INTRODUCTION

I. OBJECTIVE AND SIGNIFICANCE OF THE STUDY

From 1991, following the 1987 Law on Foreign Investment, the Regulation on EPZ in Vietnam was issued, which was the basis for establishing of Vietnam’s EPZs. With 96 IZs planed to establish to 2010, until 2000, 67 IZs have been established over the country. Initially, there were six EPZs but now only three of them remain EPZs and three others were reclassified as IZs. Recently, some IZs, open economic zones and special economic zones have opened or planned to open, but no more EPZs will be built in the immediate future and the contribution of EPZs to economic development is debatable.

The thesis attempts to analyze the roles of the EPZs in Vietnam’s development process and provides answers to the following questions:

·               What are attractivenesses of Vietnam’s EPZs to foreign investors?

·               What is the contribution of EPZs to the industrialization of Vietnam?

·               What are the causes for the success or failure of Vietnam’s EPZs?

·               What are policy implications for improving the performance of Vietnam’s EPZs?

2. METHODOLOGY

The research applies a descriptive and analytical framework to evaluate the contribution of Vietnam’s EPZs to economic development. The scope of the study is limited to some Asian countries that have most successful EPZs development, which can be drawn lessons for Vietnam. Vietnam’s EPZs will be analysed in the period from 1991 to 2000.

3. ORGANIZATION OF THE PAPER

Excluding introduction, the thesis is organized into four chapters:

Chapter One - Theoretical framework

Chapter Two - Asian country case studies

Chapter Three - Export Processing Zones in Vietnam

Chapter Four - Policy implications and conclusion.

Chapter One: THEORETICAL FRAMEWORK

1.1. OVERVIEW OF EXPORT PROCESSING ZONES

1. Definitions

There are about 30 terms used to describe the EPZs. Basically they are the same and can be defined in either large or narrow meaning. In Vietnam, the EPZ concept is defined in the Regulation on EPZ issued by the Vietnam’s Government as “an industrial zone (IZ) where export processing enterprises specializing in the production of goods for export and in the provision of services for the production of export goods and export activities are concentrated, having delimited geographic boundaries and no inhabitant, established by decision of the Government or the Prime Minister”.

2. Historical background of EPZs

According to Dorkenoo (1999), the FTZ concept has been used in history about 2000 years ago, which involves transportation-shipment, storage and re-exporting of goods.

The modern form of EPZ came from the establishment of the first EPZ in Ireland in 1959. In 1965, the first Asian zone was the Kandla EPZ established by the Indian Government, followed by the establishment of a range of EPZs in many countries. Around the end of twentieth century, EPZs become an attractive strategy to many LDCs as they seem to facilitate the growth of industry and trade.

3. Objectives and characteristics of EPZs

EPZs are the trade policy tools at the disposal of LDC Governments. Typically, they are created as open market oases within a second best economy that is dominated by distorted trade, macro and exchange rate regulation, and other regulatory Government controls. EPZs are commonly established for some primary objectives:

-         To provide foreign exchange earning by promoting non-traditional exports

-         To provide jobs to alleviate unemployment or under-employment problems in the country and assist in income creating

-         To attract FDI and engender technological transfer, knowledge spill-over.

-         To get economies of scale returns from focusing limited infrastructure investments.

Though different in name and size, zones share a few common features:

-       Unlimited, duty-free imports of raw, intermediate input and capital goods necessary for the production of exports.

-       Less Government red tape. More flexibility with labour laws for the firms in the zone than in the domestic market.

-       Generous and long-term tax holidays and concessions to the firms

-       Better standard communication services and infrastructure in comparison with the rest of the country. The utility and land rent are often subsidized by the Government

-       Zone firms can be domestic, international or joint-venture, but the role of FDI is prominent in EPZ activities

-       Further, EPZs are said to under go a four-stage life cycle: formation, take-off, maturity and decline (Oh, 1992).

1.2. COSTS AND BENEFITS OF EXPORT PROCESSING ZONES

1. Neo-classical model

The neo-classical pessimism is pioneered by Hamada (1974) and followed by many others, come to the same conclusion that the EPZs reduce host country welfare. Later, Devereuz and Chen (1995) expand on Hamada’s analysis by adding volume of trade and factor terms of trade effects. They conclude that the EPZ are likely to be welfare improving under a much wider variety of circumstances than previously realized.

The neo-classical analysis is criticized because it does not take into account some positive externalities of FDI; the Hecksher-Ohlin based analysis is based on final goods while most of the EPZ issues are related to intermediate inputs, and while treating the capital as being internationally mobile, it fails to capture the international mobility of capital goods- that is central to the functioning of EPZs. Therefore, the conclusion of most neo-classical theories that EPZs reduce the welfare of the countries is thus largely irrelevant.

