer being approved in the EPZ
(ASLK, 1991).
180 Table 4.7.1: A comparison of main restrictive regulations in the four zones
Masan Kaohsiung Shenzhen Lat Krabang
Owner- wholly-owned wholly-owned wholly-owned wholly-owned ship or joint or joint or contract- or joint venture venture ual joint venture (Korea or (Taiwan or venture or (Thailand or overseas) overseas) joint venture overseas) (foreign part share should be over 25%.)
Export domestic up to 50% 50% export, 100% export & dom- sale up to domestic 20% sold in estic 100% with sale with the zone, sale customs duty customs duty. 30% domestic except elect- sale. ronic & elec- tric products can be sold 5% on the do- mestic market
Time 10-year term N/A 30 years N/A limit renewal on firms Source: Author's compilation based on MAFEZ, 1989; MTIK, 1989; IGEPZ, 1990; SIIG, 1988; SEL, 1978-1984, SSEZY, 1985 and IEAT, 1991.
There are some common and different restrictive regulations
in these zones:
At present, there is no limit on either foreign and local
investors to set up any kind of enterprises in these zones.
But, in Kaohsiung Zone, there must be no adverse effect on
existing industries outside the zone, minimum investment
should be over $US770,000 and added value should be 25% or
more (IGEPZ, 1990). In Shenzhen Zone, the foreign share should
be over 25% in a joint venture (SEL, 1985).
181 The basic EPZ character is that most of the products
produced in the zone would be exported to the international
market. However, most countries gradually allowed part of the zones' products to be sold on the domestic market, though the
ratio is different in different countries. In Masan Zone, nearly 100% products can be sold on the domestic market (ASM,
1990). In Kaohsiung Zone, 50% of products can be sold on the domestic market (ASK, 1990). In Shenzhen Zone, about 50% of
products can be sold locally or on the domestic market (SEL, 1985). Only in Lat Krabang Zone is the rule of exporting all
production practiced strictly (ASLK, 1991).
Apart from the 30-year time limit on enterprises in
Shenzhen Zone, zones do not limit the length of time enterprises can operate. In Masan Zone, the administration
uses a 10-year term contract to adjust the firms in the zone
(ASM, 1990).
4.8 The differences between EPZs and other industrial areas
Under the strategy of export-promotion economic development in
these four countries, export-oriented manufacturing is located
in EPZs and other industrial areas. What differences exist
between EPZs and other industrial areas in the host country?
This issue also involves two other questions: 1. What are the
different policies between EPZs and other industrial areas? 2.
Why did the government establish a special area to concentrate
182 manufacturing with the EPZ's condition rather than carry out this condition in the nation as a whole?
Actually, there are some common characteristics between
EPZs and other industrial estates. For instance, most
industrial areas also offer incentives, provide infrastructure facilities, and some of them even have administration offices to manage the areas. However, the differences are reflected in the details of these aspects. The obvious difference is: there
is a customs barrier around an EPZ so that it is delimited from the domestic area, whereas other industrial areas are
inside the domestic economic territory. This difference
involves several aspects of import, export and domestic sales.
The different countries have their individual character. I
here use some examples to show the differences.
In Korea, there are several different industrial areas (see
Map 4.1). Most of them are specific industrial areas which
develop one sole industry like petrochemicals or machinery.
For instance, Changwon Machinery Industrial Area (Changwon
MIA) is close to Masan Zone. There is a management office to
manage the area. The incentives include a 100% tax holiday for
the first five years and a 50% reduction for the subsequent 3
years. (The new regulations prevent industrial areas in Korea,
except EPZs, from enjoying the tax holiday since 1991.) The
government also provides water, power supply and transport and
communication facilities. Firms can import production
materials and equipment duty free (CMIA, 1990). However, the
183 differences between Changwon MIA and Masan Zone include: the former develops only machinery industry, but the latter has many kinds of manufacturing, mainly light industry; the supporting services provided by Changwon MIA are not as complete as in Masan Zone (for instance, the enterprises must level the land and construct the plant building by themselves in Changwon MIA, but Masan Zone can offer complete factory buildings to investors). Generally speaking, the government put more attention and capital into setting up Masan Zone and provides services for the enterprises in the zone, whereas in
Changwon MIA, development mainly depends on individual enter- prises. On the other hand, firms can get more space to develop in Changwon MIA; the space in Masan Zone is limited.
In Taiwan, the common points between EPZs and other industrial areas include incentives and public infrastructure facilities (LEE, 1987). Since the government made the
"Regulation for Encouragement Investment" in 1960, incentives like the 5 years tax holiday are offered to enterprises
whether in the EPZs or other industrial areas. The government also provides basic public infrastructure facilities like
water and power supply, transport and communication facilities to enterprises in these industrial areas. However, the
differences are obvious. In other industrial areas, there are
no administration offices; all investment procedures have to
be passed through the central government and other related
government agencies; the government just provides basic public
facilities; the investors can not get a complete supporting
184 service; they have to construct the factory building and arrange other businesses related to production by themselves
(LEE, 1987). And of course there are totally different regula- tions about customs and treatment of import, export and domes- tic sales between the EPZ and other industrial areas. Firms in other industrial areas have to pay customs duty to import goods; the products which are made-in these industrial areas can be sold in the domestic market without any limitation but
EPZ's products can not.
In China, following the three waves of open policy (see details below), related incentives were offered by the government. At the same time, the original preferential policy has been corrected and expanded many times since the first
wave when the special zones were established.
Based on the Income Tax Laws of Joint Venture and Foreign
Owned Company in China, the rate of income tax on joint-
ventures is 30%; contractual joint-venture and foreign owned companies have to pay five grades of progressive tax from 20% to 40% (SEL, 1978-1984).
Since the first 4 special zones were set up, new incentives
have been introduced nearly every year. I here list the main
activities (HU ZHI XIN, 1988). In September 1983, the People's
Congress passed a decision on "The Correction of Joint Venture
Income Tax Law" which extended the time limit on reduction or
exemption of income tax. In November 1984, the State Council
185 issued a temporary regulation on reduction or exemption of income tax and consolidated industrial and commercial tax in
SEZs and 14 open cities. This regulation reduced the income tax on manufacturing production in SEZs and open cities and also expanded the scope of exemptions from the consolidated industrial and commercial tax. In September 1985, the State
Council issued another temporary preferential policy for joint ventures which invest in ports and harbours. This kind of enterprise can get more incentives on income tax (the government wanted to introduce foreign investment to develop infrastructure facilities because of the absence of domestic capital). In April 1986, the People's Congress made up "The
Law of Foreign Owned Company" which provided tax deductions for foreign investors' reinvestment. In October 1986, the 22
articles which were issued by the State Council about encouraging foreign investment gave more preferential treatment to the enterprises which export most of their
production and have advanced technology. In May 1988, the
"Regulation on Encouraging Foreign Investment in Hainan
Special Economic Zone" was issued by the State Council, which offered similar incentives of SEZs to the investors in Hainan
Zone.
From these steps, we can see a trend from "SEZs --> 14 open
cities --> coastal open areas --> inland". The incentives
which are carried out in the SEZs and other open areas are
quite similar apart from the different treatment of imports
and exports (because the former has a customs barrier and the
186 latter not); and the fact that foreign investors can invest in commercial and service businesses (including financial institutions) in SEZs and enjoy incentives but not in other open areas. A low income tax (levied at 15%) and a tax holiday for the first two years and reduction of 50% for the following three years are also offered to enterprises which are invested by foreigners and engaged in manufacturing in open cities and areas (HU ZHI XIN, 1988).
In Thailand, all provinces throughout the country are divided into three zones (see Map 4.6). Only Zone 3 is designated an Investment Promotion Zone, and offers similar incentives to the industrial estates (AGIT, 1989). Map 4.6 shows that the areas in Zone 3 are the most backward places in
Thailand. The government wants to promote economic development in these areas by offering incentives to investors. The main differences between these three zones are outlined here.
If projects are located in Zone 1, there is no tax exemption on machinery and no corporate income tax exemption, except for projects which export not less than 80%; or produce and supply raw materials or parts, mainly for manufacturers of engines, machinery, and electrical and electronics products located in the same zone; or located in industrial estates
(including EPZs) inside these provinces (AGIT, 1989).
187
Map 4.6: Investment Promotion Zones in Thailand
Investment Promotion Zones
ZONE 1
ZONE 2
ZONE 3 SARABURI assSUPHANBURI ANGTHON AYUT- THAYA KANCHANABURI NAKHON NONTA PATHUM NAKHO PATHOM SURI THANI NAYO
RATCHABURI SAMUT SAKHON SAM AMU PRA CHACHOENGSAO SON HRAM BURMA
CHONBURI GULF OF ss THAILAND
Source: Office of the Board of Investment, Thailand, 1989.
If projects are located in Zone 2, there is a 50% tax reduction on machinery, except the following projects which will be granted tax exemption on machinery: export not less than 80%; or produce and supply raw materials or parts, mainly for manufacturers of engines, machinery, and electrical and electronics products located in the same zone; or manufacture engineering products; or are agro-based; or encourage the use of domestic agricultural products; or are located in industrial estates (including EPZs) inside these provinces. In
188 addition, there is a corporate income tax exemption for 3 years, extendable yearly up to a maximum of 5 years, for projects which satisfy one or more of the following criteria: save or earn net foreign exchange of at least $US 2 million a year; or produce and supply raw materials mainly for manufacturers of engines, machinery, and electrical and electronics products located in the same zone; or manufacture engineering products; or are agro-based or encourage the use of domestic agricultural products; or are located in industrial estates inside these provinces (AGIT, 1989).
If projects are located in Zone 3 and the projects belong to the list of Government Target Activities, then, the projects can enjoy incentives. Government Target Activities are: 1. Export activities; 2. Agro-based industries, or those which support the use of agricultural products or natural resources as raw materials; 3. Activities which manufacture engineering products; 4. Activities considered by the Board to
be of special importance. The incentives include: 1. Tax exemption on machinery; 2. 50% reduction of import duty and business tax on raw materials used in production for the domestic market for one year; 3. Exemption on import duty and
business tax on raw materials for a period of 5 years for the
manufacture of exports; 4. Corporate income tax exemption for
5 years, extendable yearly up to a maximum 8 years for pro- jects which satisfy one or more of the following criteria: save or earn net foreign exchange of at least $US1 million a
year; or are agro-based, or encourage the use of domestic
189 agricultural products, or use agricultural products as the main raw materials, or use domestic supplies for at least 50% of the total value of raw materials; or employ at least 200 full-time workers; or locate their factories in industrial estates (including EPZs); 5. Special privileges, under Section
35 of the Investment Promotion Act 1977, as follows: reduction of business tax by 90% on sales of products for 5 years from the date of the first sales; reduction of corporate income tax by 50% for 5 years after the exemption period.
Projects located in these three zones thus get different incentives. However, if projects are located in the industrial estates, whatever the location of the industrial estates, they all can enjoy similar incentives under the Investment
Promotion Act 1977. On the other hand, there are also some differences between EPZs and General Industrial Zones, and they may sit in same industrial estate.
In Thailand, EPZs and General Industrial Zones are normally located in one industrial estate. Lat Krabang Industrial
Estate is constituted by Lat Krabang EPZ and General Industrial Zone. A General Industrial Zone is for the location of industries that manufacture for export and/or domestic consumption. The products of General Industrial Zone can be sold in both international market and domestic market. An EPZ is for the location of industries that manufacture for export only (IEAT, 1991). Apart from incentives which projects can enjoy in Zone 3 and other industrial estates (including
190 General Industrial Zones), the projects located in an EPZ can enjoy more incentives: 1. Exemption from import duties and business tax on raw materials and essential materials; 2.
Exemption of import duties and business tax on import destined for re-export; 3. Exemption from export duties and business tax; 4. Permission to deduct from taxable income 5% of the annual increase in revenue derived from export, excluding cost of insurance and freight (IEAT, 1991). Finally, the products of EPZ only can be exported to international market (IEAT,
1991).
Since EPZs focus on export products to international markets, while other industrial estates emphasise both the domestic economy and international markets, the related policies and incentives are different. Generally speaking,
EPZs offer more benefits to investors. However, the other industrial estates offer more market opportunities.
On the other hand, regard to the question of why the government establish a special area to concentrate manufacturing with the EPZ's condition rather than carry out this condition in the nation as a whole, the empirical evidence shows that: when the EPZs were established, these countries had no experience in introducing foreign investment.
Import substitution had developed to a bottle-neck stage; foreign currency was short; there were large deficits on the trade balance; and large numbers of unemployed people had surged from the agricultural sector. They did need foreign
191 investment and to develop export-oriented manufacturing so that they could solve these problems. The birth of EPZs was like setting up an experimental area to provide all kinds of conditions to introduce foreign investment. If this experiment failed, it would be a partial influence and easy to correct without heavy damage to the national economy. If it developed well, the host country could learn from the experience.
Therefore, EPZ's conditions were applied in a special area but not in the nation as a whole.
Moreover, EPZs have special characteristics. The main characteristics include good infrastructure facilities, less red tape administration systems and incentives. Basically, these need the government to invest in the infrastructure facilities, reform the bureaucratic system and devolve part of the power from central government to the local EPZ administration. It was difficult for the governments at that time: they had insufficient money to develop infrastructure facilities everywhere; they had also to be careful about political stability. These factors also implied that the conditions of EPZs had to be concentrated in special areas but not everywhere in the whole country.
An EPZ is like a bridgehead. The host country used it to practise and accumulate experience so that it could lead export-oriented manufacturing to develop in the nation and then transplant that experience to other industrial areas.
Meanwhile, through this bridgehead, foreign investors could
192 understand local affairs and be familiar with the investment environment, which would help them expand their businesses in
the host country. There are some examples of this diffusion in
practice.
In Korea, the first section of Masan Zone was developed in
March, 1970. It was soon fully occupied. The second section
was set up in December, 1972 (MAFEZ, 1989). At that time,
Masan Zone was called "The Forward Base of Exports". The posi-
tion of the Director General of Masan Zone Administration
Office was equal to Province Governor. Later, the central government decided to set up another two industrial areas
(manufacturing) in Kumi and Changwon in 1973 and 1974 in order
to expand the industrial areas. Meanwhile, Iri Zone was also
set up in 1974 to coordinate the export-promotion strategy
(ASM, 1990). Since then, 25 industrial areas have been set up
in Korea (KTPC, 1989).
In Taiwan, the first EPZ was set up in Kaohsiung in 1966.
In less than three years, Kaohsiung EPZ was saturated and two
new zones, Nanze and Taichung were developed in order to suit
the need of export-oriented manufacturing development (EPZA,
1986). At the same time, the government also developed
industrial areas around Taiwan. From 1960 to 1983, 69
industrial areas with 1,166 hectares were developed in Taiwan
(LEE, 1987). In 1980, Hsinchu Science Industrial Park was set
up, based on the model of an EPZ but mainly developing high-
193 tech manufacturing, to raise the manufacturing structure above an EPZ level (SIP, 1989).
In China, after the end of the "Cultural Revolution", the government carried out economic reforms and aimed to realise the four modernisations. One of the important steps of open door policy in the early stage was to set up Special Economic
Zones. At that time, the Chinese had no experience of introducing foreign investment. They were not familiar with the international economic system. The EPZ model of other countries was adopted (Delegations were sent to the Irish
Shannon Free Trade Zone and Hong Kong to learn how to set up the zones.) to introduce foreign capital, technology and equipment, and management experience to China. The government used the Special Economic Zone as a bridge to link the international economic system to the domestic economy.
After the establishment of these special zones, China gradually opened other areas to the outside world. For instance, 14 cities located along the coast became open cities in 1984 (see Map 4.7) (ERHK, 2071/1988). The third wave of open policy happened in early 1988, when Hainan Island became the fifth special zone, Liaodong and Shandong peninsulas,
Yangzi River and Pearl River deltas, South Fujian area all became coastal open areas totally 150,000 square km (ERHK,
2071/1988).
194
- Map 4.7: The location of Special Economic Zones and Open
Cities in China
/ :...... 1, ~-- eE tJtNf: *!~~ .\` ji .. ♦ l O nhuangQao ~ ~.~•~ j • '! •, __/ % % / Dalian \\ ii / 1.. / \ ! /-'\.i %• 1 ♦~t ~.J i 1 • C-1. i - _ % ~• ~ 11 ! 1 i i i t _ t• 1- • i 1 QvigOao I j 1 'l i / t 1 `• s. Lianvungang • \_.i•_,. ;.`y j --.• C l Yangrre R,rer Delta \ _ . ~. 1 r•.. ~••~Nantong -`...... •'1.... j ▪ ...... --% •'• .... ~ ~N" o \ •~•1,`.`, ~` Mu•.\ 09 hanghai ~ ...., .Su~./~ !/~~~,-' i \ ) ~ N,ngbo ~^ ` .~.-.`• ~ ~.~.` O • \ ~,-1 l ~ 1% ~.~~ P''''' ~ "~1•,~ `.{ ~, %.... ; ~ i,,{t , .. ~ 1 i % Wenzhou `=; ; 'j!M `.i~.
i k t t ✓._i ...-. CFuzhou .•. 1 ~ SOutn fu/tan ',tangle areJ 1 1 i♦ ~ ~,«. g r (\....,J. ..•1 1 ♦,J ~ I ! C„ Ì ♦ I•.. / •!~. ~,rhMU Zha" R 1~ 1 ~~ ~ Xiamen Pearl Rire/ Delta ` 1 ~ Fs~han\~` Guangzhou 1 Shantou .~} i J••",~•n~A Shen ,hen '.~, !./ 2hane•ha” )l r Zhuhai s.-. s r'~ _MACAO 'HONG KONG Zhanjiang Ileihai
• SEZs O Oven Cities Hainan Island Scale 1 : 10000009
Source: Economy Report of Hong Kong, No.2071, 1988.
195 In Thailand, Lat Krabang Zone was set up in 1982, the first
year of the Fifth National Economic and Social Development
Plan (1982-1986) (AGIT, 1989). Before the 1980s, Thailand's
exports were basically unprocessed agricultural or mineral
products which accounted for more than 60% of total exports
(MET, 1988). Since 1982, the government carried out the Fifth
Plan which shifted the economic structure towards export-
oriented manufacturing. Under this circumstance, Lat Krabang
Zone was set up. After 5 years development of Lat Krabang
Zone, another zone was set up in the Northern Industrial
Estate in 1987 (KIIT, 1989). In addition, two more zones are
in the process of being established (MET, 1988) and another
six zones are being planned (KIIT, 1989). At present, 21
industrial estates operate or are planned by the IEAT or
related industrial estate companies in Thailand (KIIT, 1989)
(See Table 4.8.1 and Map 4.4.) By 1986, manufacturing products
accounted for 55% of total exports.
Generally speaking, the empirical evidence of the four
cases shows that EPZs are used as a bridgehead to practise and
accumulate experience in introducing foreign investment and
developing export-oriented manufacturing in history.
196 Table 4.8.1: The Industrial Estates and Export Processing
Zones in Thailand, 1989
Area (rai) Selling Price Completion (baht per rai) Contact Address Industrial Estate Date Location Total Available (1 rai - 0.4 acres)
1. Lat Krabang Ill Mid 1989 Lat Krabang, Sales Division General Industrial Zone Bkk. 325 33 1,400,000 That Factory Development Co., Ltd Export Processing Zone 35 kms/east 510 204 1,650,000 Tel 2500346-9 2. Bangchan Minbun, Bkk. Public Service Division General Industnal Zone 1972 30 kms/east 677 0 2,000,000 The Industrial Estate 3 Northern Region Lamphun Authonty of Thailand General Industnal Zone 1985 600 krns/north 366 199 350,000 Tel. 2532965, 2530561 Export Processing Zone 1987 766 440 520,000 - 540,000 4. Laem Chabang End 1990 Chon Bun For Laem Chabang and General Industnal Zone 125 kms/east 1,752 1,509 59,000 (rent) Map Ta Phut, the maximum rental Export Processing Zone 789 789 period is 30 years extendable for another 20 years The rental rate uvl 5 Map Ta Phut Rayong be increased by 10 h6 every 10 years General lndustnal Zone End 1989 180 kms/east 5.030 3,447 27,600 - 34,300 (rent) 6. Bang Plee 1 Samut Prakam General Industrial Zone 1989 40 kms/east 470 0 1,000,000 Bangplee Industrial Estate Bang Plee II Office General Industrial Zone 1989 537 0 1,000,000 Tel. 3151498, 3151549 7. Samut Sakhon Planned Samut Sakhon General Industrial Zone 36 kms/west 2,000 2,000 Planned Public Services Division 8 Songkhla (Iaad-Vat) Planned Songkhla The lndustnal Estate Export Processing Zone 933 kms/south 350 350 Planned of Thailand 9. Phuket Planned Phuket Tel. 2532965, 2530561 Export Processing Zone 862 kms/south 500 500 Planned 10 Bangpoo (Phase Ill) Samut Prakam Thailand lndustnal Estate General Industnal Zone 1990 34 kms/north 500 180 1,200,000 Development Co.. Ltd. Export Processing Zone End 1989 300 2 1,500,000 Tel 2525692-7 11. Navanakom Pathum Thant Sales Division, Navanakorn Co., Ltd General Industrial Zone 1987 46 kms/north 2.500 60 2,000,000 - 2,500,000 Tel. 2519817-9 12 Bangkadt Pathum Thant Sales Division, Bangkadi General lndustnal Zone 1989 36 kms/north 1,136 398 1,500,000 Industrial Park Co.; Ltd. Tel. 5130309, 5110825-9 13 Mah Boonkrong Pathum Thant Mah Boonkrong Industrial General Industrial Zone 1990 36 ktns/north 910 728 not complete Estate Co., Ltd. Export Processing Zone Planned 200 200 not complete Tel. 2179111 ext 273 14 Minburi Minburi. Bkk. Prachapol Co , Ltd. General Industrial Zone 1990 40 kms/east 570 200 700,000 - 900,000 Tel. 3288364-5 15 Snracha Industrial Park Chon Bun Sahapatana Inter-Holding Co., Ltd. General Industnal Zone 1988 110 kms/east 599 366 750,000 Tel. 3181132-3 16 Rolana Industrial Park Pranakornsrt- Roana Industrial Park Co , Ltd General Industnal Zone - 1 Mid 1989 Ayutthaya 823 50 1,400,000 Tel. 2590402-3, 2601248 General Industnal Zone - 2 1990 63 kms/north 514 291 1,400,000 17 Suranaree Industrial Zone Nakhon Suranaree lndustnal Zone Co., Ltd General Industrial Zone Mid 1989 Ratchasima 472 130 500,000 Tel. 2714712-6 Export Processing Zone Planned 220 kms/northeast 500 500 Planned 18 M. That Bangna-Trad M.Thai Industrial Estate Co , Ltd General Industnal Zone 1990 30 kms/east 823 288 1,300,000 Tel. 2512028-9 19. Lat Krabang (Phase III) Mid 1989 Lat Krabang Sales Division, International General Industnal Zone Bkk. 317 0 1,200,000 Resources Development Ltd. Export Processing Zone 34 kms/east 495 21 1,500,000 Tel. 2353103, 2350164 20. Chon Bun End 1991 Chon Bun Hemaral Land and Development General Industrial Zone 110 kms/east 430 130 Planned Co., Ltd. Export Processing Zone 520 520 Planned Tel. 2409310-7, Fax. 2409309 21. Bangpakong (Phase II) Bangna-Trad Bangpakong Industrial Park Co., Ltd General Industrial Zone 1990 57 kms/east 1.400 1,400 1,300,000 - 1,500,000 Tel. 3192555-65
Source: Industrial Estate Companies, Board of Investment,
Thailand, 1989.
197 4.9 Summary
In summary, EPZs were born as an outcome of the government's active and direct intervention to coordinate national development by transforming policy from an import-substitution strategy to an export-promotion strategy. Apart from Lat
Krabang Zone, the zones are located at a border and coast with convenient transport and telecommunication systems to international markets. Even Lat Krabang Zone is located in the Bangkok Metropolitan Area, the most developed area in Thailand with advanced transport and telecommunication systems. Among the four zones, Shenzhen Zone is the biggest. Inside this zone, there are several industrial estates, commercial dis- tricts and residential areas. However, the other three zones are relatively small and only have capacity and facilities for
manufacturing (especially Lat Krabang Zone is located inside an industrial estate). Welfare and service facilities for
workers are complete, except in Lat Krabang Zone. Apart from
Shenzhen Zone, the zones' administration is under the leader- ship of the central government directly. The government of
Shenzhen Zone is under the direct leadership of the province government. The relations between EPZ's administration and other government offices like Customers Office, Tax Office,
Police Office and Bank, are parallel in the zones (except
Shenzhen). In Shenzhen Zone, apart from the Customers Office
and the local branch of Central Bank, other offices are the
part of the divisions of Shenzhen Government. Processing
■ applications to invest normally takes under one month, three
198 months in Lat Krabang Zone. The incentives offered by these zones are mainly reflected in an exemption of import duties and tax holidays on income tax, business and commercial tax.
Different zones offer different terms. The common restrictive regulations concern the host country's regulation of investment in the zone under the framework of national economic development. The differences between EPZs and other industrial estates in these countries are quite obvious. The former focuses on export products to international markets; latter emphasises both domestic economy and international market. Therefore, the incentives and related policies are different between EPZs and other industrial estates.
Regard to the theoretical arguments about the role of state in East Asia, one of the important characteristics of the oriental cultural tradition is the 'state hegemony' (LU,
1988). The term 'state' has different implications. For the capitalist countries in East Asia (Korea, Taiwan and
Thailand), the state is first a super-hegemony above the whole society. It adjusts the social contradictions between • different groups (classes), for example, national income
distribution and labour-capital relations, so that it can control the society. Second, in the process of state
domination, although the state uses 'the nation supreme' or
'national benefit' as a rationalisation to mitigate the
contradiction between classes, in fact, the pattern is that
capital groups cooperate with the state as a partner in
development. This forms an 'oriental type' of society
199 combining the traditional nature of a 'strong state and weak society' with modern capitalism (LU, 1988). In socialist
China, there is a 'full-power state' shielded by the name of socialism. It is not the working class that rules the nation but the state that rules the working class and the whole society. Since state domination and intervention are strong, there is no room for economic levers (market mechanisms) to adjust development, which led the national economy nearly to collapse at the end of the 'Cultural Revolution'. After summarising the lessons of the past three decades, a new reform system -- the domination of state intervention with the assistance of marketing adjustment has been practised since
1979 (ZHU, 1989).
In response to the argument about development strategies in
East Asia by different theoretical schools, the historical evidence of Taiwan, Korea and Thailand shows that the host government adopted strong import-substitution policies in the early development stage. Import-substitution policy had its positive effect in history, such as raising domestic industrial production. However, other problems also appeared.
The outstanding issue is finding a way to reduce the trade deficit and expand foreign markets (because of saturated domestic markets) in order to promote further industrialisation and solve the problems of unemployment and the falling manufacturing capacity utilisation. Meanwhile, protection for domestic production and markets is still necessary. Therefore, when export-oriented strategies dominate
200 economic development, import-substitution policy has never
been stopped, rather is has been modified to coordinate with the export-oriented strategy. The historical evidence of China
which practiced a closed door policy for nearly three decades is a typical example to prove the failure of adopting a dependency ideology. That negative experience led the communist party to recognise that reforming the old economic system and re-establishing connections with the world economy
(developed capitalist countries) would be the only policy for
China's economic development. But that does not mean giving up protection and government intervention, but making them more efficient. Hence, the answer is neither dependency's suggestion of cutting off links with the centre (developed capitalist countries) and only practicing import-substitution, nor the free market model recommended by neo-classical economists, who believe the success of East Asia arises from free markets, free trade and moderate government intervention.
In fact, economic protection has never diminished in East
Asia, and government intervenes in economy with its super
political power. The slogan of "free market and free trade" is
shouted to others to open other markets for East Asian exports, but not their domestic markets. The recent phenomenon
in East Asian countries of partially liberalised economies is
a response to the pressure of retaliation from both internal
forces (large domestic capital groups) and external powers
(other developed countries, especially America), but not to
voluntary policy formation (AMSDEN, 1989; WADE, 1990; HOU,
1988).
201 The EPZ is a typical outcome of powerful government intervention, given saturated domestic markets, unemployment, trade deficits and lack of foreign currency. The lack of capital was the outstanding problem to preventing manufacturing from further development. Under these circumstances, the government used its power to delimit an EPZ in order to develop processing manufacturing, expand overseas markets and solve the unemployment problem. The manifestation of government in this action is active and direct: comprehensive infrastructure facilities and incentives to attract foreign investment, while at same time, restrictions to protect the host country's own benefits, such as export- orientation to protect the domestic market, and re-approval mechanisms to adjust the manufacturing structure, and others like environment protection standards. On the other hand, for the firms' own business, such as production, employment recruitment, management, transport, and import-export affairs, the government only provides efficient services, not intervention. This form can be called "moderate government intervention". Therefore, in the macroeconomy, government intervention is powerful, active and direct; in the microeconomy, the private sector has the initiative, and the government is willing to assist only.
I would argue that the incentive of a company income tax holiday is not better than a low rate of company income tax.
Under 'double taxation agreements', if a foreign funded enterprise does not pay tax in the EPZ, it must pay in its
202 parent country. The benefits of a tax holiday become a gift offered by the host country to the source country of the foreign investment, but not to the investors. If low rate of tax is adopted, it is still an attractive policy, and the host government can earn certain benefits as well. On the other hand, the problem which the EPZ authority must understand is that if it only pays attention to incentives, but neglects efficient administrative services and infrastructure facilities, the EPZ would not be an attractive investment environment.
Restrictive regulations are necessary and important for the host country. First, they reflect the state's sovereign rights, which means that the EPZ is not a colony or concession controlled by foreigners. Second, they provide an opportunity for the host country to adjust the manufacturing structure based on the development of EPZs and the national economic aim. The government of the host country has the initiative in its own hands. Third, they balance rights and responsibilities between the administration office and investors. Hence, this kind of regulation is necessary, especially for political and economic reasons in developing countries.
203 CHAPTER 5
THE CAPITAL STRUCTURE IN THE FOUR ZONES
The aim of establishing EPZs is to attract foreign investment to develop processing manufacturing and export products.
Through this procedure, employment opportunities can be created and manufacturing skill and management experience can be learnt by the host country. Investment is the most important key to realise this aim, especially foreign investment. In this chapter, I shall examine the structure and movement of capital in the four cases, by analysing the ownership structure, the investment sources, the structure of investment by industry sectors and mobility of capital.
The aim of this chapter is to answer the research questions and illustrate theoretical debates. For example, to reveal the phenomenon of direct foreign investment based on the cases study of EPZs, to illustrate the trend of industrial restructuring. Meanwhile, regard to the problems of theoretical and practical approaches about EPZs, such as unreliable assumptions and scrappy viewpoints based on limited data-base case studies, this chapter provides relatively complete empirical data-bases and summarises the impact of investment on the development of EPZs in the past three decades.
204 5.1 The investment structure
In Masan Zone, by 1990, there were a total 70 enterprises with
$ÚS218 million investment (ASM, 1990). Among them, 85.4% are foreign investment; local investment only takes 14.6%. There are 48 sole-owned enterprises with investment of $US186 million, 35 foreign-owned and 13 Korean-owned. The other 22 enterprises are joint-ventures between Korea, Japan, America and other countries with investment of $US32 million. Among total investment, the sole-owned enterprises take 85% and joint-ventures share 15%. Nearly all investment in Masan Zone is direct investment (ASM, 1990).
In Kaohsiung Zone, 88 enterprises exist with a total investment of $US170.38 million. Among them, foreign investment takes 82% and 18% is local investment. 55 are sole- owned enterprises with investment of $US116.57 million, 32 foreign-owned and 23 local-owned. The other 33 enterprises are joint-ventures between the local investors and foreign investors from Japan, the United States, Hong Kong and
European countries with a total investment of $US53.81 million. The sole-owned enterprises take 68% of the total investment and joint-ventures take 32% (MSR, 1990).
Since Shenzhen City is constituted of two parts -- Shenzhen
Zone and Bao'an Xian (county) (see Map 4.3 and Chapter 4), the statistics published by Shenzhen Government are listed for both of them. I here mainly used the data for Shenzhen Zone to
205 compare it with the other cases. On the other hand, because
the social system in Shenzhen Zone differs from that of the
other zones, I list the data based on the Shenzhen statistics
system first, then I change them to be comparable to the other
zones' data. (I only use industry data for Shenzhen Zone in
this case study. The reason was explained earlier.)
By 1990, there are 1491 industrial enterprises in Shenzhen
Zone, with a total investment of $ÚS584.837 million (SNES,
1989). Among them, the enterprises are divided into two main
'groups: local capital firms and foreign capital firms. The
local firms constitute several types of enterprises:
1. Central state-owned enterprises;
2. Local state-owned enterprises;
3. Collective-ownership enterprises1;
4. Joint- ventures between domestic enterprises and Shenzhen
Zone's local enterprises;
5. Joint-ventures between state-owned and collective ownership
enterprises.
The foreign capital firms also include several types:
1. Wholly-owned foreign firms;
2. Joint-ventures between foreign investors and local
partners;
1 Collective ownership enterprise is a special type of enterprise in Socialist countries. The capital source of this kind of firms does not come from the State, but collectively from local people. The administrative leadership of this kind of firms is under the local authority. 206 3. Contractual joint-ventures between foreigners and local partners;
4. "San Lai Yi Bu" [material processing, elements assembling, seed growing, and compensation trade (SZ, 1988)].
In order to clarify the different types, I simplify these types of enterprises into several main categories in Table
5.1.1, about the number of participating industrial enterprises in Shenzhen Zone. For the local capital firms, I mix these five types of enterprises into two main categories: sole-owned enterprises and joint-ventures. For the foreign capital2 firms, I only examine three main types of enterprises (sole-owned, joint-venture and contractual joint-venture) in this research as I mentioned before (Chapter 4). Under this circumstance, joint-venture and contractual joint-venture are mixed as one category as joint-ventures. Among total investment, 57% is local investment with $US333 million and
43% is foreign investment with $US252 million (SNES, 1989).
There are several reasons why local investment is the majority in Shenzhen Zone. At the beginning of construction, Shenzhen
2 Foreign capital in Shenzhen Zone .includes three types: foreign loans, foreign direct investment and foreign commodity leasing. The foreign loans are mainly foreign bank loans. Foreign direct investment constitutes sole-owned foreign investment and foreign investment parts of joint ventures and contractual joint ventures. Foreign commodity leasing includes international leasing, compensation trade, and material processing and elements assembling. In 1989, for instance, foreign loans comprised 36% of total foreign investment, foreign direct investment 62% of total foreign investment, and commodity leasing 2% of total foreign investment (SNES, 1989). Here, the type of foreign capital enterprises being studied constitutes foreign direct investment.
207 Zone received strong support from the Central Government, including both policies and financial support (low interest rate loans). The Central Ministries of various industries set up subsidiaries in Shenzhen Zone to support industrial development in the new zone. In addition, the geographical advantage of Shenzhen Zone (close to Hong Kong, the main channel of China's exports) and the different economic system from inland, especially preferential policies, attracted domestic enterprises to set up companies or joint ventures with local companies in Shenzhen Zone. For instance, foreign exchange earned by inland enterprises from export products should be turned over to the state, firms only getting back
RMB by e:changing at the official price. However, firms in
Shenzhen Zone can keep their foreign exchange themselves and use it when they need to import goods (Note: The policy had changed by 1990. Firms in Shenzhen Zone can keep 80% of foreign exchange and turn over 20% to the state and get back
RMB) (SSES, 1990). From 1980 to 1984, 24 Central Ministries,
24 inland provinces, and over 100 cities and counties in
Guangdong Province set up 787 projects (though not only in industry) (SSEZY, 1985). Furthermore, Shenzhen local government also set up thousands of state-owned and collective-ownership enterprises (in 1988, there were 10672 enterprises) (SSEZY, 1989).
Table 5.1.1 shows the ownership structure between local firms and foreign firms. Generally, the sole-owned firms are
59% and joint ventures are 41% of total enterprises. On the
208 other hand, the local capital firms comprise 68% and foreign capital firms are 32% of total enterprises in Shenzhen Zone industrial business. Among the foreign investment enterprises, the majority (88%) come from Hong Kong with 415 enterprises.
Second is Japan with 18 enterprises, and third is the United
States with 16 enterprises.
Table 5.1.1: The ownership structure by number of firms in Shenzhen Zone, 1989 Category Sole-owned Joint Ventures Enterprises Local Firms 856 165 Foreign Firms 31 439 Total 887 604
Source: Shenzhen National Economic Statistics, 1989.
In Lat Krabang Zone, 77 enterprises exist with a total investment $US212.4 million by the end of 1990. Among them,
85% are foreign investment and 15% are local investment. There are 38 sole-owned firms and 39 joint-ventures. These sole- owned firms are comprised by 22 Thai firms, 13 Taiwan firms and 3 Japanese firms. As for joint-ventures, investment comes from Taiwan, Japan, France, Britain, Australia, China,
Pakistan and local capital (ASLK, 1991).
The ratio of foreign investment and local investment among total investment differs in the four zones. The four cases can be divided into two groups (see Table 5.1.2). One is where foreign investment takes the large majority (over 80%), as in
209 Masan Zone, Kaohsiung Zone and Lat Krabang Zone. Another is where local investment takes over half of total investment, as in Shenzhen Zone, where foreign investment comprises only 43% of investment.
Table 5.1.2: A comparison of investment in the four zones, 1990
Name of Investment ($US mil) Ownership (Number) Zone Foreign Local Total Sole Joint Total Value % Value % Value owned venture
Masan 186 85 32 15 218 48 22 70 Kaohsiung 140 82 30 18 170 55 33 88 Shenzhen 252 43 333 57 585* 887 604 1491 Lat Krabang 180 85 32 15 212 38 39 77
Source: The authority of the four zones, 1989, 1990 and 1991. *Note: The value for Shenzhen Zone is only industrial investment.
Apart from Lat Krabang Zone, the majority of enterprises are sole-owned in Masan Zone, Kaohsiung Zone and Shenzhen
Zone. There are several reasons to explain why sole-owned firms take a relative large role in these zones. First, foreign investors can set up sole-owned firms without any limit in the zone. Second, since the products in the zone should be exported to international markets, most foreign investors have their own sale channels in overseas markets.
Third, it is more convenient for management: a sole-owned firm avoids negotiation and argument between different owners in a joint-venture. Therefore, it is not necessary for foreign investors to get local partners to develop local markets. In
Lat Krabang Zone, the ratio between sole-owned firms and joint-ventures is nearly half and half. The main reason is
210 that the authority of Thailand encourages joint-ventures by regulations and incentives (see Chapter 4). Hence, if the investment environment permits sole-owned firms for foreign investors without limits, foreign investors prefer to set up sole-owned firms. Sole-ownership is less common if the government regulates that local capital should share a certain degree of ownership, or foreign investors are forced to find local partners to develop the local market.
In total investment and foreign investment, Shenzhen Zone takes first place. Second is Masan Zone. Third and fourth are
Lat Krabang Zone and Kaohsiung Zone. As for the number of enterprises, Shenzhen Zone is still first. But Kaohsiung Zone is second. Lat Krabang Zone and Masan Zone are the third and fourth. As for the average capital value per enterprise, Masan
Zone takes first place with $US3.11 million; second is Lat
Krabang Zone with $US2.76 million; Kaohsiung Zone takes third place with $US1.93 million and last is Shenzhen Zone with
$US0.39 million. The development of the average capital value of per enterprise in the four zones in history is also listed in Figure 5.4.7.
To summarise so far, direct foreign investment take the main role among the total investment in the EPZs, while sole- owned firms are the majority. Therefore, the mobility and behaviour of foreign firms have a great influence on the development of EPZs. So that we need to do further exploitation on foreign investment in the rest of the chapter.
211 5.2 The sources of foreign investment
In Masan Zone, the total foreign investment ($US186 million) is comprised by 97% of Japanese investment, and 2% of American and 1% of Finland and Singapore investment (ASM, 1990).
In Kaohsiung Zone, foreign investment ($US139 million) comes mainly from Japan and the United States. Japanese investment takes 53%. In second place is the United States,
35%. The other sources include Hong Kong and Europe, each taking about 6% (MSR, 1990).
In Shenzhen Zone, foreign investment (total $US252 million) from Hong Kong is the main source, taking 61%. Japan takes second place with 23%. Others include France, the United
States, Singapore, Britain, Australia and Taiwan (SSES, 1989)_.
In Lat Krabang Zone, of $US180 million of foreign investment, Taiwan investment comprises 43%. Second is Japan taking 21%. Others include Australia, China, France, Britain and Pakistan (ASLK, 1991).
The investment sources in the four zones are different
(Table 5.2.1). First, Japanese investment in the four zones is much larger than American investment (both of them are economic superpowers in the world and located in the Asian and
Pacific area). Second, the percentage of American investment in Masan Zone and Kaohsiung Zone is also different (America
212 has had a very strong political, military and economic influence on both countries since 1950s). The percentage of
American investment in Kaohsiung Zone is larger than in anywhere else. Third, the main source of foreign investment in
Shenzhen Zone and Lat Krabang Zone is other Asian New
Industrial Countries (NICs): Hong Kong takes 61% of foreign investment in Shenzhen Zone and Taiwan takes 43% in Lat
Krabang Zone. Table 5.2.1 demonstrates that Japanese and
American investment are less important in Shenzhen Zone and
Lat Krabang Zone than in Masan Zone and Kaohsiung Zone.
Table 5.2.1: The main foreign investment sources in the four zones Source Masan Kaohsiung Shenzhen Lat Krabang
Japan 97% 53% 23.0% 21% U.S.A. 2% 35% 2.6% Hong Kong 6% 61.0% Taiwan --- --- 2.0% 43% Others 1%1 6%2 11.4%3 36%4 Source: Author's compilation according to information from the authorities of the four zones. Note: 1. The others include Finland and Singapore; 2. The others include investment from European countries; 3. The others include France, Singapore, Australia and Britain. 4. The others include Australia, China, France, Britain and Pakistan.
To consider the issue of the different participation of
Japanese capital and American capital in the four zones, especially in Masan Zone and Kaohsiung Zone, we need to examine the characteristics of direct foreign investment of the two countries.
213 First, the character of direct foreign investment is different between Japanese firms and American firms. The technology transfer of Japanese enterprises is "orderly transfer". This means that the transfer of Japanese manufacturing to other countries depends on these countries' manufacturing level: high-technology manufacturing is transferred to developed countries and labour intensive downstream manufacturing to developing countries (WATANABE and
KAJIWARA, 1983). In contrast, American firms' behaviour is
"reverse-order": American firms transfer technology which may not exist in developing countries (TERI, 1983). Since EPZs contain mainly labour intensive simple processing manufacturing, of relatively low-technology and most of labour is unskilled or semi-skilled, Japanese firms are more adapted to develop in EPZ than are American firms. Second, there is heavy competition and a shortage of labour in the Japanese domestic economy, the Japanese firms must search for suitable places to continue their production. In contrast, American
Direct Foreign Investment occurs under a steady, monopolised domestic market. The constancy of production organisation is linked to the fixed market, profit and production procedures
(TERI, 1983). Third, the revaluation of the Japanese Yen made overseas investment become less costly for Japanese investors
(see Figure 5.4.1 & 5.4.2). Finally, in respect of geography, resources and culture, Japan is much closer to Asian developing countries than is America.
214 Another issue concerns the reason why American investment takes a larger share of foreign investment in Kaohsiung Zone than in Masan Zone. Actually, American DFI involved in Taiwan was much greater than in Korea in the past. American investment took first place among total DFI in Taiwan until
1982. After 1982, Japanese investment started to replace
America's position but only slightly (TU, 1990). In contrast,
American investment lost first place much earlier in Korea. By
1971, Japanese investment had already replaced America's position and the gap between Japanese and American investment became larger and larger (SANO, 1977). The ratio of foreign investment by Japanese and American firms in Taiwan is 1.2 to
1 (TU, 1990). However, in Korea, the ratio is 2.5 to 1 (SANO,
1977). Korea has very strong links with Japan in investment;
Taiwan's situation is more equal.
