Performance of EPZs in Bangladesh: special focus on backward linkages

Abstract

Export Processing Zone (EPZ) has turned out to be a widely used instrument of export expansion and outward orientation by developing countries. These zones are established, often as enclaves, to attract foreign investment by offering them different fiscal and non fiscal incentives. In general, it is expected that the whole economy will gradually become more open and the importance of this instrument will decline. Though most EPZs have been successful as a good source of employment, they face criticism due to the enclave nature that limits technological spillovers and demonstration effects. In theoretical discussions, supporters of EPZ mostly are concerned with materialization of these dynamic benefits. Backward linkages with domestic economy have been emphasized to enhance all the potential gains from EPZs. This study deals with the EPZ enterprises in Bangladesh with the objective of investigating the nature and extent of their relationships with upstream industries in the domestic zone. In terms of the determinants of backward linkages, it was found that knowledge of local suppliers is vital for firms to import from domestic tariff area (DTA). Both local and joint ventures at EPZs in Bangladesh were found to have greater linkages with backward vertical industries in domestic zones compared to completely foreign owned enterprises. There is also the evidence that once a firm establishes linkages with DTA, the firm is more likely to maintain the relationship. There are some groups who question the feasibility of EPZ scheme because of the fact that most investments within these zones are in the garments sector. They raise the question whether there is any possibility of knowledge spillovers from these simple processing activities. Moreover, investors in EPZs are claimed to be "footloose". However, evidence from this investigation suggests that clothing sector of EPZs in Bangladesh have higher propensity of import from DTA compared to other industries.