2. Cost- benefit analysis

In the point of view of the host country, the net benefit of EPZ in a given year t can be written: N_t = (L_tw + M_tP_M + E_tP_E + R_t + T_t) S^*_F – (L_tw^* + M_tP^*_M + E_tP^*_E + B_tS^*_K) - A_t - K_t

where:    L_t denotes employment in year t, w denotes wage paid, M_t denotes domestic raw material used in year t, P_M denotes the price paid for this raw material, E_t denotes the utilities used in year t,                P_E denotes the price paid for these utilities, R_t denotes interest and principal repayments of domestic loans in year t, T_t denotes taxes paid in year t, S^*_F denotes the ratio of the social over official value of exchange rate, w^* denotes the shadow price of labour, P^*_M denotes the shadow price of domestic raw material, P^*_E denotes the shadow price of utilities, B_t denotes domestic borrowing in year t, S^*_K denotes the ratio of the shadow price of capital to its market price, A_t denotes the administrative costs of the zone in year t, K_t denotes the capital cost of the physical infrastructure of the EPZ provided by the host Government in year t.

This model has been developed by Warr since 1983. Later, he used this method to evaluate some Asian EPZs, come to result that EPZs bring substantial benefits in some cases while create not any net benefit in some other cases. Spinnager (1984) also used the model for some other empirical studies and argued that the incentives, subsidies and spending on infrastructure are very costly for the host country. They concluded that the overall welfare impact of EPZs on the host economy is beneficial but limited.

The main drawback to this approach is the lack of adequate data for the cost-benefit calculations. Assumptions regarding rates of returns to capital, social discount rate and social benefits may also be easily questioned. More generally, while costs may be more readily observable, the extent of the benefits may not be, as there are many possible qualitative benefit that are difficult to be taken into account.

3. New growth model

The new growth approach to the possible welfare implications of EPZ come from emerging endogenous growth literature, which highlights the impact of spillovers from FDI and zone activities on the host economy. These spillovers include labor and management on-the-job training and learning-by-doing, copying, demonstration effects and catalyst factor, and impact the rate and level of human capital formation in host countries. Once these elements are added to the traditional analytical approach, Johanson (1994) argued, the EPZ may be beneficial to a country because of their spillover and their catalytic impact.

4. Costs and benefits of EPZs – statistical analysis

Based on theories have been used to evaluate impact of EPZs performance to host economy and the “enclave model”, the author try to analyse all possible costs and benefits of EPZs in the point of view of the host country Government in order to have a clear framework to evaluate Vietnam’s EPZs.

Figure 1.1: The enclave model

Investment and growth

Usually, EPZs are established to provide favourable conditions including good location, stable macroeconomic conditions, basic infrastructure and goods management mechanism to attract investment and stimulate growth, especially industries use the comparative advantages of the host countries to produce export goods that are able to compete in the international market by attracting ‘footloose’ foreign manufacturers.

To the extent that foreign firms locate in the EPZ, the most visible achievement is the inflow of foreign capital to the EPZ in comparison with foreign capital into the domestic economy as a whole. As the decision factor of the success of the EPZ is the number of the firms that operate within it, it also can be used as a criterion to evaluate an EPZ.

Export and foreign exchange earning

Developing the export of manufacturing products and earning foreign exchange are main benefits expected from an EPZ. The contribution of EPZ may be evaluated by the export revenue of every production firms in the zone, or in comparison with total export revenue of the country. There is also indirect effect of EPZ into host country export, shown by the increasing number of trade partner, as the role of EPZ firms in giving the access to international market to the host country processing goods.

While the contribution of EPZ in host country export is rather clearly, its role in foreign exchange earning is still debatable. The fully foreign owned EPZ firms can treat their foreign exchange earning in three ways: (1) held in liquid form in foreign exchange accounts, whether inside or outside the host country; (2) used for the purchase of imported capital equipment; and (3) converted into the domestic currency to be spent on wages and purchases from the local economy. The gain of domestic economy in term of foreign exchange is not important and can be omitted in the analysis on the impact of EPZ on domestic economy.

Tax revenue/tax loss effects

To create incentives for attracting FDI, the Government often offers tax breaks and tax holidays in both direct and indirect taxes for foreign firms investing in EPZs. Accompanied with significant investment into infrastructure, the tax holidays increase the costs of EPZs. However, though generally quite small, taxes raised from EPZ firms nevertheless represent a clear source of economic benefit for the domestic economy.

