European Management ]ournal Volume 5 No 2

0 European Management Journal 1987

ISSN 0263-2373 $3.00

The Role of Free Zones

in International Strategy

Nicolas Papadopoulos

Associate Professor, School of Business, Carleton University, Ottawa

Free zones are a widespread but little understood Yet there is one type of international business
phenomenon in international trade today. Ranging activity which is almost totally free, that is, as free as
from free trade zones in Panama and the United “free” can be: that which is carried out in special
States to export processing zones in Taiwan and “free zones” around the world. Free zones are
Ireland, their number has mushroomed to more than geographic enclaves located within one country but
500 worldwide and is likely to increase further. This enjoying a special status which does not extend to
article outlines the basic characteristics of various the rest of its territory. This “special status” can
types of free zones and then examines them from two range from total or partial exemption from import
perspectives: the traditional view, in which zones are duties to special tax holidays and relaxed labour,
seen mainly as convenient production locations or environmental, or other regulations. While the scope
duty-free areas for short-term warehousing; and a of activities that can be performed in some free
contempora y strategic view, in which zones are seen zones is broad, others are dedicated to such specific
as an integral part of international business strategy. functions as warehousing, export-orientated produc-
tion, or banking.

The number of free zones worldwide has risen from

The Growth of Free Zones
less than 100 to well over 500 in the past three
decades and some estimates suggest that as much as
The concept of a global market free of barriers to 20 per cent of world merchandise trade will soon be
trade and investment is dear to most people in both
passing through them. For example, the Free Trade
business and academic circles. Multinational company
Zone in Colon, Panama, one of the best known and
executives, in particular, share a near-unanimous
most significant zones worldwide, handles about
view that both tariff and nontariff barriers must be
$5 billion in trade annually.
reduced, if not eliminated. Of course, restrictions on
trade and foreign direct investment have been eased
Free zones have been a key element in foreign trade
over the past few decades at all levels - globally, for many countries, especially in East Asia, and four
e.g. through the General Agreement on Tariffs and
companies such as Olivetti, Westinghouse, and
Trade (GATT), regionally, e.g. in free trade areas
South Korea’s Gold Star, for several years. Still, they
such as the European Community (EC) and the
are rarely discussed and little understood and they
European Free Trade Area (EFTA), and nationally,
have stayed, by and large, outside the mainstream
e.g. by incentives aimed at attracting foreign investors.
of economic and business analysis and research.
Nonetheless, the rate of progress has been slow.
Many, mostly nontariff, barriers remain, protection-
There is a tendency, even among those who are
ism is on the rise and investment incentives are
familiar with the concept, to view free zones from a
often accompanied by restrictions or red tape which
narrow and tactical, rather than a broader and
reduce their attractiveness.
 THE ROLE OF FREE ZONES IN INTERNATIONAL STRATEGY 113