The third issue is that Asian newly industrialising countries take the main role of investment in the relatively new zones such as Shenzhen and Lat Krabang. This restructuring has several causes. One is that both money wages and real wages have risen rapidly in the Asian newly industrialising countries in the past (see Chapter 6). The Asian newly industrialising countries lost their comparative advantage in labour intensive manufacturing to other Asian developing countries which have a relatively abundant supply of labour available at lower wages (WATANABE and KAJIWARA, 1983). The other is that the international economic environment changed when the two international oil crises triggered a slowdown of
215 growth and severe recession of demand in the developed economies. Therefore, imports from the Asian newly industrialising countries were subjected to increasing scrutiny and control there, a process that substantially benefited other Asian developing countries with smaller shares of manufactures in their total exports (WATANABE and KAJIWARA,
1983). The advantage of labour intensive manufacturing has shifted from the Asian Newly industrialising countries to other Asian developing countries (WATANABE and KAJIWARA,
1983). Meanwhile, in developed countries such as Japan, companies gradually gave up labour intensive downstream manufacturing (even including their subsidiaries in Asian
Newly industrialising countries) and production came to focus on capital and technology intensive upstream manufacturing
(WATANBE and KSJIESTS, 1983). Hence, a large number of the
Asian Newly industrialising countries' companies (here, Hong
Kong and Taiwan) were interested in transferring labour intensive downstream manufacturing to other Asian developing economies (such as Shenzhen Zone and Lat Krabang Zone). In addition, countries like China and Thailand have rich resources, which also encourage investors from less resource- rich Asian Newly industrialising countries to develop
production by consuming local resources in these developing countries.
In general, investment in these zones is mainly from the
local region, mostly East Asia, but not North America and
Europe, which was stated by ILO and UNCTC (1988).
216 5.3 The structure of investment by industry sector
Figure 5.3.1 shows the structure of investment by industry sector in Masan Zone in December 1988. This figure illustrates the order of investment by different industrial sectors. The most important sector is electronics and electrical products which accounts for 65.7% of total investment. The second is precision products, 12.3% of total investment. Third is metal products, 11% of total investment. Others include footwear, machinery, non-metal products, textiles, sports goods and watches, which account for 11% (ASM, 1990).
Figure 5.3.1: The investment proportion of industry sector in
Masan Zone, 12/1988
OTHERS '0
NON-METAL
MACHINERY
TEXTILES 0
FOOTWEAR 0
METAL
PRECISION
ELECTRONICS 2
0 10 20 .30 40 50 60 70 PERCENT
1. The others include sports goods and watches; 2. The item includes electronics and electrical products. Source: The Authority of Masan Zone, 1990.
217 In Kaohsiung Zone (Figure 5.3.2), the most important sector is electronics, which accounts for 56% of total investment.
The second is garments with 11.4%. The third is metal products with 9.6%. Machinery accounts for 8.8%. Other manufacturing includes non-metal products, chemical and plastic products, precision manufacturing, textiles, toys, yacht, musical instruments and sport goods (MSR, 1990).
Figure 5.3.2: The investment proportion of industry sector in
Kaohsiung Zone, 1990
OTHERS1D
TEXTILES Q
PRECISION 0
CHEMICAL2
NON-METAL
MACHINERY
METAL GARMENTS r ELECTRONICS I
I I I I I I i 0 10 20 30 40 50 60
PERCENT
1. The others include toys, yachts, musical instruments and sports goods;
2. The item includes chemical and plastic products.
Source: MSR, 1990.
218 In Lat Krabang Zone (Figure 5.3.3), textiles and electronics share the same percentage of total investment, each accounting for 17.7%. Handbag and jewellery products have
15.6% each. Plastic and chemical products account for 11.1%.
Food products take 6.7%. Others, which include umbrellas, sports goods, watches, pens and toys, take 15.6% (ASLK, 1991).
Figure 5.3.3: The investment by industry sector in Lat Krabang
Zone, 1990
OTHERS 1
FOOD
CHEMICAL2
JEWELLERY
HANDBAG
TEXTILES
ELECTRONICS3
0 5 10 15 . 20 PERCENT
1. The others include umbrellas, sports goods, watches, stationery and toys;
2. The item includes chemical and plastic products;
3. The item includes electronics and electrical products.
Source: Industrial Estate Authority of Thailand, 1991.
219 In Shenzhen Zone, the investment structure is quite different from the other zones. Shenzhen Zone includes not only industrial business, but also others (see the business structure in Figure 5.3.4). Figure 5.3.4 reveals the percentage of investment in different national economic items in Shenzhen Zone. In addition, I list two percentages in Table
5.3.1: (1) the percentage of industrial investment in total
Figure 5.3.4: The average percentage of investment in different items in Shenzhen Zone from 1979 to 1988
OTHERS
SCIENCE Q
FINANCE El
AGRICULTURE E
CULTURE1
TRANS.& TEL2
TRADE3 4 URBAN
INDUSTRY
0 10 20 30
PERCENT
1. The item includes culture and health;
2. The item includes transport and telecommunication;
3. It includes commerce and food;
4. It is urban construction.
Source: SSEZY, 1989.
220 investment, and (2) the percentage of foreign industrial investment in total foreign investment in Shenzhen Zone.
Table 5.3.1: The structure of investment in Shenzhen Zone
Year (1) (2) 1979 34.4% 23.3% 1980 50.3% 38.2% 1981 51.4% 41.8% 1982 15.6% 42.2% 1983 19.2% 43.9% 1984 18.6% 48.2% 1985 27.0% 19.6% 1986 24.9% 65.2% 1987 27.4% 62.1% 1988 39.1% 63.0%
Average 27.7% 44.7%
Source: SSEZY, 1989.
(1)Percentage of industrial investment in total investment; (2) Percentage of foreign industrial investment in total foreign investment;
Figure 5.3.4 and Table 5.3.1 reflect the facts that industrial investment comprises the largest part of total investment, and it forms nearly half of total foreign investment in Shenzhen Zone. Figure 5.3.5 reveals the proportion of industry sectors in Shenzhen Zone in 1989.
Electronics accounts for 47%. Chemical and plastic products take second place with 11.5%. The third is machinery with
7.7%. Food products is fourth with 5.2%. Textiles, metal, garments, non-metal and precision manufacturing take only 5%,
4.2%, 4.1%, 2.9% and 0.3% respectively. Others (including leather, furniture, paper products, printing, sport goods, stationery, fine arts products, tobacco and fodder products) take 12.1% (SNES, 1989).
221 Figure 5.3.5: The proportion of industry sector in Shenzhen
Zone, 1989
OTHERS 1
PRECISION O
NON-METAL 7
GARMENTS
METAL
TEXTILES
FOOD
MACHINERY
CHEMICAL
ELECTRONIC S2 1 i i 1 I I i 0 10 20 30 40 50 PERCENT
1. The others include leather, furniture, paper products, printing, sports goods, stationery, fine arts products, tobacco and fodder products.
2. The item includes electronics and electrical products.
Source: SNES, 1989.
Investment by manufacturing sectors in the four zones (see
Table 5.3.2) is mainly electronic and electrical production.
Masan Zone has the largest percentage with 65.7% of total investment. Second is Kaohsiung Zone with 56%. Shenzhen Zone and Lat Krabang Zone are third and fourth with 47% and 17.7% respectively. Comparing other manufacturing, Shenzhen Zone has a relatively wider scope of manufacturing items. But manufacturing in the other three zones is mainly concentrated on several items. For instance, the manufacturing in Masan
222 Table 5.3.2: Comparison of investment by manufacturing sectors of the four zones (%)
Masan Kaohsiung Shenzhen Lat Krabang
Chemicala 3.6 11.5 11.113 Electronics 65.7b 56.0 47.Oó 17.7 Food 5.2 6.7 Footwear 3.0 Garments Handbag 15.6 Jewellery 15.6 Machinery 1.6 8.8 7.7 Metals 11.0 9.6 4.2 Non-metal 0.4 4.3 2.9 Precision 12.3 2.1 0.3 Textiles 2.6 0.9 5.0 17.7 Others 3.4c 3.3~~ 12.1e 15.6E
Source: MFEZI, 1990; MSR, 1990; SNES, 1989 and ASLK, 1991.
Note: a. This item includes chemical and plastic products; b. This item includes electronics and electrical products; c. The others include sports goods and watches; d. The others include toys, yachts, musical instruments and sports goods; e. The others include leather, furniture, paper products, printing, sports goods, stationery, fine arts products, tobacco and fodder products. f. The others include umbrella, sports goods, watches, stationery and toys.
Zone is mainly concentrated on metals (11%), precision manufacturing (12.3%), footwear (3%) and textiles (2.6%). In
Kaohsiung Zone, the scope is larger than ih Masan Zone but it is still concentrated on several main industries, such as garments (11.4%), machinery (8.8%), metals (9.6%), non-metal
(4.3%) and chemical production (3.6%). The item of others in
Lat Krabang Zone includes several industries with a relatively high percentage (15.6%), and the percentage of other productions is more equal. For instance, textiles share the same percentage as electronics (17.7%); Jewellery and handbag share 15.6% respectively; Chemical and plastic production
223 share 11.1% and food production takes 6.7%. In addition, the manufacturing level is different in the four zones. Most capital is invested in electronics and metal products in Masan
Zone and Kaohsiung Zone. Other simple processing like footwear and textiles accounts for only a small percentage. However, in
Shenzhen Zone and Lat Krabang Zone, apart from electronics which shares a relatively large investment too, other simple processing shares a large percentage, especially in Lat
Krabang Zone where textiles share the same percentage as electronics.
In general, the manufacturing in the mature zones like
Masan and Kaohsiung is concentrated on relatively high value added industries with more capital-intensity and less labour- intensity. In contrast, the manufacturing in the new zones like Shenzhen and Lat Krabang is relatively labour intensive and simple processing. These also indicate that the trend of manufacturing restructuring between developed EPZs and less- developed EPZs.
5.4 The development of investment in the past
In the past, investment in the four zones was influenced by their domestic economic policy and the changes in the international economy. The analysis of the development of investment in the four zones reveals the total investment development, the number of firms and value of capital by per
224 firm, the change of investment in different industry sectors, and the adjustment of investment.
5.4.1 Total investment in the past
In Masan Zone, the development of investment can be divided into four periods (Figure 5.4.1). Foreign investment has come mainly from Japan in the past two decades; since the rate of foreign exchange has changed dramatically between the $US,
Japanese Yen and Korean Won (see Figure 5.4.3), I use the three currencies to show the development of investment in
Figure 5.4.1.
Consider first foreign investment. From 1970 to 1975, the first period, there was a significant increase from $US1.236 million to $ÚS82.81 million (ASM, 1990). Foreign investment in
Yen and Won also increased, from Yen429 million and Won380 million to Yen25,254 million and Won40,075 million respectively. By the end of this period, Masan Zone was fully occupied, so the government decided to set up another zone in
Iri. (Meanwhile, other industrial estates were also being set up. See Chapter 4.) Therefore, in the second period from 1975 to 1980, the rate of increase was slow in $US, from $US82.8
million to $US93 million. In Yen, the figure was decreasing to
Yen18,899 million because of the increment of the Yen from the
mid-70s to the end-70s. But investment in Korean Won increased
to Won61,446 million because the Won was devalued from 1975 to
1980. During the third period between 1980 and 1985, there was
225 Figure 5.4.1: The investment in Masan Zone in $US, Yen and Won
300
200 2 r
49,
ï 100 w z>
o 1970 1975 1980 1985 1990 YEAR
40000
30000 LION L MI EN 20000 - ~ NT Y E ~
STM ~ E NV I
YEAR
A Total investment O Foreign investment •Local investment
Source: The Authority of Masan Zone, 1990.
226 a decrease in $US and a slow increase in the other two currencies. The second oil crisis and the following international recession led several firms to close down or withdraw from Masan Zone to other developing countries (see
5.4.3)(ASM, 1990). This is the main capital adjustment period in Masan Zone's history. The relatively small firms and the simple processing firms constituted the majority of withdrawing firms. In the last period between 1985 and 1989, foreign investment increased from $US96.439 million to
$US186.177 million (ASM, 1990). The figure also shows that investment in Won increased from Won85,796 million to
Won124,754 million. In contrast, due to the dramatic revaluation of the Yen, investment in Yen decreased from
Yen19,376 million in 1985 to Yen17,025 million in 1987, and finally picked up again to Yen26,440 million in 1989. The large revaluation of the Yen made the cost of overseas investment for Japanese investors became much less in Yen: less capital was needed to reach a given $US investment target. In addition, the adjustment of capital after the second oil crisis provided space for new investment to settle in the zone. Meanwhile, firms which had produced in the zone since early times needed to renew equipment (after over ten years production in the zone). Both of the factors prompted investment pick up again at end of the decade (ASM, 1990).
In contrast, local investment is not very significant; it takes only 15% of total investment (see Table 5.1.2). There were several reasons for this. In early times, the Korean
227 national economy was not very developed and also lacked domestic capital. On the other hand, the government intended to introduce foreign investment so that there was a policy which allowed only foreigners set up sole-owned firms: Koreans could set up only joint ventures with foreigners in the zone and shares has to be under 50%. Although the government has allowed local investment in the zone without any limitation since 1980 (MTIK, 1989), the rate of increase of local investment has still not been significant. The main reason for this, apart from the government's attitude, is the rule that the zone's products should be exported to international markets. Most foreign investors set up subsidiaries in the zone because the overseas market is already controlled by their headquarters, other cooperative commercial agencies or partners (TERI, 1983). For local capital, especially for small and medium size companies, it is hard to export the whole of production overseas from the beginning. Other large Korean companies mainly develop their specialised manufacturing in specialised industrial estates. Therefore, local capital is not significant among total investment in Masan Zone.
In Kaohsiung Zone, foreign investment has always taken the main role in manufacturing development. Nearly 100% of foreign investment is direct investment (ASK, 1990). Figure 5.4.2 shows that total investment has followed foreign investment up and down. Actually, the original goal was a total investment of $US18 million. However, in practice, total investment was over $US25 million in the third year, 1968 (EDEPZ, 1987) and
228 Figure 5.4.2: The investment in Kaohsiung Zone in $US, YEN and $NT
200
6 150 — :1 1. Dco ~ 100 I- Z L11 ï F CO Ill z 50 1
0 1966 1972 1978 1984 1990 YEAR
50000
40000 r â ] Z 30000 w Ï Y I--
20000i [ 1m- w 'z_ 10000 L
o 1966 1972 1978 1984 1990 YEAR
A Total investment O Foreign investment •Local investment
Source: EDEPZ, 1987; MSR, 1988-90.
229 the zone was fully occupied by over 160 enterprises in 1969
(EPZA, 1986).
Consider now foreign investment and the different histories in $US, Yen and $NT. As for $US and $NT, the development of investment can be divided into two main periods. Before 1985, foreign investment kept increasing (from $US8.32 million in
1966 to $ÚS138.33 million in 1985). During a nearly 20 years period, foreign investment never decreased. The period since
1985 has been unstable: foreign investment decreased in 1986
($US116.33 million) and 1988 ($ÚS109 million). Due to the large increment of the $NT in these years, foreign investment in $NT shows a dramatic decrease. After 1989, investment started to recover. On the other hand, foreign investment in
Yen shows a different history. Apart from a dramatic increase in the beginning (from 1966 to 1970), foreign investment in
Yen slowed down between 1970 and 1973. During that time, the rate of exchange rose from about Yen360 per dollar between
1966 and 1970 to about Yen280-300 per dollar between 1970 and
1973. Foreign investment really increased between 1973 and
1976; at same time the value of the Yen kept steady. Then, there was a decrease in foreign investment between 1976 and
1978; meanwhile, there was a large revaluation of the Yen from over Yen290 to about Yen190 per dollar. After that, the value of Yen remained in the range Yen200 and Yen250 per dollar
(from 1979 to 1984). In this period, foreign investment increased dramatically to Yen33809.7 million in 1984. However, as the value of Yen increased from Yen251 per $US in 1984 to
230 Yen124 per $US in 1988, foreign investment in Yen in Kaohsiung Zone decreased greatly in the second half of the 1980s. That shows a similar situation in Masan Zone and Kaohsiung Zone: foreign investment denominated in Yen has been influenced by the revaluation of the Yen in the past two decades. It also shows that Japanese overseas direct investment is being promoted with less cost.
Local investment in Kaohsiung Zone is not very significant, taking under 18% on average (EDEPZ, 1987 and MSR, 1988, 1989 &
1990). The reason is similar to Masan Zone. The policy of the
Authority focuses on promoting foreign investment and exporting all production overseas. These are not suitable for local investors who might develop in the zone.
It is necessary to clarify the decrease of foreign investment in Kaohsiung Zone between 1985 and 1990. (The decrease shows up in the three currencies.) There are two main reasons. One is that Kaohsiung Zone mainly developed labour intensive manufacturing (the common sense of EPZs). After the second oil crisis, the international economic recession influenced Taiwan: labour intensive manufacturing (e.g., garments and textiles) was no longer to be promoted because it was seen to be less competitive (higher labour cost), whereas capital intensive industries (e.g., chemicals, machinery) and service industries were becoming more prominent (ASK, 1990 &
TU, 1990). In addition, due to the revaluation of the $NT since 1985 (see Figure 5.4.3), direct foreign investment in
231 Figure 5.4.3: Foreign exchange rate, Yen, Won and $NT per $US
400 i i
300 r
200 I-
100 1966 1972 1978 1984 1990 YEAR
900
800 i-
700 -
~ 600 : ~
500 r
50
40 — \
F- c~§
30 r-
20 ' \-----r \ 1 1968 1972 1978 1984 1990 YEAR
Source: IMF, 1990 and Republic of China Yearbook, annual. 232 Taiwan became more expensive, which also led to a decline in investment in Kaohsiung Zone (ASK, 1990).
Figure 5.4.4 shows the different impact of local investment and foreign investment on industrial development of Shenzhen
Zone from 1979 to 1988 in three currencies: $US, Chinese RMB and Japanese Yen.
Generally speaking, the investment situation in Shenzhen
Zone is different from other cases. The local investment has the main share of total investment. The figure also shows the development of investment has a similar history in the three currencies.
Between 1979 and 1981, local investment increased. However, local investment started to decrease after 1981 and it did not recover until 1984. After 1984, local investment rose to
$ÚS233.16 million in 1985 and suddenly fell to $US129 million in 1986 and $ÚS159.8 million in 1987. In 1988, local investment recovered again to $US367 million (YANG, 1988 &
SSEZY, 1989). Local investment rose and fell dramatically in these years because the national economy boomed after China started economic reform, and the Central Government wanted to reduce the risks of the boom and keep economic development steady. Therefore, it tried to reduce the rate of economic growth by using both administrative intervention and economic methods. As for the administrative intervention, the government sent orders to the local government to reduce the
233 Figure 5.4.4: The investment of industry in Shenzhen Zone in $US, RMB and Yen
YEAR
3000
5~ 2000 r CO i F- z w ï 1000 � 1r >z
0 1979 1981 1983 1985 1987 1989 YEAR
G Total investment O Foreign investment •Local investment
Source: SSEZY, 1985-1989; and SNES, 1989. 234 budget for construction investment and to approve new projects strictly (YANG, 1988). As for economic methods, they carried out a tight national financial policy (SSEZY, 1985-89).
However, during the adjustment period, when the government intervened too strongly, it blocked investment and economic development, which again forced the government to discontinue the tight policy. As soon as the government slackened, investment and the economy started to boom again, leading the government to try to limit the boom again. Hence, Central and
Shenzhen local governments' intervention influenced local investment (including state-owned, collective and joint ventures between state-owned companies) up and down dramatically in Shenzhen Zone (SSEZY, 1989).
However, there is an exemption for enterprises which have linkages with foreign capital. The government policy guarantees that if an investment project has investment from overseas, it can not be influenced by these policies (SSEZY,
1989). Hence, foreign investment has been steadier than local investment during the past decade.
In the beginning (from 1979 to 1981), foreign investment increased at a low rate. Between 1981 and 1984, foreign investment replaced local investment to take the main role among total investment. After 1984, there were two years of decrease (1985 and 1987), because the government limited local investment and the economic situation became tighter which made foreign investors feel that economic policy in Shenzhen
235 Zone was unpredictable. But foreigners' judgements were made after the result of the government policy appeared. Therefore, the figure shows the interesting feature: local investment rose in 1985 after several years decrease, but foreign investment decreased in 1985 because of the late judgement; since local investment increased rapidly in 1985, foreigners became confident of increasing investment in 1986. In contrast, local investment decreased in 1986 because of government policy. This situation continued in the following years. Therefore, the changeable government policies made foreign investors feel insecure and to follow the local investment up and down in Shenzhen Zone (in the whole nation too) (SSEZY, 1985-89 & SNES, 1989). The difference between
Shenzhen Zone and the other cases is that domestic influences
(e.g. government policies and changes in the economy) are much stronger in Shenzhen Zone than in the other three countries' zones.
After Lat Krabang Zone was set up in 1982, investment was small. By the end of 1982, only one company (Bangkok Writing
Instruments Ltd) had started operations in the zone (BIAP,
1982). Then, eleven factories, six factories, five factories and ten factories established in 1984, 1985, 1986 and 1987 respectively. Figure 5.4.5 shows investment in Lat Krabang
Zone since 1987 in three currencies: $US, Baht and Yen. (Note: the Industrial Estate Authority of Thailand can only provide data on investment since 1987). Among total investment, foreign investment shares 85% and local investment takes only
236 Figure 5.4.5:Theinvestmentin Source: TEAT,1991. ~ 6 6 ï 3 6 I- m m 3000 � r-- z � u~7 w > w z
30000 I INVESTMENT sUSMILL ION 20000 6000 5000 r- 2000 r 10000 1000 0 1987 0 1987 L 1 I r I i i --- ' ----- • 1988 1988 1988 Lat YEAR YEAR Krahang Zonein$US, YEAR 1989 1989 1989 1990 1990 1990 _ • O Foreigninvestment A Baht Total investment Local investment and Yen 237 15% (see Table 5.1.2). Since the exchange rate between Baht and other foreign currencies has been quite steady since 1985
(KIIT, 1989), there is no big difference between the three graphs. There was a large increase (more than two times) of foreign investment between 1988 and 1989.
The development histories of total investment in the four zones are different. In Masan Zone and Kaohsiung Zone, the development stages are quite similar. The common points include:
1. Before the second oil crisis, foreign investment (which led total investment) kept rising;
2. After the second oil crisis and the international recession in the following years, foreign investment unsteadily decreased, which also influenced total investment.
The change in the international economic situation and the cost of production in the zones led to an adjustment of capital and investment structure;
3. In addition, the adjustment of capital since the second oil crisis provided space for new investment to settle in the zone. Meanwhile, firms which had produced in the zone since early times needed to renew equipment (after over ten years production in the zone). Both of the factors prompted investment pick up again at end of the decade.
238 By contrast, the situation in Shenzhen Zone is different.
Since local investment takes the main share of total investment, China's economic situation, especially government policy, determines the whole development in Shenzhen. Figure
5.4.4 shows that there were two main periods of decrease in local investment: 1982-83 and 1986-87, which also caused total investment to decrease. These occurred because the central government adjusted the development policy and carried out tight financial-economic policies. On the other hand, foreign investment only followed the development of total investment, but did not take the main role in this development as in the other cases. The situation of investment in Lat Krabang Zone is one of continuing increase.
5.4.2 Number of firms and the adjustment of capital
Figure 5.4.6 shows the number of participating enterprises in the four zones. In Masan Zone, there was a significant increase from 4 in 1970 to 115 in 1973. However, after the peak, the number fell to 70 in 1989, the same number as in
1972. In Kaohsiung Zone, the number increased from 51 in 1966 to 164 in 1972 (EDEPZ, 1987). After 1972, however, the number has decreased. In 1990, the number was only 88 (MSR, 1990). In
Shenzhen Zone, the total number of industrial enterprises increased 22 times since 1979. In 1979, there were 68 industrial firms. By 1989, there were 1491 industrial firms.
In Lat Krabang Zone, from one in 1982, the number increased to
77 in 1990 (ASLK, 1991).
239
Figure 5.4.6: The number of participating enterprises in the
four zones
150 200
100 L
50 L
0 1970 1975 1980 1985 1990 YEAR YEAR
1500 80
70 — I 60 k
1000 — 50 ~ w 2 D Z 500- 1
10
0 0 1979 1981 1983 1985 1987 1989 1982 1983 1984 1985 1986 1987 1988 1989 1990 YEAR YEAR
Source: MAFEZ, 1989; EDEPZ, 1987; MSR, 1988-90; SSEZY, 1985- 89; SNES, 1989; IEAT, 1991. 240
Figure 5.4.7 shows the value of capital per firm. Masan
Zone has the largest firms with $US2.64 million. Lat Krabang
Zone is the second one with $US2.26 million. Third and fourth are Kaohsiung Zone and Shenzhen Zone with $US1.57 million and
$US0.29 million respectively.
Figure 5.4.7: The value of capital per firm in the four zones
4
y Shenzhen A Kaohsiung O Lat Krabang •Masan I 0 1966 1972 1978 1984 1990 YEAR Source: Calculated from Figure 5.4.1, 2, 4, 5, and 6.
Considering the change of investment and number of
participating enterprises in the four zones, it is necessary to analyse the adjustment of capital in these zones and to clarify the behaviour of EPZs' firms. This involves issues connected with multinational enterprises (MNEs) in EPZs
(whether they are footloose, SRICHARATCHANYA, 1983) and the
241 influence of the domestic and international economy on the development of EPZs.
In the early days of EPZs in most countries, the process by which the authority approved firms was not very strict. This is because the authority had little experience in dealing with foreign investment and the host country wants new investment to settle in the zone. On the other hand, manufacturing is unsophisticated in these countries. That led traditional, labour intensive, simple processing manufacturing to settle in
EPZs. However, after developing for a period, the situation of the domestic and international economy has changed, and the firms in the zones needed to adjust their investment and production. This adjustment happened in both Masan Zone and
Kaohsiung Zone.
In Masan Zone, after about one decade of development of these traditional manufacturing sectors, the situation started
to change. Figure 5.4.1 and 5.4.6 already demonstrated the adjustment. In order to make clear the restructuring of
manufacturing, Table 5.4.1 shows the change of investment by
industry sectors. Of total investment, the share of investment
in electronics and electric goods has increased significantly.
The share of investment in precision production also increased
a certain degree. While the share of machinery and textiles
has not changed much, the share of metal products decreased
relatively quickly, and that of footwear has also decreased
(ASM, 1990).
242 Table 5.4.1: The investment by industry sector in Masan Zone in 1979 & 1989 (%) Item 1979 1989 Electronics & electric 47.6 65.7 Precision 8.8 12.3 Metals 25.0 11.0 Footwear 5.0 3.0 Textiles 1.9 2.6 Machinery 2.0 1.6 Others 9.7 3.8 Total 100.0 100.0 Source: The Administration Office of Masan Zone, 1990.
By now, 80 enterprises have withdrawn from Masan Zone.
Among them, 60 are Japanese sole-owned enterprises and 20 are
Korea-Japan joint ventures. These enterprises closed down or
moved to the under-developed countries. Since the
international economic environment changed because the second
oil crisis triggered the slowdown of growth and a severe
recession of demand in international developed economies.
Therefore, imports from Korea were subject to increasing
scrutiny and control there (quota limitations). The advantage
had shifted from a country like Korea to other Asian
developing countries with smaller shares of manufactures in
their total exports and lower production costs, especially
labour cost, such as China and Thailand.
There are some examples of this process. Shinhan Company,
which produced telescopes and telescopic sights was the first
Japanese firm to set up in Masan Zone, in 1971. After 11
years, it was sold to a Korean company in 1982 because of the
increase of cost of production (ASM, 1990). Je Non Co., which
• 243 produced camera lens, closed after 13 years production in
Masan Zone and a Korean company purchased the firm for the
same reason as Shinhan Company (ASM, 1990). Another Japanese
company produced nails, mainly exporting to the American
market; due to the quota limits on exporting to America, the
company shared the quota with other companies in Korea, and
the quota became less and less each year, so the company sold
its shares to a Korean company (ASM, 1990). Tandy Mobirn
Communication Co. is an America-Finland joint venture which
used to be a Japanese footwear company. In 1985, the Japanese
company withdrew and another American company, which was
already in Masan Zone, purchased it and set up a joint venture
with a Finnish company to produce telecommunication products
(ASM, 1990). A Japan-America joint venture called "Minami
International Corporation" produced Christmas trees and
lights. In August 1990, this company moved out of Masan Zone
and resettled in China. Another Japanese company called "Lee
Wang" (translation based on pronunciation), which produced
shoes also transferred production to China (ASM, 1990). One of
SANYO's plants in Masan Zone used to produce black-and-white
TVs. But now it has changed to produce circuit plates. A nail
production company changed to produce Casio watches in 1985
(ASM, 1990).
These examples reveal that an adjustment of capital and
manufacturing restructuring occurred in Masan Zone, following
the change of both the international economic environment and
244 local investment conditions. Some firms closed down; some changed ownership or production.
In Kaohsiung Zone, among the enterprises that withdrew, 11 merged; 61 never started production; 31 were ordered to close;
98 closed down; 1 moved outside the zone (MSR, 1990). The meaning of "firms never started production" is that the firms obtained approval, but before they registered the company, they applied to cancel the investment project themselves. The
"firms were ordered to close" under Company Law (Article One of Chapter Ten): if a company has not operated for over half year since registration or stops operating for over half year, the Ministry of Economic Affairs cancels its registration
(Chang, 1987).
Table 5.4.2 shows the adjustment in periods of investment by the different categories of reason. The adjustment for the three reasons happened in different periods.
For the first category (the firms never started production), the most concentrated group is in the first two
years, because most investors who applied to set up firms in the zone at the beginning were not familiar with the conditions and system. When they started to operate, they found it was not suitable so they applied to cancel the
projects by themselves (Chang, 1987). The influence of the two
oil crises on the categories is different. The first oil
crisis had more influence on (1) category but not much on (2)
245 category. However, the second oil crisis had a strong
influence on (2) category, especially the following
international recession which led to 67% of (2) category
dismissals during 1982-85 period, that is also the main period
of decrease in the number of participating enterprises in the zone.
Table 5.4.2: The adjustment of capital in Taiwan's EPZs
(1) (2) (3)
Time: 1st oil crisis 22% 12% 9.5%
2nd oil crisis 7% 21% 15.8%
Other time 30% before 67% mainly 74.7% 1969, 41% of during 1982- since rest time -1985 period 1967
Capital: ($US million) under 0.5 77.5% 87% 75.8%
0.5--1 14.2% 10% 15.8%
1--5 7.5% 3% 7.4%
over 5 0.8% 1.0%
Sources: Local capital 32.5% 34.6% 41.1%
Joint venture 30% 42%• 31.6%
Overseas Chinese 15% 14.8% 9.5%
Japan 10% 4.9% 11.6%
U.S.A. 5.8% 2.5% 3.2%
Others 6.7% 1.2% 3%
Note: (1) The firms never started production; (2) The firms closed down; (3) The firms were ordered to close.
Source: Chang, 1987.
246 The local investment and joint ventures between local capital and foreign investment are the majority of cases in all three categories. Most local capital firms and joint
ventures in the zones are small and medium size (CHANG, 1987).
Meanwhile, products of firms should be exported to the international market. Firms which are mainly local capital have a relative weak competitive capacity compared formal multinational enterprises which have a comprehensive network of production and commercial circulation, especially during international recession; so the first group of firms which face the problem of bankruptcy is the local firms and joint ventures between local and foreign capital. That is also one of the reasons why the participation of local capital in EPZs
is limited: local capital can not rely only on overseas
markets, especially during the early stage of the development of the national economy.
Table 5.4.3: The investment by industry sector in Kaohsiung Zone from 1970 to 1990 (%)
Item 1970 1975 1980 1985 1990
Electronics* 44.5 54.6 62.5 . 65.7 56.0 Garments 12.6 10.4 8.4 11.3 11.4 Metals 8.7 6.4 6.5 7.3 9.6 Non-metals 14.4 11.5 6.7 4.4 4.3 Machinery 0.4 1.8 2.7 1.6 8.8 Plastic & chemical 7.3 6.5 6.6 5.0 3.6 Textiles 9.1 5.8 4.2 1.7 0.9 Precision 0.4 0.3 0.2 1.2 2.1 Others 2.6 2.7 2.2 1.8 3.3
Total 100.0 100.0 100.0 100.0 100.0
*Note: It includes electric production before 1984.
Source: MSR, 1971, 1976, 1981 and 1990.
247 Table 5.4.3 shows the change of investment by industry sectors in Kaohsiung Zone in the past. Among total investment, the share of electronics increased significantly from 1970 to
1985. But, it has decreased in recent years. The share of investment in garments and metal products has not changed a lot. Non-metals, plastic and chemical products and textiles were gradually declining in the past two decades. In contrast, machinery and precision production rose in recent years.
In Shenzhen Zone, the total number of industrial enterprises increased 22 times since 1979 (Figure 5.4.6).
Before 1986, there were no statistics to show the record of registration and cancellation of foreign industrial enterprises. Since 1987, the Yearbook of Shenzhen Zone has listed the number of new registrations and cancellations.
Generally speaking, compared with the number of new registration, the cancellation cases are few. For example, the ratio of cancellations to registrations was about 1 to 15 in
1988 (SSEZY, 1989). From Figure 5.4.4, whenever the investment increased or decreased, firms continued to operate in the zone, which indicates that the changed situation really only influenced the enterprises to delay or promote additional investment temporarily. Firms did not move out of the zone.
Table 5.4.4 demonstrates the proportion of industry sectors in Shenzhen Zone in the past. In the beginning, the biggest industry in Shenzhen was food manufacturing. Electronics and electric production was under 5% in the first two years.
248 However, in the mid-80s, electronics and electric goods took
the largest share of industrial production. In contrast, the
proportion of food manufacturing decreased greatly. Non-metals
has also declined. Meanwhile, the proportion of machinery and chemical production has gradually increased (SSEZY, 1985-89 &
SNES, 1989).
Table 5.4.4: The proportion of industry sectors in Shenzhen Zone from 1980 to 1989 (%)
Item 1980 1985 1989
Electronics & electric 5.0 51.4 42.5 Food 35.3 9.0 6.6 Textiles 19.0 4.6 9.0 Machinery 11.2 7.9 12.3 Non-metals 5.6 2.8 2.9 Chemical & plastic 1.8 6.4 10.2 Others 22.1 17.9 16.5
Total 100.0 100.0 100.0
Source: SSEZY, 1985-1989 and SNES, 1989.
There is little data on Lat Krabang Zone and it only has
short history. So far, only two Taiwanese companies have
withdrawn. One was producing textiles and another was
producing engine equipment. The reasons is the limited
international market (ASLK, 1991). Since Lat Krabang Zone is
in the early development stage, Figure 5.3.3 reflects the
investment structure by industry sector in this period.
Comparing the capital adjustment, the four cases represent
two kinds of EPZs. Masan Zone and Kaohsiung Zone represent a
group which is relative mature. Shenzhen Zone and Lat Krabang
Zone represent a young group which has a relatively short
249 history. Therefore, the situation of capital adjustment is quite different between them.
In the mature group, there are some common characteristics of Masan Zone and Kaohsiung Zone. At first, there was a dramatic increase in these zones. In Masan Zone, in the first three years, 1970 to 1973, the number of participating firms increased to 115. In Kaohsiung Zone, there was also a large increase in the first three years from 1966 to 1969, and in the following three years, the number kept steadily increasing. In 1972, the number reached the 164. Second, after the dramatic increase, the number of firms in these zones decreased. In Masan Zone, since the peak of 1973, the number fell to 70 in 1989. In Kaohsiung Zone, the situation is similar (88 enterprises in 1990). Third, most firms which withdrew from the zones after a period of production in the zones are in traditional labour intensive manufacturing like umbrellas, shoes and clothing. Apart from that, some other firms with a relatively capital intensive manufacturing (e.g. metals in Masan Zone) withdrew because the quota limits on exporting to main developed countries' markets. Fourth, the majority of firms that withdrew from the zones are small and medium size (see Table 5.4.2). Fifth, apart from some early cases, most withdrawals because of bankruptcy happened during the second oil crisis and the following international economic recession.
■
250 Why was there no strong effect on foreign investment in these zones during the first oil crisis in the 1970s but there
was in the second oil crisis and following international recession in the 1980s? The most important influence of the first oil crisis for developed countries in the 1970s was that it led the economies into stagflation, which added to the difficulties to manufacturing, especially the traditional labour intensive manufacturing. Meanwhile, that was the period
when the first wave of industrial restructuring happened
between developed countries and newly industrialising countries. So the first oil crisis did not block the
restructuring movement; actually, it even encouraged firms to
make decisions to transfer labour intensive manufacturing to
cheaper production cost places like Korea and Taiwan,
especially EPZs in these countries. Figures 5.4.1, 5.4.2 had
shown the investment had a significant increase in Masan and
Kaohsiung during the period of the first oil crisis. However,
the second oil crisis happened after the mature EPZs had
developed over a decade. The enterprises in these zones were
facing problems when the first oil crisis happened in
developed countries. Production costs were also higher than
ten years before. Most labour intensive simple processing
manufacturing were also facing bankruptcy in NICs. This is the
beginning of the second wave of industrial restructuring:
Capitalists in newly industrialising countries as in developed
countries transferred labour intensive and simple processing
manufacturing to other developing countries like Thailand and
China. On the other hand, the adjustment of capital also
251 occurred inside these zones after this shock: new investment
replaced the old one with more capital intensive and less labour intensive manufacturing settling in the zones (see
Chapter 6). Meanwhile, old firms needed to renew equipment after over ten years production in the zones if they planned to continue production in the zones. In addition, the large revaluation of the Yen in the second half of 1980s prompted
.Japanese overseas investment. Hence, investment picked up again in these zones in recent years.
The main difference between Masan Zone and Kaohsiung Zone is: In Masan Zone, the majority of withdrawing firms are
Japanese. However, in Kaohsiung Zone, the majority are local capital firms and joint ventures between local capital and foreign investment. As for Masan Zone, there are 75% of firms
invested by Japanese with 97% of total foreign investment, when labour-intensive manufacturing lost its comparative advantage in Masan and a severe recession of demand international developed economies, the firms had to adjust their production and location like the examples in Masan I mentioned early, and among them, Japanese firms also share a large percentage. As for Kaohsiung Zone, most local capital firms and joint ventures in the zone are small and medium size, which has a relative weak competitive capacity. Hence,
the majority of withdrawing firms are this kind of enterprises in Kaohsiung Zone.
252 In contrast, the capital adjustment in Shenzhen Zone and
Lat Krabang Zone is quite different from that in Masan Zone and Kaohsiung Zone. Since Shenzhen Zone and Lat Krabang Zone are relatively new zones, their establishment and early development occurred when traditional manufacturing was transferred from both developed countries and newly industrialising countries to other less-developed developing countries. That led the participating enterprises in Shenzhen
Zone and Lat Krabang Zone to increase in the 1980s.
Consider now the argument that MNEs in EPZs are footloose
(they can easily withdraw)(SRICHARÀTCHANYA, 1983). The cases of Masan Zone, Kaohsiung Zone and Shenzhen Zone show that this critique is not correct. In Masan Zone, the majority of withdrawing firms had run their businesses in the zone over a decade. In Kaohsiung Zone, the majority of withdrawals are not
MNEs but local capital. In Shenzhen Zone, domestic policies or the international economy caused foreign enterprises to reduce investment or stop reinvesting rather than to move out of the zone. So if foreign enterprises invest in•EPZs, they seem to prefer to develop steadily (such as the cases in Masan Zone,
Kaohsiung Zone and Shenzhen Zone). If these enterprises, after developing for a period in an EPZ, believe that production costs and market opportunities are not suitable for them, it is quite reasonable to choose to withdraw or move to other zones. The important point is: they have developed for a period in the zone (such as the cases in Masan Zone). On the other hand, most withdrawing firms are not MNEs but local
253 firms (such as the case in Kaohsiung Zone). Therefore, it is hard to say that MNEs in EPZs are footloose. Relocation is not common among participating firms in the zone and the issue is not peculiar to EPZs. The different types of firms, the length of their participation in EPZs and the cases in these zones discount the critique that MNEs' are footloose in the EPZs.
5.5 Summary
In most EPZs, foreign investment takes the main role. However, in a special case like Shenzhen, domestic capital may take a relatively important part (though foreign investment has significant influence as well). Besides that, sole-owned firms of both foreign investment and local capital are the majority among the different types of firms.
As for the sources of foreign investment, Japanese investment is involved more than American capital because of their different characteristics and behaviour. A new phenomenon is that newly industrialising_countries' capital takes the main role in the wave of industrial restructuring to the less-developed developing countries. The typical examples are the capital of Hong Kong and Taiwan involved in labour- intensive manufacturing in China and Thailand. This process can be described as: industrial restructuring starts from developed countries to newly industrialising countries, and now turns from newly industrialising countries to less- developed developing countries with regard to the comment of
254 ILO and UNCTC (1988) that numerous investors from Hong Kong to other EPZs fear Hong Kong's political uncertainty after 1997,
I would argue that the most important reason is industrial restructuring rather than political fear. Otherwise, they would not shift their manufacturing investment to Shenzhen.
The examination of manufacturing sectors in the EPZs illustrates that most manufacturing is light industry, and mainly electronics and electric production. The firms in the zones are mainly small and medium size. These characteristics determine the firms' behaviour. In the mature zones, since the second oil crisis in the 1980s, some firms have stopped labour-intensive production, and changed to more capital/technology intensive production. Some of them shifted production to other developing countries. However, these adjustments occurred after firms had operated in the zone for a period. The choice was made under a changed situation of both production process and market. It does not conform to the critics' simple statement -- footloose.
255 CHAPTER 6
THE LABOUR STRUCTURE IN THE FOUR ZONES
One of the aims of establishing EPZs in developing countries is to create employment. Following the national economic strategy, in most developing countries, especially in East
Asian countries, industrial production became most important.
Regard to the links of industrialisation with employment and working condition, we have seen in previous chapters that different literatures reveal these phenomena with different result. For example, Fröbel and his colleagues claim that working conditions in the EPZs, especially wages, were often insufficient to cover the basic costs of living. Workers also suffered from long working hours, shift work, few holidays, social insecurity, insufficient pensions, the absence of unemployment benefit, and inadequate provisions for safety at work. The 'super-exploitation' was maintained by various instruments, particularly prohibition of trade unionism. The creation of specific job opportunities in export-oriented production cannot be equated with a general reduction in unemployment (FRÖBEL et al, 1980). In order to response to these statements, I examine some relevant questions in this chapter: What is the EPZs' impact on industrialisation, especially on solving the unemployment crisis? What is the labour structure and what are the working conditions, workers' welfare and organisation in these zones? I clarify these
256 questions through analysis of the following issues: The employment structure in the zones (including gender, ages, educational level and training, recruitment and mobility of labour, and employment by industry sectors); wages and welfare, which includes a comparison of wages and purchasing- power-parities (PPPs) to indicate real income and living standards of workers in developed countries and the zones. In addition, sensitive issues like trade union movements and the management structure (between foreigners and local people) in the zones are also revealed.
6.1 The employment situation
EPZs have some special characteristics of employment. I here delineate the special employment situation in the four zones by analysing total employment, the ratio of male and female, ages, educational level and training of workers, recruitment and mobility of labour, and percentage of employment by industry sector.