In case of Vietnam’s EPZs, because most of EPZ firms now are still in the tax exemption period, the government does not collect any tax from the zones. However, in the near future, when the EPZs are in their take off and mature period, the tax revenue is expected to be significant.

Firms’ profits or losses

Most firms occupying EPZs are fully foreign owned and their profits or losses, to the extent that being retained or incurred themselves, do not have any effect on the domestic economy, except for the profit tax collection as mentioned above. Therefore, the profits of domestically owned firms will be omitted.

Employment effect

EPZs exploit the international mobility of capital goods owned by internationally ‘footloose’ manufacturing firms. EPZs are essentially devices for attracting these firms and their capital equipment into the host country where these capital goods are combined with domestic labour- relatively immobile internationally- to produce trade goods that the firm exports. In this process, for the poor and labour abundant country, the welfare impact is increasing jobs generated, the unemployment and under-employment problems are solved. However, the gain from employment generated by the EPZ may be the exceeding of the wage received by the workers to the opportunity cost of employment in EPZ. There is also a qualitative gain from employment aspect. It is the transfer of skills to EPZ employees through on-the-job training or learning by doing process. It can be treated as positive externality of EPZ that in principle should reduce opportunity cost of EPZ employment.

Environment effects

To create positive relationship between industrialization and development, one urgent measurement is to prevent industrial pollution in the initial stage of industrialization. In EPZs, treatment or disposal measures are more cost-effective because of economies of scale involved. From available data, it is very difficult to analyse the environment effect from an EPZ. Instead, there is may be relevant for a description about the pollutant control measures of both the domestic Government and the foreign firms in an attempt to protect the environment.

Linkages between EPZ and the domestic economy

Under the ‘enclave model’, there are both forward and backward linkages between the EPZ firms and the domestic economy. Both forward and backward linkages bring no net welfare effects but there is existence of positive externalities in these forward and backward linkages. The EPZ can be a connection between the domestic enterprises with the international market, when the domestic enterprises may lack the access to international market. Further, when developing these linkages, the technology as well as knowledge may spill-over and bring some gain to the host country. Therefore, when evaluating the gain from EPZ in term of linkages, the criteria may be the trade volume or revenue between EPZ firms and the host country, or can compare these criteria with total export, import of the EPZ as a whole.

FDI:  technology transfer and knowledge spillover

The obtained technologies, if mastered, yield a higher level of TFP for any given capital-labour ratio, and combined with accumulated physical investment will move the economy from point A in production function f₀ to point B in a new and higher production function f₁ as indicated in the figure 1.2 below

Technology transfer into Vietnam through EPZs mainly came from FDI and knowledge spillover. The FDI inflow into EPZ is considered together with some positive externalities. However, it is difficult to evaluate quantitatively those positive externalities. The suitable way is to use some indicators that are related to the improvement or transfer of technology such as the FDI inflow, the expansion of international market, and the linkages between EPZs firms and the domestic enterprises.

Land rent

In EPZ development, there are two categories of land rent which are rental of land from the government to infrastructure firms that develop the EPZ, and the rental of land with completed infrastructure from these firms to the production firms. In the enclave model of EPZs, the land rent that the Government collects from the EPZ is a source of Government revenue which present the net benefit to the economy. However, with the objective to attract FDI, the Government often set low land rent which is frequently reduced to infrastructure firms (VIZA, 2000). Therefore in the analysis, the rent land is not treated as benefit to the domestic economy. Instead, a comparison between land rents between countries, or between EPZ and elsewhere in the host country is used to analyse the comparative advantage of the country or the EPZ in attracting FDI.

Costs of EPZs

To establish the EPZ, there are costs of clearing the site, compensation for existing works, investing and maintaining the infrastructure system, including transport, communication, water and electricity lines, and other administrative costs to operate and control the EPZs.

In some cases, the EPZs are invested and developed by the Government, every costs above should be treated as economic costs of the EPZs. In other cases, EPZs are invested and developed by a company, who rent the land from the Government to develop the EPZ and then lease it to production firms. For these cases, the costs to the Government include the investment into the connection between the EPZ and the existing infrastructure system, or social infrastructure outside the EPZ such as residential dwelling, schools and health centers. However, it is difficult to evaluate these costs as at the same time they may be used for some other purposes and have significant positive externalities such as improve living condition as well as economic development of surrounding areas of the EPZs, or urbanization of the previously rural poor area, etc.

