1.

Introduction
Since independence Bangladesh has made remarkable progress in diversified areas of social, political, cultural and economic life of its citizen. In order to boost up economic development of the country number of steps have also been taken to attract Foreign Direct Investment (FDI) and facilitate industrialization process of the country. One of such efforts was the promulgation of BEPZA Act 1980 which eventually institute the formation of Bangladesh Export Processing Zones Authority (BEPZA), the government organ responsible for creation, operation and development of Export Processing Zones (EPZ) in the country. After the independence the stagnant economy of the war ravaged country was desperately seeking private capital, technical knowhow to facilitate the industrialization process to achieve economic growth. During the initial years it could not happen. However, a visit by the than World Bank Vice President Mr. Robert McNamara in the early eighties to Bangladesh transmitted the concept of EPZs to us. Since than EPZs, in tune with the liberal industrial policy of the government along with investment friendly legal & institutional framework like Foreign Private Investment (Promotion and Protection) Act1980, have made significant progress. Pioneer EPZ of the country Chittagong EPZ started functioning in the year 1983 in the Port city of Chittagong, seeing its unprecedented success the second one came into being in 1991in Dhaka. Presently there are as many as eight operational EPZs and two proposed EPZs in different locations of the country contributing to the overall economic development process of Bangladesh through promotion of export and FDI (Foreign Direct Investment), generation of employment, transfer of technology, and development of forward and backward linkage industries and so on.

2. Theory of EPZ
EPZ is the acronym for Export Processing Zone. According to the United Nations Industrial Development Organization, an Export Processing Zone involves the establishment of modern manufacturing plants inside a custom-bonded industrial estate by offering suitable package of investment incentives to both foreign and domestic entrepreneurs. A Case Study on the Export Processing Zones (EPZs) of Bangladesh 1

However, an Export Processing Zone is an industrial area that constitutes an enclave with regard to customs tariffs and the commercial code in force in the host country. Economic Rationale for a better export performance of the zones: EPZs are special enclaves, separated from the Domestic Tariff Area (DTA) by fiscal barriers and are intended to provide an internationally competitive duty free environment for export production at low cost. EPZs are benefited usually from the following: Modern and efficient infrastructure General fiscal and non fiscal concessions to firms Better governance due to single window facilities to ensure corruption and red tape free business environment.

3. What BEPZA is
BEPZA is the acronym for the Bangladesh Export Processing Zone Authority. Bangladesh Export Processing Zones Authority (BEPZA) was set up by an Act of Parliament in 1980 to attract foreign capital and technical know-how and thereby boost exports through the establishment of export-oriented industries in special zones with special facilities. Earlier in 1980, the Foreign Private Investment (Promotion and Protection) Act was passed by parliament for promotion and protection of foreign investments. As per these acts, BEPZA, an autonomous statutory body, came into being in 1983. It was entrusted with the responsibilities of setting up and operating EPZs in the country.

4. Objectives of BEPZA
The objective of setting up EPZs was to provide investors with a congenial investment climate free from excessive procedural complications. The main objectives are given below: Promotion of foreign (FDI) & local investment Diversifications of export Development of backward & forward linkages Generation of employment

A Case Study on the Export Processing Zones (EPZs) of Bangladesh

Transfer of technology Upgradation of skill Development of management

5. Evolution of the EPZ Policy in Bangladesh

The evolution of EPZ theory has been occurred in Bangladesh in two phases. 1984-1998 1998 Onwards

5.1 First Phase (1984-1998): The policy framework that Bangladesh inherited and maintained at independence in 1971 was geared towards import substituting industrialization. The process of reform was however, initiated as early as in 1975. The reform process was further intensified following major policy declarations in 1982. Under the new policy regime, export promotion became a major concern of the government. A wide array of export incentives were offered to boost exports. These included: export subsidy, duty free access to imports, tax holidays and rebates and credit guarantees. While the incentive package mostly centered on price factor, there were several non price constraints as well, crucial amongst which were paucity of investment capital, lack of access to improved technology, inadequate linkages with the global markets. It was therefore felt that adequate inflow of Foreign Direct Investment (FDI) in the export sector was necessary to promote exports. In 1980, the Foreign Private Investment (Promotion and Protection) Act was enacted to provide equal treatment to domestic and foreign investors. But attracting FDI requires development of infrastructure and other structural reforms also. Since the country-wide development of infrastructure would be expensive and implementation of economic and structural reforms would require time, establishment of EPZs was viewed as an important strategic tool for expediting the process of industrialization in the country. A Case Study on the Export Processing Zones (EPZs) of Bangladesh 3