strategic, perspective. This is due partly to the

gradual evolution of many and widely differeiit
Exhibit
types of zones, which resulted in attracting attention
to parts of the concept rather than to the whole, and Main Types of Merchandise, Service, and
partly to the confusion that exists about the true Investment Free Zones
functions and characteristics of various types of Bonded Warehouses. Short term storage facilities
zones. used mainly by importers while they attend to
customs formalities or clear financial arrangements.
For example, in 1979 the People’s Republic of China
announced its intention to establish “special eco- Free Transit Zones. Geographic corridors offered
nomic zones” (SEZ) on its territory. One year later, a usually by coastal nations to their land-locked
Chinese official referred to the “incorrect under- neighbours for transporting goods in bond; may
standings” that followed the announcement:(l) in include the use of port and related facilities.
describing this Chinese initiative, foreign analysts Freeports. These permit the duty-free storage of
had used terms such as “duty-free zones”, “free incoming goods similarly to bonded warehouses,
trade zones”, “free trade areas”, “industrial zones”, but also offer facilities for some typical middleman
“special industrial zones”, and others. The use of so functions, e.g. bulk-breaking, re-packaging, sort-
many different terms, each of which has its own ing, labelling.
distinct meaning (and none of which fits the nature
of China’s SEZs well), shows the substantive as well Export Processing Zones. Production facilities are
as terminological confusion that surrounds the free available* for use in producing or assembling
zone concept. products for re-export.
Free Trade Zones. Often used to connote any type
Main Types and Characteristics of merchandise-related zone. Technically, how-
ever, it refers to zones which offer a wider range
Unlike “free trade areas”, which refer to trade of facilities for both importers, e.g. warehousing,
between two or more countries, a free zone is an and exporters, e.g. producing for exports.
enclave within a country. Two examples of zones Free Banking Zones. Restrictions such as minimum
which are consumer-oriented, and therefore well- reserve requirements for foreign currency dealings
understood, can serve to highlight the essence of are relaxed, thus enabling banks and their cus-
free zones as “special status geographic enclaves”: tomers to take part in the market for transnational
free gambling zones, e.g. the state of Nevada in the deposits and loans or international bond issues.
U.S. and individual casinos in other countries, and
Free Insurance Zones. Insurance companies are
duty-free stores at international borders.
able to compete for uncommon or major risk
categories, such as insuring large manufacturing
The main types of free zones for international
facilities, space equipment, works of art in transit,
business are identified in the Exhibit. More than half
or major personalities.
of the world’s 500-or-so free business zones are in
less developed and newly industrialised countries Economic Development Zones. Designated regions
(LDCs and NICs).(2) About 100 of the remainder are of countries, ranging from remote underdeveloped
located in the United States, 100 in Western Europe, areas, as in Brazil, to the inner cores of old
and 20 in Eastern Socialist countries including industrial cities in need of revitalization in the
China. Most zones are related to merchandise trade U.K. and the U.S. Their special status consists of
rather than services. Almost 100 of these are export tax holidays, grants, exemptions from certain
processing zones (EPZ), and the remainder are regulations, and other benefits, which are usually
mostly free trade zones (FTZ). tied to the investor’s ability to generate employ-
ment, develop exports, and/or transfer technology.
The EPZ concept evolved in the 196Os, mainly as a
result of the growing realization in LDCs that export
development was more promising than import
substitution as a means of achieving industrial
growth. “Asia’s Little Dragons”, Taiwan, Hong Kong, mostly in the Pacific Rim, they soon spread to other
Singapore, and South Korea, were among the first nations such as Egypt and Jordan in the Middle
to establish EPZs. Their success in penetrating East, Mexico and Guatemala in Latin America, and
foreign, mainly western industrialised markets served various African countries.
as an example that was quickly followed by other
NICs and LDCs.(3) While EPZs were found at first Tenants import goods duty free.
 114 NICOLAS PAPADOPOULOS