Chapter Two: ASIAN COUNTRY CASE STUDIES

2.1. EPZs IN TAIWAN

Taiwan is one of pioneer countries to embark on the establishment and development of EPZs. Three EPZs were established at Kauhsiung, Nantze and Taichung in the 1960s (Dorkenoo, 1999). Based on the standard of the World EPZ Authority (WEPZA), all three Taiwan’s EPZs are assessed most successful Asian ones. With average area of 8.81 hectares and average investment capital of USD 3.65 millions, a Taiwan’s EPZ firm can create about 345 direct employment and USD 14.7 millions of export revenue annually. Most exports of Taiwan are produced in EPZs and with well developed backward linkages between EPZ firms and the domestic economy, the EPZs play an important part in the industrialization and economic development of the country.

2.2. EPZs IN KOREA

Two first EPZs of Korea were established in Masan and Iri cities in early 1970s. When operations in Iri’s EPZ remained relatively modest, those in the Masan grew significantly up to 1988 and then declined. Capital inflows into the Masan EPZ, for example, increased from $1.2m in 1970 to $88.9m in 1975. During the late 1970s, there was a drop in the number of enterprises in the zone but the level of investment kept growing and the volume of exports tripled. The number of domestically owned firms in the EPZ increased in 1980s following the Government’s decision to allow local firms to operate in the enclave. Beside, the EPZs contribute to the economic development of the region through the both quantitative and qualitative effects on employment, payment of wages, the procurement of goods and services from local sources, and the conclusion of subcontracting arrangements. Some 300 local subcontractors supplied materials to 44 enterprises in that zone, which benefited from technical support and guidance provided by companies from the zones (Oh, 1992).

2.3. FREE TRADE ZONES IN MALAYSIA

In 1968, Malaysia shifted from ISI to a labour-intensive, export-oriented industrialization with the pass of Investment Incentive Act (IIA). In an endeavour to generate jobs and exports, labour-intensive, export-oriented foreign firms were offered pioneer status, lucrative fiscal incentives, subsidized factory space, and in some cases, factories already built in industrial estates and free trade zones. As a result of favourable economic policies, during the take off period of Malaysian FTZs from early 1970s to 1990, FDI into FTZs, employment and exports increased, which contributed immensely to the growth and development of the country. While in period 1980-1990, the average annual growth rate of real GDP is 6.0%, this rate was 8.6% in next period between 1991 and 1995.

2.4. SPECIAL ECONOMIC ZONES IN CHINA

Since the late 1970s, China has undergone a transition process, which brought about an impressive upsurge in production, trade and the standard of living, began essentially with the establishment of special economic zones (SEZs). Being the most comprehensive form of EPZ, a SEZ is a geographic area within a country where certain economic activities are promoted by a set of policy measures that are not generally applicable to the rest of the country (Ge, 1999). Numerous measures aimed at reforming the existing economic system and reaching a higher degree of economic openness were developed and tested in the SEZs. The rise of SEZs generated a host of impacts on the Chinese economy and on society at large, in which the most direct and immediate impact of the SEZs on the Chinese economy was the successful operation of the zones. The robust economic growth, extending over a considerable period of time, created hundreds of thousands of new, better paying jobs. This, in turn, enhanced economic welfare and improved the standard of living for those SEZ workers. The wage increases in the SEZs were closely tied to the improvement in productivity. The high productivity in the SEZs implied a more efficient utilization of physical and human resources, the result of the SEZs’ continuous efforts to develop a market-oriented, open economic structure.

Figure 2.1: Impacts of SEZs on Chinese economy

Source: Ge (1999)

The attractive policy incentives offered to foreign investors, the improved infrastructure and facilities, and the market-oriented economic and legal reforms all helped to sustain a continued foreign capital inflow and a concurrent accelerated technology transfer. The result of the strengthened forward linkage with the outside world and the vigorous pursuit of economic and institutional reforms was the emergence of an economic structure that was more resilient, efficient, dynamic, and closer in line with the comparative advantages of the SEZs.

Through a backward linkage between the SEZs and the rest of the domestic economy, not only was the SEZ expansion sustained, but more fundamentally, other parts of the country were able to benefit from the SEZ operation in fostering a faster pace of economic growth.

The development of the SEZs did not take place at the expense of the rest of the domestic economy. As the SEZs continued to expand, the zones became not just cost-free but revenue-generating to the state treasury. The amount of tax revenues that Shenzhen generated in the period from 1979 to 1995, for example, grew at an average rate of 50% per annum (Ge, 1999). The cumulative amount that Shenzhen returned to the state and provincial governments between 1980 and 1995 exceed 50 billion RMB yuan, more than offsetting the funds the zone obtained from these sources in the period (Ge, 1999).

