3.2C SEZs and Attitudes to FDI

• Attitudes to FDI

  • Attitudes to FDI have changed in developing and emerging countries.
  • During the period of decolonisation in the 1950s, 1960s and 1970s, many newly independent countries rejected international trade as exploitative. 
  • They preferred self-sufficiency through import substitution. 
• Attitudes to FDI

  • However, four Asian countries (Singapore, Taiwan, South Korea, Hong Kong) chose export led growth.
  • They experienced much faster economic growth than countries following import substitution, and became known as 'Asian Tiger economies'.
• Attitudes to FDI

  • By the 1980s, most countries had changed their attitudes towards FDI and globalisation. 
  • They no longer viewed FDI as exploitative (paying low prices for resources, low wages to workers, demanding low taxes and polluting the environment.)
  • Instead they viewed FDI as positive - creating new jobs, better paying than the existing alternative (e.g. subsistence farming) with reliable wages and better working conditions, which introduced new technology and were reliable tax contributors. 
• Attitudes to FDI

  • As a result, FDI by developed country TNCs expanded to new areas, initially to the Asian Tigers, then to other Asian and South American countries, and since 2000 also African countries.  
• Subsidies

  • Subsidies are payments by the government to a company to promote a particular activity. 
  • Governments may provide subsidies to attract FDI, e.g. a subsidy to cover relocation costs, payment per worker employed &c.
  • WTO usually prohibits subsidies to domestic firms as this acts as a trade barrier - the government payment allows a firm to accept a lower market price, undercutting the price of imports. 
  • WTO may accept a subsidy for FDI, e.g. in SEZs, as this promotes trade.
• Special Economic Zones (SEZs)

  • Special economic zones are enclaves where investors receive special tax, tariff and regulatory incentives. 
  • About 50 million people in more than 100 countries work in such locations. 
  • SEZs are used by some countries to attract FDI, spreading globalisation to new regions. 
  • Successful SEZs need good infrastructure, close proximity to trade routes or emerging markets, minimum bureaucracy and rule of law (contract security, minimal corruption, freedom from crime and violence.)
• Special Economic Zones (SEZs) example

  • In the 1960s President Suharto of Indonesia created the Jakarta Export Zone with attractive legal and economic conditions designed in consultation with US and European TNCs. 
  • The World Bank funded infrastructure improvements for ports, power supplies and roads. Gap and Levis FDI followed. 
• SEZs are attractive to FDI for a number of reasons:

  • They are tariff and quota free, allowing manufactured goods to be exported at no cost. 
  • Unions are usually banned, so workers cannot neither strike nor complain. 
  • Infrastructure such as port facilities, roads, power and water connections are provided by the government, providing a subsidy for investors and lowering their cost. 
  • All profits made can be sent to the company HQ overseas. 
  • Taxes are usually very low, and often there is a tax-free period of up to 10 years, after a business invests. 
  • Environmental regulations are usually limited.