BOX 8.4 Fiscal Incentives to Overcome First-Mover Coordination Problems: The Case of Hawassa Industrial Park in Ethiopia An industrial park in Ethiopia illustrates how a government might overcome first-mover problems by attracting a catalytic large investor—in this case, Phillips-Van Heusen (PVH), the world’s second-largest apparel company. The government worked closely with PVH to identify areas of mutual interest and delivered interventions to create an attractive environment for PVH in the new Hawassa Industrial Park (HIP). They included the following: • D emonstrating government commitment by raising capital, building facilities fast, and delivering world-class factories with high environmental standards as agreed • Delivering strong access to international markets (particularly important for the fashion industry), including the Everything but Arms (EBA) agreement for duty-free and quota-free market access to the European Union; the 10-year extension of the African Growth and Opportunity Act; streamlined customs procedures; extension of the new Djibouti–Addis Ababa rail line to Hawassa; and improving the Addis Ababa–Kenya highway on which Hawassa lies • Exploiting abundant hydropower to undercut regional competitors in electricity price and reliability (electricity is a major cost in the garment industry) • Complementing the large pool of local labor with employee selection and training programs run jointly by PVH, the government, and donors • Offering tax holidays. Thanks to PVH’s investment, 18 foreign and 5 domestic supplier companies have already committed to follow it to HIP, and more are expected. HIP was inaugurated in July 2016 and is planned to create 60,000 direct jobs on $1 billion worth of export sales from the park. Source: Adapted from Duranton and Venables 2018.
targeted improvements in transport, energy, and skills that may lead the firm to put down deep roots and develop linkages. Beyond other support in terms of infrastructure and worker training, tax holidays are also offered, although these were considered “icing on the cake” rather than key elements of the place-based investment decision (Duranton and Venables 2018). In the United States, South Carolina’s automotive cluster dates to 1992, when BMW chose the state for a $600 million assembly plant and received an incentive package worth $100 million, including nonfinancial incentives. The local airport runway was also extended, and a new employment training program was created. The objective was to create enablers that would ensure the success of BMW’s first plant outside Germany and thereby attract an anchor industry that would further develop the nascent supply capacity of the region. The initiative is thought to have generated between 25,000 and 35,000 jobs in the area (McKinsey 2019).
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