6.1.1 Total employment
In Masan Zone, the total employment was 21,049 workers by May
1990. The average number of employees per firm is about 301 persons (ASM, 1990). Among total employment, 70.9% are female and 29.1% are male. The average age is about 22 years (mainly between 18 and 25 years old). Over 95% of workers have graduated from high school. Figure 6.1.1 shows the percentage
257 Figure 6.1.1: The employment structure by industry sector in
Masan Zone, 1985
OTHERS El
NON-METAL II
MACHINERY 0
TEXTILES 0
METAL
FOOT WEAR
PRECISION
ELECTRONICS 1
0 10 20 30 40 50 60 70 PERCENT
1. It includes electrical production.
Source: HEALEY, 1989.
of employment by industry sector. The production of electronics and electric takes the first place with 61.9% of total employment. Second is precision production with 13.7%.
Footwear also shares a large part of employment with 12.4%.
Others such as metals, textiles, machinery, and non-metals only share a small percentage.
Looking the past, Figure 6.1.2 reveals employment in Masan
Zone since 1971. The period can be divided into three main parts: the significant increase period from 1971 to 1973, the
258 Figure 6.1.2: Employment in Masan Zone from 1971 to 1990
40
0 1970 1975 1980 1985 1990 YEAR
Source: Author's compilation based on VAN, 1983; HEALEY, 1989 and ASH, 1990.
slow increase from 1974-to 1987 and the decline after 1987.
During the first period, the number of employees increased over 17 times. Then, during the second period, there are
several years of slow rise (1974 and 1977) and decrease (1980-
82 and 1985). Finally, after the peak in 1987, the number of
employees has gone down. In 1990, the number dropped to 21,049
workers, similar to the level in 1973 (MTIK, 1989 and ASM,
1990).
259 The decreases are mainly influenced by the international economy: two oil crises and economic stagflation. However, the influence is different in the 1970s and 1980s. There were two slow downs in the 1970s, but a deep decrease appeared in the
1980s. That is the international economic influence on employment in Masan Zone in the 1970s is less strong than in the 1980s. During the early stage of export-oriented strategy in the 1970s, industrial restructuring between developed countries and Masan Zone was not blocked much by the first oil crisis, unlike the second one.
Since the second oil crisis, most labour intensive producers in Masan Zone have been gradually losing competitive capacity in the international market. An adjustment, such as changing production goods, transferring location or closing down, was necessary for these firms in the zone. Chapter 5 already pointed out that most withdrawal cases happened since the second oil crisis. Compare Figure 6.1.2 with Figure 5.4.1
(the investment development, expressed in suS, in Masan Zone): the situation of investment and employment-is quite similar in this period. By 1980, the investment started to drop, and it reached bottom in 1982. Then, it recovered in 1983-84, before dropping in 1985 again. Hence, the change of international economy influenced both foreign investment and employment in
Masan Zone. In recent years (from 1987 to 1990), the decrease is mainly because of the adjustment of manufacturing structure: labour intensive simple processing manufacturing has gradually been eliminated, and relative high value added
260 and more complex manufacturing has been added in the zone.
Table 6.1.1 demonstrates the number of employees by per capital (indicating labour intensity) and the value of capital per firm (reflecting capital intensity) since 1971. The number of employees per capital has declined since 1980 and capital per firm has increased during the same period, which reflects the fact that the firms in Masan Zone have developed from labour intensive simple processing to capital intensive and more complex manufacturing during the 1980s.
Table 6.1.1: Labour intensity and capital intensity in Masan Zone since 1971 Year Employment/$US1,000 capital V.'S million/firm 1971 0.23 0.24 1975 0.24 0.85 1980 0.25 1.28 1985 0.23 1.61 1989 0.11 3.11
Source: Calculated from MTIK, 1989 and ASM, 1990. Note: The values are in current prices.
In Kaohsiung Zone, employment reached 22,508 workers by
September 1990. The average number of workers per firm is about 256 persons (MSR, 1990). Of total employment, 74% are female and 26% are male. The average age is about 27 years.
The education level includes several groups: 15% of employees
have graduated from elementary school; 33% graduated from
middle school; 42% graduated from high school and 10% have a
college degree or higher level.' Figure 6.1.3 shows the
proportion of employment by industry sector. Electronics
production has the largest share of employment with 55.4%.
Second is garments with 22.8%. Metal and non-metal production
261 Figure 6.1.3: The employment structure by industry sector in
Kaohsiung Zone, 1990
OTHERS Q
PRECISION I
TEXTILES Q MACHINERY 0 CHEMICAL] J NON-METAL
METAL
GARMENTS
ELECTRONICS
0 10 20 30 40 50 60 PERCENT
1. The item includes chemical and plastic production.
Source: MSR, 1990.
share 8% and 7.4% respectively. Others including chemical and plastic, machinery, textiles and precision only share a small percentage (MSR, 1990).
Figure 6.1.4 shows the number of employees in Kaohsiung
Zone from 1967 to 1990. (In order to clarify the impact of the other two zones in Taiwan, I also include the employment situation in Nantze Zone and Taichung Zone from 1970 to 1990.)
The history of Kaohsiung Zone can also be divided into three parts: the significant increase from 1967 to 1973, the gradual
262 1987, thenumberofemployeesdeclinedsharply.In1990, fall from1973to1986andthesharpafter1987.During Figure 6.1.4:EmploymentinthreeEPZsTaiwan,1967-90 number touchedbottomwith22,508employees(EDEPZ,1987& number decreased32%between1973and1986.Finally,after MSR, 1988-1990). times. After1973,thenumberstartedtofallgradually.The the firstperiod,numberofemployeesincreasedover10 Source: EDEPZ,1987;MSR,1988 For thefirstdecrease (1973-75),onereasonis the firstoil periods ofdecrease: 1973-75,1982-83,1985-86and after1987. Looking throughthewholeprocess, thereareseveralmain 2 CC z D m (1,000 PERSONS) 20 30 L 60 50 40 10 - o 1966 1972 YEAR 1978 - 90. 1984 1990 • O NEPZ A TEPZ KEPZ 263 crisis (EPZC, 1980). Also since the other two zones were set up in Taiwan in the early 1970s, some employment in Kaohsiung
Zone was replaced by them. Therefore, the number of employees in Kaohsiung Zone never recovered to the level in 1973 after that first fall. The decrease of employment in 1982-83 and
1985-86 in Kaohsiung Zone was influenced by international factors: the second oil crisis and the following international recession (EDEPZ, 1987). Meanwhile, in the other new zones, employment also slowed down at the same time. Finally, there is the fact that the number of employees in all three zones fell in recent years, as did the number of participating firms in the zones. In spite of the investment increasing in recent years, the decline in the number of firms and employment reflects the fact that the firms in the zone have become more capital intensive and less labour intensive than before. Table
6.1.2 demonstrates that the number of employees per $IS1,000 capital had declined over 5 times from 1970 to 1990 and the value of capital per firm increased nearly 7 times in the same period.
Table 6.1.2: Labour intensity and capital intensity in Kaohsiung Zone since 1970 Year Employment/$US1,000 capital $US million/firm 1970 0.86 0.25 1975 0.56 0.50 1980 0.34 0.92 1985 0.22 1.49 1990 0.13 1.94
Source: Calculated from EDEPZ, 1987 and MSR, 1990. Note: The values are in current prices.
264 In Shenzhen Zone, total industrial employment was 211,753 in 1989. The average number of employees per firm is about 142 persons (SNES, 1989). Among them, nearly 80% are female and only 20% are male. The main age group is under 25 years and the average age was 27 years in 1989 (SESS, 1990). The average educational level includes several groups: 51.8% of industrial workers graduated from middle school or under middle school;
Figure 6.1.5: The employment structure by industry sectors in
Shenzhen Zone, 1989
OTHERS
PRECISION Q
NON-METAL EI GARMENTS
METAL
TEXTILES
FOOD n
MACHINERY
CHEMICAL1
ELECTRONIC
0 10 20 30 40 PERCENT
1. It includes chemical and plastic production;
2. It includes electronics and electrical production.
Source: SNES, 1989.
265 31.5% graduated from high school or technical school; 8.9% graduated from technical secondary school and only 7.8% have college and university degrees or higher level (SESS, 1990).
Figure 6.1.5 illustrates the percentage of employment by industry sectors. Electronics and electric production share the largest proportion of employment with 31%. Second is garments which share 9.5%. The group of chemicals, which includes medicine, rubber and plastic production, shares 6.9%.
Machinery and textiles have the same share, 6.1% each (SNES,
1989).
The employment situation in the past is revealed in Figure
6.1.6. The number of industrial employees in Shenzhen Zone has kept increasing since 1979, except for two slow downs in 1982 and 1986. In 1979, the number of industrial employees was only
6,000 (SSEZY, 1985). Then, following industrial development in the zone, the number increased to 74,500 in 1985 and 211,753 in 1989 (SSEZY, 1987-89 and SNES, 1989). As for the two slow downs, the rate of increase was 16.7% in 1982 and 0.7% in
1986, much lower than other years' increases. These slowdown coincide with the pattern of total industrial investment in
Shenzhen Zone (see Figure 5.4.4): investment decreased 37% from 1981 to 1982 and 45% from 1985 to 1986. When total investment in industry decreases, this influences the level of employment. I have explained in Chapter 5 that the government tried to control the economic boom by using administrative intervention and economic methods which led investment to
266 decline in several years in Shenzhen Zone. Hence, the industrial employment was also influenced by the intervention.
Figure 6.1.6: The number of industrial employment in Shenzhen
Zone since 1979
YEAR
Source: SSEZY, 1985-89 and SNES, 1989.
Table 6.1.3 illustrates the level of industrial employment per $US1,000 capital and the value of capital per manufacturing firm in Shenzhen Zone since 1979. Capital and labour intensity have fluctuated in the past decade. In 1981, there was the lowest labour intensity (0.21 employees per
$US1,000) and highest capital intensity (each firm had $US0.86 million). Following development, labour intensity increased to
267 0.76 in 1987 and capital intensity dropped to 0.17 in the same year. In recent years, both labour and capital intensity have become more stable, which truly reflects the labour intensity and capital intensity in Shenzhen Zone. Generally speaking, the industries in Shenzhen Zone are still more labour intensive and less capital intensive than in Masan Zone and
Kaohsiung Zone.
Table 6.1.3: Labour intensity and capital intensity of Shenzhen Zone's industry since 1979
Year Employment/$ÚS1,000 capital sus million/firm
1979 0.53 0.17 1980 0.23 0.61 1981 0.21 0.86 1982 0.38 0.34 1983 0.55 0.28 1984 0.66 0.21 1985 0.32 0.41 1986 0.58 0.18 1987 0.76 0.17 1988 0.44 0.30 1989 0.36 0.39
Source: Calculated from SSEZY 1985-1989 and SNES, 1989. Note: The values are in current prices.
In Lat Krabang Zone, employees were 27,990 in 1990. The average number of employees per firm is about 364 persons
(ASLK, 1991). Of total employment, 70% are female and 30% are male. The average age is about 22 years. The education level includes several groups: 14% of employees have graduated from elementary school; 30% graduated from middle school; 30% graduated from high school or middle vocational school; 20% graduated from advanced vocational school and 6% have college or university degree. The employment by industry sectors is illustrated in Figure 6.1.7. Textiles production employs the
268
largest proportion of people with 35% of total employment.
Electronics and electrical production share 30% of total
employees. Handbag and jewellery production have a similar
employment number which accounts about 10% of total employees
each. Plastic and chemical production and food manufacturing
each share about 3% of total employees (ASLK, 1991).
Figure 6.1.7: The employment by industry sectors in Lat
Krabang Zone in 1990
OTHERS'
FOOD
CHEMICAL2
JEWELLERY
HANDBAG
ELECTRONICS3
TEXTILES
1 i 1 I 1 0 10 20 30 40 PERCENT
1. The others include umbrella, sports goods, watches,
stationery and toys;
2. The item includes chemical and plastic products;
3. The item includes electronics and electrical products.
Sources: IEAT, 1991.
269
Table 6.1.4: Employment, labour intensity and capital intensity in Lat Krabang Zone since 1987
Year Employee Employment/$US1,000 capital $US million/firm 1987 6,680 0.13 1.61 1988 8,110 0.12 2.01 1989 21,460 0.13 2.57 1990 27,990 0.13 2.76
Source: Calculated from ASLK, 1991 and IMF, 1990. Note: The values are in current prices.
Table 6.1.4 reveals total employment, the number of employees per $US1,000 of capital and capital per firm in Lat
Krabang Zone since 1987. Employment has increased steadily since 1987. The rate of increase in each year is 21.4%, 165% and 30% respectively. Labour intensity is about 0.13 in these years, while the value of capital in each firm has increased from $US1.61 million in 1987 to $ÚS2.76 million in 1990. The level of labour intensity remained steady though firms' capital intensity has risen gradually.
Table 6.1.5: Comparison of employment and labour intensity in the four zones Item Masan Kaohsiung Shenzhen Lat Krabang
(1) 21,049 22,508 211,753 27,990 (2) 36,411(1987) 52,209(1973) 211,753 27,990 (3) 301 256 142 364 (4) 0.11 0.13 0.36 0.13
(1)Present number of employment (by 1990); (2)The peak level of employment; (3)The average number of employees per firm; (4) Number of employees/$US1,000 capital.
Source: Calculated from ASM, 1990; EDEPZ, 1987; MSR, 1990; SNES, 1989; and ASLK, 1991. -
270 The situation of employment in the four zones is compared in Table 6.1.5. At present, Shenzhen Zone has the largest manufacturing employment; second is Lat Krabang Zone;
Kaohsiung Zone and Masan Zone are third and fourth. However, as for the average number of employees per firm, Shenzhen has the least. Lat Krabang is the top. Masan and Kaohsiung are third and fourth. Comparing Figure 5.4.7 (the value of capital per firm in the four zones), the size of firms in Lat Krabang
Zone is relatively larger. Second and third are the firms in
Masan Zone and Kaohsiung Zone. The size of firms in Shenzhen
Zone is the least. As for labour intensity, the firms in
Shenzhen Zone have the highest level. Kaohsiung and Lat
Krabang have the similar level. Labour intensity is the least in Masan Zone. The comparison of production capital in the four zones indicates that Korea's zone has relatively advanced manufacturing structure, the zones in Taiwan and Thailand are the middle, and China's zone has relative lower manufacturing level.
The trend of employment in the past is different in the four zones (see Figure 6.1.2, 4, 6 and Table 6.1.5). As mature zones, Masan and Kaohsiung, have operated about two decades.
In Masan Zone, the number of employees reached a peak after 17 years. The situation in Kaohsiung Zone is different. In 1973, after 7 years of operation, employment peaked, and after that, the number declined. The main reason is that two other new zones were set up in Taiwan with similar capacity to Kaohsiung
Zone. Therefore, part of the employment was shifted there. By
271 examining the situation of employment in all three zones in
Taiwan as a whole, we can see that Taiwan's zones were in a similar situation to Korea's Masan Zone. Actually, total employment in three Taiwan's zones reached a peak in 1987 (see
Figure 6.1.4), after about two decades since the first zone set up in Taiwan. In both Korea's and Taiwan's zones, employment appears to be saturated after about two decades operation, which is an important factor in the life-cycle of
EPZ which I will analyse in Chapter 8. As relatively new zones, Shenzhen and Lat Krabang, are in the take-off stage, so employment keeps increasing at present.
6.1.2 Gender, age group, recruitment and mobility of labour
(1) Gender
In Masan Zone, as mentioned before, the present ratio of male to female employment is 29:71. However, the structure of male and female employment has changed in the past (Table 6.1.6).
Table 6.1.6: Employment by gender in Masan Zone since 1971 Year Male % Female %
1971-1975 17.9 82.1 1976-1980 24.4 75.6 1981-1985 22.1 77.9 1986 22.5 77.5 1987 23.0 77.0 1988 24.5 75.5 1989 28.1 71.9 1990 29.1 70.9 Average: 24.0 76.0
Source: MTIK, 1989 and ASM, 1990.
272 In the past two decades, females have comprised about 76% of the total labour force in Masan Zone. Most males participate management and technicians jobs. Females are mainly ordinary workers on production lines (ASM, 1990).
Recently, the proportion of males has increased from 22% in the early 1980s to over 29% in 1990.
In Kaohsiung Zone, the ratio of male and female employment is similar to Masan Zone. Table 6.1.7 shows the average ratio of males to females is 22:78 since 1967. However, the structure between male and female employment also changed in the past. During the first five years (1967-71), females made up 81.6% of employment. But at end of the 1980s, female employees declined to 74%, a similar situation to Masan Zone.
Table 6.1.7: Employment by gender in Kaohsiung Zone since 1967 Year Male % Female %
1967-1971 18.4 81.6 1972-1976 21.5 78.5 1977-1981 20.6 79.4 1982-1986 21.6 78.4 1987-1990 26.0 74.0 Average: 21.6 78.4
Source: EDEPZ, 1987 and ASM, 1990.
In Shenzhen Zone and Lat Krabang Zone, the ratio of males to females in industry is similar to the situation in the other zones. The ratio is 20:80 in Shenzhen Zone (SNSR, 1988) and 30:70 in Lat Krabang Zone (ASLK, 1991).
273 Employment by gender (see Table 6.1.8) is quite similar in all four zones. Female employees are the main labour force in the zones with 70% to 80% of total employment. The percentage of female employees is largest in Shenzhen Zone with 80% of total (industry) employment. So that EPZs have a common sense that the majority of employees are female and the characteristics of female labour forces also influence other employment sectors and social progress.
Table 6.1.8: Comparison employment by gender in the four zones Name of zone Male % Female %
Masan 29.1 70.9 Kaohsiung 26.0 74.0 Shenzhen 20.0 80.0 Lat Krabang 30.0 70.0 Source: ASM, 1990; ASK, 1990; SNSR, 1988 and ASLK, 1991.
(2) Age group
The female character of employment in EPZs is very important in determining the age group of labour.
Traditionally, Korean women would be housewives and no longer work after marriage. Most employers believed that married women would not work well since they would look after their families while working in the factory. Therefore, most female workers are under marriage age. In Masan Zone, the average age of workers is about 22 years (ASM, 1990). Women in
Korea normally have 8 years working period. However, in recent years, the situation has changed. Since the union set up in
274 the zone in 1986 (see the details in 6.3), it helped to negotiate with employers an agreement to guarantee that married women could work without discrimination. Therefore,
10% of married women came back to work in Masan Zone (ASM,
1990). It is a sort of social reform in Korea.
Table 6.1.9: Labour age in Kaohsiung Zone since 1967
Year Average age 1967-1971 19 1972-1976 21 1977-1981 23 1982-1986 25 1987-1990 27 Source: Calculated from EDEPZ, 1987 and ASM, 1990.
Although the percentage of participating female labour in
Kaohsiung Zone is similar to Masan Zone, the age group is quite different because women's working period in Taiwan is longer than in Korea. Table 6.1.9 demonstrates that the average age group in Kaohsiung Zone has increased two years every five-year period since 1967. Before 1971, most of the firms in the zone preferred to employ female labour under 24 years old. Therefore, the female workers who were between 25 and 39 years old only took 9% (3,048) of total female labour.
Others were mainly under 24 years old (EPZC, 1980A). Following economic development and social progress in Taiwan, educational opportunities for women increased, so many young female workers left industrial production for study (EPZC,
1980A). Hence, the manufacturing which mainly employed young female labour was facing the problem of lack of workers, and
275 it was forced to change the employment conditions without age limit (EPZC, 1980A). By 1979, the number of female workers between 25 and 39 years old was 12,198, three times that in
1971; they comprised 37% of total female employment. Among them, the main group was housewives who worked at factories as well as looking after their families (EPZC, 1980A).
Table 6.1.10: Employment by age group in Shenzhen Zone in 1989
Age group Percent %
15 - 19 45.5 20 - 24 32.4 25 - 29 8.8 30 - 34 7.9 35 - 39 2.7 40 - 44 2.0 45 - 49 0.7 Source: Shenzhen Economic and Social Survey, 1990.
In Shenzhen Zone, most industrial employees are young females who are under 25 years old. Table 6.1.10 demonstrates the proportion of employment by age group based on the government's survey in 1990. These who are under 25 years old comprise about 78% of total employees (SESS, 1990). Following the zone's development, the age of employees who entered the zone to work has become younger. Comparing the age of new employees between 1989 and 1988, the percentages of the age groups between 16-19, 20-24 and 25-29 were 21.6%, 31% and
16.4% respectively in 1989. However, the percentages of the same age groups were 5.4%, 18.7% and 13.9% respectively in
1988 (SESS, 1990). Hence, the situation is absolutely different from the situation in Kaohsiung Zone where workers became older following the development of zone. So that the
276 age group may have different trend of changes in different zones, it is not universal that the average age becomes older following the maturity of zone.
In Lat Krabang Zone, the situation of ages group is also similar to the other three zones. Young female employees are the majority of the labour force in the zone. At present, the average age is about 22 years old (ASLK, 1991). So the age of workers in Lat Krabang Zone is relatively young.
Table 6.1.11: The average age of employees in the four zones
Name of zone Average age
Masan 22 Kaohsiung 27 Shenzhen 27 Lat Krabang 22
Source: ASM, 1990; MSR, 1990; SESS, 1990 and ASLK, 1991.
Comparing the average age of employees in the four zones
(see Table 6.1.11), the employees in Masan Zone and Lat
Krabang Zone are relatively younger than in Kaohsiung Zone and
Shenzhen Zone. In Korea, as I mentioned before, the working age of women is mainly between 18 and 25 years old. Married women mainly stay at home as housewives. Although the situation has changed recently, the married women who come back to work in the zone only replace 10% of the married women who have left jobs. However, the working age of women in China and Taiwan is much longer. Most married women still have full time jobs. The interesting thing is that both China and Taiwan have the same cultural tradition, quite similar to Korea.
However, following social progress and women's liberation
277 movement, the participation of women in the society of both
China and Taiwan has improved a lot. Lat Krabang Zone is relatively new and actually started to develop only since
1987, so most employees are relatively young.
(3) The recruitment and mobility of labour
One important aim of establishing EPZs is to create working opportunities in the local area of EPZs. The recruitment of labour reflects the EPZs' impact on this issue. In addition, each zone has its own form of labour mobility. Here, labour turnover is calculated based on the number of employees who leave a firm in a year as a percentage of total employment.
In Masan Zone, labour is recruited mainly by advertising by individual firms. Masan Zone is located in Masan City,
Kyongnam Province. In the 1970s, labour mainly came from graduated middle school students in its own province: 80% workers came from countryside families (ASM, 1990). Following the development of both Masan Zone and the Korean national economy, the labour sources expanded to several provinces in the whole southern part of South Korea in the early 1980s, and most of them (about 80%) were graduated high school students from urban areas. One important reason is, after over a decade economic development, most country towns became formal cities, and large spaces of land became industrial estates in Korea.
Since 1980, it has been difficult to divide the urban areas ■ from the countryside in Korea. At the end of the 1980s, the
278 demand for labour in Masan Zone had decreased, and the supply of labour in Masan and Changwon areas can satisfy the demand for labour in Masan Zone. The manufacturing structure changed, which led the demand for labour to decline (see Figure 6.1.2 &
Table 6.1.1). Each year, the rate of female labour turnover is
50% in Masan Zone. Some find another job in other locations, some go to marry (ASM, 1990). The average rate of labour turnover (adding males) is about 30% of total employment (ASM,
1990).
In Kaohsiung Zone, the recruitment of labour can be arranged by the administration employment service centre or advertising by individual firm. The main sources are Kaohsiung
City and several counties around Kaohsiung city (EPZC, 1980B).
The statistics of 1968 shows that 58% of labour came from
Kaohsiung, Tainan and Taichung City; and 42% came from several counties (countryside) (EPZC, 1968). Following economic development in Taiwan, the urban area expanded to other counties around Kaohsiung City. Therefore, at present, labour in Kaohsiung Zone mainly comes from urban areas (about 80%)
(ASK, 1990). On the other hand, Kaohsiung Zone made an important contribution to working opportunities in the local area. In 1976, the employment in Kaohsiung Zone was 30% of total manufacturing employment in Kaohsiung City and other counties around Kaohsiung City. Female labour in Kaohsiung
Zone comprised 20% of total female employment and 65% of total manufacturing female employment in this area (EPZC, 1980A).
279 Table 6.1.12 demonstrates the rate of labour turnover in
Kaohsiung Zone since 1982. The highest turnover rate is 5.41% in 1989. However, employment in Kaohsiung Zone is more stable than in Masan Zone.
Table 6.1.12: Labour turnover in Kaohsiung Zone since 1982
Year Labour turnover 1982 4.38 1983 3.54 1984 4.67 1985 4.14 1986 3.90 1987 4.80 1988 5.28 1989 5.41
Source: MSR, 12/1989.
In Shenzhen Zone, there are three types of workers: permanent workers, contract workers and temporary workers. The permanent workers have a fixed job in a company or unit through their whole working life. The contract workers have a contract between the company or unit and workers themselves.
This type of employment is also quite steady. Temporary workers1 are hired by factories or companies temporarily according to the need of their production. There are also contracts between companies and temporary workers, but this kind of contract is different from the contracts issued
1. Temporary workers are mainly two kinds of people. One is in the joint-ventures between Shenzhen's companies and domestic firms. Some skilled workers come from domestic firms to Shenzhen Zone to direct production. They are temporary workers in Shenzhen but permanent workers in domestic firms. After two or three years working in Shenzhen, they will go back to their domestic firms. Another is temporary workers recruited from countryside. Their employment is dependent on the need of production in that firm. 280 between companies and contract workers. Hence, the last one is not as secure as the others. Both permanent workers and contract workers also have other benefits which the temporary workers have not, such as annual paid leave, permanent Special
Zone's residence and retirement pension. According to government survey, 82.8% of permanent workers are working in construction business. Commercial service businesses share the largest percent of contract workers with 22.7%. Temporary workers comprise the largest group of employees in industry with 51.7% (SESS, 1990).
Labour recruitment in Shenzhen Zone is by several methods.
For local capital firms (including state-owned firms, collective ownership firms or joint-ventures between them), the Shenzhen Municipal Labour Bureau approves a certain quota of permanent workers, temporary workers and contract workers for individual firms according to their production. These firms can recruit labour from the local areas or whole nation based on their need and the quota. The local government will assist in transferring the employees' residence registration.
Wholly foreign-owned firms, Chinese-foreign joint ventures and contractual joint-ventures should recruit Chinese employees on a contract basis; the contracts between the enterprises and the employees are subject to inspection by the Shenzhen
Municipal Labour Bureau. They may recruit workers on their own or they may entrust the Municipal Labour Service Company with recruitment. Enterprises are entitled to solve their needs for ■ technical persons through public recruiting, selective
281 transfer and enrolling college graduates from the all over the country (SEL, 1985).
Due to rapid industrial development in Shenzhen Zone, the demand for labour has increased greatly, especially since 1983
(see Figure 6.1.6, employment increased by an average of over
20,000 each year since 1983), but the local labour supply can not meet the large demand. Therefore, most workers are recruited from all over the country. By 1990, over 62% of industrial workers came from other provinces (outside
Guangdong Province) in China. Among industrial employees,
35.5% come from urban areas (with urban resident registration) and 64.5% from the countryside (SESS, 1990).
The number of hires is far larger than the quits. Quits comprise about 3.5% of total employment per year (calculated from SNSR, 1988 & SSEZY, 1987; based on the data of contract
workers).
In Lat Krabang Zone, 30% of employees have been recruited from local rural areas and 70% from urban areas (mainly from
Bangkok Metropolitan Area). At present, the situation of turn
over on employment is mainly employing labour and very few
quit (about 2% of total employment) (ASLK, 1991).
The common aspects of labour mobility in the four zones are
listed in Table 6.1.13. The labour force mainly came from
rural areas in Masan Zone in the early period. However, urban
282
Table 6.1.13: Labour sources and turnover in the four zones (%) Source of labour Name of zone Urban areas Rural areas Labour turnover Masan 20.0 80.0 (1972) 30.0 80.0 20.0 (1990) Kaohsiung 58.0 42.0 (1968) 5.4 80.0 20.0 (1990) Shenzhen 35.5 64.5 (1989) 3.5 Lat Krabang 70.0 30.0 (1990) 2.0
Source: ASM, 1990; ASK, 1990; MSR, 1989; SESS, 1990 and ASLK, 1991.
areas provided the majority of workers in Kaohsiung Zone in
the early time. At present, most of the labour force comes
from urban areas in both zones. So this fact indicates that
urban areas have expanded following national economic
development; EPZs absorbed a certain part of the labour force
from rural areas in history and they promoted
industrialisation in local areas. In Shenzhen Zone, the labour
force mainly depends on recruitment from rural areas in
Guangdong Province and other inland provinces in China. Since
Lat Krabang Zone is located in Bangkok area, the labour force
is mainly supplied by the local area. Hence, labour from the
urban areas comprises the majority of employees in Lat Krabang
Zone. So whatever the mature zones and the relatively new
zones, they all contribute to create working opportunities in
local areas. In the early years, a mass of agricultural labour
left the land accompanying the development of
industrialisation in these countries and EPZs absorbed a
certain part of them. Following the economic development in
these countries, the expanded urban areas became the major
labour force source. Masan Zone has the highest labour
283 turnover with 30%. Kaohsiung Zone has more stable employment with 5.4% of labour turnover in 1990. Shenzhen Zone and Lat
Krabang Zone have relatively lower rate with 3.5% and 2% respectively. Apart from Masan Zone with a relatively higher labour turnover, the others' labour turnover are all under
10%. That is because there is a gap on the cultural tradition and the attitude of society toward women's employment between
Korea and other three countries. Married women are easily leaving the job and work at home as housewives in Korea.
6.1.3 The educational level and training of labour
Through the establishment of EPZs, host countries want to improve labours' manufacturing skill and acquire advanced technology. Two important keys are linked to this issue. One is the basic educational level of employees in the EPZ, which reflects the qualification of employees in these zones.
Another is the skill level of employees through training programs.
In Masan Zone, graduated middle school students comprised over 80% of total employment in the 1970s (ASM, 1990). After
1980, the ratio of graduated middle school students has decreased. Meanwhile, the ratio of graduated high school students has increased. By 1990, graduated high school students comprised over 95% of total employment (ASM, 1990).
The rest mainly have advanced vocational college or university degrees.
284 On the other hand, anyone who enters Masan Zone to work has to get three months training. Skilled workers get training in foreign countries (in Japan mostly) (ASM, 1990). By now almost
800 staff have received overseas training; nearly 400 of them are still working in Masan Zone (ASM, 1990).
In Kaohsiung Zone in 1968, 57% of employees had only elementary school education and 42% had middle school diplomas. Only 0.6% of employees had college or university degrees (EPZC, 1968). Since "Nine Years Free Education System" was introduced in Taiwan in the 1970s, the situation started to change. In recent years, 52% of employees have high school diplomas or higher level. Table 6.1.14 lists the average educational level of employees in Kaohsiung Zone in 1968 and
1990. The employees' educational level has risen a lot.
Table 6.1.14: The average educational level in Kaohsiung Zone in 1968 and 1990 (%) Item 1968 1990 Elementary School 57.0 14.54 Middle School 42.0 33.18 0.4 41.81 High School College & university 0.6 10.47
Source: EPZC, 1968 and MSR, 1990.
When Kaohsiung Zone was set up, a training program was set up too and encouraged by the administration. There are several types of training. One is cooperative training programs
between school or college and the zone's enterprises. Schools or colleges arrange general education and firms provide special technology training. Most students are under formal
285 study or part time work and part time study. After graduation, they can become formal employees in the firms (EPZC, 1980B).
Second is training on the job. Every worker who works in the zone should get job training for a certain time (normally three months, determined by individual firms) in order to familiarise them with production procedures. Third is overseas training. In Kaohsiung Zone, there are 1484 persons who - received overseas training between 1968 and 1986 (EDEPZ,
1987). After overseas training, they would be special technicians and skilled workers in the firms.
In Shenzhen Zone, the educational level is different between different types of workers. Table 6.1.15 demonstrates that permanent and contract workers have a higher educational level. Therefore, they have better welfare and more secure jobs than others. The temporary female workers have the lowest educational level. Most of them come from the countryside where they have not completed education and people leave school earlier to work.
Table 6.1.15: The educational level in Shenzhen Zone in 1989
Type of worker (1) (2) (3) (4)
Permanent and contract workers 30.4% 36.4% 9.9% 23.3% Temporary workers 40.5% 44.5% 15.0% Temporary female workers 84.6% 13.5% 1.9%
Average level 51.8% 31.5% 8.9% 7.8%
(1) Middle school or under middle school level; (2) High school or technical school; (3) Technical secondary school; (4) College -and university level or higher degree.
Source: Shenzhen Economic & Social Survey, 1990.
286 The training program in Shenzhen Zone includes two main types: Adult education and training on the job. Adult education is divided into two parts: secondary technical education (two years) and advanced education (similar to college level, three years). Adult education used to focus on general cultural eduction which is provided to workers who have no degree. Employees spend their spare time taking the course. Since 1984, adult education started to change its emphasis from general cultural education to vocational and technical training. At present, there are over 80 institutions which provide adult education in Shenzhen Zone (SESS, 1990).
As for training on the job, individual firms provide a training program for new workers in order to make employees familiar with the procedures of production and give them a certain skill which is necessary for production. The average training time is about three months, one month for education in class, two months for production practice on the job (Tang,
1987).
There are some problems with adult education in practice.
Since people are searching for education, adult education institutes have sprung up like mushrooms. Hence, problems appear, such as unnecessary repetition, unreasonably high cost, low qualified teaching level. In addition, the ratio between advanced adult education and secondary technical education is unbalanced; the former teaches as many as 9 times the number of students as the latter (SESS, 1990).
Furthermore, although the emphasis of adult education has
287 changed from general cultural education to vocational and technical training, it is still divorced from the demand of production because there is no training network between enterprises and adult education institutes (SESS, 1990).
Therefore, it is hard to say that adult education improves the employees' skill and technology level. As for training on the job, it is a very simple training arrangement. Most employees can only operate one part of production.
The educational level of employees in Lat Krabang Zone is listed in Table 6.1.16. The majority of employees graduate from middle school, high school and some special vocational schools which account 80% of total employees.
Table 6.1.16: The average educational level of employees in Lat Krabang Zone in 1990
Item Percent
Elementary school 14.0 Middle school 30.0 High school & middle vocational school 30.0 Advanced vocational school 20.0 College or university 6.0
Source: The Industrial Estate Authority of Thailand, 1991.
The training program in Lat Krabang Zone mainly includes domestic training and overseas training through "on the job training", "off-job training" and formal training. "On the job training" takes place at the work place, preceded by a brief instruction, while "off-job training" consists of study and experiment in the classroom and laboratory. As for domestic training, most employees have from less than one week to more
288 than 6 months training, but 1-3 months are the majority (ASLK,
1991). The content of training programs varies from general knowledge of the company to specialised techniques, and most employees are given on the job training after entering the company. As for overseas training, foreign-owned firms or foreign-local joint-ventures send some of their core employees to train at their mother companies or related companies in overseas countries for a period (average 1-6 months), when they start to work in the firm, to introduce new production techniques, or to improve their employees' technological knowledge and skills.
Table 6.1.17: Comparison of educational level in the four zones Name of zone (1) (2) (3)
Masan 95% 5% Kaohsiung 48% 42% 10% Shenzhen 52% 40% 8% Lat Krabang 34% 50% 6%
(1) Middle school or under middle school level; (2) High school or vocational school at similar level with high school; (3) College, university degree or higher level.
Source: ASM, 1990; MSR, 1990; SESS, 1990 and ASLK, 1991.
The educational level of employees in the four zones is compared in Table 6.1.17. The general educational level is most advanced in Masan Zone where most employees have high school diplomas. However, in Kaohsiung Zone and Shenzhen Zone, the two poles [(1) & (3)j are relatively more important than the middle one. In Lat Krabang Zone, employees with high school or vocational school diplomas are the majority. The
289 educational structure in Lat Krabang Zone is quite reasonable for the demands of manufacturing because many employees graduate from special vocational schools (see Table 6.1.16) which provide basic knowledge and training about manufacturing before the students enter the labour market.
The four zones practise similar training programs. Every worker who enters the zone is trained on the job (normally three months) in order to satisfy the demands of production.
Overseas training is only provided to core employees who are the key members of management and production.
6.1.4 Employment by industry sectors
In most EPZs, employment by industry sectors has also changed following the development of EPZs. Through comparing employment by industry sectors between early and recent years, the impact of industrial restructuring on employment in EPZs can be clarified.
Figure 6.1.8 shows the percentage of employment by industry sectors in Masan Zone in 1973 and 1985. Apart from electronics
(including electric) and footwear production, the most significant increase is precision production, from zero to
13.7% of total employment (CHOE, 1975 & HEALEY, 1989).
290 Figure 6.1.8: Employment by industry sectors in Masan Zone,
1973 and 1985
OTHERS
NON-METAL
MACHINERY 6=3
TEXTILES I
METAL
FOOTWEAR rom
PRECISION - ELECTRONIC S1 1 0 1973 I • 1985
0 10 20 30 40 50 60 70 PERCENT
1. It includes electrical production.
Source: CHOE, 1975 and HEALEY, 1989.
In addition, by comparing employment and investment in different manufacturing sectors, Table 6.1.18 reveals the level of labour intensity in different sectors in Masan Zone in 1973 and 1988. Apart from precision which did not exist in
1973, the labour intensity of footwear increased largely between 1973 and 1988. Machinery and non-metal production also increased slightly. In contrast, the level in electronics and electrical, metals and textiles production decreased, especially electronics and electrical production which share over half investment and total output of total manufacturing
291 in Masan Zone. Therefore, the weighted average rate decreased from 0.26 in 1973 to 0.18 in 1988. The main trend is a transfer from more labour intensive production in the beginning to more capital intensive in recent years.
Table 6.1.18: Labour intensity by industry sector in Masan Zone in 1973 and 1988 Number of employees/$US1,000 capital Item 1973 1988
Electronics & electrical 0.27 0.17 Precision 0.20 Footwear 0.36 0.72 Metals 0.11 0.05 Textiles 0.39 0.18 Machinery 0.11 0.17 Non-metals 0.26 0.31
Weighted average: 0.26 0.18
Source: Calculated from CHOE, 1975; VAN, 1983; HEALEY, 1989 AND MTIK, 1989.
In Kaohsiung Zone, employment by industry sectors also changed since the beginning. Figure 6.1.9 shows the percentage of employment by industry sectors in 1969 and 1990.
Electronics increased the largest proportion among total manufacturing from 20.8% in 1969 to 55.4% in 1990. Machinery and garments also increased. In contrast, non-metal, textiles, chemical and plastics decreased from 19%, 13% and 15% in 1969 to 8%, 0.9% and 3.3% in 1990 respectively. Precision decreased a little and metal kept nearly same level between 1969 and
1990 (EPZC, 1969; EDEPZ, 1987 & MSR, 1990).
292 Figure 6.1.9:, Employment by industry sectors in Kaohsiung Zone in 1969 and 1990
OTHERS F PRECISION P
TEXTILES
MACHINERY L~ CHEMICAL 1
NON-METAL
METAL ~~~
GARMENTS
ELECTRONICS p 1969 ■ 1990 0 10 20 30 40 50 60
PERCENT
1. The item includes chemical and plastic production.
Source: EDEPZ, 1987; EPZC, 1969 and MSR, 1990.
The different levels of labour intensity by industry sectors (number of employees created by $US1,000 investment)
between 1969 and 1990 are compared in Table 6.1.19.
Electronics increased greatly in terms of employment;
meanwhile, the level of labour intensity decreased over 10
times. In addition, the level of labour intensity of other
manufacturing also declined. That reflects the fact that
manufacturing in Kaohsiung Zone has become more capital
intensive and less labour intensive.
293 Table 6.1.19: Labour intensity by industry sector in Kaohsiung Zone in 1969 and 1990 Number of employees/$US1,000 capital Item 1969 1990 Electronics 1.38 0.13 Garments 1.49 0.26 Non-metals 1.44 0.23 Metals 0.88 0.11 Chemical & plastics 1.94 0.12 Machinery 1.25 0.02 Textiles 2.06 0.13 Precision 0.59 0.01 Weighted average: 0.64 0.13 Source: Calculated from EDEPZ, 1987; EPZC, 1969 and MSR, 1990.
Figure 6.1.10: Employment by industry sectors in Shenzhen Zone in 1984 and 1989
OTHERS
PRECISION i
NON-METAL W
GARMENTS
METAL 661
TEXTILES
FOOD 673
MACHINERY ~~~ CHEMICAL r
ELECTRONICS p 1984 I , , i , , i 111 1989 0 10 20 30 40 50 60 PERCENT
Source: SSEZY, 1985 and SNES, 1989.
294 In Shenzhen Zone, employment by industry sector has changed since the early 1980s. Figure 6.1.10 shows the percentage of employment by industry sectors in 1984 and 1989. The industrial scope became wider following the zone's development, from being concentrated on a few specific industries to dispersing over different sectors. For instance, electronics and electrical production shared about 57% of total industrial employment in 1984 (SSEZY, 1985). However, it had declined to 31% in 1989 (SNES, 1989). Meanwhile, while non-metal, textiles, food and machinery had declined or had not changed much, the employment in other manufacturing had increased during the same period, especially precision production which did not exist in 1984 (SNES, 1989).
Table 6.1.20: Labour intensity by main industry sector in Shenzhen Zone in 1989
Item Number of employees/$US1,000 capital
Electronics & electrical 0.24 Chemical, oil and plastics 0.22 Machinery 0.29 Food 0.18 Textiles 0.44 Metals 0.37 Garments 0.84 Non-metals 0.25
Weighted average: 0.36
Source: Calculated from SNES, 1989.
Since Shenzhen Zone is relatively new, I only list the labour intensity level by main industry sector in 1989 in
Table 6.1.20 in order to compare with other zones. From Table
6.1.3, we have already seen that labour intensity of all
295 industry sectors became steady since 1988. Here, Table 6.1.20 shows the most labour intensive industry sectors are garments and textiles with rates of 0.84 and 0.44 respectively.
Because Lat Krabang Zone is relatively new and data is only available since 1987, we can only see the present employment by industry sectors. Figure 6.1.7 already showed the employment by industry sector in 1990. Here, Table 6.1.21 lists the level of labour intensity by industry sectors.
Textiles production has the highest labour intensity with
0.26; in contrast, chemicals have the lowest level with 0.04.
The weighted average level is about 0.13.
Table 6.1.21: Labour intensity by industry sector in Lat Krabang Zone in 1990
Item Number of employees/$US1,000 capital
Electronics & electrical 0.22 Textiles 0.26 Handbag 0.10 Jewellery 0.10 Chemical 0.04 Food 0.06
Weighted average: 0.13
Source: Calculated from ASLK, 1991.
Table 6.1.22 compares employment by industry sectors in the four zones. Such industries as electronics, precision and footwear in Masan Zone became more important than others such as metal, textiles, machinery and non-metal between the early stage and later. In Kaohsiung Zone, a similar situation also appeared. Electronics, garments and metals became more important than others such as precision, textiles, chemical
296 and plastic production. In contrast, employment in Shenzhen
Zone is different. In the past decade, the structure of employment by industry sectors became more decentralised.
Electronics (including electrical), textiles and non-metals, which used to share a large percentage of employment, gradually declined and were replaced by others such as metal, chemical (including plastics), garments and precision.
Meanwhile, the scope of manufacturing became wider than before. Since Lat Krabang Zone started to develop in recent years, the employment by industry sectors only focused on several items and there has not been any indication of adjustment yet. Hence, the cases shows that different type of zones have different trend of manufacturing development. In most small or middle size zones, the manufacturing sectors become more centralised with several main items like in Masan,
Kaohsiung and Lat Krabang. But in relatively large zone like
Shenzhen, the manufacturing sectors becomes more comprehensive than before. That also proves that there is no universal trend of manufacturing development in different zones.