2.5. LESSONS FOR VIETNAM

1. Location

A favourable location can be viewed as part of a country’s comparative advantage in economic activities such as trade and investment. Generally, a good location of an EPZ includes:

a/ Access to market:

Because of being an industrial development area for export production, an EPZ should be located near the market of both input and output. Therefore, most EPZs are located in or near the international transport nodes that include international airports, sea or river ports as well as railway stations.

b/ Infrastructure

The EPZ should be located in a commercial or economic center that has relatively good infrastructure system. Located in an area with good and reliable infrastructure, the cost for infrastructure investment, especially the connection between EPZ and the main system will be low. Further, located in the center, the social infrastructure that includes health center, housing, schools, etc. are also in good conditions, that can be utilized for foreign investors or workers who will work in the EPZ.

2. Legal framework

The EPZs established as policy instruments, their development heavily depend on the support of the Government policy. The legal framework should be established to attract FDI, stimulate export and growth, create job and solve the problem of unemployment, stimulate the backward linkage between EPZ firms and the domestic economy, The experience of the Asian EPZs with regards to promotion and support for investors show strong and open intervention and support from the state, which was one of the factors underlying the success of these economies.

3. Capacity of EPZ developers

In most cases the EPZ’s infrastructure provided by the Government. In some other cases, especially for countries that lack capital, the Government stimulates foreign investment into infrastructure of the EPZ. The infrastructure investment is rather significant and require both money as well as the reputation of the developer, as it will face many difficulties in clearing the site, compensation for existing works, investing in infrastructure and advertising to attract the occupying firms. To invest and develop an EPZ efficiently, the developer should have necessary financial resources, well organized, and goods reputation in international market as well as host country market.

Chapter Three: EXPORT PROCESSING ZONES IN VIETNAM

3.1 OVERVIEW OF EXPORT PROCESSING ZONES IN VIETNAM

1. Vietnam’s industrialization in the renovation process and the relevance of the EPZ

The renovation process of Vietnam, launched in the Sixth Party Congress in 1986 and accelerated in 1989, initiated the transition from central planning to a market-oriented economy. A mixed industrialization strategy between ISI and EOI has been introduced. Protection remains for some key heavy industries, but most light manufacturing industries have developed based on the country’s comparative advantages. The Government plays an active role in directing industrialization, and one of its activities is to establish EPZs.

From the national point of view, EPZs are ‘second best’ instruments designed to address temporary economic and institutional bottlenecks in the process of the country’s transition from a centrally planned economy to a market one. EPZs were initially established for the production of export goods to gain access to export markets and technology by providing free trade status to EPZ investors without liberalizing the entire economy. The EPZ will provide the international standard infrastructure, simplified administrative procedures from granting the investment licenses to management of investment activities. EPZs together with IZs are expected to provide jobs to alleviate unemployment or under-employment problems, assist in income creation and create linkages with the local economy. Beside, the EPZs also designed for purpose of balanced regional development.

2. Characteristics of Vietnam’s EPZs

a. Legal framework

Vietnam’s EPZs established and developed under the complete legal system, which are applied synchronously in the whole country toward foreign investment promotion, especially on manufacturing industries for export goods.

b. Location: Market access and infrastructure

All Vietnam’s EPZs are located in good locations:

Table 3.2: Vietnam’s EPZs – some main indicators

Source: Summary from Economics and Forecast Review (1993)

Vietnam’s EPZs are located in the favourable condition in term of market access. Located in economic centers of the region or the country, where the transport is convenient in land, water and airways, their connections to host country as well as international market is very comfortable for the investment as well as trade activities of the EPZ firms. Near the big cities with developed local industrial industries and agricultural, forestry and aquatic products produced locally can provide enough raw materials to process in the zone. Further, with the labour-abundant characteristic of Vietnam, with relatively high literature, can provide enough workers to work for the EPZ firms.

Most infrastructure of Vietnam’s EPZs is provided by joint-venture.  The joint-venture form of investment in infrastructure, beside attract foreign capital investment into infrastructure, makes the foreign investors share the responsibilities and risks, especially in attracting other foreigners who may not have much information about Vietnamese market to lease the zone for their production.

Table 3.3: Infrastructure cost of Vietnam’s and Asian countries’ EPZs

Source: Nguyen Xuan Trinh (1994)

All EPZs are located in socio-economic centers of regions, where they have a relatively better infrastructure system than other areas of Vietnam. However, beside the advantage of minimizing investment required to connect the zone to existing infrastructure system, the location may bring disadvantage to the EPZs. The infrastructure costs inside the zone are very high, mainly coming from the clearance of the site and compensation for existing residential and economic works, leads to high rental fees for land and infrastructure as shown in the table 3.4 below

Table 3.4: Rental fee of land and facilities in EPZs

Source: Nguyen Xuan Trinh (1994)

*: Land rent for 50 years

c. Investor selection criteria

To achieve the objectives of EPZ establishment, the industries attracted into EPZ should be industries that produce industrial goods for export, accompanied with capacity of promote the development of economic industries outside the zones. Industries that the EPZs tend to attract are generally similar between EPZs, mainly light industries that process agricultural, forestry and aquatic products, electronics assembly etc. In the beginning, the selection of industries into EPZs was not very tight.

d. Attractiveness

Management mechanism

With the “one stop” management mechanism applied for EPZs, the Provincial EPZ Management Authorities have been established, on behalf of Vietnam’s Government to manage the EPZ effectively.