Contemporary FTZs in the United States and Western zones; lower insurance premiums since goods are
Europe evolved both to facilitate the work of assessed on a lower net value; using in-zone
importers and to counter the impact of growing goods as collateral for loans or to obtain export
imports (especially from the NICs) by providing incentives from the host country.
duty-free facilities to exporters or re-exporters. The l The availability of inexpensive labour and/or
number of FTZs in the United States grew from less nearby natural resources, especially for companies
than 10 in 1970 to over 100 today, Canada established whose end-product includes a substantial labour
its first two free zones in 1984, and the U.K. set up component, e.g. electronics or textiles, and those
six freeports in the same year.(4) Eastern socialist in resource sectors where some local processing is
nations have followed the general trend by establish- required, e.g. tyre and rubber.
ing FTZs (e.g. Hungary) or SEZs (e.g. China) in the 0 “Operational convenience”, e.g., importers are
1980s. In addition to establishing four SEZs, in 1984 able to store goods temporarily and inexpensively
.China designated 14 of its coastal cities as “open while financial or administrative details are being
investment zones” and also announced special ironed out.
foreign exchange privileges, aimed at attracting
foreign investors, for 24 inland and six coastal cities. These benefits are both real and substantial, but they
Additional free zones are being developed or planned also reflect a rather narrow perspective by both hosts
by countries ranging from Turkey and Hungary to and tenants in assessing the usefulness of free
Bangladesh and Taiwan. zones. This has led to several problems, especially in
the case of EPZs and Freeports.
The growth in international trade transactions,
floating currency exchange rates, interest rate insta- The perceived benefits of zones led the majority of
bility, and other factors, resulted in similar rapid host countries to adopt a self-centred rather than
growth in the evolution of free international services customer-oriented view during the early years of
zones. For example, London was the only free zone development. When the goal was unemploy-
banking zone (FBZ) until 1981, at which time the ment reduction or regional industrialization, for
legislation making New York City an FBZ came into example, the locations selected for establishing
effect. Other cities, ranging from Montreal to Tokyo, zones often were far from established trade routes,
have become or are planned to become FBZs. did not have a sufficiently large pool of skilled
workers, or lacked the necessary infrastructure.
The growing number of free zones has been Further, many governments seemed to share the
accompanied by substantial increases in the number corporate view regarding the main advantages of
of companies that operate in them and in the free zones for business. This frequently became a
volume of trade they handle. For example, the self-fulfilling prophecy, resulting in zones which did
number of projects in the Philippines’ EPZ at Bataan not offer much beyond rudimentary processing
grew from 15 in 1975 to 50 in 1979 (5). Almost 2,000 facilities, temporary relief from import duties, or
contracts had been signed for projects in China’s customs officers on location to expedite administra-
Shenzhen SEZ from its establishment in 1980 to end- tive procedures.
1983, and these grew by another 200 in the first
quarter of 1984 (6). Similarly, in its first three years Another problem from the host country perspective
of operation the volume of trade passing through has been inadequate planning and control in zone
the U.S. FTZ in Miami increased from $170 to development. Several zones suffer from a poor
$500 million (7), and the number of workers in match between the facilities offered and the target
India’s EPZ at Kandla increased from 70 in 1966 to investors’ needs, inadequate or misdirected promo-
2,500 in 1980 (8). tion to the business community, and an unclear legal
regime (10).
Advantages and Problems of Free Zones: The
Because of these and other similar problems, the
Traditional View (9)
type and amount of trade and investment that was
attracted to some free zones did not meet the hosts’
Host governments have traditionally seen free zones
expectations. The types of benefits offered, coupled
as instruments for the achievement of such specific
with short-term corporate objectives, led most com-
national goals as reducing unemployment, develop-
panies to view zones from an opportunistic perspec-
ing exports, obtaining new technology, or industrial-
tive.
izing underdeveloped regions. Business firms have
focussed on three main types of advantages.
For example, when low labour costs were the prime
l Short-term financial gains, e.g., improved cash motive for locating in a zone, investors moved to
flow arising from the duty-free status of most other locations, in search of ever-lower wage havens,
 THE ROLE OF FREE ZONES IN INTERNATIONAL STRATEGY 115