Table 6.1.22: Employment by industry sector in the zones (%) Masan Kaohsiung Shenzhen I.at Krabang Item 1973 1985 1969 1990 1984 1989 1990 Electronics & electric 59.1 61.9 20.8 55.4 57.1 31.0 30.0 Precision 0.0 13.7 0.9 0.2 0.0 1.2 ---- Footwear 9.7 12.4 ------Metals 4.0 3.3 7.9 8.0 1.9 4.3 ---- Textiles 10.6 2.7 13.1 0.9 8.7 6.1 35.0 Machinery 4.0 1.6 0.5 1.4 6.2 6.1 ---- Non-metals 9.0 0.7 19.0 7.4 3.9 2.0 Garments ------20.6 22.8 1.2 9.5 ---- Chemical & plastics 15.0 3.3 3.3 6.9 3.0 Food & drink ------4.9 2.6 3.0 Handbag ------10.0 Jewellery ------10.0 Others 3.7 3.7 2.2 0.6 15.8 30.3 9.0 Source: CHOE, 1975; HEALEY, 1989; EDEPZ, 1987; REPZ, 1969; MSR, 1990; SSEZY, 1985; SNES, 1989 and ASLK, 1991.
297 By comparing labour intensity by industry sectors in the four zones (see Table 6.1.23), the labour intensity level of different manufacturing between the four zones can be clarified.
Table 6.1.23: Comparison of labour intensity by industry sectors in the four zones Number of employees/$ÚS1,000 capital Masan Kaohsiung Shenzhen Lat Krabang Item 1973 1988 1969 1990 1989 1990 Electronics & electric 0.27 0.17 1.38 0.13 0.24 0.22 Precision 0.00 0.20 0.59 0.01 ------Footwear 0.36 0.72 ------Metals 0.11 0.05 0.88 0.11 0.37 ---- Textiles 0.39 0.18 2.06 0.13 0.44 0.26 Machinery 0.11 0.17 1.25 0.02 0.29 ---- Non-metals 0.26 0.31 1.44 0.23 0.25 Garments ------1.49 0.26 0.84 ---- Chemical & plastics 1.94 0.12 0.22 0.04 Food ------0.18 0.06 Handbag ---- 0.10 Jewellery ------0.10 Weighted average 0.26 0.18 0.64 0.13 0.36 0.13 Source: Calculated from VAN, 1983; CHOE, 1975; HEALEY, 1989; MTIK, 1989; EDEPZ, 1987; EPZC, 1969; MSR, 1990; SNES, 1989 and ASLK, 1991.
In electronics, labour intensity in Kaohsiung Zone was higher than in Masan Zone in the early years. However, the labour intensity in Kaohsiung Zone declined from the level of
1.38 in 1969 to 0.13 in 1990, a 91% decrease. Although the level of labour intensity was not high in Masan Zone in 1973, the rate of decrease was only 37% from 1973 to 1988, so the present level of labour intensity of electronics in Masan Zone is sightly higher than in Kaohsiung Zone. Comparing the four zones on labour intensity of electronics, the difference between them are not large, which indicates that the manufacturing level of electronics in the four zones is quite close to each other.
298 The traditional labour intensive manufacturing sectors in these zones are footwear, garments, textiles, handbags and jewellery. The average level of labour intensity was about
0.38 and 1.78 in Masan Zone and Kaohsiung Zone in the early stage respectively. At present, the level is 0.45 and 0.20 in the two zones, which reflects the fact that the traditional labour intensive manufacturing in Kaohsiung Zone has been adjusted quicker than in Masan Zone. On the other hand, the present average level of labour intensity in these traditional labour intensive industries in Shenzhen Zone and Lat Krabang
Zone is 0.64 and 0.15 respectively, which proves again that the manufacturing level of Shenzhen is generally the most backward.
Other manufacturing includes precision, metal, machinery, non-metal, chemical and plastic. The average level of labour intensity was about 0.16 and 1.22 in Masan Zone and Kaohsiung
Zone in the early stage respectively. However, since the level in Kaohsiung Zone decreased, the present level in Kaohsiung
Zone is about 0.07. The level in Masan Zone has not changed a lot, at present 0.17. Meanwhile, the average level in Shenzhen
Zone and Lat Krabang Zone is about 0.28 and 0.04 respectively.
Finally, the weighted average level of labour intensity in the four zones can be compared. Kaohsiung Zone and Lat Krabang
Zone have the same level, 0.13, but Kaohsiung Zone has a wider manufacturing scope and a large decrease in labour intensity in the past. Masan Zone is in the middle. The most backward
299 situation, with the highest labour intensity is in Shenzhen
Zone. To compare labour intensity with capital intensity which
I listed before, we can summarise that the manufacturing level in the four zones: Masan and Kaohsiung have relatively higher capital intensive level and lower labour intensive level.
While Lat Krabang is in the middle and Shenzhen is the least with highest labour intensive level and lowest capital intensive level. These indications also reflect the determination and influence of investment sources. As for
Masan and Kaohsiung, most investment comes from foreign capital, especially from developed countries like Japan and the United States. In contrast, foreign investment in Lat
Krabang and Shenzhen is mainly from other newly industrialising countries, especially Shenzhen's majority investment comes from the domestic economy. These can be revealed as the developed capitals transfer the manufacturing with relatively higher capital intensity and lower labour intensity comparing with other developing countries' direct foreign investment and local capital.
So the employment by industry sectors in the four zones, the mature zones have a similar situation, where employees mainly work in several sectors, such as electronics and electric, footwear, textiles and garments, As for the new zones, Shenzhen Zone has more decentralised industry structure. In addition, following the development of production in the zones, especially since the capital
300 adjustment in the mid-1980s in the mature zones, labour intensity has decreased greatly.
6.2 The working condition
Working conditions include not only wage levels, but also welfare systems and facilities concerned with working class living standards and social progress. In addition, labour cost is an important factor for investors to consider about production cost and investment location. In order to clarify these issues, several items will be examined in this part: wage level in the four zones, their nations and developed countries; working hours and shifts; other welfare such as service facilities, benefits on dismissal and retirement and other compensation.
6.2.1 Wages
Wages represent the important factor in labour cost for
production and living standards for social welfare. In order
to clarify these issues, first, I examine the wage level
between the four zones and their nations. Wage levels are
different between the zones and their nations because most
firms in the zones are foreign capital firms which mainly
decide on a wage level based on the national wage level and
the "Collective Agreement" with the individual company union,
reflecting the company's financial situation. But the national
wage level is determined by companies based on regulation.
301 Second, I analyse the wage level between different occupations. Third, I compare the manufacturing wage level between the four zones, the United States, Japan and Hong Kong by using money wage, real wage and the relevance of wage to purchasing-power-parities (PPPs).
(1) Wage level in the four zones and their nations
In 1990, the average wage (including basic wage and other bonuses) in Masan Zone was about Won574,000 per month [$ÚS820,
Won700 per $US (IMF, 1990)] (ASM, 1990). Figure 6.2.1 illustrates that the average money wage and real wage, comparing consumer price indexes and the rate of increase of money wage and real wage in Masan Zone since 1971. In the early 1970s, the average wage in Masan Zone was Won14,000 per month [$US37.5, Won373 per $US in 1971 (IMF, 1990)](ASM,1990).
After 1973, the rate of inflation in Korea stayed in double figures till 1982. Although money wages in Masan Zone increased a lot during this period, real wages did not increase a lot. There was even a negative real wage change (-
6.6%) in 1981. Although the inflation rate has declined to single figures since 1982, the money wage did not increase greatly until 1988. During this period, there was a decrease of money wages with -2.2% in 1983. As for the real wage, there were three years of decrease with -5.7%, -0.6% and -0.8% in
1983, 1986 and 1987 respectively. In recent years, both money wage and real wage have increased rapidly: 41% and 34% in
1988, and 36% and 30.4% in 1989 respectively. In 1990, money
302
Figure 6.2.1: The monthly money wages and real wages in Masan Zone
The rate of money wage increase 50
40
30
Money wages in Won 20 600000
10 500000 -
400000 r
-10 300000 - 1970 1975 1980 1985 1990 YEAR 200000 The consumer price indexes in Korea 50 F 100000 40 r 0 1970 1975 1980 1985 1990 30 1- YEAR
20 j-
10 Real wages in Won 100000
0 80000 -10 1970 1975 1980 1985 1990 YEAR 60000
The rate of real wage increase 50 40000
20000
0 1970 1975 1980 1985 1990 YEAR
1970 1975 1980 1985 1990 YEAR
Source: ASM, 1990; IMF, 1990; WARR, 1984; and BIAP, 1982.
303 wages increased 10% and real wages 3.5%. Generally speaking, the rate of average money wage increase was 28% in the 1970s and 18% in the 1980s. Comparing the inflation rate of 15% and
8% in the same periods, the rate of average real wage increase was 12.5% in the 1970s and 10% in the 1980s. The average real wage has increased 14.4% each year since 1985 (ASM, 1990; IMF,
1990; WARR, 1984 and BIAP, 1982).
Masan Zone's wage level is compared with Korea's national manufacturing wage level in Figure 6.2.2. Money wage levels were quite similar before 1976. Since 1977, the gap between them gradually widened, especially when the money wage of
Masan Zone had three years slow down in 1984, 1987 and 1988.
The average money wage in the whole nation was about 14.8% higher than in Masan Zone between 1977 and 1988. But, the situation changed in 1989, when the money wage of Masan Zone was 6.2% higher than the national money wage (ASM, 1990; KSY,
1982; IMF, 1990 & KEPB, 1990). In the early years, apart from
1975, the national real wage level was 11.6% higher than in
Masan Zone on average. Then, the real wage of the nation was higher (about 13.6%) than in Masan Zone between 1977 and 1987 except one year (1985) when they both equalled Won53,000. In recent years, due to the rate of wage increase in Masan Zone
(41% and 36% in 1988 and 1989 respectively), compared to national wage increases of 19.6% and 25%, real wages in Masan
Zone were higher than national wage by 1.5% and 10.8% in these two years (calculated from ASM, 1990, IMF, 1990; KSY, 1982 &
KEPB, 1990).
304 Figure 6.2.2: Money wages and real wages between Masan Zone and Korea since 1971
Money wages in Won 600000
500000
400000
300000
200000
100000
0 1971 1974 1977 1980 1983 1986 1989 YEAR
Real wages in Won 100000
80000
60000 L
40000 r
20000 O Korea - Masan
11971 1974 1977 1980 1983 1986 1989 YEAR
Source: ASM, 1990; IMF, 1990; KSY, 1982; and KEPB, 1990.
305
Figure 6.2.3: The monthly money wages and real wages in Kaohsiung Zone
The rate of money wage increase 60
50 [
3040 ~ ■ Money wages in $NT 20000 —r 20 i-
10 L 15000 - 0 I_
-10 I- 10000 -20 1 1968 1972 1978 1984 1990
YEAR 5000 I- The consumer price indexes in Taiwan 60
50 0 1968 1972 1978 1984 1990 40 YEAR 30 -
20 L Real wages in $NT 5000 10 +-
0 4000 -10
-20 3000 1966 1972 1978 1984 1990 YEAR L The rate of real wage increase 2000 so
50 1- 1000 40 r 0 30 - 1966 1972 1978 1984 1990 YEAR 20 -
10 1' - 0
-10
-20 1 1968 1972 1978 1984 1990 YEAR
Source: ASK, 1990; EDEPZ, 1987; MSR, 1988-90.
306 In Kaohsiung Zone, the average wage (including basic wage and other bonuses) was about $NT 17,596 per month in 1990
($US677, $NT26 per $US in 1990)(ASK, 1990). Figure 6.2.3 reveals that the average money wage and real wage, consumer price indexes and the rate of increase of money wage and real wage in Kaohsiung Zone since 1967. Before 1973, the average money wage and real wage increased steadily and both of them were close to each other. But since the first oil crisis, the national inflation rate increased largely (47% in 1974).
Therefore, the real wage decreased 13% from 1973 to 1974 despite a 34% increase in money wages. The money wage increased six times between 1973 and 1985. However, real wages increased slightly during the same period. Although the second oil crisis caused the national inflation rate to increase in the early 1980s (consumer price index rose 19% and 16% in 1980 and 1981 respectively), the rate of increase of money wages was larger than the inflation rate (the rate of wage increase was 24% and 25% in 1980 and 1981 respectively). Hence, real wages kept increasing. Since 1985, the value of $NT rose (52%
between 1985 and 1990, see Figure 5.4.3), which kept the national inflation rate at a low level. During this period,
both money wages and real wages increased (46% for money wages and 35% for real wages between 1985 and 1990). Generally speaking, the average rate of money wage increase was 15% before 1980 and 13% in the 1980s. Comparing the inflation rate of 8% and 5% in the same periods, the rate of average real
wage increase was 7% before 1980 and 8% in the 1980s. The real
307 wage increased 6.7% each year since 1985 (calculated from ASK,
1990; EDEPZ, 1987; EYRC, 1979-89 and MSR, 1988-90).
Figure 6.2.4: Money wages and real wages between Kaohsiung
Zone and Taiwan since 1967
Money wages in $NT 20000
15000
100001-
5000
0 1967 1970 1973 1976 1979 1982 1985 1988 YEAR Real wages in $NT 5000
4000
3000
2000
1000 O Taiwan • Kaohsiung 0 1967 1970 1973 1976 1979 1982 1985 1988 YEAR
Source: ASK, 1990; EDEPZ, 1987; EYRC, 1979-89 and MSR, 1988- 90.
308 Figure 6.2.4 indicates the difference between money wages and real wages between Taiwan and Kaohsiung Zone. As for money wages, the national manufacturing wage level is about 18% higher than in Kaohsiung Zone. As for the real wage, the former is 14% higher than latter (ASK, 1990; EDEPZ, 1987;
EYRC, 1979-89 and MSR, 1988-90).
In Shenzhen Zone, there are several different wage types.
Generally speaking, a monthly wage comprises three parts: basic wage, duty wage and floating wage. The level of the basic wage is determined by the education and skill level of employees. The duty wage is based on the type of work in production. The floating wage is linked to working achievement
(based on the production plan) and economic benefits (mainly profits) of firms, similar to bonuses in other zones (TANG,
1987).
The average monthly wage level of industrial workers in
Shenzhen Zone was about RMB306 in 1989 [MUS65, RMB4.7 per $US in 1989 (IMF, 1990)](SNES, 1989). Figure 6.2.5 shows the average monthly money wage and real wage, the consumer price indexes and the rate of increase of money wages and real wages in Shenzhen Zone since 1979. Before 1984, both money wages and real wages had increased, the former by 170% and the latter by about 100% between 1979 and 1984. The inflation rate in
Shenzhen Zone was relatively low. However, the situation has changed since 1985. The average inflation rate was 19.78%
309
Figure 6.2.5: The monthly money wages and real wages in Shenzhen Zone
The rate of money wage increase 50
40
30 r ~
20 1_ Money wages in RMB 400 10 - oL 300 L
-10
-20 200 r 1979 1981 1983 1985 1987 1989 YEAR
The consumer price indexes in Shenzhen 50 , r 100
40r ! 0 30 1979 1981 1983 1985 1987 1989 YEAR 20 - Real wages in RMB 10 I- 140 Or 120 t- -10 1 100 /_ -20 1 I 1979 1981 1983 1985 1987 1989 80 L YEAR
The rate of real wage increase 60 ~-/ / 50 40 L 40 {-
20 r 30 .-
0 20 L 1979 1981 1983 1985 1987 1989 YEAR 10 1- O-
-10
-20 1979 1981 1983 1985 1987 1989 YEAR
Source: TANG, 1987; SNES, 1989; SNSR, 1988 and SSEZY, 1985-89.
310 between 1985 and 1989, meanwhile, the average rate of increase of money wages was 10.42%. Therefore, although money wages increased 46% between 1985 and 1989, the real wage decreased
32% from RMB124.3 in 1985 to RMB84.5 in 1989 (calculated from
TANG, 1987; SNES, 1989; SNSR, 1988 & SSEZY, 1985-89).
Figure 6.2.6 compares the manufacturing wage level between
Shenzhen Zone and the whole of China. The average money wage level in Shenzhen Zone is 79% higher than China's wage level.
However, the inflation rate is different between Shenzhen Zone and China. Figure 6.2.6 illustrates that the consumer price indexes in China are about 5% lower than in Shenzhen Zone, especially in recent years. The inflation rate in Shenzhen
Zone was 15.3%, 30.3% and 25.3% in 1987, 1988 and 1989 respectively (SSEZY, 1988 & 1989); meanwhile, the inflation rate in China was 8.8%, 20.7% and 16.3% in the same years
(IMF, 1990). Therefore, although Shenzhen Zone's money wage is higher than in China, the gap in real wages between in
Shenzhen Zone and China gradually closed and crossed in 1989 at RMB84 (calculated from SNES, 1989; CSY, 1988 and IMF,
1990).
In Lat Krabang Zone, the wage level is the same as Bangkok
Metropolitan Area's manufacturing wage. For manufacturing workers, the average monthly wage is about B3,500 in 1990
[$US140, Baht25 per $US in 1990 (IMF, 1990)](ASLK, 1991).
Figure 6.2.7 reveals the average money wages and real wages, and the consumer price indexes since 1984 (TDRIF, 1990 and
311 Figure 6.2.6: The money wages and real wages in Shenzhen Zone and China
The rate of national wage increase 30
20
Money wage in MS 10
-10 1979 1981 1983 1985 1987 1989 YEAR
The consuaer price indexes in China 30
20 r
10 L Real wage in RM/ 140
0 120 ^
-10 1979 1981 1983 1985 1987 1989 100 r YEAR The rate of national real wage increase 80 * 30 , T
80 20
40 I 1979 1981 1983 1985 1987 1989 10 YEAR
o I- O China •Shenzhen
1983 1985 1987 YEAR
Source: SNES, 1989; CSY, 1988 and IMF, 1990.
312 Figure 6.2.7: The monthly money wages and real wages in Lat Krabang Zone
The rate of money wage increase 20
10 Honey wages in Baht
4000
0 3500
-10 3000 1985 1988 1987 1988 1989 1990 YEAR The consumer price indexes in Bangkok area 20 2500
2984 1985 1988 1987 1988 1989 1990 10 YEAR
Real wages in Baht 0
2800
-10 1984 1985 1988 1987 1988 1989 1990 2800 YEAR
The rate of real wage increase 20 2400
10
2000 t I t t 1984 1985 1988 1987 1988 1989 1990 YEAR
-10 1984 1985 1988 1987 1988 1989 1990 YEAR
Source: TDRIF, 1990 and ASLK, 1991.
313 ASLK, 1991). The money wages have kept increasing except for one year's slow down in 1987. Money wages increased 45% during these years, an average annual rate of increase of about 6%.
Meanwhile, the inflation rate was not high during these years, about 3.8%. Therefore, real wages in these years steadily increased, averagely 2.6% annually. The wage level in Bangkok area is about 25% higher than in whole Kingdom (TDRIF, 1990).
The increase of both money wages and real wages in the four zones in the past is shown in Table 6.2.1. Both money wages and real wages in Masan Zone had the largest rate of increase: the rate of average annual money wages increase was over 27% and 18% in the 1970s and 1980s respectively. The rate of real wages also increased over 10% in both the 1970s and 1980s.
Second is Kaohsiung Zone: money wages increased 16.6% and
12.5% annually in the 1970s and 1980s, and real wages increased over 7% annually in the past two decades. Since
Shenzhen Zone and Lat Krabang Zone have relatively short history, the rate of wages is counted in the 1980s. Since the inflation rate in Shenzhen Zone was quite high in the past decade, there was a big gap between the increase of money wages and real wages. But the data on Lat Krabang Zone reflects the fact that money wages and real wages were relatively close in the past several years compared with other zones.
314 Table 6.2.1: Comparison of the rate of wage increase in the four zones (%) Name of zone Money wage increase Real wage increase average annual average annual
Masan 27.8 (1970s) 18.3 (1980s) 12.5 (1970s) 10.1 (1980s) Kaohsiung 16.6 (1970s) 12.5 (1980s) 7.1 (1970s) 7.9 (1980s) Shenzhen 18.5 (1980s) 3.2 (1980s) Lat Krabang 6.4 (1980s) 2.6 (1980s)
Source: Calculated from IMF, 1990; ASM, 1990; KEPB, 1990; KSY, 1982; BIAP, 1982; WARR, 1984; ASK, 1990; EDEPZ, 1987; EYRC, 1979-89; MSR, 1988-90; TANG, 1987; SNES, 1989; SNSR, 1988; SSEZY, 1985-89; ASLK, 1991 & TDRIF, 1990.
We have seen several figures which compare the zones' wage level and their national manufacturing wage level. The situation in the four regions is different. In Korea and
Taiwan, national wage levels are higher than zones' wage levels. Generally speaking, the national money wage is 1.5%
and 3.8% higher than the zones' level in Korea and Taiwan
respectively. In terms of real wage, the national level is
6.4% higher than the zone's level in Taiwan but similar to the
zone's level in Korea. Shenzhen zone's wage level was always
higher than national wage level. The wage level of Lat Krabang
Zone is similar to the level of Bangkok area. However, the
wage level of Bangkok area is about 25% higher than in whole
Kingdom. These phenomena reflect that it may not the universal
principle that the wages in the zone are only higher (or
lower) than outside zone's wages. Different zones in different
countries have a different situation. When people analyse the
comparison of wages and working conditions between the EPZ
firms and outside zone's firms, they should reveal them case
by case, but it is very hard to summarise a model generally
315 like some critics did before (FROBEL et al, 1980; RONDINELLI,
1987).
(2) Wage levels between different genders or occupations
In Masan Zone, the difference in wage levels between male and female employees is similar to that between technicians or management staff and ordinary workers because most male employees are technicians and management staff and female employees are mainly labourers working behind production lines. Normally, the wage of male staff is about twice that of female workers. In other words, the wage of technicians and management is twice that of ordinary workers (ASM, 1990).
The difference of wage levels between male employees
(mainly technicians and management staffs) and female employees (mainly ordinary workers) in Kaohsiung Zone is also about 2:1 (EDEPZ, 1987).
In Shenzhen Zone, the wage difference between management staff and ordinary workers is about 2:1 (TANG, 1987).
The wage level between female workers (mainly unskilled workers), male workers (mainly semi-skilled workers) in Lat
Krabang Zone (also the whole Bangkok Metropolitan area) is male workers can earn at least twice as much as female workers. As for management staff, their salary is over two times higher than the wage of ordinary workers (KIIT, 1989).
316 These phenomena reflect that since female employees are mainly unskilled workers, their average wage levels are about
50% lower than their male fellows. It is a common situation as in the firms outside the zones. This indicates that the situation of women's wage levels have not been changed, even in a place where the majority of labour forces are women.
(3) Comparison of manufacturing wages between the zones and developed countries
The comparison of wage levels in the four zones reveals an important key to production cost. In order to clarify the gap of wage levels between the four zones themselves and developed countries such as the United States and Japan or an area like
Hong Kong which is the main source of investment in Shenzhen
Zone, I draw several figures to indicate manufacturing wage levels. Here, money wages are the important indication for both investors and government to measure labour cost. Real wages demonstrate the internal income of workers in these regions over time. Finally, purchasing-power-parities (PPPs) compare real incomes and living standards of workers between the different regions.
Table 6.2.1 already showed the increase of wages in the four zones. Here, Figure 6.2.8 compares money wages and real wages in the four zones. The data shows that money wages were about 20% higher in Masan Zone than in Kaohsiung Zone before
1983 (EDEPZ, 1987 & WARR, 1984). Then, during the period
317 Figure 6.2.8: Money wages and real wages between the four zones
Money wages in $ÚS1.00
Real wages in $US1.00
y Lat Krabang 0 Shenzhen O Masan •Kaohsiung
Source: WARR, 1984; ASM, 1990; EDEPZ, 1987; MSR, 1988-90;
SNES, 1989; IMF, 1990 and ASLK, 1991.
318 between 1983 and 1987, money wages in Kaohsiung Zone were 14% higher than in Masan Zone (ASM, 1990; EDEPZ, 1987 & MSR,
1988). Finally, in recent years, money wages in Masan Zone jumped again to about 20% higher than in Kaohsiung Zone (ASM,
1990 & MSR, 1988-90). General speaking, average money wages in
Masan Zone were 10% higher than in Kaohsiung Zone in the past.
Secondly, the curves of Shenzhen Zone and Lat Krabang Zone indicate that money wages in Lat Krabang Zone were 75% higher than in Shenzhen Zone (SSEZY, 1989 & TDRIF, 1990). The order of average money wage level in the four zones is: Masan Zone is 10% higher than Kaohsiung Zone; Kaohsiung Zone is 264% higher than Lat Krabang Zone and Lat Krabang Zone is 75% higher than Shenzhen Zone. However, the situation of real wages in the four zones is different because of the impact of different exchange rates and inflation rates in these countries. Before 1980, real wages in Masan Zone were 37% higher than in Kaohsiung Zone (IMF,1990, WARR, 1984, EDEPZ &
1987). But, real wages in Kaohsiung Zone have been higher than in Masan Zone since the early 1980s. The average real wage in
Kaohsiung Zone was about 29% higher than in Masan Zone in the past decade. That is because the average inflation rate in
Korea was 8.24%, about 77% higher than in Taiwan (4.65%) during the last decade (IMF, 1990, MSR, 1990 and EYRC, 1989).
Therefore, real wage levels in Kaohsiung Zone are much higher than in Masan Zone. In addition, since the value of the Baht has remained steady in recent years and the inflation rate in
Thailand stayed at a relatively low level (3.8% average since
1985), real wages in Lat Krabang Zone have been high relative
319 to money wages (IMF, 1990 and TDRIF, 1990). Furthermore, real wages in Shenzhen Zone were quite close to those in Masan Zone and Kaohsiung Zone before 1984. However, since the inflation rate has been high (about 20% average inflation rate since
1985) and the devaluation of RMB, real wages in Shenzhen Zone have decreased in recent years (IMF, 1990; SSEZY, 1989 & SESS,
1990). Generally speaking, the order of present real wage levels in the four zones is: Kaohsiung Zone is 15% higher than
Masan Zone; Masan Zone is 21% higher than Lat Krabang Zone and
Lat Krabang Zone is 525% higher than Shenzhen Zone. Both money wages and real wages indicate that Shenzhen Zone has advantages to continue to develop labour intensive manufacturing, which accords with the results of the comparison of labour intensity in the four zones (Table
6.1.23).
Second, I compare wage levels between developed countries and the zones.
Figure 6.2.9 demonstrates that monthly manufacturing money wages and real wages in the United States and Japan compare with the wage level in Kaohsiung Zone and Masan Zone. Table
6.2.2 shows the average rate of annual increase of money wages and real wages in Masan Zone, Kaohsiung Zone, Japan and the
United States in the 1970s and 1980s.
320
Figure 6.2.9: Money wages and real wages between the United
States, Japan, Masan Zone and Kaohsiung Zone
Money wages in $US1.00 Real wages in $US1.00
800 : NT - i b00 - .&-‘''A
400 -
300 -
200 - A Japan O Masan 100 - •U.S.A.
0 1973 1977 1981 1985 1989 YEAR
Money wages in $US1.00 Real wages in $US1.00
A Japan O Kaohsiung . U.S.A.
YEAR
Source: JSY, 1989; USDL, 1989; ASM, 1990; WARR, 1984; EDEPZ, 1987 and MSR, 1988-90.
321 Table 6.2.2: Annual increase on wages in different regions in the 1970s and 1980s (%)
Money wage Real wage Location 1970s 1980s 1970s 1980s 18.0 12.5 10.0 Masan Zone 28.0 Kaohsiung Zone 15.0 13.0 7.0 8.0 10.3 1.5 1.6 Japan (manufacturing) 15.7 U.S.A. (manufacturing) 8.3 5.1 - 0.3 - 0.5
Source: Calculated from ASM, 1990; IMF, 1990; WARR, 1984; BIAP, 1982; ASK, 1990; EDEPZ, 1987; MSR, 1988-90; JSY, ANNUAL and USDL, 1989.
The levels of money wage in the United States and Japan were quite close. However, money wages have risen in Japan, especially since 1985. The average rate of money wages in
Japan is about 50% higher than in the United States (JSY, 1989
& USDL, 1989). Manufacturing money wages in Masan Zone and
Kaohsiung Zone were about 30% of the two developed countries' wage levels. On the other hand, real wages in the United
States were higher than in Japan. During 16 years between 1973 and 1988, the average real wage in the United States was about
20% higher than in Japan. The interesting thing is that the
American real wage level has declined over 6% between 1973 and
1988. In contrast, Japan's real wage level increased by 28% during the same period (JSY, 1989 & USDL, 1989). Therefore, the two curves are gradually closing to each other in recent years. Comparing real wages between the developed countries and the zones (Masan and Kaohsiung), the average real wage in the two zones was about 20% of the developed countries' real wage level during the whole period. The data in Table 6.2.2 indicates that both money wages and real wages increased in
Masan Zone and Kaohsiung Zone. In contrast, the rate of
322 increase of manufacturing money wages has gradually slowed in
Japan and the United States and real wages fell in the United
States.
Figure 6.2.10: Money wages and real wages between Shenzhen
Zone and Hong Kong Money wages in $US1.00 600
500
400
300
200
100
0 t t 1980 1981 1982 1983 1984 1985 1986 1987 1988 YEAR Real wages in $US1.0.0 500
3C0
200
100 O Hong Kong . Shenzhen
0 1980 1981 1982 1983 1984 1985 1986 1987 1988 YEAR
Source: HEEY, 1987-89 and SSEZY, 1985-89. 323 Figure 6.2.10 compares money wages and real wages of manufacturing between Hong Kong and Shenzhen. There are several indications reflected in this figure. There is a decline of both money wages and real wages in Hong Kong between 1982 and 1987, which was mainly influenced by the dim economic situation, linked to the international oil crisis and recession and political risk about Hong Kong's future. The average money wage in Hong Kong was over 6 times higher than in Shenzhen Zone during the period between 1980 and 1988. The average real wage in Hong Kong was over 9 times higher than in
Shenzhen Zone during the same period (HKEY, 1987-89 & SSEZY,
1985-89).
Table 6.2.3: Labour cost in different location, 1988
Name of location Money wages
Shenzhen Zone (manufacturing) 1.00 Lat- Krabang Zone 1.76 Kaohsiung Zone 7.20 Masan Zone 7.89 Hong Kong (manufacturing) 7.90 U.S.A. (manufacturing) 25.20 Japan (manufacturing) 43.76 Source: Calculated from SSEZY, 1989; TDRIF, 1990; MSR, 1990; ASM, 1990; HKEY, 1989; USDL, 1989 & JSY, 1989.
Finally, I use two ways to clarify labour costs, real incomes and living standards in these regions. First, compare money wages in all of the cases (see Table 6.2.3). Using
Shenzhen Zone's wage level (which is the lowest among all the cases) as basis, there are three categories of labour cost.
Japan and America represent the highest labour cost places, about 44 and 25 times Shenzhen on money wages respectively;
324 Hong Kong, Korea (i.e. Masan) and Taiwan (i.e. Kaohsiung) which are Asian NICs represent the middle level, over 7 times
Shenzhen on money wage respectively. Thailand (i.e. Lat
Krabang) and China (i.e. Shenzhen) are the lowest labour cost places.
Second, purchasing-power-parities (PPPs) illustrate the real incomes and living standards in these regions (see Table
6.2.4). The calculation begins with the workers' wage in $US per capita in these regions (with the United States set at 100 in each year) to get the nominal wage in $US per capita in each region. Then divide the nominal wages by estimates of price indexes for private consumption (purchasing power parity over consumption/exchange rate, the United States=100)(SUMMERS
& HESTON, 1980, 1984 & 1987).
Table 6.2.4: The relevance of wages to PPPs in different region
U.S.A. Japan Masan Kaohsiung Hong Kong China* Lat Krabang Year (1) (2) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2)
1973 100 100 72 80 6 18 6 14 1975 100 100 81 86 10 24 8 14 1980 100 100 120 104 16 29 14 21 36 48 5 14 1985 100 100 110 108 18 33 18 28 25 53 4 20 4 14 1989@ 100 100 153 166 42 75 34 55 34 68 4 30 7 24 Source: Calculated from USDL, 1989; JSY, ANNUAL; WARR, 1984; ASM, 1990; EDEPZ, 1987; MSR, 1988-90; KOMIN, 1989; HKEY, 1989; SUMMERS & HESTON, 1980, 1984 & 1987. (1)The nominal wage in $US per capita; (2)The purchasing power of wages in $US. *: Since the data on private consumption in China is not available, the data here (1) is Shenzhen Zone's wage level in $US to American wage level as 100; (2) is the real gross domestic product per capita (RGDP) of China to American RGDP as 100. @: They are estimated based on CPI in each individual country to American level.
325 Table 6.2.4 demonstrates that the main trend is that the purchasing power of wages in these regions had been gradually becoming closer to the American level. The PPP of Japan has even exceeded the American level since 1980. As for the rate of purchasing power increase, the level of PPP in Japan, Masan
Zone and Kaohsiung Zone has increased 35%, 83% and 100% between 1973 and 1985 respectively. The PPP of Hong Kong has increased 10% between 1980 and 1985. Horizontally, the table compares the purchasing power of wages between these regions.
In 1985, apart from Japan and America, Hong Kong has the highest PP which was about half of the level of America. Masan
Zone and Kaohsiung Zone have a similar PP about 30% of the level of America. The level of Lat Krabang Zone was the least, only about 10% of American PP. So there remains a large gap in workers' purchasing power of wages between developed countries and developing countries. However, following economic development in the developing countries, the gap has gradually decreased.
6.2.2 Working hours and shifts
In Masan Zone, during the 1970s, since the wage was not very high, most workers needed to work overtime to gain more income. [Overtime work should be paid at least 150% of wage level (PARK, 1979).] At that time, a standard of 8 hours of work per day and 48 hours per week was established by law. The work hours, however, may be extended up to 10 hours a day and
60 hours a week upon mutual agreement between employers and
326 employees (PARK, 1979). Based on the report of the
International Labour Office, the working hours were around 54 in Korean zones (ILO & UNCTC, 1988). But the authority of
Masan Zone denied that and claimed that working hours were around 50 to 52 per week at that time (ASM, 1990). In the
1980s, especially since the union was set up at the end of
1986, the situation has changed. Since the union negotiates about working conditions (mainly wages and working hours), most employers have agreed to increase wages and reduce working hours. By 1990, 20 enterprises worked 44 hours per week, 45 enterprises worked 46 hours per week. Only 5 enterprises were still working 48 hours (ASM, 1990). However, according to the Labour Standard Law of Korea, from October ith, 1990, the working time is limited to 44 hours, 5.5 working days per week (ASM, 1990). Every enterprise in the zone has only one working shift except in some special situations (ASM, 1990).
In Kaohsiung.Zone, the standard working time is 8 hours per day and 48 hours per week. Based on the statistics of 1968,
95% of workers worked day shifts (normally between 7:00 am and
6:00 pm) and only 5% worked night shifts in the early years
(EPZC, 1968). At present, there is only one working shift and overtime work should be under 3 hours per day, 24 hours per
week with 200% wage payment (ASK, 1990).
In Shenzhen Zone, according to the Labour Law of Special
Economic Zone in Guangdong Province, the working time is 8
327 hours per day and 48 hours per week (SSEZY, 1989). Overtime work should be under 4 hours per day with 150% wage payment.
If workers work on a legal holiday or at night between 22:00 pm and 6:00 am, companies should pay 200% of normal wage
(SSEZY, 1989). At present, most firms arrange one working shift in day time. Some special firms have three shifts but they need to get special approval from local Labour Bureau
(SSEZY, 1989).
In Lat Krabang Zone, the standard working time is 8 hours per day and 48 hours per week (ASLK, 1991). There are three working shifts: morning, afternoon and night shifts. This is different from other zones, which have one shift except on special arrangement with official approval.
Table 6.2.5 compares the working hours and shifts in the four zones. Masan Zone has relatively short working hours per week compared with the other zones. Only Lat Krabang Zone stilt carries three working shifts.
Table 6.2.5: Working hours and shifts in the four zones Name of zone Working hours/week Working shift/day
Masan 46 1 Kaohsiung 48 1 Shenzhen 48 1 Lat Krabang 48 3 Source: ASM, 1990; ASK, 1990; SSEZY, 1989 and ASLK, 1991.
328 6.2.3 Other welfare
In Masan Zone, other welfare for workers includes service facilities, benefits on dismissal, retirement and other compensation. Service facilities include several dining halls, women's accommodation, health stations, entertainment and sports centres, department store, library and employment service centre (ASM, 1990). In case of dismissal, the employer should provide a minimum of 30 days advance notice for a worker having more than six months of service. If the employer fails to give 30 days advance notice, the law requires the employer to pay a dismissal allowance equal to 30 days wages
(PARK, 1979). Apart from basic wages made to workers, other benefits such as bonuses or commissions, cost-of-living allowances, family allowances, job performance allowances, and other similar payments are made regularly to workers based either on individual contract or collective bargaining agreements (PARK, 1979). In addition, according to the Labour
Standard Law, employers having 30 or more employees should provide a "retirement allowance" consisting of a minimum of 30 days average pay for each year of service (PARK, 1979).
Workers can have 8 days annual leave with pay for one full
year of service without absence and an additional one-day paid annual leave for each consecutive year of service up to a maximum of 20 days (PARK, 1979).
In Kaohsiung Zone, the other welfare for workers also
includes service facilities, the benefits of dismissal or
329 retirement from employment and labour insurance (ASK, 1990).
Service facilities include several dining halls with cheap food, transport vehicles, women's accommodation, department store, health station, industrial sanitation service, library, entertainment centre and employment service centre. Each firm has its own welfare committee which organises activities such as employee education, financial support for the education of employees' children, and calamity subsidy. The benefits on dismissal or retirement from employment include three types of transaction. First, based on Labour Basic Law, each company should set up a retirement pension fund. It is 2% of total wages, 15% paid by company and the rest deducted from employees' wages. The condition for receiving the pension is: if an employee is over 55 years old and has been working in one company over 15 years, the company will pay the entire retirement pension. Second, if a firm is in bankruptcy, employees will get a pension from that fund. The payment is calculated based on the time of employment (one year working for one month payment at the normal wage level). Third, if an employee is dismissed, the firm pays compensation (the value is determined by the individual firm, not government). Labour insurance is another choice for employees arranging their retirement pension if they do not plan to work in one firm over 15 years. There are several classifications of the insurance, but normally, the amount of pension is calculated from the monthly wage level. The insurance cost is paid 20% by individual workers and 80% by the company (ASK, 1990).
330 In Shenzhen Zone, there are two kinds of social security system. One is for permanent employees in local capital companies such as state-owned companies, collective ownership companies and joint-ventures. Each company should set up a retirement pension fund. The value is 20% of the total wage
(including basic wage, duty wage and floating wage) paid by companies or units (TANG, 1987). Another is for contract and temporary employees in local capital companies, foreign-owned companies and Chinese-foreign joint-ventures. Companies pay
25% of the wage (deducted from monthly wage) to the Municipal
Labour Service Co. as the cost of social security. It will cover the employees' retirement pension, cost of medicine during retirement, unemployment (it is called "waiting for employment" in China) subsidy, pension for injury and funeral expenses (TANG, 1987). Companies also will offer 5% of total wage from companies' income to subsidise welfare for employees such as health care and entertainment activities (TANG, 1987).
In Lat Krabang Zone, employees are entitled to medical leave (not more than 30 working days per year) or maternity leave (if appropriate). The company must pay workers compensation if an employee suffers injury, sickness, or death in the course of work. As for welfare facilities, there are medical and sanitary facilities, dining halls and other basic facilities. However, compared with other zones, Lat Krabang
Zone has relative backward service facilities and welfare system for workers. For instance, the authority and companies
331 do not provide transport, accommodation, child care, culture and entertainment facilities inside the zone (ASLK, 1991).
6.3 Unionisation
Since EPZs are a relatively new enclave of industrial development, many EPZs' authorities tried to block union activities in the zones in the early stage in order to attract foreign investors who already resented dealing with unions in their countries. Some countries had banned union activities inside the zone (eg. Masan Zone earlier), and some countries still ban it now (Bangladesh) (BEPZA, 1990). However, following economic development, especially in the Asian NICs, social progress has also reached a certain degree.
Unionisation is part of this progress. Under the pressure of the labour movement inside and outside the country, some countries allow unions to set up inside EPZs. However, the attitude of both authority and employers to unionisation is different in different zones.
In Korea, the Labour Union Law was enacted in 1953.
However, unionisation was banned inside Masan Zone until 1986
(ASM, 1990). This is not surprising because even the Labour
Union Law had been amended several times in Korea in the past
(PARK, 1979). Since the government allowed unions to set up inside Masan Zone in 1986, the independent and individual company unions started to establish in different enterprises inside the zone. In 1990, 43 enterprises of the total of 70
332 enterprises set up unions and 80% of all employees joined the unions. 23 enterprises which have below 50 employees have not set up unions (ASM, 1990).
The most important activity of unions is bargaining the
"Collective Agreement" between employers and employees every two years (ASM, 1990). This agreement lists the rights, benefits and duties of both employers and employees in over
100 articles in order to maintain and improve their working conditions and living standards. The basic conditions of the agreement are raised by the workers in the beginning. Then, unions represent workers to negotiate with their own firm's employers. The leaders of unions are free elected by workers in individual enterprise (ASM, 1990).
Iri the early stage, since the contradiction between employers and unions was very sharp, and unions had little experience in organising workers, there was a lot of violence.
In addition, since the union set up in the zone at the end of
1986, the wages increased largely in the following years. In
1989, the average wage increase was over 100% compared with the wage in 1985. However, the situation has gradually changed: the union movement became more mature than before and both unions and employers have more experience in dealing with each other. At present, in most cases, unions are the adjustment partner between workers and employers. The claims raised by unions are more reasonable than before. For instance, employers and the authority believed that unions
333 would require a 30% wage increase in 1990. However, considering the economic situation in the zone, unions asked for only a 10% wage increase. From this action, employers felt that unions were becoming more understanding and reasonable. So they would like to cooperate with unions. At present, both the Administration Office and employers are affirming the impact of unions in Masan Zone (ASM, 1990).
In Kaohsiung Zone, the union movement started earlier than in Masan Zone. In accordance with the Labour Union Law, company unions were set up in the zone's enterprises in July
1970 (EPZA, 1986). In December, 1971, the Taiwan EPZ Joint
Labour Union was established in order to improve the relationship between individual unions in different firms
(EPZA, 1986). In 1984, the government issued the Basic Labour
Law which demonstrated labour's rights and benefits such as: working contract, wage and bonus (including minimum wage), working hours (including maximum overtime working hours) and holiday, protection for women and children labour, retirement benefit, compensation, supervision and _ examination (ASK,
1990). Based on the law, workers understand their rights and protect their own benefits. At end of 1990, among 88 enterprises, 63 firms have union organisations, over 85% of employees have joined the union, 42 firms have set up
Collective Agreements (ASK, 1990). Other firms are without unions because the number of employees is small (ASK, 1990).
The most important activity in which the union is involved is setting up a "Collective Agreement" which regulates the
334 benefits and rights between employees and employers. The r agreement is changed every three years (ASK, 1990).
In Shenzhen Zone, there were 1,546 company union organisations (not only industrial enterprises) with 181,585 members by 1989 (SSEZY, 1989). Among them, 75% of foreign- owned firms and Chinese-foreign joint-ventures set up unions and 62% of employees joined unions (SSEZY, 1989). In foreign- owned firms and most Chinese-foreign joint-ventures, unions have a certain impact on protecting the benefits of workers such as investigating illegal employment of children, checking wage levels, welfare facilities and complaints from workers, solving arguments between employees and employers. Nearly 100% of state-owned companies have union organisations. However, the unions' effect in this kind of firms is very limited and the main task of unions is to organise entertainment activities. The reason is that this kind of union is not independent and is under the leadership of the Party Committee and managers in firms.
