Export Processing Zones

Abstract

Export processing zones (EPZs) are industrial estates that are fenced in for producing manufactured goods for export. In short, they are trade enclaves that import raw materials, process them, and then export to the world market. The development of EPZs is justified by a number of motivations: to generate employment, to produce foreign exchange earnings, to promote exports, to provide a catalyst effect on local firms about how to export to the world market, to use trade enclaves to diffuse knowledge, know-how and management skills to local firms, and to stimulate industrial development in the host country. Epzs are created under specific circumstances–developing countries have abundant labor resources, while capital becomes mobile in the global economy. The combination of labor and capital in EPZs provides a chance for developing countries to absorb foreign direct investment (FDI) and be linked to the global economy with the minimum impact on the domestic economy, as the goods produced in EPZs are exported. WTO rules are against subsides for export, which requires the phasing out of EPZs’ tax incentives. Some EPZs are taking this chance to evolve into industrial and science parks and beginning to integrate with their local economies.