once wages in the host country started rising as a zone’s special status, might have chosen to invest
result of industrialisation.(ll) Or, when the motile elsewhere, the establishment of a progressive,
was to gain access to natural resources, companies export-oriented image, and the diffusion of contem-
were naturally interested more in the resources porary labour skills and work habits from the zones
themselves and less in aiding the host’s national to the host country’s domestic territory (17).
goals.
For business, the traditional advantages from operat-
Furthermore, the traditional financial and operational ing in free zones can be seen, in summary, as oppor-
convenience advantages typically benefit importers tunities for greater efficiency. For example, the main
more than exporters, thus often defeating the host’s attraction of countries like Brazil, Taiwan, the U.S.,
export-orientated drive. In countries as diverse as or Panama may be, respectively, their resources,
the U.S. and China, the early excitement about FTZs low-cost labour, large internal market, or strategic
and SEZs dissipated somewhat when it was realized location; the presence of zones in those countries
that they became a way of exporting to those huge simply makes it easier and less costly to access their
markets, rather than exporting from them (12). In already-existing comparative advantages (18). In
addition, the government in China is concerned other words, the free zones in those countries are
about the fact that a large proportion of SEZ more a welcome fringe benefit than a major strategic
investments has been in services such as hotels and factor in business decisions.
resorts rather than in industry.
A Strategic Perspective
The direct contribution of EPZs to the manufactured
exports of LDCs and NiCs has been relatively small,
The benefits that were described above will, of
ranging from less than one per cent in India (1978)
course, continue to be important in government
to 3.9 per cent in South Korea (1980) and 7.5
decisions to establish more and improve existing
per cent in Taiwan (1979) (13). Because of their
inconvenient location or other disadvantages, some zones, and in business decisions to locate in them.
However, it appears that the more successful zones
free zones such as China’s Zhuhai SEZ, Canada’s
share one or more of the following key character-
FTZ in Newfoundland, and the U.K.‘s Freeport at
Prestwick have had difficulty attracting investors istics, in addition to the traditional ones that are
common to most zones.
(14).
l Their infrastructure is substantially better than what
The extent of technology transfer and employment is available in the host country’s regular territory.
benefits to the host countries have also been An example of this is China’s SEZ in Shenzhen.
questioned (15). Zone employment, as a proportion Being more a region than an enclave, Shenzhen
of the total number of workers in manufacturing, is occupies an area of 328 square kilometres and has
less than one per cent in such countries as Senegal a population of 100,000. Its infrastructure, in
and South Korea. Furthermore, most of the workers terms of such elements as roads, utilities, produc-
employed in free zones are semi-skilled or unskilled tion and housing facilities, and financial and other
labourers, and the vast majority of these are young services, is far superior to most other regions in
women aged 18 to 24. the country.
l Their legal framework is substantially diferent from
Finally, the use of some free zones, especially EPZs, that of the host country itself, so much so that in-
has remained largely regional. For example, about 90 zone operations have significant advantages over
per cent of all the investment in China’s SEZs has off-zone ones. Examples include relaxed labour or
been made by Chinese businessmen from Hong environmental regulations and corporate reporting
Kong, Macau, and overseas. Another example is requirements (19), or differences in the allowable
South Korea’s EPZs. In 1980, 86 per cent of foreign forms of corporate ownership. For example, India
investments in them had originated in Japan, 10 permits full foreign ownership of production
per cent in the U.S., and only four per cent came facilities in its EPZs, while this is limited to 74
from other countries.(l6) per cent for off-zone firms (20). More generally,
when a host country is known for slow or cumber-
In spite of the above problems, the rapid growth of some administrative procedures, the deregulated
zones to date suggests that for both host countries environment of its zones is an advantage in and of
and corporate tenants the benefits outweigh the itself.
disadvantages. Furthermore, for the host countries l The political environment in the host country is
the benefits are often indirect or difficult to measure. such that operating outside a zone’s special status
Such benefits include the attraction of foreign would be difficult. As Grubel has noted, many
investors who, without the added incentive of a host countries view zones as natura1 laboratories
 116 NICOLAS PAPADOPOULOS