The country, therefore, started the EPZ programme in 1981 with the creation of the Bangladesh Export Processing Zones Authority (BEPZA) under the BEPZA Act. Under the BEPZA Act, the two primary objectives of EPZs in Bangladesh are to promote foreign direct investment (FDI) and exports beside other objectives such as generation of employment, transfer of technology and upgradation of skill. The government has adopted an 'Open Door Policy' to attract foreign investment to Bangladesh and promoting; attracting and facilitating foreign investment in the Export Processing Zones is one of the important responsibilities of the BEPZA. The first EPZ became operational at Chittagong in 1983-84. Chittagong is one of the most developed cities of Bangladesh. The project was implemented in three phases. The first phase spread over the period 1978-85. The size of the zone was 140 acres. It was expanded by 60 acres in the second phase implemented during 1985-86 to 1989-90. In the third phase 253 acres of land was developed increasing the size of the zone to 453 acres. The second EPZ was set up in Savar near the capital city Dhaka. Dhaka EPZ commenced its operations in 1993-94. Its size was 141 acres. In 1997, it was further expanded by 205 acres. Both these zones are currently fully occupied. 5.2 Second Phase (1998 Onwards): Encouraged by the success of these zones, the government recently set up four more EPZs. These are in Mongla, Ishwardi, Comilla and Uttara. Uttara, Mongla and Ishwardi are in the industrially backward regions and have other locational disadvantages in terms of distance from the port and industrial towns. The government has recently approved two more EPZs in developed regions near Dhaka (Adamjee Jute mill) and Chittagong (Steel mill).

6. EPZs growing contribution to Investment, Export and Employment

EPZs contribution to Investment, Export and Employment can be described in two categories: Over all analysis (BEPZAs contribution) Zone wise analysis

A Case Study on the Export Processing Zones (EPZs) of Bangladesh

6.1 Over all analysis: Presently 264 enterprises are carrying out their operational activities in the EPZs. The export from EPZs has also grown steadily which is now 17% of the country's total national export and the same has exceeded two billion marks during the last financial year. The direct employment opportunities for more than two hundred thousand Bangladeshi nationals have also been created in the EPZ units constituting 64% of the total work force from female category. YEAR tOTAL eXPORT OF bANGLADESH ($ M) 1994-1995 3473 228 6.56 1995-1996 3882 337 8.68 2001-2002 5986 1077 18.0 2002-2003 6548 1200 18.33 2003-2004 7603 1354 17.80 2004-2005 8654 1548 17.88 Table 1: BEPZAs contribution to the total national export Table 1 shows the BEPZAs contribution to the total national export. If we analyze these data, we will find that BEPZAs contribution to the national export has been increased dramatically since the last decade. That means the production in EPZs is being increased due to the development of infrastructure and other facilities in these days During the FY 2005-2006 total actual investment made in EPZs stands US$ 112.89 Million. During the last FY 2006-2007 the actual investment is USD 152.37 which is 34% higher than the investment made in the previous financial year. In the year 20052006 the lease signed investment in BEPZA was US$ 153 million and in the year 20062007 the lease signed invest in BEPZA is US$ 566 million which is 270% more than the previous year. tOTAL EXPORT OF epzS ($ M) % OF BEPZAS CONTRIBUTION

