Dominican Republic - Free Zone Manufacturing

Free-zone manufacturing

There was no economic process more dynamic in the Dominican Republic during the 1980s than the rapid growth of free zones. Although the Dominican government established the legal framework for free zones in 1955, it was not until 1969 that the Gulf and Western Corporation opened the country's first such zone in La Romana. Free-zone development progressed modestly in the 1970s, but it accelerated rapidly during the 1980s as the result of domestic incentives, such as Free-Zone Law 145 of 1983 and the United States CBI of 1984. Free-Zone Law 145, a special provision of the Industrial Incentive Law, offered very liberal incentives for free-zone investment, including total exemption from import duties, income taxes, and other taxes for up to twenty years. By the close of the decade, the results of free-zone development were dramatically clear. From 1985 to 1989, the number of free zones had more than doubled, from six to fifteen; employment had jumped from 36,000 to nearly 100,000. The number of companies operating in free zones had increased from 146 to more than 220. In 1989 six more free zones were being developed, and three more had been approved. These zones were projected to bring the total to twenty-four by the mid-1990s. Demand nonetheless outpaced growth, forcing some companies to wait as long as a year to acquire new factory space.

The country's free zones varied widely in terms of size, ownership, production methods, and location. The size of free zones ranged from only a few hectares to more than 100 hectares. Private companies operated nine of the country's fifteen free zones in 1989, but only four of those were managed as for-profit ventures. The government administered six zones, including the Puerto Plata free zone, the only mixed public-private venture. Most companies in the free zones, 66 percent in 1989, were from the United States. Dominicans owned 11 percent of the firms, and the remaining enterprises had originated in Puerto Rico, Taiwan, Hong Kong, Panama, the Republic of Korea (South Korea), Canada, Italy, and Liberia. Most free zones hosted an assortment of producers, while a few focused on a limited number of subsectors, such as garments, electronics, or information services. Other free-zone products included footwear, apparel, jewelry, velcro, furniture, aromatics, and pharmaceuticals. Most operations were performed under short-term subcontracting arrangements. The government also afforded free-zone benefits to certain agrobusinesses , dubbed special free zones, which were physically located outside the free zones themselves, thus causing some agro-processing to fall under the free-zone export category. Among the most innovative activities in the free zones were information services, such as data entry, Spanish-English translation, computer software development, and even toll-free telephone services for Spanish-speakers in the United States; all of these services were available because of the island's advanced telecommunications infrastructure. By 1989 nearly every region of the country was home to at least one free zone; the greatest concentration was found in the south and southeast.

Apart from the incentives of Free-Zone Law 145 and other domestic legislation, a growing number of foreign companies chose the Dominican Republic as an investment site because of the twin plant scheme, or 936 scheme, with Puerto Rico under the CBI. The twin-plant concept allowed companies to benefit both from the exemption of United States import duties under the CBI and from income the tax exemptions granted to firms in Puerto Rico under Section 936 of the United States tax code, while also taking advantage of the Dominican Republic's low labor costs. As the Spanish-speaking country closest to Puerto Rico and the most prolific developer of free zones in the region, the Dominican Republic hosted over 50 percent of the seventy twinplant investments that had been recorded by 1989.

The National Council for Free Zones (Consejo Nacional de Zonas Francas--CNZF), within the Secretariat of State for Industry and Commerce, spearheaded free-zone development. A major justification for the development of free zones was the levels of employment that the generally labor-intensive work stimulated. Also, free zones provided hard currency, mostly in the form of wages, rent, utilities, and supplies, for a nation hungry for foreign exchange. By the late 1980s, however, jobs in the free zones were only beginning to make a dent in the country's chronically high unemployment, which had averaged about 25 percent for more than a decade.

Based on the export success of Southeast Asian nations, freezone development had a proven economic value, but it was not without policy trade-offs. Although the strategy provided numerous jobs, the new jobs that it created offered limited opportunity for advancement. Similarly, with the exception of information services and agro-processing, free-zone enterprises entailed limited technology transfer for longer-term development. Free-zone development also forged few economic links with the local economy because of the limited value added by assembly operations. Besides labor and utilities, few local inputs became part of the manufacturing process, mostly because of insufficient local supply, uneven quality, and certain government regulations. The rapid growth of free-zone construction also created some nationwide bottlenecks in cement production, the generation of electricity, and other basic services. Finally, the liberal tax and tariff exemptions extended to free-zone manufacturers reduced the potential revenue base of the government and forced domestic businesses and individuals to assume a greater portion of the tax burden.

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