for economic and legal experimental approaches incorporate them. An example is Taiwan, whose
that would not be appropriate or possible in their EPZs are rapidly evolving from cheap labour havens
domestic territory (21). Eastern socialist countries to integrated high technology industrial parks (23).
provide a typical case in point. For example, Other examples are the U.S., Belgium, India, and
Hungary’s free zones are exempt from customs Hungary, all of which permit the designation of indi-
restrictions and also from certain foreign exchange vidual company plants as FTZs or EPZs, wherever
and foreign trade regulations. Unlike the prevailing they may be, in order to enhance the investor’s
legal environment elsewhere in China, companies flexibility. From the international company perspec-
in SEZs can lease land for lengthy time periods (up tive, the presence of these characteristics, individually
to 50 years in Shenzhen), hire or dismiss workers, or in combination, means that free zones can be used
and repatriate profits and foreign employee wages. systematically as key elements of global strategies,
l The zone is developed as an integrated institution rather than simply as tools for gaining short-term
with facilities that are relevant to its objectives. advantages.
For example, the FTZ in Orlando, Florida, has the
objective of acting as a major distribution hub, The difference between the traditional and strategic
and is described as a, viewpoints is that the latter calls for considering
long-term investments in zones, and integrating
“Cost reduction center . . . [which] offers an them with the firm’s overall international operations.
opportunity for internationally oriented manufac-
turing and distribution firms to expand and The strategic perspective has two dimensions: view-
develop American and overseas markets . . . its ing zones individually, and viewing them as inter-
location is enhanced due to Florida’s unique mid- national networks.
way position between Canada, Central and South
America, and other world markets;“(22)
Zone-specific Advantages
Appropriately the zone is part of “Orlando Trade-
port”, a major business park which in turn is As has already been noted, there are cases where
located within the city’s airport complex, and offers the presence of a particular zone can mean the
a broad range of production, warehousing, exhi- difference between being able to operate in the host
bition, and infrastructure facilities. On the other country or not. This is especially so in countries
hand, the free zones in Massachussetts and in where the first three of the listed characteristics are
Hsin-Chu, Taiwan, aim at attracting manufacturing present, which means that the target country’s
plants and offer, among other benefits, training, overall legal or political environment and/or its
laboratory, and research institutes. The FTZs in infrastructure are considerably worse than those of
New York City, Copenhagen, and Helsinki are its zones.
orientated towards trade and distribution, and
therefore emphasise their warehousing and show- However, there are several other cases where
room facilities. individual free zones may warrant consideration for
l The zone occupies a strategic geographic locution. The long-term investment, as the following two examples
significance of a given location may be determined indicate.
in relation to such factors as major trade routes,
large markets, or important resources. Examples Strategically-located zones can be used as centralised
of free zones that meet such criteria are those in distribution hubs, thereby enabling the firm to
Shannon, London, Hamburg, and Helsinki in reduce its total inventories while still being able to
Europe, New York, Orlando, and Colon in North respond quickly to the needs of several nearby
and Central America, and Taiwan, Hong Kong, or markets. For instance, exporters who hold inven-
Singapore in the Pacific. tories separtely in each of their markets may
l Finally, successful zones are those whose strong experience stock-outs or surpluses in individual
points are not outweighed by major disadvantages. For countries because of unforeseen demand fluctuations.
example, a host country’s strategic location may This can be avoided by holding inventories for
be of little benefit to most investors if the zone several markets in a free zone located in any of the
itself is located in a remote region or suffers from target markets themselves, or in a third country, and
a lack of skilled labour. suplying each separate market as conditions evolve.
(24)
As the free zone concept matures, an increasing
number of countries seem to recognize the import- The same logic can be applied to cases where import
ance of the above characteristics. Therefore, wherever quotas, duties favouring end-products over others,
necessary and possible, zones are modified to or uncertain demand, make it advantageous to
 THE ROLE QF FREE ZONES IN INTERNATIONAL STRATEGY 117