Year 1994-1995 1995-1996 1996-1997

Investment ($ M) 35.93 30.58 53.9

Year 2001-2002 2002-2003 2003-2004

Investment ($ M) 55.7 102.63 115.05

A Case Study on the Export Processing Zones (EPZs) of Bangladesh

1997-1998 1998-1999 1999-2000 2000-2001

68.83 71.61 34.98 48.40

2004-2005 2005-2006 2006-2007 2007-2008

118.52 112.89 152.37 129.82

(up to Dec. 2007) Total Investment = $ 1262.16 Million Table 2: Investment in the EPZs (up to December, 2007) The Export target for the FY 2006-2007 was 2 Billion US Dollar and actual export is made US$ 2.064 Billion US Dollar during this year. The Export target for the FY20072008 is set as US$ 2.3 Billion. During this current financial year from July 2007 to December, 2007 the total export made by the EPZ enterprises is US$ 1084.59 million.

Export (up to December, 2007) Year 1994-1995 1995-1996 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 (Dec.) Total Export = $14988.32 million Table 3: Cumulative Export Export 228.26 337.02 1354.00 1548.68 1836.18 2063.67 1084.59

6.2 Zone wise analysis: In this section, table 4 shows the data about the eight EPZs of Bangladesh regarding investment, export and employment. The following shows the cumulative performance of all the EPZs of Bangladesh. It reveals from the record total number of industries in EPZs rose up to 447 with cumulative investment of US$ 1262.16, export US$ 14988.32 million and employment up to 203766. We want to discuss something more. Firstly, total number of the industries operating their business in the EPZs is 264 more than half of which are established in the Chittagong EPZ (the first EPZ in the country). Name of EPZs
In

Industry
Under

Investment

Export

Employment

A Case Study on the Export Processing Zones (EPZs) of Bangladesh

($ M) ($ M) Chittagong EPZ 135 31 596.21 8405.07 Dhaka EPZ 91 29 550.17 6406.23 Comilla EPZ 16 24 68.15 129.74 Mongla EPZ 12 25 3.91 27.57 Uttara EPZ 03 03 2.81 0.11 Ishwardi EPZ 03 17 2.14 6.22 Adamjee EPZ 03 18 26.07 13.04 Karnaphuli EPZ 01 16 13.29 0.08 Total 264 183 1262.16 14988.32 Table 4: Zone wise statistics (up to December, 2007)

Operation

Implementation

(No.) 119847 71679 6671 217 1417 111 2114 1476 203766

Then, the amount of investment in Chittagong EPZ (CEPZ) and Dhaka EPZ (DEPZ) are collectively $1146.38 million while the total amount of investment in all of the eight EPZs (including DEPZ and CEPZ) is $1262.16 million. Furthermore, in case of amount of export we see the same picture. However, this analysis is just data based and means that the investors are more interested to invest in the old two EPZs where they get much more facilities. Beside that, the new six (among which Adamjee and Karnaphuli is established very recently) EPZs should be advertised more in front of the investors.

7. BEPZAs contribution to achieve Millennium Development Goals

Apart from export earning objectives employment pattern shows that EPZs have been making significant contribution to the gradual empowerment of women which supports the objective of Millennium Development Goal (MDG). This financial and social empowerment of women has far reaching effect on the countrys poverty reduction initiatives as the increasing number of young girls and woman are joining the productive workforce of EPZs migrating from poverty prone remote rural areas of Bangladesh linking the rural economy with industrialization process.

A Case Study on the Export Processing Zones (EPZs) of Bangladesh

Figure 1: Ratio of employment Figure 1 says that the majority of the human resources working in the EPZs are women.

8. Investors from Different Countries

It may be pointed out that investors from Japan, South Korea, the U.S., the U.K., China, Hong Kong, Singapore, Malaysia, Taiwan, Thailand, Spain, Panama, Germany, France, Belgium, Netherlands, UAE, Canada, Italy, India, Pakistan and Bangladesh have already invested in the EPZs of Bangladesh.

9. Different Types of Industries available in EPZs

In the EPZs of Bangladesh, the following industries are available: Textile, Agro-based Industries, Chemicals, Backward and forward linkage Industries, Electrical Equipment and Components, Electronic Products, Software, Optical Goods, Garments and Garments Accessories, Laboratory Ware, Printing and Publishing, Printing and Copying Equipment & Accessories, Do-it-yourself Tools and Equipment, Musical instruments etc.

