Free zones in El Salvador

Abstract

In this case study a recent graduate of a Central American MBA program is confronted with the design, formulation, and evaluation of an international investment project for establishing a private-sector free trade zone in El Salvador. The main objective of private and public free trade zones is to facilitate export-oriented industrial development. Most highly developed free trade zones around the world offer a variety of benefits to the companies that operate in them. These benefits include tax exemptions, duty-free imports, and personnel recruitment services. At the beginning of the case, there is a checklist of all the items that should be taken into account properly to design, prepare, and evaluate a project of this kind. The case provides information about world demand characteristics for public and private free trade zones that any company that is potentially interested in doing business in a free trade zone should take into account. In addition, it offers information about countries offering free trade zones and how each can compete to attract additional investors. The emphasis is placed on the Central American region, particularly El Salvador and Costa Rica. El Salvador is the site where the prospective investors are located, and Costa Rica is considered as an alternative site. When the case takes place, Costa Rica is considered to be the most advanced in terms of investments in and development of public and private free trade zones. The case provides detailed information on both macro and micro elements. It is therefore expected that the decision will be based not only on qualitative considerations, but also on quantitative ones. The macro elements include the potential impact of changes in incentives granted to foreign investors and the image of instability such changes might convey to investors. As for quantitative issues, information in the case is sufficient to develop a comprehensive financial analysis of the project. The basic purpose of the case study is to present the major factors to be considered in making decisions about international site location, including the importance of macro environmental elements, the site itself, costs, prices, and market characteristics. The discussion emphasizes the importance of this final element, the market for public and private free trade zones. The case may also be used to achieve other secondary objectives, such as: • • Understanding the role of the parties involved in the decision • • Calculating the cost of the preinvestment stage • • Understanding some of the typical problems arising from skipping stages without awaiting final results • • Mastering the use of financial analysis indicators such as the internal rate of return (IRR) when a political or country risk is involved.