service an individual market through a zone or established an early presence in Eastern Europe in
zones located in the target country itself. When sufh anticipation of future opportunities rather than for
conditions occur sporadically and extend over the immediate gains, and the many companies which,
short term only, the advantages from using free for the same reason, invest in China today.
zones are limited to the traditional ones that were
described earlier. But if these conditions are recurrent For all but a handful of companies, however,
or hold over a long time, and especially when the developing effective global strategies is subject to
market is large and important, investment in new such major disadvantages as high cost, difficulties in
plant and/or warehousing space in the host country’s co-ordinating long-term objectives with the need for
free zone(s) may be called for. This would seem short-term flexibility, and the fact that extensive
justified, for example, in any of the following cases. international operations are subject to a great variety
of trade and investment barriers in various countries.
Exporters of fad-items or toys, who are typically
Some, if not most, of these problems can be avoided
faced with uncertain demand and who could
if free zones are viewed collectively as international
avoid paying’duty on merchandise that may well
networks.
remain unsold.
Textile and footwear producers from LDCs and
NICs, who are subject to recurring or permanent
International Zone Networks
quotas in some western developed nations. By
maintaining inventory in zones, a producer can be
International zone networks can be used in a variety
“first to market” as the quota levels permit, while
not paying duty during the interim waiting of industries; the following examples illustrate the
range of possible applications.
period.
Exporters of bulky products which pay less duty if
imported in finished form, such as car imports to Many exporters need to adapt their products to local
the U.S. In such cases, a dual advantage can be requirements in foreign markets, but also to rational-
ise production for greater efficiency. In such cases,
gained. Goods can be shipped in component or
processing or assembly can be performed in the
modular form, thus benefiting from lower freight
producer’s home country, while packaging and
charges, and then assembled in a zone before
labelling is left to be done in FTZs located in each of
being imported into the target market, thus taking
the target countries. This approach makes economies
advantage of the lower end-product duty rate.
of scale possible through centralized production, but
it also has the advantages of lower cost, since the
Global Competitive Position product resides in a duty-free environment while
being finalised, lower exposure to risk arising from
When the specific advantages of individual zones errors in labelling or unforeseen changes in the host
are pooled together, they can be viewed as a means countries’ laws, and better adaptations to local
for establishing a strong global competitive position. tastes, since local talent can be used for this task.

The importance of strategic positioning has grown in Companies faced with uncertain demand levels can
tandem with the fierce struggle for global advantage in use zones internationally to increase their flexibility
the competitive 1980s. Many authors have suggested and reduce their risks. This is possible because
that international success depends increasingly upon goods kept in FTZs can be redirected from one
being in a position, geographically and otherwise, to market to another at little cost and without being
block competitive strategies, gain early access to subjected to import formalities. For example, this
advantageous resource or labour locations, obtain could be useful to exporters of fad items whose sales
competitive financing, pre-empt buyer segments by may fall far short of expectations in a given market,
establishing an early foothold in markets with future or to high technology firms facing short product life
potential, and generally co-ordinate global operations cycles. Rather than having to discard them or sell
more effectively.(25) them at greatly discounted prices, such companies
can ship their unsold products to other markets
There are several companies which successfully prac- where the fad may be more successful or where the
tice such globally coordinated, long term strategies. high technology product is still needed. To do this
They include European companies investing in quicky and at a reasonable cost, exporters would
Canada with a view to the much larger U.S. market, need to use zones in several countries systematically
North American companies investing in Belgium or so as to avoid becoming entangled in the higher
Italy as beachheads for penetrating European Com- costs and administrative procedures of their target
munity or North African markets, firms such as market’s customs-bound territory.
Occidental Petroleum, Fiat, and Pepsi Cola which
 118 NICOLAS PAPADOPOULOS