10. Mode of Investment

BEPZA pursues an open door policy in matters of foreign investment in its EPZs. Bangladesh Export Processing Zones Authority is a statutory body but very different from other autonomous organization. It enjoys complete freedom of action in its decision making process independently of any Administrative Ministry. Investment with 100% foreign ownership (Type - A ' ) Joint ventures (Type-B) with no limit to the extent of equity sharing by the foreign partner 100% Bangladeshi ownership (Type-C) are allowed in the EPZs.

A Case Study on the Export Processing Zones (EPZs) of Bangladesh

Figure 2: Percentage ratio between different kinds of investment Figure 2 shows the ratio between different types of investment. It says, Type-A industries are of 61%, Type-B industries are of 17% and Type-C industries are of 22%. In other word, the majority of the industries in the EPZs of Bangladesh are owned by the foreigners.

11. Governance of the EPZs in Bangladesh

Soon after the commencement of the Bangladesh Export Processing Zones Authority Act, 1980, the Government established an Authority called the Bangladesh Export Processing Zones Authority (BEPZA) for carrying out the purposes of this Act. The General direction and administration of the affairs of the Authority is vested in the Executive Board, which is headed by the executive chairman. The Executive Board, in discharging its functions, acts in accordance with the guidance, orders and instructions given by the Board of Governors of the Authority from time to time. The Board of governors is constituted under the chairmanship of the Prime Minister. It consists of 7 cabinet level ministers and 11 secretaries. BEPZA is the autonomous body that ensures all the pre entry and post entry services to the investors. There are three broadly defined departments under the Executive Chairman: Engineering, Finance and Investment. These are in turn headed by three officials: Member (Engineering), Member (finance) and Member (Investment) respectively.

A Case Study on the Export Processing Zones (EPZs) of Bangladesh

Figure 3: Structure of the Administrative Set up of the EPZs of Bangladesh

12. Facilities Available in the EPZs

The core competency areas of Bangladesh EPZs are its diversified and attractive package of incentives and physical facilities.

12.1 Incentives: BEPZA offers both fiscal and non fiscal incentives to the investors. They are described below: 12.1.1 Fiscal Incentives: Bangladesh offered a substantial package of fiscal and non fiscal incentives initially. But it has been made more attractive in the 1990s in Bangladesh. Initially, in 1981, the country offered a tax holiday of 5 years. It was raised to 10 years in 1986 and after the expiry of tax holiday; the tax liability was reduced to 50% of total tax attributable. Beside that, the government also announced in 1986, tax exemption on dividend income of non resident shareholders for the period for which the company enjoyed tax benefits A Case Study on the Export Processing Zones (EPZs) of Bangladesh 10

and such exemptions were continued even after the expiry of the tax exemption if the earnings were re-invested. Besides, the government allowed accelerated depreciation on any machinery or plant in EPZs. In 1987, the government announced exemption from stamp duty on transfer of land in EPZs. At the time of inception in 1981, the government exempted the zones from custom duties and sales tax on imports of machinery, equipments and raw materials. But in the late 1990s, the government exempted the zones from all import duties; value added tax and other supplementary taxes. A part from these, some additional incentives is announced for the zones set up in backward regions. For instance, subsidy of 50% is given on land and factory rent in these zones. Recently, the government has also announced a 30% cash incentive for agro based industries in three backward zones of Uttara, Mongla and Ishwardi. 12.1.2 Non-Fiscal Incentives: Non fiscal incentives have also been extended over the years. Exchange controls were simplified, foreign currency loan from abroad under direct automatic route was allowed. In 1989, the government exempted the zones from three major labour laws. These included the Factories act, the industrial dispute act and the Employment of Labour (standing orders) act. These were replaced by two instructions: Instruction 1 and Instruction 2. These instructions carried detailed guidelines on the classification of employees, minimum wages, additional benefits to be paid by the employers in general and for electronic industry, terry towel industry and textiles in particular. This was a major incentive to the EPZ units. The exemption from the labour laws highly benefited their business in the EPZs. However, labour reforms have been introduced recently in the zones. The new laws require the units to have labour councils. Representatives in the councils are to be elected by labour under the supervision of the zone authorities. Almost all the units opined that this would affect their business highly adversely. Moreover, Bangladesh is offering the most generous incentives to the zone units and the units are enjoying huge advantages in terms of fiscal and non fiscal incentives. 12.2 Physical Facilities:

A Case Study on the Export Processing Zones (EPZs) of Bangladesh

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Physical facilities denote the infrastructure facilities available in the EPZs. In Bangladesh, BEPZA plays a direct role in providing the following facilities: Basic infrastructure: Electricity, gas, water, road and telecom.

Factory building available on rental basis

Enclave for workers dormitory

Warehouse or godowon available

Business support services: Courier (DHL, FedEx), Banks, Police Station, Fire Station, Post Office and Shipping Agent

Administrative support service: Shopping center, daycare center, commissariat, health club, investors club, medical center, sports complex, accommodation for expatriates, public transport, school and college.

13. Effects of foreign investment in EPZs

Technology transfer and skill transfer are two most important dynamic effects expected of foreign investment.

13.1 Technology Transfer: The field survey reveals that in a relatively simple industry with no proprietary technology, such as RMG and footwear, technology transfer takes place readily both inside and outside the EPZs, though on a very limited scale. The transfer is from foreign technicians and managers working together on factory floors, from foreign buyers to local firms, and through consultants, movement of employees, visits to plants abroad, and so forth. But in industries, such as electronic components, with internationally established

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firms resist challenging, fast-changing, and largely proprietary technology, transfer of technology to Bangladesh is very limited. In any case, firms in Bangladesh are not capable of mounting a competitive challenge without a lot of help. In such industries, the direct transfer of product and process technologies through the EPZs has been very small, except in simple industries, such as RMG 13.2 Skill Transfer: Technology transfer is intertwined with skill transfer. The field survey reveals that skill transfer to the rest of the economy occurs mainly through the movement of people who have received training in foreign and joint-venture firms in the EPZs and through learning by locally owned firms there. Interviews with a number of factory managers in the EPZs indicate that the factories in the EPZs contribute significantly to workers technical production and factory management skills even though the acquisition of broader management capability or marketing skills is very slow. There are quite many instances in both CEPZ and DEPZ that technicians and managers who have acquired the ability to compete in the world market have carried this expertise to the rest of the economy. To foster such mobility and make it more productive, the business environment outside the EPZs must be rationalized as well, through deregulation and import liberalization (for healthy competition) and industrial restructuring (for efficient production). When the business environment outside the zones is not attractive, technology and skill transfer effects tend not to be fruitful or to contribute much to the local economy. In such cases, on-the-job training in the foreign firms and joint ventures is instrumental in transferring skill to the DTA. One cannot avoid the conclusion that the only feasible way to acquire skills through the EPZs at an early stage of development is through on-the-job training, not at training centers, in formal courses, or from written materials. In this context, it may be noted that the relocation of electronics assembly operations in the EPZs leaves the more skilled jobs involving high technology in their original locations giving the EPZ firms a truncated occupational structure. Thus the notion that EPZs could serve as nurseries for the development of industrial skills are not borne out by experience.

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14. Special Economic Zone enlarged version of EPZ

Given the scarcity of land in Bangladesh, its efficient use for industrial purposes is of utmost importance. Indiscriminate use of land for industrial purposes coupled with poor environmental practices is causing environmental damage and is emerging as a major problem in Bangladesh. Poor availability of infrastructural facilities identified as the most important constraint in investment climate assessment in Bangladesh. Investors, in particular foreign investors, are also discouraged by property right problems, such as lack of clean titles, which make access to land difficult. In view of this, our development partners especially World Bank proposed to Bangladesh Government to set up special Economic Zones with the following strategy: Introduction of a broader concept of economic zones, i.e., including Special Economic Zones (SEZ) which have not been tried in Bangladesh, and the provision of a broader range of value added services, such as logistical service in the zone. A greater role for the private sector in the development and operation of economic zones. A clear option to establish both export-oriented industries and manufacturing units for domestic market. A separation of the regulatory function of Government from its zone ownership functions.