In Lat Krabang Zone, 10% of firms set up company unions (about 8 firms) (ASLK, 1991). This situation is quite similar to that of the trade union movement in Thailand. Trade unions in Thailand only represent 10% of total industrial workers and most of the unions are formed in big firms (CHIRA, 1990).
Therefore, the problems of the union movement include: 1. It can not represent the interests of the wholé labour force; 2.
The main activity is focused on asking for an increase in the
335 minimum wage despite its questionable effectiveness (CHIRA,
1990). Compared with other zones, there are relatively fewer union activities in Lat Krabang Zone. The explanation given by the Authority is that most firms are quite small and workers did not ask to set up union (ASLK, 1991). However, in comparison with the other three zones, firms in Lat Krabang
Zone are not very small (see Table 6.1.5). That is, both the authority and employers are still standing to the position that worries about the union movement and tries to block its development inside the zone. According to the survey by Thai
University Research Association (TURA), the non-union work force in factories lacks job security and other working welfare (CHIRA, 1990). That is one reason why welfare facilities and other social security rules in Lat Krabang Zone are relatively backward compared with other zones (see 6.2.2 &
3).
Table 6.3.1: Comparison the union movement in the four zones Name of zone (1) (2)
Masan 61% 80% Kaohsiung 72% 85% Shenzhen* 75% 62% Lat Krabang 10% not available Source: ASM, 1990; ASK, 1990; SSEZY, 1989 & ASLK, 1991. (1)Firms with union/total firms; (2)Union members/total employment. * It only includes foreign-owned firms and Chinese-foreign joint-ventures. Every state-owned firm has a union in Shenzhen Zone.
Comparing the union movement in the four zones (see Table
6.3.1), both Masan Zone and Kaohsiung Zone have the most regular union activity. In Shenzhen Zone, except for the ùnion
336 at state-owned firms, the union's impact in foreign-owned firms and Chinese-foreign joint-ventures is effective. The most backward union system is in Lat Krabang Zone, which really influences the working welfare of non-union work force.
Based on the information provided by the authority in these zones, the activities of unions inside the zone have both positive and negative impacts, but the positive is larger than negative for the development of the zone.
First, the positive impacts include:
1. Raising the position of workers. Before the establishment of unions, the relationship between boss/manager and workers was ordering and being ordered. The managers usually treated workers very rudely. However, since the unions set up in the zone, the unions have helped workers to ask for fair treatment and protected workers' benefits. Gradually, the relationship has been changed and becomes more equal and mutually cooperative. Therefore, workers can work more positively (ASM, 1990; ASK, 1990).
2. Raising the welfare and living standard of workers (ASM,
1990; ASK, 1990; SSEZY, 1985-89).
3. Through involvement in negotiation about the Collective
Agreement with employers, reducing the 'uncooperative and violent incidents between workers and employers (ASM, 1990).
337 4. Unions encourage employers to use machinery to reduce the workers' working intensity, which raises the level of technology and productivity (ASM, 1990; ASK, 1990).
5. Promoting and guaranteeing the employment right of married women (ASM, 1990).
Second, the negative impacts include:
1. In the early stage, since the contradiction between employers and unions was very sharp, and unions had little experience in organising workers, there was violence (ASM,
1990).
2. Unreasonable demands are made by union sometimes, such as too large wage increase (ASM, 1990).
3. Some unions' press provide false propaganda which influences workers working attitude and involves unstable situation inside the zone (mainly in early stage) (ASM, 1990).
The authorities of Masan Zone and Kaohsiung Zone have an important verdict on union movement and its impact on the
■ zones: It is necessary that unions exist inside the zone and that impact is mainly positive. They claim that both the authority and employers in the EPZs should change their attitude and encourage the participation of unions in the development of production and zones. Meanwhile, the union
338 movement will also pay attention to the methods, especially r raising reasonable requirements and introducing more cooperative attitudes (ASM, 1990; ASK, 1990).
6.4 The management between foreigners and local people
In most EPZs, foreign investment enterprises prefer to employ foreign managers to manage the firms in the early stage.
Depending on the management skill of local people, the management occupations are gradually filled by local managers.
In Masan Zone, in the early stage, foreign managers occupied all administrative positions. There were 500 foreign managers and technicians working in Masan Zone before. But now, there are only 100 foreign staff working in the zone.
Most Korean staff have occupied management positions except in special departments. At present, the ratio of local managers to foreign staff is 4 to 1 (ASM, 1990).
In Kaohsiung Zone, the situation is similar to Masan Zone.
In the beginning, most management occupations were taken by foreign managers. Following production development and training programs, the management occupations have been gradually replaced by local people. By 1990, among 440 senior level managers, 235 persons are foreigners (201 from Japan, 9 from America, 9 from Hong Kong and 16 from other countries) and 205 persons are local managers (ASK, 1990). The ratio of local managers to foreign managers is nearly one to one.
339 In Shenzhen Zone, most senior managers and key technicians
■ in foreign-owned firms are foreigners. Middle level management occupations are mainly taken by local people. Based on the Law of Chinese-foreign Joint-Ventures, the management occupations in Chinese-foreign joint-ventures are arranged as one to one between local people and foreigners (RFJSEZ, 1986).
In Lat Krabang Zone, the ratio of foreign managers to local managers is nearly one to one (ASLK, 1991).
In the four zones, in the early stage, most management occupations had been taken by foreign managers in most foreign investment firms. However, following the development of production, the ratio of local participation has gradually increased. In most zones, the situation is one to one between foreigners and local people. But most management occupations in Masan Zone are taken by local people.
6.5 Summary
In summary, the situation of employment in the four zones are revealed by several items. First, the total number of manufacturing employment is the highest in Shenzhen Zone, and rests are in Lat Krabang, Kaohsiung and Masan. However, as for the average number of employees per firm, Shenzhen has the least. Lat Krabang is the top. Masan and Kaohsiung are third and fourth. Comparing the employment with the value of capital
per firm in the four zones, the size of firms in Lat Krabang
340 Zone is relatively larger. Second and third are the firms in
Masan and Kaohsiung. The size of firms in Shenzhen is the least. As for labour intensity, the firms in Shenzhen Zone have the highest level. Kaohsiung and Lat Krabang have the similar level. Labour intensity is the least in Masan Zone.
In addition, the trend of employment in the past is different in the four zones. As mature zones, Masan and
Kaohsiung, have operated about two decades. In Masan Zone, the number of employees reached a peak after 17 years. However, in
Kaohsiung Zone, after 7 years of operation, employment peaked, and after that, the number declined. The main reason is that two other new zones were set up in Taiwan with similar capacity to Kaohsiung Zone. Shenzhen and Lat Krabang, are in the take-off stage, so employment keeps increasing at present.
Moreover, employment by gender is quite similar in the four zones, which is that female employees are over 70% of total employment. The average age of employees are relatively younger in Masan and Lat Krabang than in Kaohsiung and
Shenzhen. These are influenced by both cultural tradition and social progress and women's liberation movement in different countries. On the other hand, the age group has become older in some zones like Kaohsiung and others have become younger like in Shenzhen following the development of the zones. So there is no universal principle that the average age becomes older following the maturity of zone.
341 The labour mobility in the four zones are different. The labour force mainly came from rural areas in Masan Zone in the early period. However, urban areas provided the majority of workers in Kaohsiung Zone in the early time. At present, most of the labour force comes from urban areas in both zones. In
Shenzhen Zone, the labour force mainly depends on recruitment from rural areas in Guangdong Province and other inland provinces in China. Since Lat Krabang Zone is located in
Bangkok area, the labour force is mainly supplied by the local area. So whatever the mature zones and the relatively new zones, they all contribute to create working opportunities in local areas. On the other hand, apart from Masan Zone with a relatively higher labour turnover, the others' labour turnover are all under 10%. That is because there is a gap on the cultural tradition and the attitude of society toward women's employment between Korea and other three countries. Married women are easily leaving the job and work at home as housewives in Korea.
As for the educational level, most employees in Masan Zone have high school diplomas. However, the majority of employees in Shenzhen Zone and Kaohsiung Zone have middle school or under middle school level. The most reasonable educational structure is in Lat Krabang Zone, where most employees graduate from special vocational schools which provide basic knowledge and training about manufacturing before the students enter the labour market. Besides that, the four zones have similar training programs. The main task is trained on the job
342
■ in order to satisfy the demands of production, and overseas r training is limited.
Furthermore, employment and labour intensity by industry sectors in the four zones reflect the manufacturing level. As for the employment, following the manufacturing development, the number of employment becomes more concentrated on several sectors in Masan and Kaohsiung. In contrast, employment in
Shenzhen Zone become more decentralised. Since Lat Krabang
Zone started to develop in recent years, the employment by industry sectors only focused on several items and there has not been any indication of adjustment yet. Therefore, the cases shows that there is no universal trend of manufacturing development in different zones. As for labour intensity, the average level of labour intensity in Masan Zone and Kaohsiung
Zone has declined dramatically, which reflects the fact that the traditional labour intensive manufacturing has been adjusted. On the other hand, the present average level of labour intensity in Shenzhen Zone is still relatively high, which proves that the manufacturing level of Shenzhen is generally the most backward, even lower than Lat Krabang Zone.
The situation of wage levels between EPZs and their national manufacturing level is different in the four zones.
In Korea and Taiwan, national wage levels are higher than zones' wage levels. In contrast, the wage levels in Shenzhen and Lat Krabang are higher than the wage levels of national manufacturing. These reflect the fact that different zones in
343 different countries have a different situation, and it may not the universal principle that the wages in the zone are only higher (or lower) than outside zone's wages. The comparison of wage levels between genders and occupations, normally the wages of male or management staff are twice that of female or ordinary workers. The clarification of labour costs, real incomes and living standards between developed countries and the four zones demonstrates several points. First, there are three categories of labour cost reflected on nominal wage levels. Japan and America represent the highest labour cost places. Hong Kong, Masan and Kaohsiung are the medium. Lat
Krabang and Shenzhen are the lowest labour cost places. In terms of real incomes and living standards, the comparison of the purchasing power of wages in these regions shows that the developing regions had been gradually becoming closer to the developed regions in the past two decades.
The summary of the working conditions and other welfare in the four zones reveals that the situation has been improved significantly following the maturity of zones, like the cases in Masan and Kaohsiung. However, there are relatively backward service facilities and welfare system for workers in relatively new zone such as in Lat Krabang Zone. The improvement of working conditions and other welfare has linked directly with trade union movement. Through the bargaining of
"Collective Agreement" with employers, the wage levels increased dramatically. In Masan, the wages.increased 100% in
1989 compared with the wage in 1985, when the unions did not
344 exist (ASM, 1990). On the other hand, unions also help to negotiate with employers to guarantee the working opportunity for married women in Masan Zone (ASM, 1990). Unions also have the impact on compromising the contradiction between workers and employers, and the relations between them have become more mutually cooperative (ASM, 1990; ASK, 1990). In contrast, the working conditions and other welfare are relatively backward in the zone where lacks the complete union system. For example, in Lat Krabang Zone, since there are relatively fewer unions, the non-union work force in factories lacks job security and the welfare facilities and other social securities are relatively backward compared with other zones.
Finally, most management occupations had been replaced from foreign managers to local people following the development of production and management training program provided by the zones' firms. At present, the ratio of local managers to foreign managers is nearly one to one in most of the zones.
Regard to people's criticism which was revealed in the literature review about employment and working condition in
EPZs, I would raise some different viewpoints. For example,
Rondinelli (1987) criticises that EPZs do not make much impact on reducing overall unemployment in the region in which they are located, especially among young males. However, the empirical cases in the four zones demonstrate that there is an important contribution by EPZs which create employment opportunity and share a large percentage of manufacturing
345 employment in the local area. As for the female participation of manufacturing employment, I would argue from three points:
First, the empirical evidence of the cases proves that the establishment of EPZs absolutely creates a large amount of employment, through the private investment from both foreigners and local capital. Second, Female workers are also part of labour forces and they all belong to the working class. Creating employment for female workers is also creating total employment. I believe it is a social progress that females participate in manufacturing production. Through this participation, women can have their own income sources and that would improve their position both domestically and socially.
In addition, Fröbel and his colleagues (1980) claim that: comparing the working conditions in industrialised countries, the working conditions in the EPZs, especially wages, were often insufficient to cover the basic costs of living. Workers also suffered from long working hours, shift work, few holidays, social insecurity, insufficient pensions, the absence of unemployment benefit, and inadequate provisions for safety at work. They believe that 'super-exploitation' was maintained by various instruments, particularly prohibition of trade unionism. Finally, they blame the zones worsen the situation of structural unemployment in developed countries.
I would argue that, at first, people criticise these problems based on an incomparable condition, which is totally
346 different history background, the level of industrialisation
and modernisation between developed countries and developing countries. The critics use the standard in developed countries to measure the situation of EPZs in developing countries, but
importantly they ignore to exploit the developing countries' own conditions, the vertical comparison of history, and make
up the reasonable standard to measure the situation in EPZs.
The historical evidence of the four zones proves that: following the development of industrialisation, the trade union movement has become strong and the living standard of
workers has also increased significantly, which are reflected on releasing the ban on union organisations, the regular
bargain and collective agreement between unions and employers, the raise of both money wages and real wages, and the increase of purchasing power relevant to wages. Moreover, I believe any industrialisation does have a procedure, even in developed countries. The history of Western industrialisation had proved there was a long period of barbarous capital primitive
accumulation with 'super-exploited' phenomenon. However, following the economic development and union movement, the
industrialisation became more civilised and workers' working conditions and living standard had improved. These phenomena
have also appeared in the process of EPZs' development. In the early stage, situation was just like these critics described,
workers had low wages, long working hours and shift work.
Trade unions were banned inside the zones. But, under the
pressure of labour movement inside and outside the zones, the
'Basic Labour Law".had been set up and practiced inside the
347 zones, which guaranteed union could set up in individual firms in the EPZs, the standard of working conditions and welfare were also regulated. Following the development of union movement inside the zones, workers' real income have been increased significantly. Other welfare have been improved as well, such as working hours are limited under 48 hours per week, one work shift (except Lat Krabang Zone) and other benefits toward working conditions, holidays and retirement arrangement. On the other hand, comparing the situation between the EPZ firms and firms outside the zone, generally speaking, the working conditions and other welfare in the former are much better than in the latter. Furthermore, concern the blame that the zones actually worsen the situation of structured unemployment in developed countries, I think the problem of structured unemployment in developed countries has more complicated causes in terms of capitalist crisis in developed countries rather than simply blame the development of industrialisation in developing countries.
Some other issues are also important. In the early stage, labour mainly came from rural areas. Following economic development in these countries, urban sources are the majority of the labour force in the zones because many rural areas had been developed as industrial estates and urban areas. In addition, following economic development in these countries, the educational level of labour has improved a lot, which also promotes and suits the manufacturing restructuring from labour intensive to capital/technology intensive in the zones.
348 However, as for the training, the firms in the zones mainly
provide simple training programs for labour only in order to
familiarise workers with production procedures, except that a
limited number of key employees get formal technical and skill
training overseas. Comparing the wage level in the zones with
other developed countries such as the United States and Japan,
the wage level in these developed countries is much higher
than in the zones, despite the real wage in some developed countries was negative increase in the past such as in the
United States. It is an important indication which reflects
the transaction of manufacturing (mainly labour intensive)
occurred between developed countries, newly industrialising countries and other developing countries because one of the
reasons is the concerning of competitive production cost in
these areas. On the other hand, for the living standard,
although the workers' purchasing power of wages between
developed countries and developing countries still has a large
gap, following the economic development in the developing
countries, the gap has gradually become smaller than before.
349 CHAPTER 7
THE PRODUCTION STRUCTURE IN THE FOUR ZONES
Following the development of EPZs, more and more manufacturing businesses settled in the zones. - That involved the import of capital goods and raw materials from outside (both overseas and domestic places) and the export of finished products to both overseas and domestic markets (mainly overseas). In this chapter, by analysing the output value of products by industry sectors, the constitution of imports and exports, the value of output per unit of investment and productivity, I examine and compare the structure of production in the four zones, and the linkage between the international economy, the domestic economy and the zones. Regard to the literature argument about the relations between core and periphery, such as dependency theory emphasises the self-reliant and autarchic development pattern which cuts off links with the metropolitan countries, and claims that the relatively successful development in East
Asia occurred because they have fewer links with developed countries, the cases study in this chapter can examine the issue based on the linkage between the international economy and zones. On the other hand, critics claim that EPZs' stimulative effects on local and regional economies tend to be weak or nonexistent (RONDINELLI, 1987). For example, the domestic value added by the zone's industries has been low -- less than 25% of the value of gross exports in most countries;
350 industrial productivity in the zone is about 35% below the national average; EPZs have few backward or forward linkages with local economies and provide few benefits for the development of domestic industries (RONDINELLI, 1987). By examining the production performance of the four cases, these statements can be revealed and the facts can be demonstrated.
Finally, the productive competitive advantage in different regions can also be clarified.
7.1 The output of products
In most EPZs, since most products are supposed to be exported overseas, their output is nearly equal to the value of exports. Some of the zones allow a certain percent of products to be sold in the domestic market in recent years, but the structure of output by industry sectors is still the same as the structure of exports by industry sectors because exports are still the majority of total output. Here, the data on the output in Masan Zone and Kaohsiung Zone mainly comprises the value of exports (plus the value of domestic sales in recent years). The data on output in Shenzhen Zone comprises both exports and domestic sales. Since the statistical system in
Lat Krabang Zone is imperfect, the data on some important items is not available.
In Masan Zone, total output was $US1,667 million in 1989,
64% exported to overseas market and 36% sold in the domestic market (ASM, 1990). Figure 7.1.1 illustrates the structure of
351 Figure 7.1.1: The output by industry sectors in Masan Zone, 1989
OTHERS Q
NON-METALS
MACHINERY Q
TEXTILES Q
FOOTWEARS 0
METALS
PRECISION
ELECTRONICS 1
r II I I I I I I 0 10 20 30 40 50 60 70 80 PERCENT
Source: MAFEZ, 1989.
output by industry sectors. Among total output value, electronics and electric products share the largest part with
72%. Second are precision products with 11.8%. Metals are third with 6.9%. Others such as footwear, textiles, machinery and non-metals share only a small part of output, 3.2%, 2%,
1.3% and 0.4% respectively (MAFEZ, 1989).
Comparing the structure of capital, employment and output by industry sector in Masan Zone, Table 7.1.1 shows that: although electronics and electric industries share the largest percentage of total investment, employment and output, the
352 percentage of output is higher than the shares of capital and employment. That indicates the fact that electronics and electric industries are efficient with relatively high productivity. Moreover, precision production is the second with the shares of total capital, employment and output.
However, the percentage of output is lower comparing with the shares of capital and employment. That indicates the rate of output to input is relatively lower than electronics and electric production. Other industry sectors, such as metals, machinery, textiles, non-metals and footwear, their percentages of total output are all lower than the shares of input. However, the difference between them is that metals production has relatively high capital input and less labour input; in contrast, footwear, textiles and non-metals have relatively low capital input and more labour input. These phenomena also reflect the situation of different intensity of capital and labour between different sectors, which I revealed in the previous chapters.
Table 7.1.1: Comparison of capital, employment and output by industry sector in Masan Zone, 1989 (%)
Item capital employment output
Electronics & electric 65.7 61.9 72.0 Metals 11.0 3.3 6.9 Non-metals 0.4 0.7 0.4 Machinery 1.6 1.6 1.3 Precision 12.3 13.7 11.8 Textiles 2.6 2.7 2.0 Footwear 3.0 12.4 3.2 Others 3.4 3.7 2.4
Total 100.0 100.0 100.0
Source: ASM, 1990; MAFEZ, 1989; MSR, 1990.
353 In the past two decades, output has generally increased in
Masan Zone in current price (see Figure 7.1.2). There are only
Figure 7.1.2: The value of output in Masan Zone since 1971
2000
1500 N) IO L IL
1000 ($US M LUE A V 500 •Current price O Constant price
0 1971 1974 1977 1980 1983 1986 1989 YEAR
Source: MTIK, 1989.
four years of decrease: 1975, 1982, 1985 and 1989. On the other hand, the curve of output in constant price shows that the real growth of output has occurred in the 1970s. However, it is mainly stagnant in the 1980s. The first three decreases in terms of current price and the stagnation in the 1980s in terms of constant price are mainly influenced by two international oil crises and economic recession, which lead national and international economies into stagflation. The
354 latest decrease in 1989 is 5.8%, which indicates that the
exuberant period of production in the zone has passed, even
though investment picked up again more recently (see Chapter
5) (ASM, 1990).
Table 7.1.2: Output value by industry sector in Masan Zone (%)
Item 1978 1982 1989
Electronics & electric 56.8 61.5 72.0 Metals 13.0 8.2 6.9 Non-metals 0.4 0.4 Machinery 9.6 1.8 1.3 Precision 12.7 11.8 Textiles 3.3 5.0 2.0 Footwear 7.5 6.1 3.2 Others 9.8 4.3 2.4
Total 100.0 100.0 100.0
Source: Calculated from VAN, 1983; WARR, 1984 and MAFEZ, 1989.
The proportion of output by industry sectors has changed
over time (see Table 7.1.2). Electronics and electric products
have increased their share, in spite of already having the
largest proportion of output in 1978. Another apparent
increase occurred in precision production which did not exist
in 1978 but increased to over 10% later. The production of
textiles increased from 1978 to 1982, but declined in recent
years. The production of non-metals did not exist in 1978 but
increased to 0.4% later. Other production such as metals,
machinery, footwear mainly decreased over time.
In Kaohsiung Zone, total output (export overseas and
production for domestic territories) was $ÚS1,054 million in
1990 (MSR, 1990). Figure 7.1.3 reveals that among total
355 Figure 7.1.3: The output by industry sectors in Kaohsiung
Zone, 1990
OTHERS Q
TEXTILES
PRECISION
CHEMICAL 0 NON-METAL 0
MACHINERY 0
METAL n GARMENTS
ELECTRONICS
I t t t t t t t I 0 10 20 30 40 50 60 70 80 PERCENT
Source: MSR, 12/1990.
output, electronics and electrical products comprise 69.2%;
garments share 13.5%; third and fourth are metals and non-
metals production with 6.5% and 5.3% respectively; others such
as machinery, chemical and plastic, precision and textiles
share a relatively small percentage (MSR, 1990).
Figure 7.1.4 illustrates total output in Kaohsiung Zone
since 1967. In terms of current price, it has increased
greatly since the beginning. The average rate of annual
increase of total output value is 49% before 1980 and 10% in
the 1980s (calculated from EDEPZ, 1987; MSR, 1988 & 1989).
356
Figure 7.1.4: The value of output in Kaohsiung Zone since 1967
1500
2 o 1000 - D-- - 2 cD n .69, w 500 >Q
•Current price O Constant price
o 1966 1972 1978 1984 1990 YEAR
Source: EDEPZ, 1987 and MSR, 1988-90.
There were four periods of decrease in the past: 1975, 1982,
1985 and after 1988, which are similar to the situation in
Masan Zone. On the other hand, in terms of constant price of output, there is a significant increase from 1967 to 1973.
However, there is a period of stagnation from 1974 through the
1980s, which started earlier than Masan Zone. Later, it reaches the peak in 1988 and then declines. These indicate that apart from the beginning 7 years, there is no significant increase of real output in the second half of 1970s and 1980s.
The rate of decrease in terms of current price and stagnation in terms of constant price are mainly influenced by two
357 international oil crises and economic recession which involve the inflation, and national and international economies slow down. There is a decrease of 1.5% in 1989 and 21.8% in 1990, which reveals that the production in the zone has started to decline after developing over two decades (MSR, 1989-90).
Table 7.1.3: Comparison of capital, employment and output by industry sector in Kaohsiung Zone, 1990 (%)
Item capital employment output
Electronics 56.0 55.4 69.2 Garments 11.4 22.8 13.5 Metals 9.6 8.0 6.5 Machinery 8.8 1.4 2.9 Non-metals 4.3 7.4 5.3 Chemical & plastic 3.6 3.3 0.8 Precision 2.1 0.2 0.2 Textiles 0.9 0.9 0.3 Others 3.3 0.6 1.3
Total 100.0 100.0 100.0
Source: Calculated from MSR, 1990.
Comparing the structure of capital, employment and output by industry sectors in Kaohsiung Zone, Table 7.1.3 illustrates a similar situation as in Masan Zone (see Table 7.1.1).
Electronics production not only has the highest percentage of both input (capital and employment) and output, but also is the most efficient sector among total items, that the percentage of output is much higher comparing with the percentages of capital and labour input. Other sectors have relatively low output percentage comparing their shares of input of capital and labour. The sectors like garments and non-metals have high percentage of labour input and less capital input. In contrast, metals, machinery, chemical and
358 plastic, and precision production have relatively high capital input and less labour input, which reflects the fact that the different labour and capital intensity between different industry sectors again, as the analysis in the previous chapters.
In the past two decades, the proportion of total output by industry sectors also changed (see Table 7.1.4). Electronics apparently increased its share of total output. Garments, metals and non-metals had declined from the beginning to the middle period and picked up a little in recent years. Others such as chemical, plastic and textiles had mainly declined.
Machinery and precision had several years increase in the middle period but declined again in recent years.
Table 7.1.4: Output value by industry sector in Kaohsiung Zone (%) Item 1969 1974 1979 1984 1990
Electronics 48.2 58.4 63.2 66.4 69.2 Garments 20.6 11.0 9.9 10.7 13.5 Metals 3.5 4.3 3.9 1.3 6.5 Machinery 1.0 2.2 0.7 4.8 2.9 Non-metals 13.6 9.1 .6.4 5.0 5.3 Chemical & plastic 4.5 6.2 4.8 3.5 0.8 Precision 0.4 0.4 2.5 1.7 0.2 Textiles 2.8 3.1 1.8 0.7 0.3 Others 5.4 5.3 6.8 5.9 1.3
Total 100.0 100.0 100.0 100.0 100.0
Source: Calculated from EDEPZ, 1987 and MSR, 1990.
In Shenzhen Zone, total industrial output was RMB18,995 million ($US3820.317 million) in 1990, 61% exported to the international market and 39% sold in the domestic market
359
(SSEZY, 1991). Table 7.1.5 demonstrates the total output by different types of enterprises: foreign-Chinese joint-ventures share the largest percentage of total output; second are state-owned firms; Wholly-owned foreign firms take third place; finally, collective-ownership firms and local capital joint-ventures share only a small percentage (calculated from
SNES, 1989). Table 7.1.5: Output value in Shenzhen Zone in 1989 Share in total output Output Type of firm (RMB million) (%)
Local firm: State-owned 2,959.55 29.5 Collective-ownership 629.73 6.3 Joint-ventures* 16.06 0.2 Sub-total 3,605.34 36.0
Foreign capital firm: Wholly-owned 1,207.35 12.0 Joint-ventures* 5,216.22 52.0 Sub-total 6,423.57 64.0 Total: 10,028.91 100.0
Source: Calculated from SNES, 1989. * Local firm's joint-ventures are organised between local capital firms. Foreign capital joint-ventures are set up between foreign capital firms and local firms.
Table 7.1.6: Output of foreign capital firms by region in Shenzhen Zone in 1989
Output value Percent Region (RMB million) (%)
Hong Kong 4,503.09 70.1 Japan 1,028.48 16.0 U.S.A. 606.96 9.4 Singapore 144.38 2.2 Thailand 93.40 1.5 Australia 11.79 0.2 Others 35.47 0.6
Total: 6,423.57 100.0
Source: Calculated from SNES, 1989.
360 Among the output of foreign capital firms, Table 7.1.6 shows the percentage taken by different countries and areas.
Hong Kong, the main investment source, shares by far the largest percent of total output among foreign capital firms; second are Japanese firms; American investment firms take third place. Others such as Singapore, Thailand and Australia share a limited percentage (calculated from SNES, 1989).
Figure 7.1.5 reveals the total output by industry sectors in Shenzhen Zone in 1989. Electronics and electrical products share the largest percentage with 47% of total output. Second
Figure 7.1.5: The output by industry sectors in Shenzhen Zone,
1989
OTHERS
PRECISION SAL a GARMENTS n
METAL n
TEXTILES Í'
FOOD MACHNEAY I I CHEMICAL
ELECTRONICS 0 10 20 30 40 50 PERCENT
Source: SNES, 1989.
361 garments, non-metalsandprecisionshareasmallpercentage Shenzhen Zonesince1979.Intermsofcurrentprice,total respectively, fourthandfifthplaces.Otherssuchasmetals, machinery with7.7%.Foodandtextilesshare5.2%5% Figure 7.1.6:ThevalueofoutputinShenzhenZonesince1979 with 4.2%,4.1%,2.95and0.3%respectively(SNES,1989). is chemical,plasticandmedicalproductswith11.5%.Third Source: SSEZY,1985-90 and Figure 7.1.6illustratestotaloutputofindustryin
VALUEMU SM ILLION) 4000 3000 2000 1000 0 1978 19801982198419861988 1990 r r .r 1il SNES, YEAR 1989.
• O Constantprice Current price 362 output has continually increased, especially in recent years.
The average annual rate of increase in these years is 79.7%.
On the other hand, the curve of real growth of output in terms of constant price also shows that there is a strong continual increase from the end of 1970s to 1990, although there is a relatively higher inflation rate in Shenzhen comparing the average level in China (see Figure 6.2.5 & 6) (calculated from
SSEZY, 1985-90 and SNES, 1989).
Table 7.1.7: Output by industry sector in Shenzhen Zone (%)
Item 1979 1981 1983 1985 1987 1989
Electronics & electric 2.0 50.4 45.4 51.4 45.0 47.0 Chemical & plastic 5.4 1.3 6.8 6.4 9.1 11.5 Machinery 6.4 4.8 8.2 7.9 8.5 7.7 Food & drink 56.4 15.4 8.2 9.0 8.6 5.2 Textiles 6.7 10.4 12.1 4.6 8.9 5.0 Non-metal 5.4 3.8 4.8 2.8 2.7 2.9 Others 17.7 13.9 14.5 17.9 17.2 20.7
Total 100.0 100.0 100.0 100.0 100.0 100.0
Source: Calculated from SSEZY, 1985-89 and SNES, 1989.
In the past decade, the proportion of total output by industry sectors also changed (see Table 7.1.7). The share of electronics and electrical products increased significantly, from 2% in 1979 to over 45% after 1981. Machinery, chemical and plastic products also increased. Textiles had an unstable history: increasing from 6.7% in 1979 to over 10% in 1981-83, then declining to 4.6% in 1985, before picking up again to
8.9% in 1987 and finally decreasing to 5% in 1989. The most significant decrease is food and drink products, which shared
56.4% of total output in 1979. However, following industrial development, other manufacturing increased greatly. Finally
363 food and drink products only accounted for 5.2% of output in
1989. Non-metal products also decreased largely (calculated from SSEZY, 1985-89 and SNES, 1989).
In Lat Krabang Zone, all production has been exported to the international market in the past. Table 7.1.8 illustrates total output (also total exports) in Lat Krabang Zone since
1987. Total output has increased in the past few years. The average rate of increase is about 49% per year (ASLK, 1991 and
IMF, 1991).
Table 7.1.8: Output value in Lat Krabang Zone since 1987
Year Baht million Increase % $US million Increase 58.345 1987 1,500.8 1988 2,480.9 65.3 98.083 68.1 14.7 1989 2,891.8 16.6 112.486 1990 4,762.4 64.7 190.116 69.0
Source: ASLK, 1991 and IMF, 1991.
The Industrial Estate Authority of Thailand could not provide data on output by industry sectors.
The total output in the four zones is compared in Figure
7.1.7. Before 1985, the value of total output in Kaohsiung
Zone was higher than the others. However, Masan Zone exceeded
Kaohsiung Zone in 1986. And then, Shenzhen Zone exceeded Masan
Zone in 1987 and it has produced more than the other zones in recent years. Among the four zones, the value of output in Lat
Krabang Zone is the lowest. In 1989, Shenzhen Zone's output is
58% higher than Masan Zone; Masan Zone is 24% higher than
364 Kaohsiung Zone and Kaohsiung Zone is 11 times higher than Lat
Krabang Zone.
Figure 7.1.7: Comparison of total output in the four zones
3000 ~z 0 J_J 2 2000 {f}~ ~ W D J > 1000 7 Lat Krabang 0 Shenzhen O Masan •Kaohsiung
Source: MTIK, 1989; EDEPZ, 1987; MSR, 1988-90; SSEZY, 1985-90;
SNES, 1989; ASLK, 1991 and IMF, 1991.
In summary, Shenzhen Zone is the largest among the four zones in terms of investment, labour force and range of manufacturing items, so it has the largest output. By industry sector, the output in the zones mainly comprises electronics and electric products. Electronics and electric industries not only have the highest percentage of both input (capital and employment) and output, but also is the most efficient sector
365 among total items, that the percentage of output is much higher comparing with the percentages of capital and labour input. Other sectors have relatively low output percentage comparing their shares of input of capital and labour.
In the past, the trajectory of the mature zones (Masan and
Kaohsiung) illustrates two important trends. First, they have been affected by similar influences of the international economy on the output of EPZs, represented by two international oil crises and economic recession. Second, the recent data demonstrates that the peak of the mature zones' production has passed. Although investment has picked up in recent years and manufacturing restructuring had appeared since the mid-1980s, the output of the zones has apparently declined since 1988.
In the relatively new zones such as Shenzhen and Lat
Krabang, output has mainly increased, but the data on Lat
Krabang Zone indicate that the rate of increase is not stable.
7.2 The structure of imports and exports
Exports are the main characteristic of EPZs. Countries want to promote the development of export-oriented economies by establishing EPZs. Here, through analysing the balance of exports and imports in the zones and comparing the export performance of the zones and the whole nation, I seek to demonstrate the impact of EPZs on national export-orientation.
366 In addition, the constitution of imports and exports in the zones also illustrates the linkage between the international economy, the domestic economy and the zones.
Table 7.2.1: Comparison of export performance between Korea and Masan Zone since 1971 Year (1) (2) (3) (4) (5) (6) 1971 0.9 1,068 0.08 0.2 -1,326 1972 9.7 1,624 0.60 3.4 - 898 1973 70.4 3,225 2.18 29.1 -1,015 1974 177.8 4,460 3.99 57.4 -2,392 1975 169.4 5,082 3.33 94.3 -2,166 1976 285.7 7,716 3.70 155.4 -1,058 1977 347.1 10,046 3.46 211.6 - 765 1978 416.4 12,711 3.28 244.4 -2,261 1979 513.0 15,056 3.41 321.6 -5,283 1980 538.3 17,505 3.08 317.4 -4,787 1981 592.8 21,254 2.79 346.4 -4,878 1982 489.2 21,853 2.23 302.2 -2,398 1983 563.8 24,445 2.31 320.7 -1,747 1984 739.5 29,245 2.53 419.3 -1,386 1985 698.0 30,283 2.30 434.1 - 853 1986 826.7 34,714 2.38 448.2 3,130 14.3 1987 1,049.6 47,281 2.22 530.1 6,261 8.5 1988 1,238.4 60,696 2.04 685.2 8,885 7.7 1989 1,066.7 62,377 1.71 594.9 912 65.2 Source: Calculated from VAN, 1983; HEALEY, 1989; MTIK, 1989 and KEPB, 1990. (1)The value of exports of Masan Zone (FOB, $US million); (2)The value of exports of Korea (FOB, $US million); (3) The share of exports of Masan Zone in total exports of Korea (%); (4)The surplus of trade of Masan Zone ($US million); (5)The surplus of trade of Korea ($US million); (6) The share of surplus of trade of Masan Zone in total surplus of trade of Korea (%).
Figure 7.2.1 illustrates imports and exports in Masan Zone since 1971, and Table 7.2.1 compares export performance and balance of trade in Korea and Masan Zone. In the past two decades, exports have increased largely in Masan Zone.
■ However, there were four years of decrease in both exports and
367 Figure 7.2.1: The value of import and export in Masan Zone since 1971
1500
.,z Q 1000 J J -f CO D -69- W 500 Q > O Export •Import
0 1971 1974 1977 1980 1983 1986 1989 YEAR
Source: VAN, 1983 and MTIK, 1989.
imports: 1975, 1982, 1985 and 1989, which were the years when output fell. The balance of trade has remained in surplus since the beginning. In 1971, the value of the surplus was
$US0.239 million. After that, the value of the surplus has kept increasing. By 1979, the value of the surplus increased to $US321.564 million. Finally, the value of the surplus was
$US594.928 million in 1989. Generally speaking, EPZ's exports are only a small share of national exports. The highest level is 3.99% in 1974. But since the EPZ's products are mainly
368 exported to overseas markets, the EPZ has made a significant achievement in having a surplus of trade.
Table 7.2.2 illustrates the structure of imports by industry sectors and the share of imports from the domestic economy in total imports. First, among total imports, electronics and electrical consume the largest percentage.
Metals production is second. Other products share less than 5% each. Second, the share of imports from domestic areas in total imports by industry sectors is: Footwear had the largest proportion of imports from the domestic market with over 70%;
Metals production consumed over 60% material from the domestic market; Machinery and textiles used over 30% domestic material among total imported material; Finally, electronics and electrical production had 29% of material supplied by the domestic market.
Table 7.2.2: Imports by industry sector in Masan Zone (%) Imports from domestic area Total imports Imports Item ratio* 1980 1983 1984 1985
Electronics & electrical 58 33.0 29.0 29.0 29.0 Metals 22 65.0 61.0 69.0 Non-metals 3 19.0 18.0 8.0 Machinery 4 43.0 35.0 34.0 Precision 3 9.0 11.0 16.0 16.0 Textiles 2 33.0 31.0 19.0 37.0 Footwear 4 70.0 75.0 81.0 77.0 Others 4 29.0 31.0 42.0 41.0
Source: CHOE, 1975 and HEALEY, 1989. * Imports ratio is share of imports from overseas by industry sectors in Masan Zone in 1985.
369 In addition, Figure 7.2.2 demonstrates the trajectory of imports from overseas and the domestic market in Masan Zone.
Figure 7.2.2: The structure of import from overseas and the domestic market in Masan Zone
600
500
~z 0 400 __IJ
~ 300 -69-... W 200 Q >
100 O Overseas •Domestic
0 1971 1974 1977 1980 1983 1986 1989 YEAR
Source: VAN, 1983; WARR, 1984; HEALEY, 1989 and ASM, 1990.
In the beginning, imports were mainly from overseas (over
80%). However, following the development of both Masan Zone and the domestic economy, some imports could be replaced by domestic products, and the ratio of imports from the domestic market gradually increased; it has exceeded 30% since 1977. In recent years, over 40% of total imports consumed by production in Masan Zone have come from the domestic market. Generally
370 speaking, the average share of imports from the domestic market among total imports was 25% in the 1970s and 35% in the
1980s (calculated from VAN, 1983; WARR, 1984; HEALEY, 1989 and
ASM, 1990).
There are two aspects of the constitution of exports in
Masan Zone. One is the structure by industry sectors and another is the ratio of exports to the international market and the domestic market. Since the output of Masan Zone is mainly exported to the international market, the constitution of exports by industry sectors is similar to the structure of output by industry sectors (see Figure 7.1.1). In Korea, the government ruled that products made in the zone had to be wholly exported to the international market in the early years, except some products which were needed in the domestic market (see details in Chapter 4). Since 1980, the government has allowed the zone's products to be sold in the domestic market with customs duty. Electronics and electrical industries could sell only 5% of the output to the domestic market (ASM, 1990). Since then, domestic sales have gradually increased. Table 7.2.3 demonstrates this process. In 1973,
100% of products were sold in the international market. Then, a small percentage of products were sold in the domestic market. After the change of government regulation in 1980, domestic sales increased to 14.9% of total output in 1981. And later, there is a significant increase of domestic sales: 36% of total products of Masan Zone were sold in the domestic market in 1989 (HEALEY, 1989 and ASM, 1990).
371 Table 7.2.3: Overseas sale and domestic sale of Masan Zone's products since 1973 (X) Year Overseas sale Domestic sale 1973 100.0 0.0 1977 94.3 5.7 1981 85.1 14.9 1985 86.2 13.8 1989 64.0 36.0 Source: HEALEY, 1989 and ASM, 1990.
In Kaohsiung Zone, the situation of imports and exports is revealed in Figure 7.2.3. In the first two years, because the
Figure 7.2.3: The value of import and export in Kaohsiung Zone since 1967
O Export •Import
YEAR
Source: EDEPZ, 1987 and MSR, 1988-90.
372 zone had just started operation, a large amount of capital goods and raw materials were imported. Therefore, imports were higher than exports in 1967 and 1968 (EDEPZ, 1987). However, the situation had changed in the third year. In 1969, the firms could produce a large amount of products and the value of exports exceeded the value of imports by $US7.801 million
(EDEPZ, 1987). After that, the value of exports increased rapidly and it has exceeded the value of imports in the past two decades.
Table 7.2.4 illustrates the export performance and balance of trade between Kaohsiung Zone, three EPZs in Taiwan and the whole of Taiwan. As for the export performance, in 1967, the zone only shared 1.3% of the total export value of Taiwan.
Following the development of the zones, Kaohsiung Zone's exports shared 7.6% of total national exports in 1971. After that, as the other two zones started to operate, the three zones' exports shared 9% of total national export value in
1974, the peak in history. Following the development of an export-oriented economy in Taiwan, the national exports have greatly increased since the mid-1970s. Therefore, the share of
EPZs' exports in total national exports has gradually declined since that time. By 1986, the share of Kaohsiung Zone's exports and the three zones' exports in total national exports declined to 2.4% and 6% each (calculated from EDEPZ, 1987).
The balance of trade in Kaohsiung Zone has been favourable except during the first two years. In addition, the balance of trade in the three EPZs had also kept in surplus and its level
373 has increased each year, even when the national balance of trade had deficits in 1974 and 1975, and only a small surplus in 1980.
Table 7.2.4: Comparison of export performance between Kaohsiung Zone, three EPZs and Taiwan since 1967
Year (1) (2) (3) (4) (5) (6) 1967 1.3 1.3 -5.5 -5.5 -165 1968 3.3 3.3 -3.2 -3.2 -114 1969 5.7 5.7 7.8 7.8 -119 1970 7.4 7.4 12.1 19.2 -43 1971 7.6 7.9 44.4 53.1 216 24.54 1972 6.6 7.6 72.8 98.7 474 20.89 1973 6.3 8.4 72.9 135.8 556 24.28 1974 6.2 9.0 107.4 200.1 -1,330 1975 5.5 8.5 108.2 197.4 -643 1976 4.8 8.3 138.8 302.6 567 53.44 1977 4.5 8.0 147.7 359.5 850 42.35 1978 3.7 7.1 120.5 363.2 1,660 21.87 1979 3.7 7.5 177.2 594.7 1,329 44.77 1980 3.5 7.2 191.7 670.6 78 860.26 1981 3.4 7.0 277.7 789.8 1,411 55.72 1982 3.3 7.3 258.4 814.0 3,316 24.55 1983 3.0 6.5 229.6 756.2 4,836 15.63 1984 3.1 6.7 308.6 963.7 8,497 11.31 1985 2.8 6.1 326.5 926.3 10,621 8.72 1986 2.4 6.0 373.9 1,170.9 15,610 7.50 Source: Calculated from EDEPZ, 1987. (1)The share of exports of Kaohsiung Zone in total exports of Taiwan (%); (2) The share of exports of three EPZs in total exports of Taiwan (%); (3)The balance of trade in Kaohsiung Zone .($US million); (4)The balance of trade in three EPZs ($US million); (5)The balance of trade in Taiwan ($US million); (6) The share of trade surplus of three EPZs in total trade surplus of Taiwan (%).