International zones can be used by companies who order to distinguish between those that have the
need to penetrate several foreign markets but do not potential of playing a major part in international
have the resources to establish operations in each production and marketing strategies, and more
individual market. For example, a medium-sized traditional zones which can only be used to
firm can produce its products in two well-integrated facilitate international operations.
EPZs, use five FTZs as hubs in physical distribution, l Superimposing the positions of these zones on a
and finally display its merchandise to potential global “map” portraying future opportunities and
buyers from a variety of countries at four carefully threats, as these are determined by considering
selected FTZs or Freeports that have full display and the international environment, competitive strat-
exhibition facilities. egies and positions, and the company’s own
corporate objectives and constraints.
In all of the above examples, taking advantage of the l Examining whether, and if so to what extent, it is
network view of free zones presupposes the main- possibIe to integrate a network of free zones into
tenance of long term facilities at several carefully international operations. This process may result
selected zones. In an extreme scenario of a company in developing entirely new strategies, rather
that makes full use of a variety of zones, it is than integrating the free zones into the firm’s
possible to produce, assemble, finance, insure, existing ones. In other words, the analysis of free
transport, store, repackage, adapt, and display zone characteristics may reveal opportunities for
products to potential customers, each of these strategies which were not thought possible when
functions being performed in a different country the concept of international zone networks was
while, throughout the entire process, the goods not part of the firm’s planning process.
remain in “mid-ocean” for all practical purposes.
That is, products may move from resource extraction In addition to distinguishing among zones based on
to final importation into the target market without their strategic, rather than tactical, significance,
ever being subject to local restrictions in various answering the following two key questions can help
intermediate countries. to ensure that the investor’s objectives are not in
conflict with those of the host nation.
Whether zones are viewed individually or as net-
works, the preceding discussion shows that the Are zones primarily orientated towards imports or
benefits from adopting a broader perspective go well exports? Most freeports fall into the first category,
beyond the traditional ones. While earlier views most EPZs and China’s SEZs into the second, and
concentrated mainly on production and financial most FTZs combine characteristics of both. It is
benefits, the strategic concept sees zones as playing a important to note, however, that as time passes this
major role in marketing as well. In fact, free zones can distinction is becoming increasingly blurred. For
be seen as instruments for “just-in-time-marketing”, instance, Colon in Panama was developed as an EPZ
a concept similar to “just-in-time-inventory” which but now resembles more the FTZ definition, and one
was popularized by Japanese management. Simply example, Malaysia, illustrates those countries which
stated, just-in-time-marketing means being able to have begun permitting imports to their own territory
supply market demand as effectively and efficiently from their EPZs, provided that standard import rules
as possible, while gaining from deferring duties are observed. This trend increases flexibility for zone
and other advantages throughout the production-to- tenants. It also, however, raises the possibility that
consumption process. the host government may take action to change the
zone’s legal status if import operations rise to the
point where they defeat its export goals.
Implementing a Global Zone-based Strategy
What were the specific public policy concerns that
The main difference between a traditional and a
led the host country to establish free zones?
zone-based international strategy is that, in the
Knowing these can help to identify the government’s
second case, investment in free zones is systemati-
future intentions about its zones and the type of
cally planned in order to achieve two main goals:
investor who will be looked upon most favourably.
optimal coverage of strategic positions on the global
For instance, Eastern European nations see FTZs as
map, and a reduced need for resource deployment.
an instrument for encouraging business co-operation
between domestic and foreign firms. They are,
There are three main stages in implementing a zone-
therefore, likely to encourage long term investors
based strategy.
who are willing to collaborate with local companies
l Identifying free zones whose characteristics are in such matters as co-production agreements involv-
suitable to the firm’s nature and objectives. To do ing technology transfer. On the other hand, many
this, it is necessary to assess a variety of zones in West European and U.S. FTZs are orientated towards
 THE ROLE OF FREE ZONES IN INTERNATIONAL STRATEGY 119

