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Dominican Republic 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
(see Dominican Republic - Communications
, this ch.).
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 (see Glossary),
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.
Data as of December 1989
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