Furthermore, the surplus of EPZs comprised a large part of the total national trade surplus, especially during the period between 1976 and 1981: the surplus of the three EPZs comprised over half of the total surplus on national trade. These facts reflect the fact that EPZs have led the national economy's
374 transition from import-substitution to export-orientation: At end of the 1960s and the early 1970s, the national balance of trade was in deficit when the strategy of import-substitution was close to an end. Following the establishment and development of EPZs in Taiwan (which is part of the strategy of export-orientation, see Chapter 3 and 4), both export value and surplus of trade in the three zones gradually increased and their shares in national trade increased year after year, reaching a peak between the mid-1970s and early 1980s. After the transition of the national economy, mainly an export- orientation strategy was practised in Taiwan in the 1980s.
Hence, the impact of EPZs on the national economy gradually declined. The percentage of exports and surplus of trade in
EPZs among total national trade has declined since the early
1980s.
As for the constitution of imports in Kaohsiung Zone, there are two main issues: 1. The ratio between capital goods and raw materials; 2. The ratio of sources between overseas and domestic areas. First, by September 1990, the accumulated value of imports was $US8,541 million in Kaohsiung Zone since
March 1966. Among them, 6.2% are capital goods (machinery and equipment) and 93.8% are raw materials (MSR, 1990). Second,
Figure 7.2.4 reveals the history of imports from both overseas and domestic areas. In the first three years, imports came only from overseas. Since 1970, limited goods have been imported from the domestic economy. Imports from domestic
■ areas shared only 7.4% of total import value in 1970 (EDEPZ,
375 1987). However, the ratio of imported goods from the domestic economy became larger in the following years. In 1979, the percentage of imports from domestic areas reached a peak at
28.5% of total imports (EDEPZ, 1987). By September 1990, the accumulated value of imports from domestic areas comprised about 21% of total imports in Kaohsiung Zone since March 1966
(MSR, 1990).
Figure 7.2.4: The imports from overseas and the domestic market in Kaohsiung Zone
600
500
„z 400
~ 300
200
> O Overseas 100 Domestic
0 1966 1972 1978 1984 1990 YEAR
Source: EDEPZ, 1987 and MSR, 1988-90.
As for the constitution of exports from Kaohsiung Zone, again two main issues should be clarified: 1. The constitution
376 of exports by industry sectors; 2. The ratio between overseas sales and domestic sales. Since the products are exported
outside the zone, the constitution of exports by industry
sectors is the same as the structure of total output by
industry sectors (see Figure 7.1.3). In Taiwan, most EPZs'
products could not be sold in the domestic area until 1987
(before 1987, the government only allowed 20% of electronic
components and 1% of products which had been kept in stock
over three years to be sold in the domestic market with
customs duty. See details in Chapter 4.) At the end of 1987,
the government changed the rules and allowed part of EPZs'
products to be sold in the domestic economy up to a maximum of
50% of total output. Table 7.2.5 illustrates the percentage of
overseas sales and domestic sales since 1988. Although the
government allowed the EPZs' products to be sold in the
domestic area, the percentage of domestic sales is limited
compared with overseas sales.
Table 7.2.5: Overseas sale and domestic sale of Kaohsiung Zone's products since 1988 (%) Year Overseas sale Domestic sale 1988 99.14 0.86 1989 99.13 0.87 1990 97.61 2.39
Source: Calculated from MSR, 1988, 1989 & 1990.
Consider now the import and export distribution in overseas
markets. Figure 7.2.5 reveals the percentage of accumulated
value of imports and exports in Kaohsiung Zone by region since
1966. 81.8% of total imports come from Asian countries (EPZA,
377
Figure 7.2.5: The distribution of import and export market by
region in Kaohsiung Zone
AFRICA `
MID-EAST
STH AMERICA
OCEANIA
EUROPE
NTH AMERICA
ASIA ❑ IMPORT 1 t t t t ■ EXPORT 0 20 40 60 80 100 PERCENT
Source: EPZA, 1986.
1986). Second is North America and third is Europe. Other
regions such as Oceania, South America, Mid-East and Africa
share only a small percentage. On the other hand, North
America is the largest market for the zone's products, with
53.7% of total export value. Second is Asia with 26.6% and
third is Europe with 16.4%. Other regions such as Oceania,
South America, Mid-East and Africa still share a small
percentage. Generally speaking, North America is the main
export market and Asia is the main import source for Kaohsiung
Zone. This phenomenon reveals that EPZs' production largely
depends on the developed countries' market. However, when the
378 developed world is in recession, that would be a significant threat for EPZs' exports. For EPZs' production, shifting the developed market to exploit new markets is difficult, but it is also important to disperse the risk.
Since Shenzhen Zone is a large modern city, the constitution of exports and imports is quite different from other zones. Exports are not only the manufactured goods, but also other goods such as agricultural goods. In addition, among total exports, there are Shenzhen's products and transit goods from inland China. For instance, in 1988, of total exports, 69.2% were industrial products and 21.5% were agricultural products, and other products shared 1.2%. In addition, 52.9% were Shenzhen's products and 47.1% were transit goods from inland China (SSEZY, 1989). As for imports, there is also a different distribution: means of production
(including not only industrial production equipment and raw materials, but also construction materials) and means of livelihood; imports are for Shenzhen Zone and for inland firms. For instance, in 1988, of total imports, 80% were means of production and 20% were means of livelihood. In addition,
11% were imported for inland firms (SSEZY, 1989). A special characteristic of firms in Shenzhen Zone is that commercial firms and manufacturing enterprises in Shenzhen all involve commercial trading businesses in a certain degree.
Figure 7.2.6 illustrates total exports and imports in
Shenzhen Zone. Before 1987, the value of imports was higher
379 than exports. The value of the deficits each year were $US589 million, $US604 million, $US542 million, $US179 million and
$US395 million since 1982 (SSEZY, 1985-87). However, the va]ue of exports first exceeded the value of imports in 1987 with a surplus of $US268 million (SSEZY, 1988). After that, the balance of trade in Shenzhen Zone has always remained in surplus and the value of surplus increased to over $US500 million in 1989 and 1990 (SSEZY, 1989-90).
Figure 7.2.6: The value of imports and exports in Shenzhen
Zone 3000
~ 0 2000
•(3.
1000
O EXPORT 0 • IMPORT 1980 1982 1984 1986 1988 1990 YEAR Source: SSEZY, 1985-90.
380 The performance of exports and the balance of trade between
Shenzhen Zone and the whole China are compared in Table 7.2.6.
Table 7.2.6: Comparison of export performance between Shenzhen Zone and China
Year (1) (2) (3) (4) (5) 1982 60.9 22,204 0.3 -589 3,316 1983 120.0 22,226 0.5 -604 836 1984 265.4 26,139 1.0 -541 -1,271 1985 563.0 27,545 2.0 -179 -15,289 1986 726.0 31,343 2.3 -395 -12,054 1987 1,414.0 39,540 3.6 268 -3,852 1988 1,849.0 40,900 4.5 256 -3,700 1989 2,174.0 46,100 4.7 577 -2,400 1990 2,996.0 53,800 5.6 521 -1,300
Source: Calculated from SSEZY, 1985-90 and IMF, International Financial Statistics Yearbook, 1982-91. (1) The value of exports from Shenzhen Zone (FOB, $US million); (2)The value of exports from China (FOB, $US million); (3) The share of exports from Shenzhen Zone in total exports from China (%); (4)The surplus of trade of Shenzhen Zone ($US million); (5)The surplus of trade of China ($US million);
First, the exports from both Shenzhen Zone and China have increased in the past. But the average annual increase from
Shenzhen Zone has been higher than in China: the former is 68% and the latter is 12%. The share of exports from Shenzhen Zone as a percentage of total exports from China has increased from
0.3% in 1982 to 5.6% in 1990. The balance of trade between
Shenzhen Zone and China is different. In Shenzhen Zone, the balance was in deficit before 1987, and after that, has been in surplus. However, the national balance of trade had a surplus in 1982 and 1983, and after that, it has always been in deficit, though the value of the deficit has declined in recent years. Finally, in summary of the table, since China
381 started economic reform and the open door policy at the end of
1970s, the value of exports has increased largely. Shenzhen
Zone, as one of the outcomes of the economic reform and open policy, promotes the development of an export-oriented economy in China, shares a certain percentage of total national exports and reduces the deficit on national trade. The data indicate that this impact has grown stronger in recent years
(SSEZY, 1985-90 and IMF, 1982-90).
Table 7.2.7 reveals the structure of imports in Shenzhen
Zone. Of total imports, the means of production used to be a minority, only 13% of total imports in 1984. However, the situation changed in the following years: the share of the means of production has increased to nearly 50% in 1985. And after that, it became the majority of total imports
(calculated from SSEZY, 1985-90). As for the ratio between foreign capital firms' imports and local firms' imports, the former was the minority with under 30% before 1986. But its share has increased since 1986. In 1989, it increased to 76.7%
(calculated from SSEZY, 1985-90). In addition, the percentage of imports for inland areas among total imports also increased from 0.6% in 1984 to 11% in 1988. In summary, the value of total exports has mainly increased in the past. Meanwhile, the share of both the means of production and foreign capital firms' imports among total imports has changed from the minority in the early years to the majority in recent years.
The proportion of imports for inland among total imports also increased, which indicates that Shenzhen Zone is not only a
382
industrial area, but also a hub of commercial trade between the international market and inland China.
Table 7.2.7: The structure of imports in Shenzhen Zone
Year (1) (2) (3) (4)
1983 724 19.3:80.7 1984 807 13.0:87.0 25.0:75.0 99.4:0.60 1985 742 49.6:50.4 21.7:78.3 1986 1,121 71.9:28.1 57.5:42.5 1987 1,146 1988 1,593 80.0:20.0 71.6:28.4 89.0:11.0 1989 1,597 80.3:19.7 76.7:23.3
Source: Calculated from SSEZY, 1985-90. (1)The value of total imports in Shenzhen Zone ($US million); (2) The ratio between the means of production (production equipment and raw materials) and other goods among total import value; (3)The ratio between foreign capital firms' imports and local firms' imports among total import value; (4) The ratio between Shenzhen Zone's imports and acting imports for inland among total import value.
Table 7.2.8: The constitution of exports in Shenzhen Zone Year (1) (2) (3) (4)
1983 120 50.4:49.6 47.2:52.8 1984 265 71.3:28.7 84.0:16.0 1985 563 52.2:47.8 44.6:55.4 58.7:41.3 1986 726 62.8:37.2 44.4:55.6 70.3:29.7 1987 1,414 58.3:41.7 35.8:64.2 58.1:41.9 1988 1,849 69.2:30.8 30.0:70.0 52.9:47.1 1989 2,174 73.4:26.6 46.5:53.5 63.2:36.8 1990 2,996 82.0:18.0 55.4:44.6 71.2:28.8
Source: Calculated from SSEZY, 1985-90. (1)The value of total export in Shenzhen Zone ($US million); (2) The ratio between industrial products and other products among total export value; (3) The ratio between foreign capital firms' exports and local capital firms' exports among total export value; (4) The ratio between Shenzhen Zone's products and transit goods from inland among total export value.
383 Table 7.2.8 demonstrates the constitution of exports from
Shenzhen Zone. Of total exports, industrial products comprise the majority with over 50%, especially in recent years. The share of industrial products increased to 73.4% in 1989 and
82% in 1990 (calculated from SSEZY, 1985-90). Foreign capital firms export about 48.5% and local capital firms export about
51.5% of exports (calculated from SSEZY, 1985-90). In addition, as for the ratio between Shenzhen Zone's products and transit goods from inland, the former has always comprised the majority with over 50% of total exports. In 1990, it increased to 71.2% (calculated from SSEZY, 1985-90). In summary, total exports in Shenzhen Zone have increased in the past. Exports mainly comprise industrial products produced in
Shenzhen Zone. The shares of foreign capital firms' exports and local firms' exports among total exports are nearly equal.
Table 7.2.9: Overseas sale and domestic sale of Shenzhen Zone's products since 1979 (%)
Year Overseas sale Domestic sales*
1979 20.54 79.46 1980 39.01 60.99 1981 40.87 59.13 1982 39.31 60.69 1983 33.17 66.83 1984 33.36 66.64 1985 37.07 62.93 1986 51.02 48.98 1987 53.27 46.73 1988 53.50 46.50 1989 58.40 41.60 1990 63.60 36.40
Source: ZHU, 1988 and SSEZY, 1985-90. * Domestic sales include selling in inland China and inside Shenzhen Zone.
384 The share of Shenzhen's total output between exports to the international market and sales to the domestic market is revealed in Table 7.2.9. In the beginning, products were mainly sold in the domestic market. Following the development of industrial manufacturing in Shenzhen Zone, the ratio of exports to the international market has gradually increased and has exceeded 50% since 1986. In recent years, the majority of products have been exported to the international market
(ZHU, 1988 and SSEZY, 1985-90).
In Lat Krabang Zone, because of imperfect management and incomplete statistics, data on imports are not available. The value of exports is the same as the value of total output because all products are exported to the international market.
In addition, among total imports, 95% are from overseas and 5% are from the domestic market (ASLK, 1991).
The balance of trade between these zones (except Lat
Krabang Zone) is demonstrated in Figure 7.2.7. Before 1976,
Kaohsiung Zone had the highest level. After 1976, Masan Zone started to exceed Kaohsiung Zone until 1988. But, Masan Zone dropped in 1989 while Kaohsiung Zone continued to increase.
Hence, Kaohsiung Zone became the leader again. Shenzhen Zone had the least surplus, especially as there were several years of deficit before 1987. In recent years, the surplus of all three has declined and is about the same level.
385 Figure 7.2.7: The balance of trade in three EPZs
800
600
z 400 O '3J 2 200 CO D .69- 0 W D J > -200
G Shenzhen O Masan •Kaohsiung
1972 YEAR
Source: VAN, 1983; MTIK, 1989; EDEPZ, 1987; MSR, 1988-90 and
SSEZY, 1985-90.
The sources of imports and the markets for exports of the four zones are revealed in Table 7.2.10. The largest percentage of imports came from the domestic market in Masan
Zone, followed by Kaohsiung Zone. In Lat Krabang Zone, only a small percentage of materials is imported from the domestic market. In Shenzhen Zone, some goods consumed in the zone came from inland China, but there is no data to show the percentage. Lat Krabang Zone still exports 100% of its products to the international market. Among the other three zones, Shenzhen Zone and Masan Zone have the largest
386 percentages of zone's products sold in the domestic market. In
Kaohsiung Zone, only a small percentage of the zone's products are sold in the domestic market.
Table 7.2.10: Imports and exports of the four zones (%)
Imports Exports Name of zone Overseas Domestic Overseas Domestic
Masan (1989) 60.0 40.0 64.0 36.0 Kaohsiung (1990) 80.0 20.0 98.0 2.0 Shenzhen (1990)* 63.6 36.4 Lat Krabang (1990) 95.0 5.0 100.0 0.0
Source: ASM, 1990; MSR, 1990; SSEZY, 1990 and ASLK, 1991. *The structure of imports in Shenzhen Zone is not available.
The EPZs in these countries have had a significant impact on the transfer of the national economy from import- substitution to export-orientation. Originally, the linkage between the international economy and the zones has been strong. Following the economic development of both nations and zones, the linkage between the domestic economy and the zones has been improved, as is demonstrated by the increase of inputs to the zones' production from the domestic market
(which include raw materials and intermediate products) and the zones' products sold in the domestic market. The improved economic linkages between the domestic economy and the zones have several advantages for both nations and the zones, such as reducing the expense of foreign currency, the effect of international recession and the cost of production (transport cost and relatively cheaper domestic products), and promote the development of the domestic economy.
387 On the other hand, it is necessary to offer a certain domestic market to the firms in the zones from the beginning.
When the EPZs were set up, the national economic strategy of import-substitution had not completely ended. In the early period of production in the EPZs, the skills of workers were not high and the quality of products was not good enough to compete with other mature products in the international market. Offering a certain domestic market to the firms in the
EPZs can not only can support the production of these new firms, but also is an attractive condition to absorb more investment. The example of Shenzhen Zone demonstrates that the majority of products were sold in the domestic market in the beginning. Following the development of production, the share of exports to the international market gradually increased and became the majority in recent years. This is a quite reasonable development process. However, the situation in
Masan Zone and Kaohsiung Zone is different. The domestic sale of the zones' products had been forbidden for a long period until recent years. The government opened the domestic market to the zone's products after pressure of, both international competition and the requirement of the firms in the zones. In fact, since a large amount of capital goods and raw materials were imported from the international market, the government was concerned with the problem of balance of foreign currency, which is why the government regulated that other products of the zones should be exported to the international market.
Actually, individual firms would also be concerned about their account balance of foreign currency. If they can solve the
388 problem by themselves, there is no reason for government to use administrative intervention to block domestic sales.
Hence, it is necessary to offer a certain domestic market to the zones' products from the beginning, but the firms should balance foreign currency by themselves.
7.3 The output per unit of investment and productivity
Efficient production is an important key to the EPZs' competitive capacity in the international economy. By analysing the output per unit of accumulated investment, we can examine the effect of investment in these zones. In addition, comparing productivity between the zones and the nations, the manufacturing position and the quality of the labour force in the zones can be clarified. Furthermore, through comparison of the productivity level and wage level between the zones and other developed countries, the quality of the labour force, production level and investment priority in these regions can be demonstrated.
The information comes from different sources and the statistic systems are different in these countries. The productivity level of Shenzhen Zone and Lat Krabang Zone is calculated by using output per worker per annum. In Masan Zone and Kaohsiung Zone, it is calculated by using value added per worker per annum. The productivity level by industry sectors is calculated based on the output by industry sectors per worker per annum in the four zones. Furthermore, output per
389 unit of investment is calculated in $US. Finally, in comparisons of the productivity level between these zones and other developed countries and areas, the output per worker per annum is the standard measure.
Table 7.3.1 illustrates output per unit of accumulated investment in Masan Zone and the labour productivity level in
Masan Zone and manufacturing in Korea. As for output per unit of investment in Masan Zone, in the first three years, the output level was lower than the investment level. In 1974, the output level started to exceed the investment level and the gap between them became larger following the manufacturing development in Masan Zone. By 1988, the marginal output per unit of investment reached 9.00, the peak in history. Then it dropped to 7.65 and 6.50 in 1989 and 1990. As for the labour productivity level of both Masan Zone and the manufacturing of
Korea, in the early 1970s, the latter was higher than the former. Following the development of Masan Zone, the productivity level of Masan Zone had gradually caught up. In
1977, the level of Masan Zone was for the first time higher
($US70) than the national manufacturing level. Since then, the level of productivity of Masan Zone had been generally higher than the national level. In 1988, value added per worker in
Masan Zone was $US2,040 higher than in national manufacturing as a whole.
There are two indications revealed in Table 7.3.1. First, since the capital adjustment that occurred in Masan Zone after
390 the mid-1980s, production has become more capital intensive and less labour intensive, which was already proved in Chapter
6. Hence, the value added created by per worker definitely increased. Here, value added level per worker in Masan Zone has increased significantly since 1987. In 1987, value added per worker in Masan Zone was $US16,490, 30.5% above the
$US13,180 in 1986. In 1989, it increased to $US37,040, 181% higher than in 1986. Second, the marginal output per unit of investment has declined in recent years.
Table 7.3.1: Efficiency of production in Masan Zone and Korea
Masan Zone Value added per worker per annum (SUS1,000)0 Year Investment : Output* Masan Korea 1971 1.00 : 0.16 0.19 2.18 1972 1.00 : 0.26 0.42 2.32 1973 1.00 : 0.85 0.88 2.64 1974 1.00 : 2.04 1.34 2.92 1975 1.00 : 1.96 3.38 3.82 1976 1.00 : 3.09 3.97 4.62 1977 1.00 : 3.54 5.79 5.72 1978 1.00 : 4.33 7.44 7.65 1979 1.00 : 5.24 10.00 8.49 1980 1.00 : 5.45 10.46 8.45 1981 1.00 : 5.94 11.79 10.22 1982 1.00 : 5.17 12.29 10.40 1983 1.00 : 5.98 10.97 11.25 1984 1.00 : 6.85 12.08 12.12 1985 1.00 : 6.43 14.43 11.80 1986 1.00 : 7.43 13.18 13.42 1987 1.00 : 8.55 16.49 16.49 1988 1.00 : 9.00 23.59 21.55 1989 1.00 : 7.65 37.04 1990 1.00 : 6.50 Source: Calculated from VAN, 1983; MTIK, 1989; MAFEZ, 1989; KEPB, 1990 and IMF, 1990. Note: @ It is calculated based on current exchange rate in each year. * The marginal output per unit of investment (accumulated investment relating to the output per year in $US).
Table 7.3.2 illustrates the labour productivity level by main industry sectors in Masan Zone in 1973 and 1989. The productivity of the main industries in Masan Zone increased between 1973 and 1989. In the beginning, the production of
391 electronics and electric had the highest productivity. Second was footwear and third was textiles. Other items had a relatively lower level. After nearly two decades development, metals production has the highest productivity and electronics and electric production has become the second. And the productivity of precision production reached the third position in 1989. Footwear production had a relatively lower productivity compared with other manufacturing.
Table 7.3.2: Productivity by industry sector in Masan Zone in 1973 and 1989 (Unit: $US1,000)*
Item 1973 1989
Electronics & electric 3.75 84.01 Precision 62.22 Footwear 3.59 18.64 Metals 1.74 150.92 Textiles 3.25 53.51 Machinery 1.74 58.72 Non-metals 1.84 41.15
Weighted average: 3.31 72.23
Source: Calculated from CHOE, 1975; HEALEY, 1989 and ASM, 1990. * The productivity is calculated based on output value by industry sectors per worker per annum in current exchange rate.
Table 7.3.3 demonstrates output per unit of accumulated investment in Kaohsiung Zone and the productivity level between Kaohsiung Zone and the manufacturing of Taiwan. In the beginning, the level of output was lower than investment. But since 1968, output has exceeded investment and the gap between them gradually became larger in the following years. In 1988, the marginal output reached the peak in history with $US10.48 per unit of accumulated investment. After that, it dropped to
392 Table 7.3.3: Efficiency of production in Kaohsiung Zone and Taiwan Kaohsiung Zone Value added per worker per annum (SUS1,000)e Year Investment : Output* Kaohsiung Taiwan 1967 1.00 : 0.53 1968 1.00 : 1.02 ---- 1969 1.00 : 1.71 0.33 1970 1.00 : 2.67 0.34 1971 1.00 : 3.39 1.09 1972 1.00 : 3.86 1.60 1973 1.00 : 5.12 1.40 1974 1.00 : 5.39 2.20 1975 1.00 : 4.01 2.69 1976 1.00 : 5.02 3.13 1977 1.00 : 5.04 3.41 1978 1.00 : 4.93 2.92 1979 1.00 : 5.80 4.24 1980 1.00 : 5.67 4.61 ---- 1981 1.00 : 5.81 6.85 10.31 1982 1.00 : 4.97 7.18 10.35 1983 1.00 : 4.98 6.43 11.30 1984 1.00 : 5.85 7.93 12.62 1985 1.00 : 5.23 9.00 13.21 1986 1.00 : 6.79 10.55 15.05 1987 1.00 : 7.46 16.76 17.10 1988 1.00 :10.48 18.97 17.94 1989 1.00 : 9.83 24.54 18.91 1990 1.00 : 6.19 26.81 Source: Calculated from EDEPZ, 1987; MSR, 1988-90; TU, 1990 and ADB, 1989-90. Note: @ It is calculated based on current exchange rate in each year. * The marginal output per unit of investment (accumulated investment relating to the output per year in $US).
$9.83 in 1989 and $6.19 in 1990. As for the labour productivity level in Kaohsiung Zone and the manufacturing in
Taiwan: in the early years, Kaohsiung Zone's value added per worker stayed at a low level, $US330 in 1969 and $US340 in
1970 (EDEPZ, 1987). Then, following the development of manufacturing in Kaohsiung Zone, it has increased. By 1980, the value added per worker was about 13 times higher than in
1970. After 1980, the margin of its increase was even larger than in the 1970s, especially in recent years: after the adjustment of capital in the zone since the mid-1980s, the level of value added per worker rose from $US10,550 to
$US26,810 between 1986 and 1990. Meanwhile, the productivity
393 level in Kaohsiung Zone was lower than in the whole national manufacturing before 1987. However, Kaohsiung Zone's productivity level started to exceed the level of national manufacturing in 1987, and has remained higher than latter in recent years. Table 7.3.3 has similar indications to Table
7.3.1. One is that manufacturing in Kaohsiung Zone has become more capital intensive and less labour intensive since the mid-1980s when the adjustment of capital happened in the zone.
Here, the increase of value added per worker also reflects that adjustment. Another is the marginal output per unit of investment has declined in recent years.
Table 7.3.4: The productivity by industry sectors in Kaohsiung Zone in 1969 and 1990 ($US1,000)*
Item 1969 1990
Electronics 6.16 58.5 Garments 2.66 27.7 Metals 1.18 38.0 Non-metals 1.90 33.6 Chemical & plastic 0.80 11.3 Machinery 5.30 97.1 Textiles 0.57 15.8 Precision 0.46 46.7
Weighted average 2.66 46.8
Source: Calculated from EDEPZ, 1987; EPZC, 1969 and MSR, 1990. * The data are calculated based on the output value by industry sectors per worker per annum in current exchange rate.
Table 7.3.4 reveals labour productivity level by industry sectors in Kaohsiung Zone in 1969 and 1990. In the early years, electronics production had the highest productivity, and second was machinery. Other items had a relatively lower productivity level. After over two decades development, the
394 productivity of machinery has increased greatly with the highest level. Electronics production has become the second.
Other items such as precision manufacturing, metals and garments have also increased greatly. Although textiles, chemical and plastic have increased a certain degree, they still have a relatively lower productivity level compared with other production.
In Shenzhen Zone, output per unit of accumulated investment and labour productivity level of industry are revealed in
Table 7.3.5. In addition, the Table also compares manufacturing productivity levels between Shenzhen Zone and
China. As for output per unit of investment of industry in
Shenzhen Zone, the lowest level was in 1981 with $US1.45 and the highest level was in 1987 with $8.39. The average level is
$4.12 during this period (calculated from SSEZY, 1985-90 and
SNES, 1989). The labour productivity of manufacturing in
Shenzhen Zone has increased in the past. In the beginning, output was only $US3,133 per worker per annum. Following the industrial development of Shenzhen Zone, the productivity level also increased. By 1989, output value increased to
$US12,714 per worker per annum. The average output was
$US9,021 per worker per annum during these years (SSEZY, 1985-
90 and SNES, 1989). Comparing the manufacturing productivity level between Shenzhen Zone and China, Table 7.3.5 demonstrates that the national level was higher than Shenzhen
Zone in 1979. However, Shenzhen Zone's productivity level started to exceed the national level after that. The increase
395 in productivity in Shenzhen Zone is much larger than in the nation. Since the devaluation of RMB, the national manufacturing productivity level in $US has declined (although it has increased in RMB), but the level in Shenzhen Zone still increased. In 1987, the productivity level of Shenzhen Zone was 195% higher than the national level (SSEZY, 1985-89; SNES,
1989 and CSY, 1988). These indicate more rapid manufacturing development in Shenzhen Zone in the past decade compared with national manufacturing as a whole. These are greater difference than in Masan and Kaohsiung.
Table 7.3.5: Efficiency of production in Shenzhen Zone and China
Output value per worker per annum ($US1,000)Q Shenzhen Zone Shenzhen China Year Investment : Outputs (RMB1,000) (SUSI,000) (RMB1,000) (SUS1,00O)
1979 1.00 : 1.66 4.888 3.133 8.814 5.650 1981 1.00 : 1.45 12.050 7.067 8.948 5.248 1983 1.00 : 5.15 18.559 9.392 9.722 4.920 1985 1.00 : 3.44 31.598 10.759 12.300 4.188 1987 1.00 : 8.39 41.173 11.062 13.961 3.751 1989 1.00 : 4.60 47.361 12.714 Source: Calculated from SSEZY, 1985-89; SNES, 1989; CSY, 1988 and IMF, 1990. Note: @ It is calculated based on current exchange rate in each year. * The marginal output per unit of investment (accumulated investment relating to the output per year in $US).
Table 7.3.6 illustrates the labour productivity level by main industry sectors in Shenzhen Zone. In 1984, textiles production had a relatively higher productivity than other items. Apart from metals, garments and precision which did not exist at that time, other items were similar. However, after 5 years, food and drink production took the first - place.
Chemicals and plastics became second. Electronics and electric
396 production took the third place. In contrast, the productivity of textiles has declined 23%. Garments and precision have a relatively lower productivity compare with other items.
Table 7.3.6: The industrial productivity level in Shenzhen Zone in 1984 and 1989 ($US1,000)*
Item 1984 1989
Electronics & electric 11.729 19.277 Chemical & plastic 11.730 21.191 Machinery 11.729 16.049 Food & drink 11.731 25.427 Textiles 13.346 10.422 Non-metals 11.730 18.436 Metals 12.419 Garments 5.487 Precision 3.179
Weighted average: 11.729 12.714
Source: Calculated from SSEZY, 1985-90 and SNES, 1989. * The data are calculated based on the output value by industry sectors per worker per annum in current exchange rate.
Table 7.3.7 demonstrates output per unit of accumulated investment in Lat Krabang Zone and the manufacturing productivity level of Lat Krabang Zone and Thailand. Output per unit of investment in Lat Krabang Zone increased between
1987 and 1988, but has declined in the following years. The history of productivity levels was similar to the change of output per unit of investment in Lat Krabang Zone. These indications reflect the fact that production in Lat Krabang
Zone remains at an unstable stage. Even though investment and number of employees has been increasing recently, the effect on both output and productivity is not satisfactory. The labour productivity level in Lat Krabang Zone was higher than
397 that of manufacturing in Thailand in 1987 and 1988. However, because of the unstable production performance in Lat Krabang
Zone, the national productivity level was higher than Lat
Krabang Zone's level in 1989 and 1990 (ASLK, 1991; TDRIF, 1990 and ADB, 1990).
Table 7.3.7: The efficiency of production in Lat Krabang Zone and Thailand
Lat Krabang Output value per worker per annua (SUS1,000)e Year Investment : Outputs Lat Krabang Thailand
1987 1.00 : 1.10 8.734 5.685 1988 1.00 : 1.39 12.094 6.413 1989 1.00 : 0.65 5.242 7.016 1990 1.00 : 0.90 6.792 7.647 Source: ASLK, 1991; TDRIF, 1990 and ADB, 1990. Note: @ It is calculated based on current exchange rate in each year. * The marginal output per unit of investment (accumulated investment relating to the output per year in $US).
The marginal output per unit of investment ($US1.00) and output per firm in the four zones are compared in Table 7.3.8.
The marginal output per unit of investment before 1981 was higher in Kaohsiung Zone than in the others. Then, Masan Zone exceeded Kaohsiung Zone during the period between 1981 and
1987. However, Kaohsiung Zone had picked up again and become the leader since 1988. Shenzhen Zone has lower output per unit of investment than Kaohsiung Zone and Masan Zone but higher than Lat Krabang Zone. Generally speaking, in the 1970s, the average value of output per unit of investment was $US4.52 in
Kaohsiung Zone and $US2.39 in Masan Zone. In the 1980s, the average level was $US6.66 in Kaohsiung Zone, $US6.85 in Masan
Zone, $US4.73 in Shenzhen Zone and $US1.01 in Lat Krabang
398 Zone. As for the value of output per firm, Masan Zone has the highest level in recent years. Second is Kaohsiung Zone. The levels in Shenzhen Zone and Lat Krabang Zone are close to each other, but the latter is higher than the former. So, the value of output both per unit of investment and per firm in the mature zones is far larger than in the new zones, but when the mature zones had developed about two decades, the figures started to decline.
Table 7.3.8: Output per unit of investment and output per firm in the four zones
Kaohsiung Masan Shenzhen Lat Krabang Year (1) (2) (1) (2) (1) (2) (1) (2)
1967 0.53 75 1968 1.02 206 1969 1.71 386 1970 2.67 675 1971 3.39 972 0.16 39 1972 3.86 1,195 0.26 139 1973 5.12 1,868 0.85 612 1974 5.39 2,365 2.04 1,650 1975 4.01 2,014 1.96 1,665 1976 5.02 2,869 3.09 3,064 1977 5.04 3,106 3.54 3,716 1978 4.93 3,636 4.33 4,998 1979 5.80 4,704 5.24 6,389 1.66 280 1980 5.67 5,226 5.45 7,138 0.82 495 1981 5.81 6,028 5.94 7,824 1.45 1,250 1982 4.97 5,793 5.17 7,245 3.05 1,033 1983 4.98 6,249 5.98 8,512 5.15 1,460 1984 5.85 8,300 6.85 11,122 7.78 1,657 1985 5.23 7,783 6.43 10,376 3.44 1,395 1986 6.79 9,400 7.43 13,597 6.98 1,234 1987 7.46 11,358 8.55 18,660 8.39 1,426 1.10 1,768 1988 10.48 13,960 9.00 23,589 5.66 1,670 1.39 2,802 1989 9.83 14,491 7.65 23,810 4.60 1,806 0.65 1,731 1990 6.19 11,982 ------0.90 2,469 Source: Calculated from VAN, 1983; MTIK, 1989; MAFEZ, 1989; EDEPZ, 1987; MSR, 1988-90; SSEZY, 1985-89; SNES, 1989 and ASLK, 1991. (1)The marginal output per unit of investment ($US1.00); (2)The value of output per firm ($US1,000).
In Chapter 5 and 6, I compared the value of investment per firm in the four zones. Here, I compare the value of output per firm with the value of investment per firm in Table 7.3.9,
399 by using the lowest level of Shenzhen Zone as basis. Among the
four zones, the highest level of output per firm compared with
investment per firm is in Masan Zone. Second is Kaohsiung
Zone. However, although Lat Krabang Zone has a large input of
investment per firm, the value of output per firm is quite low. In addition, comparing the situation of Lat Krabang Zone
with Shenzhen Zone, the former has a far larger input of
investment per firm than the latter, but the values of output
per firm are quite close. So, these reflect the fact that
Masan Zone has the highest output ratio among the four zones.
Kaohsiung Zone takes second place. The production in Shenzhen
Zone has developed more rapidly with relatively larger output than Lat Krabang Zone. Finally, Lat Krabang Zone has a relatively lower output ratio compared with the others.
Table 7.3.9: Comparison output and investment per firm in the four zones Name of zone Investment per firm Output per firm
Shenzhen 1.00 1.00 Lat Krabang 6.79 1.29 Kaohsiung 3.77 5.43 Masan 7.97 13.15
Source: Calculated from Figure 5.4.7 and Table 7.3.8.
Another standard for measuring the efficiency of production is to compare the value of output per worker per annum, the labour productivity level. Here, I examine two aspects: one is the productivity level by industry sectors; another is the development process of productivity level in the past. First, the productivity level by industry sectors - in the zones
(except Lat Krabang Zone) is revealed in Table 7.3.10.
400 Table 7.3.10: The productivity level by industry sectors in the zones ($US1,000)
Item Masan Kaohsiung Shenzhen (1989) (1990) (1989)
Electronics & electric 84.01 58.50 19.28 Precision 62.22 46.70 3.18 Metals 150.92 38.00 12.42 Machinery 58.72 97.10 16.05 Non-metals 41.15 33.60 18.44 Footwear 18.64 Textiles 53.51 15.80 10.42 Garments 27.70 5.49 Chemical & plastic 11.30 21.19 Food & drink 25.43
Weighted average: 72.23 46.80 12.71
Source: Calculated from HEALEY, 1989; ASM, 1990; MSR, 1990; SSEZY, 1990 and SNES, 1989.
From this table, the different level of productivity by different industry sectors between the three zones can be illustrated. The production of metals in Masan Zone has the highest productivity level. Second is machinery production in
Kaohsiung Zone. Other manufacturing items in Masan Zone are relatively higher than other zones. The difference of productivity level by different manufacturing sectors between
Masan Zone and Kaohsiung Zone can be revealed by comparing the difference of investment inputs and labour intensity. The previous chapters have demonstrated that electronics and electric, metals and precision production are the most important industries with large percentage of investment in
Masan Zone. In addition, comparing investment with labour intensity, these industries have relatively lower labour intensive level (see Table 6.1.18 and Table 7.1.1). In contrast, other industries have either less inputs of investment or relatively higher labour intensive level. For
401 Kaohsiung Zone, machinery, electronics, precision production and metals have relatively higher productivity level than other industries. To compare the inputs of investment and labour intensity between these industries (see Table 6.1.19 and Table 7.1.3), electronics, metals and machinery production have a large percentage of total investment. Although precision production has a relatively low level of investment, its labour intensive level is the lowest among the total industries. Machinery, metals and electronics production also have a relatively lower labour intensive level than others.
Garments production has a relatively higher inputs of investment, but its labour intensive level is the highest among the total industries. Therefore, in Kaohsiung Zone, the industries such as machinery, electronics, precision production and metals have a relatively higher productivity level. Finally, generally speaking, the productivity by industry sectors in Shenzhen Zone is the lowest among the three zones.
Table 7.3.11: Comparison of the productivity and wage level in different location, 1988@
Name of location Productivity* Money wage MN/P
Shenzhen (manufacturing) 1.00 1.00 1.00 Lat Krabang 0.95 1.76 1.85 Kaohsiung 3.19 7.20 2.26 Masan 4.02 7.89 1.96 Hong Kong (manufacturing) 1.05 7.90 7.52 U.S.A. (manufacturing) 10.51 25.20 2.40 Japan (manufacturing) 17.29 43.76 2.53 Source: Calculated from SSEZY, 1985-90; TDRIF, 1990; ASLK, 1991; EDEPZ, 1987; MSR, 1988-90; ASM, 1990; MTIK, 1989; HKEY, 1987-89; USDL, 1989; DCUS, 1989-90 and JSY, Annual. Note: @ The data is the proportion based on Shenzhen as basis 1.00. * Total output per worker per unit of working time.
402 In Chapter 6, I examined the wage level (money wages and real wages) between the four zones and other developed countries and areas such as the United States, Japan and Hong
Kong. Here, Table 7.3.11 illustrates the labour productivity levels in these cases in comparison with wage levels.
In Table 7.3.11, I copy money wage levels from Table 6.2.3.
These cases represent several levels of manufacturing production. First, comparing the developed countries (Japan and America) with the mature zones (Masan and Kaohsiung), the productivity level in Japan is 3.3 times higher than in Masan
Zone and 4.42 times higher than in Kaohsiung Zone; meanwhile, the wage level in Japan is 4.5 times higher than in Masan Zone and 5.1 times higher than in Kaohsiung Zone. In addition, the productivity level in America is 1.6 times higher than in
Masan Zone and 2.3 times higher than in Kaohsiung Zone; at same time, the wage level in America is 2.2 times higher than in Masan Zone and 2.5 times higher than in Kaohsiung Zone.
These factors demonstrate that the gap of productivity level between the developed countries and the mature zones is smaller than the gap of wage level between them. In other words, the manufacturing employees in the developed countries can earn more than their colleagues in these developing countries' zones, although their productivity level is not much higher. Another more apparent example appeared between
Hong Kong and Shenzhen Zone. The former has a much higher wage level (about 7 times higher) compared with the latter.
However, the productivity level in Hong Kong is only 5% higher
403 than Shenzhen Zone's level. The fact that Hong Kong is 7 times higher on wage level but has similar productivity level to
Shenzhen Zone indicates that the manufacturing in the latter is more competitive, which reveals why manufacturing transfers from Hong Kong to Shenzhen Zone and a large amounts of capital invested in industry in Shenzhen Zone come from Hong Kong. The money wage of manufacturing in Hong Kong is far higher than the productivity level, which reflects that they take the advantages from this free economic island where is a economic pivotal between China and the rest of the world, even the manufacturing is not advance there. In Shenzhen Zone and Lat
Krabang Zone, the wage level in the latter is 76% higher than the former but the productivity level is 5% lower than former.
That also reflects the fact that the production in Lat Krabang
Zone is less competitive and efficient compared with other cases. Apart from Hong Kong, the gap between money wages and productivity is relatively bigger in Japan and America. In contrast, the gap in Masan and Lat Krabang is relatively small.
In summary, as for the capital productivity level, the marginal output per unit of investment (see Table 7.3.8) has passed a peak in the mature zones after operating about two decades (and it is still early to comment on the new zones).
On the other hand, apart from Lat Krabang Zone, productivity has increased greatly, especially after the capital adjustment in the mature zones in the mid-1980s. The
404 comparison of labour productivity and wage levels between the four zones and other developed countries and areas demonstrates that the gap of productivity between them is much closer than the gap of wage levels, which illustrates the necessity of manufacturing restructuring between them in terms of labour intensive manufacturing, especially following industrial development in these newly industrial areas with improved productivity level and competitive capacity. Since the management system in Lat Krabang Zone is imperfect
(incomplete statistical system and the absence of important economic data prove that problem), it has lower competitive capacity and inefficient production compared with other three zones.
7.4 Summary
In early stages, EPZs have a tremendous linkage with international economy, but the inward linkages with the domestic economy appeared relatively weak. However, following the development of both EPZs and the domestic economy, the linkages between them have been improved significantly; the phenomenon of increasing purchases of domestic raw materials and intermediate goods by EPZs' firms demonstrates this improvement. These disprove the claim by Rondinelli (1987) that EPZs' stimulative effects on local and regional economies tend to be weak or nonexistent.
405 Most EPZs' products are exported to the overseas market, especially developed countries: that indicates two important issues. On the one hand, the industrialisation or development in developing countries can not be successful without the mutual relations with developed countries (the centre). On the other hand, following the rise of protectionism and economic recession in developed countries, the exports of EPZs' products became more difficult than before. So the new zones are facing tougher situations than the mature zones did 10 or
20 years ago. Therefore, for the EPZs' firms, exploiting new markets and shifting the risk from the traditional developed markets are necessary. It is not because of the dependency's ideology about diminishing the dependence on developed countries, but reducing the business risk in terms of marketing management.
In addition, there is a significant impact of the EPZs on their national economy, as they transfer from import- substitution to export-orientation. This is demonstrated by the performance of exports and the surplus of trade between the EPZs and their nations, especially in the period of international crises. However, since each EPZ is a small delimited area with a limited capacity, its exports share only a small percentage of the total national exports.
Industrial productivity in the EPZs was lower than in the nation as a whole in early times. But following the development of manufacturing in the zones, their productivity
406 has been improved dramatically, and EPZs' level is higher than the national average level now. The facts are totally different from the claim of Rondinelli (1987) that industrial productivity in the zone is lower than the national average.
The comparison of labour productivity and wage level between the four zones and other developed countries indicates that the gap of labour productivity between them is much less than the gap of wage levels, reflecting the fact that labour intensive manufacturing restructuring between them is again necessary in term of the productive competitive advantage.
407 PART III
IMPLICATIONS
After the case study of the four zones, their general situation has been demonstrated. In Part III, I use two chapters to summarise the overall performance of the four zones and the results of this study.
Chapter 8 gauges the four zones' benefit and cost in terms of economic and social welfare to the host countries. Chapter
9 summarises my research aims, questions and results in the context of theoretical and practical approaches raised by other literature. In addition, the pattern of EPZ's life cycle is examined, using Masan Zone and Kaohsiung Zone as examples.
My constructive suggestions to these four zones in terms of their specific future are also offered in this chapter.
