Fostering Innovation in Developing Economies through SEZs
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higher value added sectors. These successful SEZs proved extremely good at moving away from the low-skilled, labor-intensive industries of their first years of operation. New garment industries were not allowed in Taiwan, China’s EPZ as of 1974, for example. Enhancing labor circulation. The literature has paid little attention to the role of labor turnover from SEZs as a channel for the diffusion of technology and processes to the domestic economy. It seems, however, that labor turnover can be significant for transferring technology and managerial know-how to domestic firms. For this reason, some countries (see box 8.3) have used fixed-term nonrenewable two- to five-year contracts for local managers in SEZs. Furthermore, because of a strict labor policy as well as voluntary departure, many employees left SEZs to create rival firms. Reforming the business climate. Improving the general business climate of the host country is essential for developing a catalyst SEZ (FIAS 2008). Indeed, SEZs’ medium- to long-term viability and their capacity to
Box 8.3
SEZs and Labor Circulation: A “Domestic Diaspora”? In the Masan Zone in the Republic of Korea, an estimated 3,000 to 4,000 people received specialized training, either in the zone or abroad (mainly Japan), and half of these employees eventually left the zone to work in local electronic firms. In Taiwan, China, under government guidance, personnel from firms in the zones were placed at potential suppliers’ factories to offer advice on production methods and quality control. Shannon, Ireland, had high labor turnover between the SEZs and the domestic economy, with many managers leaving to create competing firms outside the SEZs. In Shenzhen, China, workers were appointed by the government for a threeyear term and then were required to leave the zone. Many managers subsequently started their own firms, capitalizing on experience gained in the SEZs. This put competitive pressure on firms within the SEZs to innovate or disappear. Sources: Callanan (2000); Jenkins, Esquivel, and Felipe Larrain (1998); Leong (2007).