distribution, so that investing in manufacturipg author’s “The Free Trade Zone as a Strategic
operations may not be so important. Element in International Business”, Canadian
Business Review, Vol. 12, No. 1 (Spring 1985)
pp. 5155; “An Overview and Evaluation of Free
Strategies of Adjustment Trade Zones”, in R. Andiappan and J, Cattaneo,
(eds) Proceedings, Administrative Sciences Associ-
Although free zones have proliferated in the past
ation of Canada, lnternutional Business Division
three decades, and although more and more com-
(Montreal, Canada: May 1985); and “A Marketing
panies are using them, there have been problems.
Perspective on the Present Status and Future
Some have been a natural part of the maturation of
RoIe of The Free Trade Zone”, Second World
the free zone concept itself, while others reflect the
Marketing Congress (Stirling, U.K.: August 1985),
conflict between the investors’ and the host countries’
pp. 115-126.
goals. Judging by recent developments, it seems that
10. See, for example: “Zones of confusion . . . and
both parties are adjusting their strategies in order to
loans of frustration”, China Trade Report (July
take into account each other’s objectives and limit-
1985), pp. 8-9.
ations. If business adopts a strategic view of free
11. Since the barriers to entry and exit are Iow, zone
zones, and begins to view them as an integral part of
investors who shift production locations fre-
international operations, there is a strong possibility
quently are often described as “footloose”.
that this will lead to longer-term zone investments
12. Even for the U.S., accurate statistics are not
which, in turn, are likely to be viewed more
available. Estimates on the import proportion of
positively by the host countries.
FTZ trade vary from 30 per cent to 70 per cent;
see UNCTAD, op.cit., as well as “Foreign Trade
References Zones: Going About as Far as You Can Go”, The
Economisf (November 22 1980) pp. 97-98, and
1. Ru, Sun “The Conception and Prospects of the Diamond, Walter, “Free Trade Zones Offer
Special Economic Zones in Guangdong”, Chinese Worldwide Opportunities”, Area Development
Economic Studies (Fall 1980) pp. 68-78. (December 1979) 12ff.
2. Unless otherwise noted, all statistics are drawn 13. OECD 1984, op.&., p. 50.
from: BasiIe, Antoine and D. Germidis, Investing 14. Zhuhai eventually did attract additional invest-
in Free Export Processing Zones (Paris: Organiz- ment; see “Zone out of the Twilight”, Fur Eastern
ation for Economic Co-operation and Develop- Economic Review (April 18, 1985) p. 74, and “No
ment, 1984); Export Processing Free Zones in more room left in Zhuhai”, China Trade Report
Developing Countries (United Nations Conference (March 1985) p. 1.
on Trade and Development - UNCTAD - 15. See OECD 1984, UNCTAD 1983, and UNIDO
January 1983) Dot. TD/B/C.2/211; Export Processing 1983, op.&.
Zones in Developing Countries (United Nations 16. OECD 1984, opxit., p. 41.
International Development Organization - 17. For example, it was noted above that employ-
UNIDO - August 1980) Dot. ICIs.176; Currie, ment in EPZs is generally low in proportionate
Jean, Investment: The Growing Role of Export terms. However, zones tend to generate net
Processing Zones (The Economist Intelligence employment gains since they absorb otherwise
Unit, Special Report No. 64, June 1979); and unemployed persons, rather than diverting
Diamond, Walter, and D.B. Diamond Tax-Free workers from other jobs and their absolute
Trade Zones of the World, Vol. 1, (New York: numbers in some countries are significant (e.g.,
Mathew Bender & Co. Inc., 1984). in Mexico and South Korea the proportions are
3. NIC exports to OECD members rose from 2.9 and 0.7 per cent, but these represent 120,000
$1.2 billion to $55 billion between 1963 and 1979; and 31,000 jobs, respectiveIy). Some of these
see OECD 1984, opcit., p. 19. issues are discussed in Jayawardena, D.L.U.,
4. In the U.S., the term “Foreign (rather than “Free Trade Zones”, fournu2 of World Trade Law,
‘Free’) Trade Zones” is used. 17 (September-October 1983) pp. 427444, and
5. OECD 1984, op.cit., p. 41. Ping, Ho Kwon, “Birth of the second generation”,
6. Crane, George T., “Whither the SEZs?“, The Far East Economic Review, (May 18, 1979), pp. 76-
China Business Review (November-December 78.
19&Q), pp. 35-37. 18. Wall, David, “Export Processing Zones”, Journal
7. Grubel, Herbert, Free Market Zones: Deregulating of World Trade Law, No. 10 (1976) pp. 478489.
Canadian Enterprise (Vancouver, Canada: The 19. It should be noted, though, that the global trend
Fraser Institute, 1983), p. ix. is towards protecting individual, labour, and
8. OECD 1984, op.cit., p. 48. public rights in zone operations.
9. This and the foIlowine sections draw from the 20. Grubel 1983, op.&., p. 66.
120 NICOLAS PAPADOPOULOS

21. Ibid., pp. 3132. of Commerce, Special Issue on FTZs (New York,
22. Orla&o Tradeport literature (Greater Orlando November 8, 1983).
Aviation Authority, 1985). 25. Ayal, Igal and J. Zif, “Competitive Market Choice
23. OECD 1984, op.&., p. 61. Strategies in Multinational Marketing”, Columbia
24. Several examples of this are noted in the ]ournal Joumaf of World Business (Fall 1978) pp. 72-81.