Figure 3.1: The “one stop” management mechanism of EPZ

Source: Nguyen Xuan Trinh (1994)

Together with the Authorities, the infrastructure firms that supply and operate the infrastructure system will solve troubles inside the zone immediately and effectively. Further, there are international standard services being provided within the zone, bring conveniences and comforts to the investors.

Financial privileges

Significantly different with invest outside the EPZ, investment in EPZ can enjoy great financial privileges as follows:

Table 3.5: Financial privileges to EPZ firms

Source:    Summary based on the Law on Foreign Investment and the Regulation on EPZs

Economists and experts considered the tax incentive is just a sub-measurement in promoting investment, because when considering whether to invest, the investors often based on the business environment rather than on the privilege policies.

e. Comparison between EPZs and IZs

Similarities

-           They are policy instruments used to attract FDI as well as domestic investment into processing industries, bring changes in the infrastructure both inside and outside the zone, lead to urbanization and creation of industrial cities in the future, create employment, increase people’s incomes, expand the welfare of the surrounding area with linkages between the zones and the domestic economy, and protect the environment.

-           To successfully operate, they need a stable and supportive legal framework, favorable location in terms of market access and infrastructure system, and developers that have capacity in financial, reputation to attract foreign enterprises and have good management skills and capacity to operate the zone

-           They are managed under the “one door” mechanism.

Differences

The main difference is that the EPZ firms have to export a major part of their output to the international market while the IZ firms can sell its products to the domestic market.

-           With different targets, there are different privileges for IZ firms and EPZ firms. The main different is the import- export tax application.

Table 3.6: Difference in tax incentives between EPZs and IZs

-           The EPZs ad IZs under different set of laws and regulation, and the management of IZs is more complicated than the EPZs

f. Causes for the success or failure of the EPZs

The development and operation of southern EPZs (and IZs as well) are successful while of the northern ones are mostly considered failures. Reasons for success or failure are:

-         The business environment in the south is much more attractive to investors than in the north.

-         Northern EPZs needed more time and money to clear sites than the southern ones, which increased construction cost and the re-lease land rent and reduce the attractiveness of the zones.

-         Southern EPZs have favourable time of establishment than northern oness

-         The capacity of the developers.

Of six EPZs in the national plan, Noi Bai, Da Nang and Can Tho EPZs were reclassified as IZs under the decision of the government, Haiphong 96 EPZ was not developed, so there are only two EPZs still in operation. However, they are considered successful zones and actively contribute to the economic development of the country.

3.2 CONTRIBUTION OF EPZs ON INDUSTRIALIZATION AND ECONOMIC DEVELOPMENT

1. Investment and growth

Most firms occupying EPZs are 100% foreign invested invest in light industries.

Table 3.7: FDI attraction into EPZs

Unit: USD million

Sources: HEPZA (2000)

*: GSO (2001), excluding supplemented capital for projects licenced in previous years and Vietsovpetro projects

FDI into EPZs follows the same trend as total FDI commitment to Vietnam. The implemented capital of FDI firms in EPZs is 62 percent of registered capital, compared with 33 percent of FDI projects into IZs, and 51 percent for total FDI commitments into the manufacturing sector (MPI, 2001).

2. Trade expansion

EPZs made a significant contribution into increasing trade volume, although most of them are not in full capacity.

Table 3.8: International trade of EPZs in comparison with the whole country

Unit: USD million

Sources: GSO (2001), and Annual report of the HEPZA (2000)

The EPZs’ trade balance is often in surplus, meaning that the value-added of processed goods in the EPZs increase over time. Not only increase in the quantity, trade partner of EPZs also increase as the expansion into the overseas markets.

Table 3.9: Import, export of EPZs by country in the year 2000

Source: Annual report of the HEPZA, 2000

The successful development of EPZs in terms of trade expansion impact on the domestic economy through forward and backward linkages. So far, there are about 60 EPZ firms have “exported” to Vietnam’s market and this number is anticipated to increase in future (HEPZA, 2000). For Vietnamese enterprises, “imports” from the EPZs is cost-effective as no necessary significant transport cost and the delivery schedule is quicker than imports from abroad as custom and quality control procedures are simpler.