408 CHAPTER 8
THE BENEFIT-COST ANALYSIS
Benefit-cost analysis is an important means of clarifying the effects of EPZs. From this analysis, not only the benefits and costs of the EPZs can be illustrated, but also the life cycle of the EPZs. The most important work has been done by Warr
(WARR, 1983, 1984, 1987a, 1987b, 1989a and 1989b), who analysed the benefits and costs of four EPZs in Indonesia
(Jakarta), Korea (Masan), Malaysia (Penang) and Philippines
(Bataan) by using ex-ante evaluation. His finding, in brief, is that EPZs can make a limited contribution to the growth of exports, especially in the early stages of industrialisation.
The zones contribute significantly to the employment of unskilled and semi-skilled workers. Moreover, the foreign exchange required to pay domestic workers adds to the host countries' foreign exchange earnings. In this respect EPZs are similar to the direct export of labour. In addition, EPZ firms have made little contribution to tax revenue because of tax holidays have been granted to the firms. The benefit-cost analysis shows that different countries' EPZs have different results. For example, Bataan Zone in Philippines has limited benefits because of the infrastructure costs of constructing the zone in the isolated site chosen were very high.
Meanwhile, EPZ firms granted preferential access of subsidised interest rates by the Philippines government led to a heavy
409 social cost for the country. In contrast, the example of
Malaysia shows that EPZs can be established and operated at much lower cost than was the case in the Philippines. Both the
Malaysian and Korean examples show that EPZs can yield acceptable social rates of return as public investments, even under a conservative evaluation. The conclusion made by Warr is the EPZs can provide an efficient and productive means of absorbing surplus labour in the early stages of development.
As industrial development proceeds, and the surplus labour which characterised the earlier stages of industrialisation is absorbed, interest in EPZs has tended to wane (WARR, 1989a and
1989b). Here, I use the basic structure of this analysis to gauge the benefits and costs of my four cases till present in terms of ex-post evaluation, in order to clarify the question that EPZ is or is not a beneficial public investment project in the past over two decades. Finally, as part of factors of the life cycle of EPZ's, its development trend can be illustrated.
8.1 The components of benefit-cost
Benefit-cost analysis is concerned with the host country's position, which focuses on what kind of benefits can be gained by the host country and what sort of costs should be paid by the host country through the establishment of any public project (GITTINGER, 1972 and 1982). Here, the components of benefits and costs for EPZ project are demonstrated as follow:
410 A. Employment benefit-cost (E)
The creation of employment by the establishment of EPZ is a social benefit that can be created from generating additional jobs beyond the costs. If the wages earned by the workers in the zones are higher than the social opportunity cost of this employment, then the net gain from employment is equal to the total wage of workers in the EPZs minus the estimated social opportunity cost of employing these workers.
Lr = Wz - sc ( 1 )
E: net gain from employment;
Wz: total wages of the workers in the EPZs;
Sc: social opportunity cost of employing those workers.
The social opportunity cost of employment is based on the average market wages outside the EPZs. Since labour markets are regulated by government in some countries, government intervention in wage formation means that actual wages outside the zone do not exactly equal the shadow price of labour.
Hence, most of the research is based on the estimation (WARR,
1989a and 1989b).
s c = F7m
Re = 14 z, / i•7m
Wm: market wage rates;
Re: EPZs' wages as a proportion of the market wage rates.
411 Re = Wz / S c S c = Wz / Re (2 )
So the net gain from employment can be calculated as:
= Wz - S c = Wz - Wz / Re
E = Wz (Re - 1) / ß e ( 3 )
B. Purchase of domestic goods (Dp)
The domestic goods purchased by EPZs' firms are a benefit if the price paid by the zones' firms is higher than the social cost of producing them. Local raw materials and other goods generally compete with imported substitutes, and the duty applied to these imports gives the basis for estimating the difference between the social opportunity cost of providing these imports at CIF prices and the prices paid. The formula can be based on Dp equal to value of purchase minus social cost of these goods.
Dp = Vp - S op (4)
Dp: the net gain from purchases of domestic goods by the EPZs' firms;
Vp: the value of purchases of domestic goods by the EPZs' firms;
Sop: the social opportunity cost of producing the goods purchased by EPZs' firms.
412 Now, let
paid price = Pact;
quantity = Q; and
social cost of producing the goods = Popp.
So, Vp = Q x Pact;
Sop = Q x Popp.
From formula (4),
Dp = Vp - Sop
:. Dp = Vp - Q x Popp.
But Vp = Q x Pact,
V P .. Dp = Vp - x Papp Pac t
= Vp ( 1 - Papp /Pact) IC ) and Rp = 1 - Popp/Pact.
Rp: the difference between the price paid and the social opportunity cost of providing these goods as a proportion of the actual price paid. Here, local purchases replace the imports, and the difference between the social opportunity cost of providing these imports and the 'prices paid can be estimated by using the border CIF prices of these imports and the prices paid.
C. Domestic sales of the EPZs' products
One typical characteristic of EPZs is to export almost all of the output to the international market. However, following development, a certain percentage of EPZs' products is allowed
413 to be sold in the domestic market with duty at the normal rate. The net value to the host country of the products consumed locally is the value at CIF prices of the goods which would be imported; this is also the net price actually paid to the EPZs' firms. Therefore, these sales have no net welfare effects and they are not put into an account.
D. Taxes and other revenues (Tb)
Here, taxes and other revenues include several items. First, there is collection of charges and fees from the zone's enterprises, such as management fees, land rental, infrastructure development fees, charges on providing services
(eg. transport and warehousing). Second, there are taxes and customs charges, such as tax revenues (mainly company income taxes after tax holidays), import licensing fees and customs supervision charges. Third are the services charges of other government agencies, such as labour insurance premiums, banking service charges, public utilities charges (power, water supply, post services and communications).
E. Foreign exchange benefits (F)
Warr has clarified that the foreign exchange earnings of foreign-owned firms in the zone merely constitute transactions between those firms and firms abroad (WARR, 1989). This part of foreign exchange benefit will be paid back to the headquarters of the firms in their mother countries.
414 Therefore, the foreign exchange earnings from exports after deducting imports can not be revealed as net benefits for the
host country. However, the host country can gain foreign exchange benefits from three sources: the wages of workers in
the EPZs; the net surplus between domestic goods purchases
(including raw material, intermediate goods and capital goods)
minus social opportunity cost of those goods; and taxes and other revenue. To purchase raw materials and services from the domestic economy, to employ local workers, and to pay the tax and other charges, the zone's firms have to convert their foreign exchange into domestic currency based on the official exchange rate. When exchange controls and domestic protection mean that the social value of foreign exchange to the domestic currency exceeds the official exchange rate (ie, the domestic currency is overvalued), the conversions of foreign exchange
bring benefits to the host country. The proportional difference between the estimated shadow price of foreign exchange and the official exchange rate yields net foreign exchange benefits:
F = ( F7z t Dp 4- Tb ) ( 1P-1_ ) ( 6 )
F: foreign exchange benefits;
P: the estimated ratio of the shadow price of foreign exchange
to the official rate.
As before, Wz is the total wages of the workers in the
EPZs; Dp is the net gain from purchases of domestic goods by
the EPZs' firms; and Tb is taxes and other revenues.
415 F. Other costs (Oc)
Other costs also include several aspects. First are the costs of the initial development, such as acquisition of land and infrastructure facilities. Second are the costs of the zone's management and operation, such as administrative costs in personnel and property, administrative services like transport, warehousing, health care, security, investment promotion, company registration, licensing. Third are the costs of taxes and customs supervision. Fourth are the costs of services provided by other government agencies, such as insurance, public banking facilities, public utilities including power and water supply, post office and communications.
G. Net benefits (Nb)
Total benefits (E + Dp + Tb + F) minus total costs (Oc) in each year.
H. Interest (discount) rate (i)
It is necessary to chose a proper discount rate to demonstrate the net present value of an EPZ (GITTINGER, 1972 & 1982).
Here, I chose two discount rates to illustrate the option of
building up the EPZ based on the real level of these projects.
I. The result of benefit-cost analysis
416 Finally, the total benefits and costs are equal to the sum of all these items. The result of benefit-cost analysis can be demonstrated in the net present value and internal rate of return. The net present value is calculated from the present worth of gross benefits minus the present worth of gross costs:
irk n Cn E S ( 7 ) t=1 ( 1tz)n
(t=1, the year when a project starts.)
The internal rate of return is that discount rate i such that
ra Bn — n E — O (s) t=1 (1-w1)n where Bn = benefits in each year;
Cn = costs in each year;
n = number of years;
t = 1, the year when a project starts.
Through the calculation, the benefit of a project can be examined by the ratio of net benefit to net cost and comparing the discount rate with the internal rate of return. If the internal rate of return is higher than the discount rate, and benefit is larger than the cost, proving that the project is worth investment.
417 8.2 The benefit-cost of Masan Zone
In Masan Zone, the annual components of benefit-cost analysis are demonstrated in Table 8.2.1.
First, the net gain from employment. In Warr's paper (WARR,
1984), Re is 1.1 by using the firm managers' estimates that average wages for semi-skilled and unskilled workers inside the zone were about 8% to 12% higher than the market wage rates, and taking the mid-point of 10% (WARR, 1984). Here, I use Re equal 1.1 to calculate E in Table 8.2.1.
Second, the benefits from Dp are calculated based on the estimated ratio of shadow prices to market prices of domestic raw material as 0.92 (KOO, 1981; NAM, 1981a and 1981b) introduced by Warr (WARR, 1989) and the value of imports from the domestic market which is listed in Chapter 7.
The rental revenue, taxes revenue and other charges such as management fees and other services fees are listed as Tb.
As for the foreign exchange benefits, according to the research by Koo (1981) and Nam (1981a & 1981b), the estimated ratio of shadow prices of foreign exchange to the official rate is 1.08 in Korea based on average every year. In Table
8.2.1, the foreign exchange benefits are calculated based on P equal to 1.08.
418 The other costs include the construction and development of the zone, the zone's management and maintenance such as the opportunity cost of administrative personnel and the opportunity cost of administrative buildings.
Table 8.2.1: The annual components of benefit-cost in Masan Zone ($US million)
Year E Dp Tb F Oc Nb
1970 0.00 0.00 0.00 0.00 -2.82 -2.82 1971 0.05 0.00 0.00 0.04 -2.69 -2.60 1972 0.34 0.03 0.00 0.30 -2.47 -1.80 1973 1.04 0.83 1.44 1.10 -2.12 2.29 1974 1.34 2.65 1.79 1.53 -0.58 6.73 1975 1.99 1.95 1.55 2.03 -0.37 7.15 1976 3.20 4.44 1.71 3.31 -0.58 12.08 1977 3.94 5.44 1.50 4.02 -0.43 14.47 1978 5.11 6.60 1.85 5.17 -0.48 18.25 1979 6.84 7.82 1.78 6.79 -0.41 22.82 1980 6.23 8.70 1.74 6.32 -0.34 22.65 1981 6.61 9.58 2.31 6.77 -0.30 24.97 1982 7.10 7.57 2.17 7.03 -0.27 23.60 1983 7.78 9.89 2.20 7.81 -0.40 27.28 1984 9.47 11.94 2.30 9.47 -0.50 32.68 1985 9.24 10.17 2.40 9.14 -0.80 30.15 1986 11.73 15.60 2.60 11.78 -1.00 40.71 1987 13.60 22.38 2.80 13.98 -1.05 51.71 1988 24.53 32.05 3.06 24.40 -1.10 82.94 1989 19.63 27.22 2.95 19.69 -1.13 68.36
Source: Calculated from CHOE, 1975; WARR, 1984 & 1989; IMF, 1991 and ASM, 1990. Note: The values are in current prices.
In Table 8.2.1, among the total components, the most important benefits are from the purchase of domestic goods
(Dp), which share about 40% of total benefits. There is a similar level of benefits from both employment (E) and foreign exchange (F), which account for less 30% of total benefits respectively. The most less important benefits are from taxes and other revenues (Tb) with a small percentage of total benefits. Looking through the history of other costs (Oc) and
419 net benefits (Nb), in the early years, the costs were the dominant factor of total components, which influenced that there were three years negative net benefits in the beginning.
However, following the completion of infrastructural construction of Masan Zone, the total costs had declined since
1974. In contrast, the benefits had increased. Thus the net benefits had become positive since the early 1970s. But the situation has changed recently. Total costs have increased since 1983, especially in recent years because of the increase of administrative expenditure. On the other hand, other benefits have declined since 1988 due to the adjustment of capital (see previous chapters), number of employees and participating firms have declined and input-output ratio has also declined in recent years, these lead the net benefits decline too.
Table 8.2.2: Results of benefit-cost analysis in Masan Zone Net benefit Net present value Internal rate of return (X) (SUS million) Life of the zone (years) Net cost (1) (2) (3) (1) (2) (3) 20 (1970-1989)
Result 11.83 10.27 8.75 130.4 103.5 82.9 59 Source: Calculated from Table 8.2.1; CHOE, 1975 and GITTINGER, 1972 & 1982. (1)The discount rate = 10%; (2)The discount rate = 12%; (3)The discount rate = 14%. Note: The interest rate of project loans in Masan Zone is mainly between 12% and 14% (CHOE, 1975).
Table 8.2.2 demonstrates the results for three discount rates: 10%, 12% and 14%. In practice, the interest rate of loans for Masan Zone's projects is between 12% and 14% (CHOE,
1975). Generally speaking, Masan Zone is a beneficial public
420 project. The ratio between net benefit and net cost is quite large in all three interest rates. After 20 years' development, the net present value is at least $US80 million.
The internal rate of return is 59%, which is much higher than the effective interest rate.
8.3 The benefit-cost of Kaohsiung Zone
In Kaohsiung Zone, the annual components of benefit-cost analysis are demonstrated in Table 8.3.1.
First, the net gain from employment is calculated from the following data. The workers inside the zone are mainly unskilled and semi-skilled female workers from Kaohsiung City and other county (rural areas) around Kaohsiung. According to the 'Economic Yearbook of Republic of China', the average agricultural workers' income is about 83% of the non- agricultural workers' income based on average every year data
(EYRC, ANNUAL). I here use the average national manufacturing wages and agricultural sector's income level to estimate the market wage rates. Thus, average wages of workers inside the zone are estimated 3% (between 2% and 4%) higher than the market wage rates (including agricultural sector) (EYRC,
ANNUAL).
Second, for the benefits from Dp, there is no available estimated ratio of shadow prices to market prices on the purchase of domestic goods. Based on the government
421 statistics, the average price of imports after tariff is the
CIF price plus 20% based on average every year (YE, 1981). I here adopt it to estimate Dp.
Table 8.3.1: Annual components of benefit-cost in Kaohsiung Zone ($US million)
Year E Dp Tb F Oc Nb
1966 0.000 0.00 0.00 0.000 -3.31 -3.31 1967 0.003 0.00 0.03 0.005 -2.00 -1.96 1968 0.008 0.00 0.11 0.015 -1.80 -1.67 1969 0.018 0.00 0.46 0.043 -1.70 -1.18 1970 0.030 1.21 0.97 0.128 -1.60 0.74 1971 0.040 2.27 2.24 0.235 -1.50 3.29 1972 0.046 3.25 2.63 0.298 -1.40 4.82 1973 0.068 5.39 4.69 0.496 -1.30 9.34 1974 0.086 5.49 4.99 0.536 -1.28 9.82 1975 0.077 4.85 4.47 0.478 -1.26 8.62 1976 0.107 7.92 5.93 0.700 -1.20 13.46 1977 0.120 8.40 5.25 0.710 -1.25 13.23 1978 0.139 11.96 4.72 0.856 -1.28 16.40 1979 0.164 20.62 4.17 1.215 -1.30 24.87 1980 0.202 21.01 1.36 1.170 -0.97 22.77 1981 0.241 19.46 1.36 1.161 -1.66 20.56 1982 0.234 16.05 1.29 1.012 -1.46 17.13 1983 0.256 17.78 1.28 1.111 -1.88 18.47 1984 0.305 21.37 1.35 1.324 -1.62 22.73 1985 0.317 19.93 1.44 1.286 -1.81 21.17 1986 0.360 22.86 1.66 1.470 -2.11 24.24 1987 0.496 24.57 2.32 1.750 -2.80 26.34 1988 0.495 26.51 3.40 1.870 -3.22 29.06 1989 0.516 21.63 3.97 1.726 -4.45 23.40 1990 0.438 13.23 4.19 1.292 -5.54 13.61 Source: EYRC, ANNUAL; EPZC, 1967-80; SRI; 1981; WANG, 1986; EDEPZ, 1987; IGEPZ, 1990 and ASK, 1990. Note: The values are in current prices.
As for the Tb, they include management fee (0.3% of export value), land rental (from $US0.028 to $US0.44 per square meter per month from the early years to the present), infrastructure development fees and charges on providing services (WANG,
1986; EDEPZ, 1987 and IGEPZ, 1990). In Table 8.3.1, Ab is calculated from the government records from 1966 to 1985
422 (EPZC, 1967-80 and EPZA, 1986), and author's survey which includes the data from 1980 to 1990 (ASK, 1990).
According to the research by the Institute of Economics
Academia Sinica, the average estimated ratio of shadow price of foreign exchange' to the official rate in Taiwan between the early 1960s and the early 1980s'is about 1.04 based on average every year (SHI, 1981). The foreign exchange benefit in Table
8.3.1 is calculated based on this rate.
As for the other costs (Oc), the capital for the initial development mainly came from three sources: the loan from
China-America Fund with 45%; the loan from Transport Bank and
Land Bank with 25% and mortgage loan from Central Bank with
30% (EPZC, 1975). The capital for the costs of thezone's management and operation, and other government agencies' expenditures mainly came from the national treasury (EDEPZ,
1987). In an authority report, the accumulated costs of three
EPZs in Taiwan in terms of present value from 1966 to 1983 was found to be $NT19,343 million or about $US496 million according to the prevailing rate of exchange of $US1 to $NT39
(assuming 10% discount rate)(WANG, 1986). These costs are not only the expenditures of the administration of EPZs, but also include other government agencies' expenditures such as customs office, post office, bank, power and water supply and communications. According to the government report, the costs of the initial development of Kaohsiung Zone were about 23% of the total initial development costs of the three zones in
423 Taiwan (EDEPZ, 1987). In Table 8.3.1, Oc is calculated from the government records of the initial development (EDEPZ, 1987 and EPZC, 1967-80), and author's survey which includes the data from 1980 to 1990 (ASK, 1990).
In Table 8.3.1, among the total benefits, the benefits from purchasing domestic goods (Dp) are the largest with nearly 70% of total benefits. Second is the benefits of taxes and other revenues (Tb) which share over 20% of total benefits.
Comparing with Masan Zone, Kaohsiung Zone has relatively lower benefits from foreign exchange (F) and employment (E), which only share a small percentage of total benefits. As for the other costs (Oc) and net benefits (Nb), since the initial infrastructural construction, the total components were dominated by the costs. Thus during the first four years, there were negative net benefits. The similar situation had occurred as in Masan Zone: following the completion of the infrastructural construction and the development of production, the factors of benefits had increased and costs had gradually declined, which led the net benefits into positive. Till the 23rd year (1988), the net benefits reached the peak and then declined significantly in the following years because of the increase of administrative expenditures and the decrease of the benefits from the purchases of domestic goods, employment and foreign exchange.
Table 8.3.2 reveals the results for three discount rates:
10%, 12% and 14%. In practice, the interest rate on loans for
424 Kaohsiung Zone's projects is about 10% (WANG, 1986). As a result, the ratio of net benefit to net cost is much larger than one in all three interest rate regimes. After 25 years development, the net present value is at least $US40 million.
In addition, the internal rate of return is 39%, also higher than the effective interest rate.
Table 8.3.2: Results of benefit-cost analysis in Kaohsiung Zone Internal rate of return (X) Net benefit Net present value Life of the zone (years) Net cost (SUS million) (1) (2) (3) (1) (2) (3) 25 (1966-1990)
Result 5.04 4.49 3.98 73.8 56.2 43.1 39 Source: Calculated from Table 8.3.1 and GITTINGER, 1972 & 1982. (1)The discount rate = 10%; (2)The discount rate = 12%; (3)The discount rate = 14%. Note: The interest rate of project loans in Kaohsiung Zone is mainly around 10% (WANG, 1986).
8.4 The benefit-cost of Shenzhen Zone
Shenzhen Zone not only has the functions of industrial manufacturing, but also other businesses such as commerce and trade, services, construction, education and science. In order to achieve a reasonable result, I here calculate the benefit- cost of Shenzhen Zone as an entirety, not only focussing on industry as I did before.
First, in Table 8.4.1, the net gain from employment is calculated from the following data: 1. The total wage bill includes the employees' wages in all businesses. 2. The
425 average zone's wage level is about 79% higher than the average national wage level in an average every year basis (based on the calculation in Chapter 6). Since the labour market in
China is regulated by government, the actual wages outside the zone do not exactly equal the shadow price of labour. However, there is no reliable source on the shadow price of labour in
China. Therefore, Re is estimated as 1.79 based on the above judgement.
Second, Shenzhen Zone has a large amount of goods purchased from the domestic market, such as construction materials, consumer goods and intermediate goods for manufacturing.
However, there is no reliable information about the value of purchasing domestic goods. Here, to be conservative, I estimate Dp equal to zero.
Tb includes industrial and commercial taxes, the charges for leasing land and the company income tax.
The ratio of the shadow price of foreign exchange to the official rate is estimated from the situation of foreign exchange in Shenzhen Zone. There is a two-tier pricing system for foreign exchange in China: official rate and effective rate or secondary rate (such as the rate of the Foreign
Exchange Adjustment Centre and the rate of the black market)
(LIANG, 1989 & MARTIN, 1990). Because there has been an extensive capital/exchange market in China, the official rate is expected to underestimate the actual opportunity cost of
426 foreign exchange. As I do not have a reliable shadow price of foreign exchange, here the estimated ratio of shadow price of foreign exchange to the official rate in Shenzhen Zone is based on the effective rate to the official rate, which is about 1.35 in an average every year basis in the 1980s (LIANG,
1989). Since Dp is equal to zero, the foreign exchange benefits mainly come from employment, taxes and other revenue.
As for other costs, there are mainly two factors. One is the basic construction costs including the infrastructure facilities and development projects in industry, agriculture, public utilities (such as power and water supply, transport and communication), commerce and trade, finance, science, education and health, urban construction and others. Another is public financial expenditure for management and maintenance of the zone. Among the accumulated capital of the basic construction in Shenzhen Zone, 2.3% are allocated by the central government, 21.7% are domestic loans, 13.5% are allocated by the province and city government, and the rest is investment by foreign and local firms for their own firms' construction such as factory building, which would be returned by their business profits (SSEZY, 1989). Therefore, the costs of the basic construction should be deducted from the investment of these individual firms. In addition, according to Shenzhen Yearbook, the public financial expenditure includes the government investment in basic construction and other expenditure. In order to avoid double calculation, the
427 costs of financial expenditure here should be deducted from the expenditure of basic construction.
Table 8.4.1: Annual components of benefit-cost in Shenzhen Zone ($US million)
Year E Dp Tb F Oc Nb 1979 8.66 0.0 23.73 15.20 -31.05 16.54 1980 12.81 0.0 36.73 23.05 -47.13 25.46 1981 15.35 0.0 76.72 39.06 -91.69 39.44 1982 23.16 0.0 86.01 48.52 -208.15 -50.46 1983 35.51 0.0 152.22 81.53 -303.02 -33.76 1984 57.53 0.0 189.90 112.24 -445.78 -86.11 1985 76.14 0.0 209.65 133.94 -467.09 -47.36 1986 73.05 0.0 200.43 128.26 -306.47 95.27 1987 95.15 0.0 207.89 148.45 -339.52 111.97 1988 159.61 0.0 336.29 244.66 -566.75 173.81 1989 175.02 0.0 469.25 303.46 -650.89 296.84 1990 201.24 0.0 442.86 315.08 -678.12 281.06 Source: SSEZY, 1985-90 and IMF, 1991. Note: The values are in current prices.
The type of the development in Shenzhen is different from Masan and Kaohsiung. In Table 8.4.1, the most important benefits are from taxes and other revenues, which share over 40% of total benefits. Foreign exchange benefits take the second place with about 30% of total benefits. Third is the employment benefits. On the other hand, Oc demonstrates the costs of the zone have been increased following the development of the zone. That because of Shenzhen is not a small manufacturing area such as Masan and Kaohsiung, but it is a large city with all of the urban functions. As establishing a modern city, the construction projects can not be completed in a short period. Therefore, following the development of the zone, more investment will_be input after receiving a certain 'return'. Nb also reveals a different
428 result from Masan and Kaohsiung. There are three years net benefits in the beginning, then following four years negative net benefits because of the large input of construction projects. And finally a large amount of positive net benefits occurred in recent years.
Table 8.4.2: Results of benefit-cost analysis in Shenzhen Zone Net present value Internal rate of return (X) Net benefit Net cost ($OS million) Life of the zone (years) (1) (2) (3) (1) (2) 13) 12 (1979-1990)
Result 1.15 1.14 1.13 381.7 318.9 267.9 62 Source: Calculated from Table 8.4.1 and GITTINGER, 1972 Iv. 1982. (1) The discount rate = 8%; (2) The discount rate = 10%; (3) The discount rate = 12%. Note: The interest rate of project loans in Shenzhen Zone is mainly under 8% (SNSR, 1988).
Table 8.4.2 illustrates the results under three discount rates. Since the interest rate of project loans in Shenzhen
Zone is mainly about 8% (SNSR, 1988), I here chose three discount rates in 8%, 10% and 12%, which are relatively lower than the rates in Masan Zone and Kaohsiung Zone, but close to the effective interest rate in Shenzhen._ As a result, the ratio of net benefit to net cost is larger than one under the three interest rate regimes. After 12 years development, the net present value is at least $US260 million. In addition, the internal rate of return is 62%, which is higher than the effective interest rate, and about same as Masan.
429 8.5 The benefit-cost of Lat Krabang Zone
Although Lat Krabang Zone started formal operation in 1982, it is part of Lat Krabang Industrial Estate, which has been developed since 1977. There is a working paper on the cost of land development and operating results of the Lat Krabang
Industrial Estate and Export Processing Zone (SUNANTA, 1984), which analysed the financial cost and benefit of the whole estate and EPZ from accountancy point, including initial investment, operating expense and financial revenue, without other social and economic benefits such as employment and foreign exchange benefits. The analysing of the return for the operation is divided into 3 cases in this paper. Case 1: the return for the whole operation at Lat Krabang Industrial
Estate. Case 2: the return for the operation of general industrial zone, and Case 3: the return for the operation of
Export Processing Zone. Each case consists of the study of the result for the operation of the whole period of the project, through the means of the analysis of net present value, internal rate of return and the payback period (SUNANTA,
1984).
The result of the study reveals that the return in case 1 and case 2 are both profitable for the investment, while in case 3 it is found to be unprofitable for the investment since the internal rate of return is less than the interest rate of the loan Lat Krabang Industrial Estate has to pay the World
Bank. However, analysis of the return was done only from
430 financial aspect without considering the economic, social and other aspects. Thus, those benefits resulting from the project but are difficult to calculate in cash value are not taken into consideration, such as: labour employment, distribution of industry into appropriate areas, industrial development etc.
Here, I use the initial costs, operating expense and financial revenue from this working paper, combining with other social and economic benefits to demonstrate a relatively comprehensive components to illustrate the benefits and costs of Lat Krabang Zone.
The employment benefits are calculated from the wage bill of workers in the zone, deducting the social costs of employment. The average wage level in the zone is about 21% higher than the average market wage rates (TDRIF, 1990).
Therefore, Re is equal to 1.21.
As for the benefits from Dp, 5% of imports come from the domestic market. However, since there is no available data on total imports, I here only assume there are no benefits from Dp.
As for the foreign exchange benefits, based on the floating of the Baht in 1980s (IMF, 1991), the supply and demand of foreign exchange by the influence of exports and imports
(adjusting the official exchange rate for subsidies, tariffs
431 and tariffs equivalents), assume the estimated ratio of shadow price of foreign exchange to the official rate in Thailand is around 1.06 (PHAICHITR, DIREK & CHANIN, 1987). Since Dp is equal to zero, F here is mainly from the wages of employees, taxes and other revenue.
Table 8.5.1: The annual components of benefit-cost in Lat Krabang Zone MS million) Year E Dp Tb F Oc Nb 1977 0.00 0.00 0.00 0.00 -0.28 -0.28 1978 0.00 0.00 0.00 0.00 -0.07 -0.07 1979 0.00 0.00 0.00 0.00 -0.56 -0.56 1980 0.00 0.00 0.00 0.00 -1.45 -1.45 1981 0.00 0.00 0.00 0.00 -0.17 -0.17 1982 0.15 0.00 0.02 0.05 -0.03 0.19 1983 0.25 0.00 0.12 0.09 -0.03 0.43 1984 0.37 0.00 0.63 0.17 -0.05 1.12 1985 0.52 0.00 0.88 0.24 -0.09 1.55 1986 0.68 0.00 0.71 0.28 -0.10 1.57 1987 1.59 0.00 0.31 0.58 -0.06 2.42 1988 2.07 0.00 0.31 0.75 -0.06 3.07 1989 5.69 0.00 0.32 2.03 -0.08 7.96 1990 8.11 0.00 0.36 2.88 -0.13 11.22 Source: Calculated from SUNANTA, 1984; TDRIF, 1990 and ASLK, 1991. Note: The values are in current prices.
Table 8.5.1 tell us that the situation of Lat Krabang Zone is also different from other three zones. First, the most important benefits are from neither Tb nor Dp, but from E. The benefits from employment share over 70% of total benefits. On the other hand, since Lat Krabang Zone is part of Lat Krabang Industrial Estate, some of the initial development had been done before 1982, when the zone started the formal operation. Therefore, in the first five years (between 1977 and 1981), there were only the costs of the initial development. The net
432 benefits have appeared since 1982 and the net benefits has increased in recent years.
Table 8.5.2: Results of benefit-cost analysis in Lat Krabang Zone
Internal rate of return (X) Net benefit Net present value Net cost (MUS million) Life of the zone (years) (1) (2) (3) (1) (2) (3) 14 (1977-1990)
Result 5.29 4.52 4.05 10.3 8.1 6.4 34 Source: Calculated from Table 8.5.1 and GITTINGER, 1972 & 1982. (1)The discount rate = 8%; (2)The discount rate = 10%; (3)The discount rate = 12%. Note: The project loan for the Lat Krabang Zone is from the World Bank with 8% interest rate (SUNANTA, 1984).
Table 8.5.2 reveals the results under three discount rates.
Since the project loan for the development of Lat Krabang Zone is from the World Bank with 8% interest rate (SUNANTA, 1984),
I here chose three discount rates, 8%, 10% and 12%. The ratio of net benefit to net cost is higher than one. The net present value is at least $US6 million. In addition, the internal rate of return is about 34%, which is also higher than the effective interest rate.
8.6 Summary
Comparing the components of benefits and costs of the four zones, we have seen there are different factors of the main
benefits among the four zones. As for Masan and Kaohsiung, the
most important factor of benefits is Dp with about 40% and 70% of total benefits in each zone. However, in Shenzhen, the
433 first important source of benefits is Tb with over 40% of total benefits. In Lat Krabang, over 70% of total benefits are from employment. Moreover, the trend of net benefits is also different between the four zones. Masan and Kaohsiung have similar pattern: in the beginning 3 to 4 years, there were negative net benefits. After that, the net benefits became positive and kept to increase. However, they have declined in recent years. Shenzhen has a different situation, where the negative net benefits occurred in the middle for several years because of the large unfinished construction projects as part of urban infrastructural facilities. After that, there is an increase of positive net benefits till recent years. Since Lat
Krabang Zone is part of the industrial estate, the initial development started 5 years earlier than the zone began to operate. Therefore, there were 5 years negative net benefits.
However, since the zone started to operate in 1982, the net benefits has gradually increased till recent years.
Table 8.6.1 summarises the results of the benefit-cost analysis of the four zones. The discount rates are chosen differently in these zones, which are relatively close to the effective interest rate in these areas.
The ratio of net benefit to net cost is highest in Masan
Zone among the four zones. Although the ratio in Shenzhen Zone is the lowest, the net present value is far larger than other three zones. This is because the absolute value of both cost and benefit is huge. The ratio between them is small but the
434 gap of value between them is still larger than in the other zones. In addition, Lat Krabang Zone has relatively lower level of the net present value than others. If we focus on the effective interest rate to compare the net present value
between Masan Zone (over 12%) and Kaohsiung Zone (about 10%),
we can see the level in Masan is relatively higher than in
Kaohsiung. Furthermore, the internal rate of return is
relatively higher in Shenzhen Zone, but it only has 12 years development history. For the long run, both Masan Zone and
Kaohsiung Zone have a high internal rate of return.
Table 8.6.1: Comparison the results of benefit-cost of the four zones
Name of Net benefit Net present value Internal rate zone Net cost (SUS million) of return Discount rate Discount rate (X) 8% 10% 12% 14% 8% 10% 12% 14%
Masan 11.83 10.27 8.75 ---- 130.4 103.5 82.9 59 Kaohsiung ---- 5.04 4.49 3.98 ---- 73.8 56.2 43.1 39 Shenzhen 1.15 1.14 1.13 ---- 381.7 318.9 267.9 ---- 62 Lat Krabang 5.29 4.52 4.05 10.3 8.1 6.4 ---- 34 Source: Table 8.2.2; Table 8.3.2; Table 8.4.2 and Table 8.5.2.
In summary, these zones have a definite positive effect on social and economic welfare to these host countries in the
past. Through the benefit-cost analysis, we have seen that each zone has received certain net benefits. All of them have a positive net present value. Even the internal rate of return
indicates these zones were worth developing.
435 CHAPTER 9
CONCLUSION
To conclude this thesis I first summarise the results I have achieved from this research. The main results are placed in the context of my research questions and other literature critiques, in particular the differences between my conclusions and those of other critics. The life cycle of the zones is interpreted from the main economic indexes which were calculated in the previous chapters. Second, I reflect on the results by demonstrating my own approaches towards theoretical and practical approaches to the development of East Asia and
EPZs. Finally, I provide some constructive suggestions towards the futures of the four zones.
9.1 Summary of the results
This study has evaluated the phenomenon and impact of EPZs in four East Asian countries. The aim of the research has been to clarify specify theoretically and practically in order to reveal the role of EPZs in these countries' development. With my research aims and questions, I have chosen four representative EPZs in four East Asian countries: Masan in
South Korea, Kaohsiung in Taiwan, Shenzhen in China and Lat
Krabang in Thailand. These four cases represent two degrees of industrialisation in developing countries. The cases in Korea and Taiwan represent the development pattern of newly
436 industrialising countries (NICs) or newly maturing economies
(NMEs), and the cases in China and Thailand represent the development in less-developed developing countries. Through these comparisons, we can see different levels of development and different stages of industrial restructuring between the two types.
9.1.1 General review of the thesis
In the beginning of the thesis, I introduced the development, procedures and present situation of EPZs over the world. The history of free trade areas in the world, the establishment of
EPZs and their definition and characteristics, the differences between various special economic areas, and the present situation of EPZs in the world are all described.
With regard to the literature debate about development, direct foreign investment and EPZs, I generally review the theoretical approaches to development by Neo-classicism,
Dependency and Marxism and their interpretation of development strategies in East Asia. Then, the main body of the literature review relevant to EPZs is revealed, which includes the approaches to direct foreign investment in terms of international trade, industrial organisation, the advantage of ownership, internalisation and location. In addition, theoretical and practical statements about EPZs are reviewed.
437 Then I focus on the historical cases of the four zones to demonstrate the political and economic background to the establishment of EPZs, and their coordination with national development strategies. Attention is focused on the investment environment, in terms of both policies and physical utilities.
The investment structure demonstrates the ownership structure of EPZs' firms, their capital sources, industry sectors and the adjustment of capital in EPZs. Moreover, the behaviour of direct foreign investment and its role in industrial restructuring between developed countries and developing countries are clarified.
Employment in the zones is analysed by gender, age group, educational level, recruitment and mobility of labour. By analysing employment by industry sectors and labour intensity, the characteristics of manufacturing in EPZs are further revealed. Moreover, the important issue of working conditions, which include wages (both money wages and real wages), working hours and shifts and other welfare are also examined in this chapter. By comparing wage levels in EPZs, the host nations and developed countries (mainly investing countries), labour costs in different regions are revealed -- an element of the industrial restructuring occurring between developed countries and developing countries. In addition, the relevance of wages to purchasing-power-parities (PPPs) illustrates differences in real incomes and living standards of workers in the different regions. Finally, the sensitive issues of unionisation in the
438 zones and managerial relations between foreigners and local people are also examined.
In order to explain the role of EPZs in national economic development, I measure the output of products by industry sectors, the constitution of imports and exports, value added and productivity, and compare these indexes between the four zones, their nation and other developed countries. In addition, I gauge the four zones' overall performance by means of benefit-cost analysis, in terms of economic and social welfare to the host countries.
9.1.2 The results of the thesis
The background to the establishment of the four zones demonstrates that EPZs are set up by host governments to promote their economic development and lead to political stability. Under import-substitution strategies, domestic manufacturing production increased significantly (saturating the domestic market), large numbers of people left the agricultural sector, and the national trade deficit rose, so the host governments intervened with adjusted strategies. The new strategies were designed in the light of the lack of capital in the domestic economy, so that attracting foreign investment was the policy to adopt. However, the host countries had little experience in dealing with direct foreign investment in the early years. In addition, domestic manufacturing production was not strong enough to compete with
439 foreign MNEs. Furthermore, the domestic market had saturated.
The emergent problem appeared: with the aim of promoting exports, how could governments allow direct foreign investment
within the nation without foreign firms taking over the domestic market? The solution was to delimit a separated area from the nation for foreign investment, especially joint ventures between foreign and local capital, using foreign capital (and management skill, information and marketing), to lead domestic manufacturers to exploit the international market, create employment and expand purchases of domestic raw materials and intermediate goods. Therefore, the legislation on EPZs ruled that EPZs' products were mainly for exports; only limited output could be sold on the domestic market. This role obviously reveals the adjusted strategies, characterised by simultaneous export promotion and import substitution
(protection). Since the EPZ is delimited from the nation, if there are problems in its development, the negative influence is only partial. For the host government, the establishment of
EPZ is in the nature of an experiment.
In most cases, foreign investment plays the main role in the value of investment and number of EPZs' firms. In a special case like Shenzhen, domestic capital takes a relatively important part, but foreign investment still has significant influence. Sole-owned firms are the majority among the different types of firms in the zones. Of the foreign investors, the Japanese are involved more than American and
European capital. A new phenomenon is that East Asian newly
440 industrialising countries' capital plays the main role in the less-developed developing countries. Moreover, the manufacturing sectors in the zones are mainly light industry, especially electronics and electric production. The firms in the zones are mainly small and medium size.
In the mature zones, the main adjustment of manufacturing sectors has occurred since the second oil crisis in the 1980s, from labour-intensive production to more capital/technology intensive production. Some of the labour-intensive production has shifted to other developing countries as well. However, these transformations occurred after labour intensive producers had operated in the zone for a time.
Employment in the zones is dominated by female participation. In addition, the manufacturing sectors are mainly labour intensive, despite the fact that labour intensity decreased and capital intensity increased in the mature zones since the mid-80s. EPZs do have an impact, by creating employment opportunity and sharing a large percentage of manufacturing employment in the local area. The trend of employment in the past is different in the four zones. As mature zones, Masan and Kaohsiung have operated about two decades and the level of employment has recently declined. In contrast, Shenzhen and Lat Krabang are in the take-off stage, so employment keeps increasing at present.
441 Some other phenomena of labour structure are worth remarking. In the early stage, labour mainly came from rural areas. Following economic development, urban sources comprise the majority of the labour forces in the zones, because many rural areas have been developed as industrial urban areas. The educational level of workers has increased as well. However, the firms in the EPZs only provide simple training programs in order to familiarise workers with production procedures. Only limited key employees get formal technical and skill training, mainly arranged overseas.
The relation between wage levels in EPZs and their nations is different in the fo r zones. In Taiwan, national wage levels are higher than zones' wage levels. In contrast, the wage levels in Shenzhen and Lat Krabang are higher than the wage levels of national manufacturing. In Korea, the national wage levels are higher than zone's wage level, but the situation has changed in recent years. These reflect the fact that different zones in different countries have a different situation; it is not a universal principle that the wages in the zone are only higher (or lower) than outside zone's wages.
In comparing wage levels between genders and occupations: normally the wages of male or management staff are twice those of female or ordinary workers.
The clarification of labour costs, real incomes and living standards between developed countries and the four zones demonstrates several points. First, there are three categories
442 of labour cost reflected in nominal wage levels. Japan and
America represent the highest labour cost places. Hong Kong,
Masan and Kaohsiung are the medium. Lat Krabang and Shenzhen
are the lowest labour cost places. In terms of real incomes
and living standards, the comparison of the purchasing power
of wages in these regions shows that the developing regions
have been gradually becoming closer to the developed regions
in the past two decades.
The evidence indicates that it is necessary to have trade
unions in the zones for their positive impact is much stronger
than the negative one. They are an important key to improve
workers' social position, working conditions and living
standards, and active compromises in industrial relations. As
for the management structure: in the early stage, most
management occupations had been taken by foreign managers in
most foreign capital firms. However, following the development
of production and training of key employees, the ratio of local participation has gradually increased. At present, local
managers are more than foreign managers in most zones.
In the early stage, EPZs had a tremendous linkage with
international economy, and the inward linkages with the domestic economy appeared relatively weak. However, following the development of both EPZs and the domestic economy, the linkages between them have been improved significantly, which is reflected on the increased purchases of domestic goods by the EPZs' firms and the domestic sale of the EPZs' products.
443 Most EPZs' products are exported to the overseas market,
especially developed countries, such as North American.
There has been an important impact of the EPZs on their
national economy, as they transferred from import-substitution
to export-orientation. This is demonstrated by the performance
of exports and the trade surplus between the EPZs and their
nations, especially in the period of international crises.
However, since each EPZ is a small delimited area with a limited capacity, its exports share only a small percentage of the total national exports.
Industrial productivity in the EPZs was lower than in the nation as a whole in early times. But following the development of manufacturing in the zones, their productivity has been improved dramatically, and EPZs' productivity is now higher than the national average level. The comparison of
labour productivity and wage levels between the four zones and other developed countries indicates that the labour
productivity gap between them is much less than the gap of
wage levels. Labour intensive manufacturing restructuring
between zones is again necessary to achieve productive competitive advantage.
Finally, the benefit-cost analysis provides the result that
these zones have a definite positive effect on social and economic welfare in host countries in the past. They are
beneficial public investment projects. The analysis in the
444 thesis has more positive results than Warr's analysis based on
a downward estimate (WARR, 1989a & b).
9.1.3 The life cycle of the zones
To analyse the life cycle of the zones, the mature zones such
as Masan Zone and Kaohsiung Zone are the most suitable examples, having developed over two decades. In the earlier chapters, we have seen many indications of the significant changes that have happened in recent years in these zones. I
here use the main economic indexes in the two zones to
illustrate the pattern of the EPZ's life cycle. The indexes
include the number of participating enterprises, the level of employment, labour and capital intensity, share of dominant
industry in total employment and output, nominal wages, purchasing power of wages, total investment, marginal output
per unit of investment (capital productivity level), net exports, net benefits, share of sales on domestic market, share of purchasing domestic goods, and labour productivity level.