15. Challenges for BEPZA

BEPZA has been striving hard to upgrade its operational efficiency to a level which would cater the diversified needs of the investors. To achieve this objective challenges ahead for BEPZA would be: a. Development of improved physical infrastructures, integrated environment and water management, power generation, commercial complex on Public Private Partnership (PPP) basis.

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b. Development of a productive and sound industrial relation environment. Compliant industrialization and full right of workers union as per international best practice benchmarking. c. Achieve organizational excellence by developing online capabilities and automation to ensure quality and expeditious delivery of services to the investors. Ensure full implementation of E-governance in all EPZs. d. Create more zones in the strategically located sites to accommodate the increasing demand of the existing investors. Attract relocating industries from Far East and CIS.

16. Creation of two new Zones the immediate challenge ahead

On the backdrop of growing demand by prospective investors Board of Governors of BEPZA, the apex body of the Authority on 11 th February 2008 has formally approved two new EPZs namely Meghna EPZ and Feni EPZ in the District of Munshiganj and Feni respectively. Meghna EPZ, having its excellent locational advantage near to DhakaChittagong National Highway, proximity to Capital City Dhaka (34km) and adjacency to an already growing industrial cluster, has bright prospect to flourish. The project is expected to accommodate 130 Units with a projected investment of 1625 Million USD and employment of more than one hundred thousand persons. Competitive advantage of Feni EPZ depends on its easy accessibility to Chittagong Port. The Zone is only 120 km away from the port which will facilitate the export and import activities of the locators of this Zone comparatively faster than others. This zone is expected to be developed on 500 Acres of land which will create employment opportunities for more than 80,000 workers and employees. BEPZA has a vision of creating new Zones keeping pace with the present day need of the investors and customizing the concept in Bangladeshs context.

17. Conclusion
The concept of EPZ is not entirely new. It is a kind of Free Trade Zone that combines manufacturing and trading activities. BEPZA is contributing to our economy in several terms i.e. development of foreign investment climate, improvement of export

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performance, employment generation, technology and skill transfer as well as to achieve Millennium Development Goals (MDGs). With the changing global business and investment scenario the EPZs of Bangladesh have revised its expansion strategy and in tune with the varied needs of the present day businesses, Bangladesh EPZ Authority (BEPZA) is customizing its investment incentives and facilities. Opening up of new sectors of investment have provided an excellent opportunity to prospective investors. New zones in strategically located places with state of art industrial facilities and pro-investment institutional frame work providing the right kind of environment to grow. BEPZA believes that investors from all around the globe would find the EPZs of Bangladesh as a truly attractive investment destination. For better export performance international market access of Bangladeshi product is of prime important. Bangladesh has got huge potential in respect of natural resources, skilled manpower and investment friendly atmosphere. Development partners should come forward to find market for Bangladeshi products in the developed countries.

18. Bibliography
1. Kumar, N. (2003) Host Country Policies, WTO Regime and the Quality of Foreign Direct Investment: A Quantitative Analysis of the Role of Multinational Enterprises in Industrialization, Export orientation and Innovation in Host Countries, Oxford University Press. 2. Cling, J.P. and G. Letilly (2001), Export Processing Zones: A threatened instrument for global economy insertion? DT/2001/17 Paris: DIAL A Case Study on the Export Processing Zones (EPZs) of Bangladesh 16

3. Dunning [1998] Globalization, Foreign Direct Investment and Technology transfers: Impacts on and Prospects for Developing Countries London and New York: Routledge. 4. Dunning, J.H. (1980). Toward an Eclectic Theory of International Production: Some Empirical Tests, Journal of International Business Studies. 5. ILO/UNCTC (1988) Economic and Social Effects of Multinational Enterprises in Export Processing Zones, Geneva, Switzerland. 6. Kankesu J. (2003) Benefit-Cost Appraisals of Export Processing Zones: A Survey of the Literature, Development Policy Review.

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