Table 3.10: Trade between EPZ firms and the domestic economy

Unit: USD millions

Source: Annual report of the HEPZA (2000)

Meanwhile, backward linkage has developed since the early days of the EPZs. Most of products ‘imported’ from domestic economy are used as intermediate goods that the EPZ firms used to produce their export goods. The rising demand for the domestically supplied goods and services stimulated the relevant domestic enterprises and the growth of the regions. This, in turn, spread to those with whom they did business, sparking further economic expansion.

3. Technology transfer

With increasing FDI inflows to and exports from EPZs, expanded international markets as mentioned in previous parts, technology is transferred into Vietnam through the FIEs in EPZs. Generally, technology used in EPZ firms are not the latest but commonly used in some developed countries, brought into Vietnam by foreign firms with the aim that making profit by combining these technologies with cheap labour in the EPZs. Some of them are really modern ones with the automatic processing lines, products are designed and produced in automatic and computer-aided machines, which are specialized in production organization, using uniform and high productivity equipment, which are more common in industrial countries (MOSTE, 2000).

Through the backward linkages and the competition between domestic enterprises and the EPFs, technology transfer through EPZs has contributed slightly to the technological level of production process of the domestic economy. As a result of technology improvement, some intermediate goods previously imported are processed domestically with competitive quality and price. This in turn strengthens the backward linkages and increases the local content of export goods from EPZs, including goods produced with sophisticated technology such as the monitors of televisions and parts of automobiles.

One of the most significant gains from FDI in general and FDI from EPZs in particular is the “knowledge spillover effect”. Most EPZ workers are being train in the EPZs or in the parent country of the EPZ firm for about 3 to 6 months until they can work well in their position. Through such training and learning-by-doing and on-the-job training, knowledge as well as industrial working behaviour are spilled over to the labour forces, increased their working skill and productivity. In EPZ firms, various types of technology have been used to produce export goods, operated efficiently by an increasing share of Vietnamese workers, or even fully operated by Vietnamese. Therefore, we can conclude that there are positive effects of technology transfer and knowledge spill over from the FDI of EPZ firms.

4. Employment generation

Foreign firms employ local labour directly and the various linkages between foreign and domestic enterprises also mean that enlarged foreign operations in the EPZs translate into enhanced domestic activity and employment.

Table 3.11: Comparison of employment generation

Unit: Thousands of people

Source: Annual report of the HEPZA (2000), GSO (2001)

The table shows that EPZs have success to achieve the target of creating employment, with labour in EPZs account for about 9 percent of labour in manufacturing sector. EPZ firms recruit a relatively young labour force, who are healthy and eager to learn new skills. Further, their working life will be longer and suitable with the life of the EPZs, bring the stability to the operation of the EPZ firms. The EPZs bring social and economic gain by giving young and unskilled woman opportunities to work and earn high income relative to underemployment in the rural areas.

Figure 3.2: EPZ labour by age and gender

Source: MPI report (2000)

In order to attract semi-skilled and skilled employees, which account for about 39% of total EPZ labour to relocate and work in the EPZs, the wage and working conditions offered in EPZs are higher and better than the national average. When average salary of domestic labour in manufacturing sector is about VND452,000 per month (McCarty, 1998), the EPZ labour enjoy a monthly salary of average VND1,000,000 (VIZA, 1999). The salary difference is the net social benefit of generating an additional job in the EPZs. Besides high salary, under the management of the EPZ Authority, EPZ labour are managed and secure in their work with official contracts with the firms and social security paid by the EPZ firms ensuring a safe environment for the workers in EPZs.

The employment impact contributes to regional development. The expansion of the EPZs not only permitted a more productive use of surplus workers, improving their income and welfare, but also benefited their regions of origin, as part of the income from higher-paid EPZ jobs is repatriated. In addition, the regions of origin benefited from reduced excess labour, leading to an improved marginal productivity of labour and a higher income.

Beside direct labours working in EPZs, the establishment of EPZ also creates jobs for thousands of indirect employments working in 52 domestic enterprises, which are suppliers of raw materials, components, parts and all manner of services to the foreign EPZ firms (HEPZA, 2000).

5. Environment protection

In a report of the MOSTE (2000), the EPZ firms are voluntarily follow their commitment that protect the environment by using relatively good technology that not only saving energy, but also emit less pollutants into the environment or treat their waste before emitting into the main system of the zone. Therefore, the EPZs activities are ensured that bring minimized harmful impact to the environment.