Figure 9.1.1 indicates the pattern of number of firms and employment, and the level of labour and capital intensity. In
Masan Zone, the number of firms reached a peak in the 4th
year, and has declined since then. The latest level (in 21th
year) equals the level in the 3rd year. In addition, after a dramatic increase in the first 4 years, employment became stagnant between the 5th and 18th year (with a few slight
445
Figure 9.1.1: Pattern of EPZ life cycle (I)
120
100
80
60
40
20
0 0 5 10 15 20 25 YEAR
180 -
150 -
120 -
90 -
60
30 -
0 0 10 20 30 YEAR
y Capital intensity ($US0.1 million/firm) A Labour intensity (No. of employee/$ÚS10 capital) O Number of employment (1,000 persons) •Number of firm
Source: Author's compilation based on VAN, 1983; HEALEY, 1989; ASM, 1990; MTIK, 1989; EDEPZ, 1987 and MSR, 1988-90.
446 increases). However, employment started to decline after the
19th year and the latest level is about the level in the 3rd
or 4th year. On the other hand, there are contrasting trends
in labour intensity and capital intensity: the former has declined during the second decade but the latter has increased, especially in the last 5 years. In Kaohsiung Zone, a similar pattern has occurred. The number of firms has declined since the 8th year and the latest level (in the 26th
year) is even lower than the level in the 2nd year. Employment reached a peak in the 8th year. After that, the number has declined after being stable for over one decade. However, employment declined sharply in the last 4 years and has reached the same level as in the 3rd or 4th year. On the other hand, the level of labour intensity declined dramatically and the level of capital intensity increases consistently.
These phenomena indicate that the number of participating firms and level of employment in the zone have declined significantly as the years go by. Labour intensity also declines and the capital intensity increases dramatically.
These prove that manufacturing in the zones has become more capital intensive and less labour intensive following the zones' development.
Figure 9.1.2 demonstrates the pattern of the share of dominant industry in total employment and output, the nominal wages and the purchasing power of wages. -
447 Figure 9.1.2: Pattern of EPZ life cycle (II)
100
80
60
20
o o 5 10 15 20 25 YEAR
YEAR
y Share of dominant industry in total output. (%) A Purchasing power of wages in $US (US PPW as 100) O Nominal wages ($US10/month) - Share of dominant industry in total employment (%)
Source: CHOE, 1975; HEALER, 1989; EDEPZ, 1287; MSR, 1990; SUMMERS and HESTON, 1980., 1984 and 1987.
448 In Masan Zone, the share of the dominant industry (here,
electronics and electric manufacturing) in total employment
has slightly increase (unfortunately, there are only two
years' data available), but the share of total output has
significantly increased. On the other hand, both nominal wages
and the purchasing power of wages show a tremendous increase
as the years pass. Similar patterns appear in Kaohsiung Zone.
As the years go by, both the share of the dominant industry
(here, electronics production) in total employment and output
value have increased steadily. On the other hand, both nominal
wages and purchasing power of wages have increased
dramatically.
These phenomena prove several things. First, they contrast
with the claim of ILO and UNCTC (1988) that the share of the dominant industry tends to decline as the years go by. Second,
they disprove the criticism by Rondinelli (1987), and Frbel
and his colleagues (1980) that EPZs have little effect on social and economic welfare in the region, and offer
insufficient wages which can only cover the basic costs of living. The fact is that the wages have increased dramatically and even the purchasing power of the wages has caught up with the standard of the United States as the years go by. These increases also involve a third issue: as a factor in
production costs, the increase of wages became an important concern for investors, in terms of the investment location, and the product to be manufactured. This concern has been reflected in the claim by Clifford (1990) that rapid increases
449 of wages in EPZs damage their comparative advantage in unit- labour costs from the investors' point of view.
Figure 9.1.3 illustrates the pattern of total investment, marginal output per unit of accumulated investment, net exports and net benefits. In Masan Zone, total investment has slightly increased as the years passed. In contrast, the other three trajectories [marginal output (output per unit of accumulated investment), net exports and net benefits] reached a peak in the 19th year, and after that, they all started to fall. In Kaohsiung Zone, total investment has also slightly increased, but it became stagnant in the latest years. On the other hand, the marginal output reached a peak in the 22nd year, declining sharply after that to finally reach similar level as in the 6th year. In addition, net exports have significant increased till the 24th year but they dropped in the latest year. Moreover, the net benefits increased until the 14th year; then there is stagnation until the 23rd year, when the net benefits peak; and after that, they decline in the latest years.
These patterns indicate that, although total investment has slightly increased or stagnated as the years passed, other trajectories which link to the benefits, such as output per unit of input, net export and net benefits have passed their peak after about two decades of EPZs' development. These are important for both the host country's administration and investors to concern about the period of the efficiency of
450 Figure 9.1.3: Pattern of EPZ life cycle (III)
100 -
80 -
60 -
40
20 -
0
-20 0 5 10 15 20 25
YEAR 120 - 100 - 80 - 60 40 - 20 - 0 - -20 0 10 20 • 30 YEAR
y Net exports (FOB $US10 million) 0 Total investment ($US10 million) O Net benefits ($US million) •Marginal output ($US10.00)
Source: VAN, 1983; MTIK, 1989; EDEPZ, 1987; MSR, 1988-90; Table 8.2.1 and Table 8.3.1.
451 an EPZ project.
Finally, Figure 9.1.4 reveals the pattern of share of sales on domestic market in total output, the share of purchasing domestic goods in total input and the labour productivity level. In Masan Zone, following the development of manufacturing in the zone, the linkage between the zone and the domestic economy has been improved. Both patterns of share of sales on domestic market and purchasing domestic goods have increased during the two decades (apart from several years stagnation in the middle). On the other hand, productivity also increased as the years went by, reaching a peak in the latest year. In Kaohsiung Zone, the situation is slightly different from Masan Zone. First, the share of sales in the domestic market is zero till the 22nd year, when there is a slight increase; even then it shares only a small percentage of total output. Second, the purchase of domestic goods reached a peak in the 14th year; after that, it has declined slightly and stagnated. However, the pattern of productivity is similar to that in Masan Zone. Following the development of manufacturing in the zone, the productivity level kept increasing and reached a peak in the latest year.
These patterns indicate that different zones may have their own specific situation. Generally speaking, however, these phenomena prove that following the EPZ's development, its ties to the domestic- economy have been strengthened and productivity has been improved significantly. These data
452 Figure 9.1.4: Pattern of EPZ life cycle (IV)
100
80
60
40
20
YEAR
10 20 30 YEAR
Productivity level (value-added per worker per annum, $US1,000) O Share of purchasing domestic goods in total input (%) •Share of sales on domestic market in total output (%)
Source: MAFEZ, 1989; KEPB, 1990; IMF, 1990; VAN, 1983; MTIK, 1989; EDEPZ, 1987; MSR, 1988-90; WARR, 1984; HEALEY, 1989 and ASM, 1990.
453 disprove the claim by Rondinelli (1987) that EPZs have few
backward or forward linkages with local economies, provide few
benefits for the development of domestic industries, and have low industrial productivity.
These data allow the pattern of life cycle of EPZ's development to be summarised. Although different zones have different situations and backgrounds, there are some common characteristics of their development pattern. To the host country's administration and investors, these patterns provide an important enlightenment about the most efficient development period of EPZ. From these two representative zones in such newly maturing economies (NMEs) as Korea and Taiwan, we have seen that the trend of development in terms of beneficial indexes (eg: marginal output, net exports and net benefits) has been upward for about two decades. However, since the peak at the end of the second decade, they have been declining in the latest years. In contrast, production costs
(eg: labour costs and administration costs) have been increasing and reached a peak in the latest year, although labour productivity and capital intensity have been improved as well. Generally speaking, the development of EPZs reaches a peak after two decades; the most exuberant time of the EPZs' life cycle is basically around 20 years.
I claim that the decline of the EPZs' life cycle in Korea and Taiwan after two decades is directly relevant to the restructuring of manufacturing, and national and international
454 economic development. The traditional types of labour intensive processing firms in these zones are facing a shrinkage of their export markets, as quota limitations in developed economy markets become stricter; and they are losing their competitive advantages, because of the dramatic increase of input costs (not only wages, but also other expenditures, such as rental, administration services charges) and the decline of marginal output level and net benefits. On the other hand, other developing countries, such as Thailand and
China now also offer similar incentives but with more attractive conditions, like abundant resources and cheap labour, more development spaces, and less strict quota limitations from developed economy markets. These factors force the enterprises in the maturing zones to change their production or transfer to other developing economies. These changes of production scale and structure make the pattern of life cycle of the maturing EPZs to appear as the trend of shrinkage. The fundamental issue of shrinkage is not the nature of zones' ageing, but the national and international industrial restructuring; this enforces the EPZs' production decline since the characteristics of labour intensive simple processing manufacturing, after the EPZs have led the national economic transition from import-substitution to export- orientation. For countries like Korea and Taiwan, their economies have already changed from newly industrialising economies to newly maturing economies, these changes appearing in the development of EPZs are not unavoidable. It is not an
455 universal rule for other developing countries, only can be
revealed as a reference.
9.2 Reflection on theoretical and practical approaches
In response to arguments about development strategies in East
Asia and EPZs from different theoretical and practical approaches, I here reflect on the empirical evidence of the case studies.
9.2.1 Reflection on theoretical approaches
First, with regard to the issue of development, three schools
(Neo-classicism, Dependency and Marxism) have different judgements. For the neo-classical school, development means economic growth, and this kind of growth fundamentally relies on economic freedom and private (individual) development.
Government intervention should be limited to creating an environment which can promote and guarantee individual development. Tn contrast, dependency critics argue that the international political and economic systems determine the fundamental problem: that only developed countries can develop and their development relies on the underdevelopment of the developing countries. Therefore, they believe that development in neo-classical terms cannot happen in developing countries, and they suggest that development can be achieved in the developing countries only by cutting off the dependent linkage with the developed countries (the centre) and carrying out
456 self-reliant development. However, Marxists have different viewpoints. They claim the problem of underdevelopment in the developing countries has arisen from the backward production relations, which block the development of productive forces.
Developing countries can have development if the backward production relations change. This change is reflected in social structure and classes. There is a great promotion for this change, which can be provided by government intervention.
Meanwhile, foreign trade and capital may also provide an impetus for the transformation of social relations in developing countries. The variations within the three schools are obvious: the neo-classical school believes the mechanism of free market systems, and the role of government is to remove any form of coercion from markets with moderate intervention; the dependency school claims the independent and self-reliant development pattern is the desirable way for the development of the periphery; the Marxists emphasise changing the social structure and classes to realise social progress.
The argument has also expanded into the issue of East Asian development pattern. The neo-classical side believes that East
Asian countries have a great economic growth in the past three decades because they carried out free market policies, through export-oriented economic strategies to realise their comparative advantage. Government impact is limited, the intervention of government is relatively moderate. However,
Marxists claim the fundamental reason for East Asia's development is the significant change of class structure,
457 which creates more advanced production relations. The change
of social structure is directly linked to government
intervention. The direction of government policies is firmly
on realising their political goal and industrialising, to
insure high levels of productive investment, more investment
in certain key industries, and exposure of many industries to
international competition. The government governs the market,
which is far beyond moderate intervention. Even when export-
oriented strategies dominate economic development, import-
substitution policies have only been modified to protect certain domestic industries under government intervention.
Dependency critics mainly focus on uneven development in Latin
America and Africa; some try to claim that the relatively successful development of East Asia has been due to their fewer linkages with developed countries (EVANS, 1985). Since the development pattern in East Asia is far beyond the approach of dependency, its illustration has been basically
ignored.
With regard to the approaches about development and East
Asian development pattern, I argue in the thesis that the
historical evidence of Taiwan, Korea and Thailand shows that the host government adopted strong import-substitution
policies in the early development stage. Import-substitution
policy had its positive effect in history. In order to reduce the trade deficit and expand foreign markets, as well as to
protect domestic production and markets, import-substitution
policy has never stopped, even when export-oriented strategies
458 dominate economic development. Rather import-substitution
policy has been modified to coordinate with the export-
oriented strategy. On the other hand, the historical evidence
of China which practiced a closed door policy for nearly three
decades is a typical example to prove the failure of adopting
a dependency ideology. That negative experience led the
communist party to recognise that reforming the old economic
system and re-establishing connections with the world economy
(developed capitalist countries) would be the only policy for
China's economic development. But that does not mean giving up
protection and government intervention, but making them more
efficient. Hence, the answer is neither the dependency's
suggestion of cutting off links with the centre (developed
capitalist countries) and only practicing import-substitution,
nor the free market model recommended by the neo-classical
economists, who believe the success of East Asia arises from
free markets, free trade and moderate government intervention.
In fact, government interventions in economy relied on their
super political hegemony. The slogan of 'free market and free
trade' is shouted to other markets for East Asian exports, but
not their domestic markets. The recent phenomenon in East
Asian countries of partially liberalised economies is a
response to the pressure of retaliation from both internal
forces (large domestic capital groups) and external powers
(other developed countries, especially America), but not
voluntary policy formation. Based on this judgement, I believe
that the approach of the political economic side is more
accurate.
459 Second, there are several theoretical approaches relevant to the issue of direct foreign investment: industrial organisation theory, international trade theory, and 'eclectic theory'.
Industrial organisation theory (HYMER, 1979) claims that the MNEs' desire to control foreign operations is the central motive for direct foreign investment. The control by the foreign investor is not merely a desire to determine the prudent use of assets but a strategic move to eliminate competition between the investing firm and firms in other countries.
International trade theorists, such as Vernon (1976), explain direct foreign investment by reference to the product cycle theory. This claims that the production technology of a new product improves as time passes; the maturing of technologically advanced products tends to press enterprises toward establishing overseas production units, a move necessary to protect or prolong their position. The evidence is mainly from the case of U.S. MNEs. Also from international trade theory, Kojima (1982) and Ozawa (1979) have a different approach. They believe that direct foreign investment should originate in the investing country's comparatively disadvantaged industry. The recipient country can develop a comparative advantage in the same industry. The Japanese-type direct foreign investment was originally dominated by labour intensive industry with simple technology transplanted from
460 Japan to developing countries. In this type of industry, big
Japanese firms may maintain a strong comparative advantage and continue to export, but small and medium firms, being marginal, inevitably lose competitive capacity and must go abroad (KOJIMA, 1982 & OZAWA, 1979).
However, an 'eclectic theory' attempts to reconcile the controversy between the different approaches. Dunning (1977) claims that the costs of transferring knowledge and coordinating economic activities from research and development and finance via production to marketing and after-sales service are lower inside firms than in market exchange between independent firms since there are not perfect markets. These offer incentives for firms to internalise activities, which leads to MNEs spreading over the globe. He summarises the theory that the international competitiveness of a particular country depends on the ownership endowments of its enterprises; on its locational endowments, relative to those of other countries; and the transfer costs in moving goods and services from one country to another. The locational advantages will be the key influence on where production takes place. The origin of ownership endowments rests on internalising economies; these also may influence the location of enterprises (DUNNING, 1977).
In view of the discussion of DFI, the argument between different schools has a significant mutually complementary effect. In fact, every individual school infers why, how,
461 where and when DFI occurs, but in a relatively narrow sense.
For the fundamental motivation of DFI, I believe the claims by
Marxists are acceptable, that capitalists are forced to innovate and expand production to search for maximum profit, because if they fall behind they will be driven out of business by their competitors. In terms of these, DFI is a part of survival and competition, expanding from one location or country to several locations abroad. This is the basic principle -- the internal cause of DFI. Other factors, such as how, where and when DFI occurs, are all determined by the conditions of specific firms, economic situation and investment environment. According to the size of firms and the structure of their industry sectors, different types of firms practise DFI by using these conditions in different ways, and their behaviour is not immutable. Therefore, direct foreign investment is not only limited to large MNEs which have a lot of competitive advantages, but also small and medium size firms with different industry sectors; not only the developed countries' MNEs, but also developing countries' MNEs, though they may have different transaction behaviour.
The empirical evidence in EPZs shows that the majority of
EPZ firms are small and medium size with investment under
$US0.5 million (see Chapter 5). Industry sectors are mainly labour intensive and simple process manufacturing (see Chapter
5, 6 and 7). This kind of firm is relatively losing its production advantage in its home country and has to transfer production to abroad, such as to EPZs in developing countries.
462 In contrast, the investment of large MNEs in EPZs is not
because they have lost competitive advantage in their home countries, but as part of their global development strategy.
Most production technology transferred by large MNEs is higher than that of small and medium size firms. The control system
between headquarter and subsidiaries is also different between large MNEs and small and medium size firms. Large MNEs gradually give up the traditional tight control between parent company and subsidiaries abroad which is still practiced by most small and medium size firms. By using new management systems, the large MNEs' headquarters allow the individual subsidiaries to develop independently, such as self- determining R & D, production and marketing. Therefore, I believe the issue does not lie only in the pattern of either the anti-trade-oriented American-type suggested by Vernon or the trade-oriented Japanese-type argued by Kojima and Ozawa; rather the size of firms and their production structure determines the behaviour of direct foreign investment. On the other hand, the internal linkages of large MNEs between parent companies and subsidiaries are far beyond the ideology of industrial organisation approach and 'eclectic theory' about internalisation. There is also no satisfactory explanation about why third world countries' MNEs invest overseas, including in developed countries. Although the 'eclectic theory' tried to make up the defect in direct foreign investment theories between international trade approach and
industrial organisation approach, a new theoretical approach
with more complete analysis is necessary since there are new
463 investment styles occurring and the international investment
environment has changed.
Third, the issue of the development of EPZs in developing
countries is also argued by the neo-classicists, the Marxists
and the dependency theorists.
Theoretically, the neo-classicists believe that EPZs are
part of a liberalised export-oriented and free trade strategy
(KRAUSE, 1985). But it is still a second-best method of
attracting DFI into the export industries for host countries
wedded to protecting their import-competing industries
(BALASUBRAMANYAM, 1988). They believe the first-best method is
the adoption of a liberal foreign trade regime bereft of
tariffs and quotas on imports: DFI would then be attracted to
the labour-intensive exportable industries to take advantage
of the relatively cheap labour of these countries. However,
the political economy side believes that the creation of EPZs
has not been based on free trade (WADE, 1990). The government
has intervened in trade: the volume and composition of imports
have not reflected domestic demand in relation to
international prices; exports have been promoted by both price
and nonprice means in the context of macroeconomic stability
(WADE, 1990). Moreover, the establishment of EPZs is also a
political tool to coordinate the national goal (WOO, 1991). In
contrast, the dependency critics basically have an opposite
attitude toward the development of EPZs in developing
countries. They believe that there are mainly negative effects
464 to host countries by establishing EPZs. The problems include:
workers in the zones being 'super-exploited' compared with those of the industrialised countries; EPZs would not induce industrialisation but would intensify the uneven and dependent development of developing countries; EPZs worsen the situation of structural unemployment in developed countries (FRÖBEL et al, 1980).
I do not believe that EPZs are a liberalised tool for developing countries that are applying free trade and free
market ideology as viewed by the neo-classical theory.
Actually, the host country of EPZs would rather ask other countries to be liberalised and open the market to EPZs' products than open its own domestic market to these products.
The limit on domestic sales as a restrictive regulation is
typical evidence. I also argue with the approach by
Balasubramanyam that EPZs are the second-best method of attracting direct foreign investment into export industries for host countries. The problem with the first-best method is that the host government could not protect the weak, recently established domestic manufacturers who face competition from
the foreign MNEs, and prevent the foreign MNEs' products from
invading the domestic market, which was already saturated.
There would be no space for domestic manufacturing to develop.
On the other hand, I also doubt the suitability of the
methodology of the dependency critics. I would argue that, at first, dependency theorists criticised EPZs for these problems
465 on the basis=of non-comparable conditions: totally different historical background, level of industrialisation and
modernisation between developed countries and developing countries. The critics use the standard in developed countries to measure the situation of EPZs in developing countries; they ignore the developing countries' own conditions in discussing reasonable standards to measure the situation in EPZs. This is an obvious disadvantage of these approaches which are divorced from the reality of the developing economies.
I also believe that any industrialisation has a typical process, even in developed countries. The history of Western industrialisation continued a long period of barbarous primitive capital accumulation with 'super-exploited' workers.
However, following economic development and the union movement, industrialisation became more civilised and workers' working conditions and living standards have improved. These phenomena have also appeared in the process of EPZs' development. In the early stage, the situation was just like these critics described: workers had low wages, long working hours and shift work. Trade unions were banned inside the zones. But under the pressure of the labour movement inside and outside the zones, the 'Basic Labour Law" had been set up and practiced inside the zones, which guarantees that a company union can set up in individual firms in the EPZs; the standard of working conditions and welfare were also regulated. Following the development of the union movement inside the zones, workers' real income have been increased
466 •
significantly. Other welfare has been improved as well:
working hours are limited below 48 hours per week, one work
shift and other benefits toward working conditions, holidays
and retirement arrangement. Generally speaking, the working
conditions and other welfare in the EPZ firms are much better
than in firms outside zone.
Furthermore, consider the argument by Fröbel and his
colleagues (1980) that the zones actually worsen the situation
of structural unemployment in developed coùntries. I think the
problem of structural unemployment in developed countries has
more complicated causes in terms of the capitalist crisis in
developed countries rather' than simply being a matter of
industrialisation in developing countries. I feel the original
meaning of their approach is to try to point out that capital
mobility which searches for cheaper production cost places
leads to structural unemployment in developed countries. There
is another potential meaning that third world countries'
workers take over the employment opportunity from developed
countries' workers. The contradiction of labour relations
between developed countries and developing countries also
appears. Therefore, I conclude that it is important to raise
the question about how to coordinate the relations of labour
(union) movements in developed countries and developing
countries under the circumstance of capital globalisation, to
face issues ' like structural unemployment in developed
countries and industrialisation in developing countries. These
467 issues need to be further reviewed in terms of the new international division of labour.
Moreover, the approach by the political economy side is closer to the empirical evidence, which shows that the EPZ is a typical outcome of powerful government intervention. Under the situation of saturated domestic markets, unemployment, trade deficits and lack of foreign currency, which were the outstanding problems preventing manufacturing from further development, the government used its power to delimit an EPZ in order to develop processing manufacturing, expand overseas markets and solve the unemployment problem. The manifestation of government in this action is active and direct: providing comprehensive infrastructure facilities and incentives to attract foreign investment, while at same time, using restrictions to protect the host country's own benefits, such as limit domestic sale to protect the domestic market, and re- approval mechanisms to adjust the manufacturing structure, and others like environment protection standards. On the other hand, for the firms' own business, such as production, employment recruitment, management, transport, and import- export affairs, the government only provides efficient services, not intervention. This form can be called "moderate government intervention". Therefore, in the macroeconomy, government intervention is powerful, active and direct; in the microeconomy, the private sector has the initiative, and the government is willing to assist only.
468 9.2.2 Reflection on practical approaches
Besides these theoretical approaches, some practical
information about EPZs has been offered in different
viewpoints.
First, there are general statements of EPZs' statutes.
Krause (1985) believes that EPZs were extremely helpful as an
economic transitional device between the primary import-
substitution and primary export-substitution subphases. Dicken
(1986) claims that in the global competitive bidding for
production, one of the most significant developments of recent
years is to attract international investment with a whole
range of incentives, and EPZs have been used as a particularly
important tool. Wall (1976) states that government can
implement policies designed to enable individual firms to
invest profitably on the basis of the country's comparative
advantage. There are several reasons cited for investment in
EPZs: for example, suitable location, adequate and secure
provision of utilities, reduced red-tape concerning both the
original license to invest and day-to-day affairs (WALL, 1976
& KEESING, 1989). ILO and UNCTC (1988) divide EPZs in the
world into three types: the high net export pioneers, the
small net export model and the import processing pattern.
Comparing these statements, the four empirical cases show
there are some common senses: the EPZ is a typical outcome of
government policies. Under the circumstances of the saturated
469 domestic market, unemployment, trade deficit and absence of foreign currency and the lack of capital to develop manufacturing production, the government used its power to delimit a piece of land to set up EPZs in order to attract foreign capital to develop processing manufacturing and export products. The government intervention is active and direct by providing comprehensive infrastructure facilities, preferential policies and efficient administrative services to investors, meanwhile using restrictive regulation to protect host country's own benefits. In addition, the process of EPZs' development has greatly relied on foreign capital, equipment, production and management skill and market. Moreover, all the four zones are high net export pioneers in terms of the division of EPZs by ILO and UNCTC (1988).
Second, the capital sources to EPZs are varied. ILO and
UNCTC (1988) claim that among developed countries, capital is mainly from MNEs of American and European origin. Among developing countries, most numerous investors are from Hong
Kong. The former has a long history- of manufacturing subsidiaries throughout the world which tend to be governed by their global market strategy. The latter has a fear of the political uncertainties after 1997. KUMAR (1987) states that among the EPZs' firms, foreign controlled units have a better performance than domestic controlled joint-ventures and purely domestic units in terms of employment weighted value-added level. Moreover, Sricharatchanya (1983) believes the MNEs attracted to EPZs are usually "footloose". They seek out cheap
470 labour, require low-skilled workers, pay relatively low wages, base their production on high import content and generate low domestic value added.
However, based on the empirical cases, Japanese investment is involved more than American and European investment. Most labour intensive small and medium size Japanese firms transfer industries to developing countries because they lost their competitive advantage and faced a shortage of labour
(increasing both money wages and real wages in their home country). They transferred manufacturing to EPZs because the
EPZs' characteristics are focused on developing labour- intensive simple processing manufacturing, of relatively low technology; most labour is unskilled and semi-skilled.
Japanese small and medium firms are adopted to develop in
Asian EPZs. In addition, in respect of geography, resources and culture, Japan is close to Asian developing countries.
Moreover, the large revaluation of Yen occurred in the second half of 1980s also promoted Japanese overseas investment. On the other hand, the capital from newly industrialising countries, here such as Hong Kong and Taiwan, takes the main role of investment in the relatively new zones in China and
Thailand. This restructuring has several causes. On the one hand is that both money wages and real wages have risen rapidly in the Asian NICs in recent years. However, the labour productivity levels in Asian NICs and other Asian developing countries are close to each other; the gap of wages between them is larger. The advantage of labour-intensive simple
471 processing manufacturing has been shifted from the Asian NICs
to other Asian developing countries. On the other hand, the
international economic environment has changed as growth has
slowed in the developed countries. So imports from the Asian
NICs were subjected to increasing control in developed
countries, especially America, a process that substantially
benefited other Asian developing countries with smaller shares
of manufactures in their total exports. Therefore, a large
number of the Asian NICs' companies (here, Hong Kong and
Taiwan) were interested to transfer labour intensive
downstream manufacturing to other Asian developing areas such
as Shenzhen and Lat Krabang. Whereas ILO & UNCTC (1988)
comment that most investors in other developing countries come
from Hong Kong because of their fear about political
uncertainties concerning the area's future after 1997, I
believe that the most important reason is industrial
restructuring concern rather than political fear. Otherwise,
they would not shift industrial manufacturing to Shenzhen
(inside China) so greatly.
There is no obvious evidence in the four cases to prove
that foreign controlled units have a better performance than
domestic controlled joint-ventures and purely domestic units,
as claimed by Kumar (1987).
Consider now the argument that MNEs in EPZs are footloose
(SRICHARATCHANYA, 1983). The empirical cases show that this
critique is not correct. In Masan Zone, the majority of
472 withdrawing firms had developed in the zone for over a decade.
In Kaohsiung Zone, the majority of withdrawing firms are not foreign MNEs but local capital. In Shenzhen Zone, whatever happens to the domestic policies or the international economy, foreign enterprises may reduce re-investment, rather than move out of the zone. Therefore, I believe that EPZs' firms are like other MNEs, it is hard to say that MNEs in the EPZs are footloose. The length of their participation in the EPZs and their histories of these zones discount the critique of MNEs' footloose character in the EPZs.
Third, people have different attitudes towards the effect of EPZs on national development. As for employment, ILO and
UNCTC (1988) claim that the most successful EPZs have generated large amounts of new manufacturing employment, but without significantly affecting overall national unemployment levels. In a review of labour laws, working conditions and industrial relations in EPZs, Dror (1984) believes that most
EPZs do not carry out the labour law, and trade unions are prohibited in the zones. In fact, working conditions inside the zones are generally better than outside the zones. The spillover benefits from EPZs' manufactured exports to the national economy are in three major categories (KEESING,
1989): learning by locally owned firms, training and know-how acquired by individuals, and positive benefits from requirements for locally produced inputs and services. Healey
(1989) provides more details of EPZs' backward linkages to the domestic economy: for example, the utilisation of domestic raw
473 materials for EPZs' firms as indirect exports, EPZs' products
sold in the domestic market, outzone processing
(subcontracting arrangements) and employment generation inside
and outside the zones.
In contrast, Rondinelli (1987) claims that EPZs' development is mainly disadvantageous for national development. He observes that EPZs' stimulative effects on local and regional economies tend to be weak or nonexistent.
In the short run they can create social and economic problems for localities and exacerbate intra- and inter-regional economic disparities. In addition, the domestic value added by the zone's industries has been low. EPZs owned by governments seem to make low rates of return. Moreover, industrial productivity in the zone is much lower than the national aN.erage. EPZs may attract investment by providing a source of supplementary income for poor households with young female members, but they do not make much impact on reducing unemployment among young males, nor reducing overall unemployment in the region in which théy are located. He points out that EPZs have few backward or forward linkages with local economies and provide few benefits for the development of domestic industries. EPZs have also transferred little technology to indigenous industry. Often EPZs' growth occurs at a rate beyond the capacity of local and national governments to meet demand for housing, services and transportation and to absorb migrants into the workforce
(RONDTNELLI, 1987). In addition, although ILO & UNCTC (1988)
474 agree that the most successful EPZs have generated large amounts of new manufacturing employment, they believe that
EPZs do not have any significant impact on overall national unemployment levels. Clifford (1990) recently claimed that the higher costs of labour forces in EPZs damages their comparative advantage in unit-labour costs.
With regard to the argument about EPZs do not have much impact on reducing unemployment, I would argue that the empirical evidence proves that the establishment of EPZs creates a large amount of employment, as the government intervenes by offering a convenient investment environment to private investment from both foreign capital and local capital. The level of employment in EPZs take a quite large percentages among the total manufacturing employment in the local area where EPZs are located. On the other hand, female workers are also part of the labour force: Creating employment for female workers is also creating total employment. I believe it is social progress that females participate manufacturing production. Through the participation, women can have their own income sources, improving their position both domestically and socially. I believe that EPZ is a delimited area with a certain development goal. The national unemployment problem cannot be solved only by EPZs.
Following industrialisation, the trade union movement has become strong and the living standards of workers have also increased significantly. These are reflected in releasing the
475 ban on union organisations, the regular bargaining and collective agreements between unions and employers, the rise of both money wages and real wages, and the increase of purchasing power of wages. These disprove that the wages of
EPZ workers are often insufficient to cover the basic costs'of living, but coincide with the claim by Clifford (1990) that the higher costs of labour forces in EPZs damage their comparative advantage in unit-labour costs.
Moreover, EPZs are a link between the domestic economy and the international economy. There is an outward linkage to the international economy and inward linkage to the domestic economy. These have also improved gradually following the increase of purchasing domestic goods by EPZs' firms, the domestic sale of EPZs' goods and subcontracting arrangements with outzone's firms. As for the outward linkage to the international economy, most capital goods and raw material are imported from overseas while final products are exported to the international market, especially developed countries. As for the inward linkage to the domestic economy, apart from the purchase of domestic goods by EPZ firms, the domestic sale of
EPZ goods and subcontracting arrangements with outzone firms are also significant. However, there is little evidence to prove that advanced technology is transferred to the domestic economy. Actually, the main channel is personal transfer through employees who used to work in the zones and move to other outzone firms later: they bring a certain manufacturing skill and management experience to domestic firms. But we know
476 that technical training is limited in EPZ firms; a comprehensive training program is only provided to key employees. Actually, EPZs mainly contain labour-intensive simple processing manufacturing, which use less advanced technology. The original government prospect for EPZs to have advanced technology firms was not realistic. The authority of
EPZs (ASM, 1990 & ASK, 1990) argue that the manufacturing capacities used not to exist in their countries while the EPZs were set up, so that is a kind of new skill and technology for them. However, we should understand that this is not advanced technology. The function of transferring advanced technology may rely on the development of Science Parks, but not EPZ.
The productivity level of EPZs was lower than that of the nation in early time. But following the development of manufacturing in the zones, the EPZs' level has been improved dramatically and now exceeds the national average level. The facts are totally different from the claim of Rondinelli
(1987) that industrial productivity in the zone is lower than the national average.
Finally, to summarise the life cycle of EPZs, ILO & UNCTC
(1988) state that it seems that all EPZs tend to go through the same type of life cycle. In the first few years, one major industry rapidly comes to be the dominant industry, and its relative importance declines as the years go by. Meanwhile,
■ the fully owned foreign subsidiaries relatively decline and the domestic sales by EPZ firms gradually increase. People
477 also claim that once full employment is reached, the effect of the EPZs ends (KRAUSE, 1985).
The pattern of life cycle reveals that the most prosperous period of EPZ is generally about two decades. The impact of
EPZs has declined as the national economy transits from import-substitution to export-orientation pattern and as international industrial restructuring forces changes.
Therefore, the life cycle of EPZs is not only determined by
EPZs' own development process, but also relies on the national and international economic development. The example of the two zones only provides an enlightenment to other countries; exactly the same situation will not develop in other EPZs.
Therefore, individual EPZs and their host countries should judge their development pattern based on their own specific situation.
9.2.3 Reflection on the results
The research results have provided the answers to the questions of my research aim and my own reflection about theoretical and practical approaches. Now, I raise some issues relevant to the EPZs' role in the development in East Asia.
First, the state is a super-hegemony above the whole society in East Asian countries in terms of oriental cultural tradition. For the capitalist countries like Korea, Taiwan and
Thailand, the state adjusts the social contradictions between
478 different interest groups (classes), for example, the national income distribution and worker-capital relations, so that the state can control the society. In addition, in the process of state domination, although the state uses 'the nation supreme' as a rationalisation to mitigate the contradiction between classes, capital groups actually cooperate with the state as a partner in development. This forms the "oriental type of capitalist society" with the nature of a 'strong state and weak society'. In socialist China, there is a 'full-power state' shielded by the name of socialism. The system is not that the working class rules the nation but the state rules the whole society. Since central state intervention is strong in China, there is no room for market mechanisms to adjust development, which led the national economy nearly to collapse by the end of the 'Cultural Revolution'. After summarising the lessons_ of history, an economic reform system has been practised since 1979, in which the state dominates but with assistance from marketing adjustment.
Development in these countries is based on 'using foreign investment' rather than 'relying on foreign investment'. The
EPZs' development enlightens us that the host country's attitude to foreign investment is very important. Under the circumstances of a shortage of investment in the world and capital globalisation, there is sharp competition between different regions to absorb foreign investment. For the host country, on the one hand, they should welcome foreign investment by offering preferential policies and effective
479 administrative services; on the other hand, they use legislation to protect the host country's own benefits and guide foreign investment to develop based on the national development strategy.
In addition, I would argue that the incentive of company income tax holiday would not be better than adopting low rate of company income tax. Under 'double taxation agreements', if a foreign funded enterprise does not pay tax in the EPZ, it must pay tax in its parent country, so the benefits of a tax holiday become a gift offered by the host country to the investing country of the foreign investment, but not to the investors. If countries adopt a low rate of tax, it is still a attractive policy, and the host government can earn certain benefits as well. On the other hand, EPZs authorities should understand is if they only pay attention to offering incentives, but neglect efficient administrative services and infrastructure facilities, that would not be an attractive investment environment.
The changes in manufacturing structure which appeared in the mature zones like Masan and Kaohsiung reflect the different influence of two international oil crises. The first oil crisis led the developed countries' economy into stagflation, which prompted labour-intensive manufacturing to transfer to cheaper production cost locations such as EPZs in the Asian NICs. This was in the period of the first wave of industrial restructuring between developed countries and NICs.
480 However, the Second oil crisis happened after the mature zones had developed over a decade. The enterprises in these zones and the whole host country were facing similar problems as developed countries had when the first oil crisis happened.
Production costs were higher than ten years before. Most labour-intensive simple processing manufacturing were also facing difficulties to survive. This is the beginning of the second wave of industrial restructuring from newly industrialising countries and developed countries as well to less-developed developing countries. An adjustment of manufacturing structure also occurred inside the zones in
Asian NICs: some old firms moved out and were replaced by new investment with more capital intensive and less labour intensive manufacturing. Meanwhile, other old firms still run businesses in the zones but renew their equipment and replace production with less labour intensive forms. Therefore, although the number of firms in the mature zones has declined, total investment picked up again at the end of the 1980s.
The outward linkages between EPZs and developed economy demonstrate that industrialisation in developing countries can not be successful without mutual relations with developed economies. However, the new problem that EPZs are facing is the economic recession and the increase of protectionism in developed countries. The export of EPZs' products to developed economy markets is becoming more difficult, especially for the new zones, as the international political and economic situation has changed and is quite different from two decades
481 before when the mature zones stated. New developing economies have not the beneficial economic environment that Japan, Korea and Taiwan had, offered by America in response to the international political contradiction between the capitalist and socialist camps. Therefore, exploiting new markets and dispersing marketing concentration are becoming most important for EPZs' exports.
An important point follows. As they need to exploit new markets, new international economic and political relations between the old NICs (new NMEs -- newly maturing economies, eg. South Korea, Hong Kong and Taiwan) and other less- developed developing countries (eg. Thailand and China) have formed. Those represent a new pattern of international relations different from the centre-periphery pattern. Their relations will strengthen following the development of both of them, especially as they have a mutually complementary characteristic: the former has relatively advanced manufacturing and capital without abundant resources, cheap labour and large market, and the latter have quite different conditions.
Expanding the demand of the domestic market for EPZs' goods is an alternative way to diminish the negative influence of international recession and protectionism. But the pre- condition is that individual EPZ firms must keep their foreign exchange balanced if they expand domestic sales: most raw material and capital goods are imported from overseas by
482 paying foreign currency, and profit remittance is also in foreign currency as foreign capital firms. Most developing countries' currencies are unchangeable in the international financial market, and most domestic sales are traded in the domestic currency. By reducing the imports of raw materials and other goods, replacing with the domestic goods or making sure the domestic buyers pay in foreign currency, permits EPZ firms to keep their foreign exchange balanced. Meanwhile, EPZ firms should know that their products are sold on the domestic market as imported goods with duty; hence, the quality and price of EPZ goods need to be comparable with overseas imports.
The overall economic performance of the four zones demonstrates that EPZs have a significant impact on national economic development. They form a pivot to help the national economy transfer from import-substitution to export- orientation patterns. EPZs have contributed to exports and to the national trade balance, especially in the period when international economic crises led national"exports to decline.
Following the development of EPZs, their productivity has been improved dramatically and is now much higher than the national average level. The four zones have shown that the net benefit is higher than the net cost, though with different level. They all have a net present value and the internal rate of return is much higher than the effective interest rate in these areas. - The most important sources of the net benefit are from employment benefit, the purchase of domestic goods by EPZ
483 firms, foreign exchange benefit, and taxes and other revenues.
On the other hand, the host government should pay attention to reducing the cost of the EPZ project, such as choosing a suitable location which can cost less for the transport system or other facilities, and reduce any subsidy to EPZ firms to the minimum level.
9.3 The future of the four zones
EPZs have played a pivotal role in the national economic transition. They are an experiment station as well, in which some unexperienced businesses have practised. When its tasks wind down, the necessity of its existence is limited.
In countries like Taiwan and Korea, which started to set up
EPZs earlier, the authorities do not plan to have further development of EPZs. They plan for general industrial estates.
Foreign investment in the latter also enjoys incentives (see the details in Chapter 4). The authorities of these countries agree that the effect of EPZs has passed. The reason that they have not closed EPZs is that EPZs are the symbol of commitment to foreign investors. They do not know how long EPZs will run, but they have to keep them running, even if their effect has diminished (ASM, 1990 & ASK, 1990).
Following the national economic transfer to export- orientation, the whole national economies are on the trail toward a liberalised economic system (as in Taiwan and Korea),
484 so the functión of EPZs has diminished. The advantage of EPZs has gradually disappeared, but their disadvantages have become more obvious. For example, if firms in other industrial estates export their products, they can enjoy the similar benefits that EPZ firms have. But, land is limited inside the zone and the development space for new manufacturing is confined compared with other large space industrial estates.
Therefore, the traditionally defined EPZ is no longer necessary. Its functions and structure should be changed into other types. Some people (ASK, 1990) suggest that EPZs can be used as Science Parks to develop high-tech production. But I do not think this is desirable because the EPZ's facilities and structure are designed for labour-intensive simple processing factories, quite different from the requirements of high-tech production (which need special design and special construction). Individual firms may change their production into more technology-intensive forms, but the whole zone cannot change so readily. The traditional functions of EPZs in these countries depend on its relatively comprehensive infrastructure facilities. These functions could be changed into a general industrial estate, without customs and other privileged treatment. The firms in the zone would enjoy the same benefits as the firms in other industrial estates. The services from the authority can be reduced to the cost for the administrative expenditure. This would not influence the host country's commitment to foreign investors. Investors in the zone can choose to continue production inside the zone or move to larger industrial areas, or other countries based on their
485 own judgement• in terms of the profitability. An alternative strategy could be followed if the nation moves toward a liberalised economic system, the whole national economy of
Taiwan and Korea becomes a free trade area similar to Hong
Kong; then EPZs can be used as duty-free storage processing areas in order to satisfy the needs of the transit trade.
Countries like China and Thailand started to establish EPZs quite recently. The challenge they are facing is different from the EPZs in Taiwan and Korea. They need to continue their development. Shenzhen may sustain development for a long time because it not only has EPZ functions, but also an industrial urban capacity. The most important problems for Shenzhen and
Lat Krabang are their relatively low productivity level, less efficient administrative management, more stronger competition in the international market, and tougher environment in the international economy than before, following the recession and protectionism in developed countries. To improve productivity, the authority should encourage firms provide more training program to the workers, and the authority- can also cooperate with firms to set up training program. An important lesson we have learnt from the study is that most EPZ firms provide limited training to workers; so new technology can be mastered by few workers. The authority of the zones should realise the problem and try to solve it. For more efficient administrative management, the authority should reform their administrative service system to coordinate the requirement of investors and workers. Without efficient administrative system, production
486 would not bé competitive. Facing the challenge from the international competition, both authority and firms should realise that, on the one hand, improving production becomes more competitive and able to exploit new market for exports; on the other hand, it is necessary to expand inward linkages to the domestic economy. China and Thailand are countries with relatively rich resources. Following industrialisation, manufacturing has increased greatly in the domestic economy.
Therefore, there is a condition for EPZ firms to purchase more domestic raw materials and intermediate goods to reduce the expenditure in foreign currency. Meanwhile, relatively expanding the sale of EPZ goods to the domestic market is an alternative way to reduce the risk of the negative influence from the international recession. I would not suggest that these zones become import-processing zones. Export is still the main task of these zones, but relatively enlarging the inward linkage is important to promote the EPZs' further development.
If EPZ is to be successful, it depends on specific background, time, internal factors and the international economy and market. This study illustrates two types (mature and new) of EPZs' development process. The cases provide enlightenment to other countries which are now designing or operating EPZs with both positive and negative lessons. There is no typical model to be copied from one place to another.
The development pattern of other EPZs should be designed according to their countries' specific situation and condition
487 combined with the changeable international economy. On the other hand, this study also provides empirical evidence about the literatures that analyse the development of EPZs, especially their role in East Asian economic development.
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Minerva Access is the Institutional Repository of The University of Melbourne
Author/s: ZHU, YING
Title: The role of Export Processing Zones in East Asian development: South Korea, Taiwan, China and Thailand
Date: 1992-07
Citation: Zhu, Y. (1992). The role of Export Processing Zones in East Asian development: South Korea, Taiwan, China and Thailand. PhD thesis, Department of Geography, The University of Melbourne.
Publication Status: Unpublished
Persistent Link: http://hdl.handle.net/11343/39443
File Description: The role of Export Processing Zones in East Asian development: South Korea, Taiwan, China and Thailand
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