Further, the establishment of EPZs and IZs that concentrate industrial production firms into a certain area is a cost-effective instrument to treat industrial pollutants and protect the environment, as the economies of scale reduce remarkably the abatement cost of industrial pollutant treatment, therefore reduce the social cost for environment protection.

However, waste gases of high sulphur energy is not entirely treated before emitted into the air, solid waste is not treated in the zones and is exported to the domestic areas through the local environment company.

Chapter Four: POLICY IMPLICATION AND CONCLUSION

4.1. SUMMARY

The thesis is focused on evaluating the roles of EPZs into the economic development of Vietnam. The models chapter is followed by analysis of EPZ development in Taiwan, Korea, Malaysia and China to draw lessons for Vietnam.

The evaluation of the two operating EPZs in Vietnam provided the conclusions:

Taking part to the success or failure performance of EPZs is the role of the location choice, the legal framework and its application in each zone, the capacity of the developer, and the time of establishment.

Established in favourable location in terms of both market access and infrastructure, with attractive incentives offered to foreign investors, the two EPZs have played an active role in attracting FDI into the country. Positive externalities such as technology transfer and knowledge spillover have also brought positive welfare to Vietnam.

Through export activities of foreign companies in the EPZs, supported by open and simple legal mechanisms, trade between EPZs and the rest of the world as well as with the domestic economy has expanded.

The FDI inflows create jobs. The safety and high-wage job opportunities created for unskilled young woman bring significant welfare to the host country. Beside the direct employment effect, EPZs also create indirect employment outside zone industries through the linkages between EPZ firms and local enterprises, and take part into regional development.

Because of economies of scale, the concentration of processing firms into an area minimized the abatement cost of industrial pollutants.

The above-mentioned gains from EPZs are obtained with little direct expense. The government provides land to the SOE for taking part in the joint-venture to develop the infrastructure of the EPZs. What the government obtains are the international standard infrastructure areas for export processing firms to operate and expected tax collection after about ten years from establishment. The ‘outside infrastructure’ systems are invested by the government not only actively serving for the operation of the EPZs, but also contribute to the economic development and improvement of the living standard of the regions, which reduce the opportunity cost of such investment.

Though impossible to give the net welfare benefit from the EPZs, the research shows that the EPZs bring both direct and indirect significant benefits for the country.

4.2. POLICY IMPLICATIONS

The policy implications to improve the attractive and efficient EPZs are:

-           The Regulation on EPZs and IZs should change to manage IZs and EPZs more efficiently by a clear and consistent legal framework:

ü      The Regulation should include only EPZs and IZs and exclude the high-technology zones.

ü      Set clear responsibilities of the provincial authorities. Set the Department of industrial zone management - MPI as the state management unit of EPZs and IZs.

ü      Set criteria to select the infrastructure firms, especially the foreign companies.

ü      Set responsibility of maintaining the infrastructures to the infrastructure firms.

ü      Let the infrastructure firms take part to invest in the outside zone infrastructures with privileges like investing inside zone.

ü      Set criteria to select the processing firms based on the job creation, environment protection and technology absorption, and not limit the industries to invest into the zones, as long as they are not the prohibited ones.

ü      Tax incentive can be used to encourage investment into some industries.

ü      Encourage the production firms using some domestic products by considering it not the import goods and not controlled by custom officers.

-      The establishment of EPZs should be included in a long-run socio-economic development plan of the region. Currently, existing zones provide enough areas for attracting investment for from fifteen to twenty years, therefore should not establishing more EPZs in short-run. Instead we should use the resources to improve and maintain the infrastructures both inside and outside of existing EPZs. Beside, social infrastructure such as dwellings, hospitals and schools also need a detail plan to establish, serving EPZ labour and their family.

-      The EPZ infrastructure should be developed by stages according to the level of FDI attraction, avoid having hundreds of hectares being cleared for infrastructure investment without any investors. For light manufacturing lines it is possible to build multi-storey factories to use land more efficient.

-      There should be one or several small IZs located around the EPZs, where firms with forward and backward linkages with the EPZ firms can grow.

-      There should be training center of labour working in EPZs, provided by infrastructure firms or local authorities, to supply skill or semi-skill workers to work in the zones.

-      To protect the environment from damages caused by the waste gases, each factory should have the gas treatment station to treat the waste gas before emit to the air, instead of just using the chimney to diffuse the waste gas into the air. Encourage the firms reuse the solid waste that come from various sources in the zones while having the relevant method to collect and treat this kind of waste. Further, it is necessary to have environment supervision system in the zones. Using environment protection measure in the initial stage is cost-effective to avoid the case that the profits earned today may not cover the abatement cost for environment in the future.