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PORTS & FREE TRADE ZONES
From Site Selection magazine, November 2016
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The Future of Free Zones:

Tapping into new reservoirs of investment and stimulating innovation in service delivery

PORTS & FREE TRADE ZONES
Cargo is loaded onto rail cars at the Georgia Ports Authority Chatham Intermodal Container Transfer Facility at the Garden City Terminal near Savannah, Georgia. The Chatham ICTF serves CSX, one of two Class I rail providers at the Garden City Terminal.
Photo courtesy of Georgia Ports Authority

by DOUGLAS VAN DEN BERGHE (CEO) and CHRIS STEELE (COO),
Investment Consulting Associates

We have had the opportunity to engage with many free zones around the world over the years, whether through a corporate site selection project, working with many free zones in enhancing their service delivery or setting up new zones around the world. Over the last couple of years we have seen some changes taking place in the global economy that will impact the future of free zones. Here are two of them:

Drivers of FDI and New Forms of Investment (NFIs) versus Traditional FDI

Foreign Direct Investment (FDI) is often seen as a recipe for free zones to attract new tenants and investors. Times are changing, however. Investment data show that overall investment in FDI has remained relatively stable over the past several years or even declined. FDI flows as well as greenfield FDI projects declined in 2015, and preliminary figures for 2016 show a stable pattern. Of course, that data tends to measure direct investment by a company into a new site owned wholly by the company. 

WBCT Port of Louisiana
A view of the West Basin Container Terminal at the Port of Los Angeles in California.
Photo courtesy of Port of Los Angeles

In addition, much of the offshoring and FDI activity of the previous 30 years has focused on efficiency gains, cost reduction and access to resources. Now, companies are looking at innovative ways of capitalizing on the other sides of the equation — market and asset access — and they are doing so in ways that may not look like traditional FDI.  

In contrast to more conventional direct FDI, companies — both inbound to the US and outbound globally — are exploring vehicles such as joint ventures and M&A as means for entering new foreign markets. In these cases the companies in question gain existing knowledge how to operate in market, may gain access to pre-existing supplier and customer networks, and generally ease the path to investment. The drawbacks include some loss of control, lack of integration, and the inability to perhaps fully bring their culture, products, and identify to the new market.  


Incentives are often the ‘cherry on top’ for any investment project considering a free trade zone.

These less conventional forms of international business may also not be the prime focus of many free zones. However, the benefits to attract these new forms of investment can be similar to those found with greenfield FDI projects.

Financial Incentives Being Used to Lure FDI versus Enhanced Service Delivery by Free Zones

Financial and fiscal incentives are often the foundation of any free zone. Whether it is customs duty exemptions, import/export exemptions, tax holidays, tax credits or job creation grants, companies are often attracted by the incentive package that free zones offer. However, as the number of free zones around the world grows there are many similarities in the menus of financial incentives free zones offer to attract investors. This makes many investors conclude there are really not many differences between free zones around the world, or that free zones more or less all offer the same menu.

Top 25 US Foreign Trade Zones by Warehouse/Distribution Activity

Merchandise Received

Rank Zone Location
1 124 Gramercy, Louisiana
2 202 Los Angeles, California
3 78 Nashville, Tennessee
4 1 New York, New York
5 21 Dorchester County, South Carolina
6 147 Berks County, Pennsylvania
7 84 Harris County, Texas
8 74 Baltimore, Maryland
9 138 Franklin County, Ohio
10 38 Spartanburg County, South Carolina
11 235 Lakewood, New Jersey
12 144 Brunswick, Georgia
13 50 Long Beach, California
14 29 Louisville, Kentucky
15 49 Newark/Elizabeth, New Jersey
16 226 Merced, California
17 22 Chicago, Illinois
18 205 Port Hueneme, California
19 26 Atlanta, Georgia
20 86 Tacoma, Washington
21 62 Brownsville, Texas
22 68 El Paso, Texas
23 148 Knoxville, Tennessee
24 39 Dallas/Fort Worth, Texas
25 25 Broward County, Florida

Exports

Rank Zone Location
1 21 Dorchester County, South Carolina
2 62 Brownsville, Texas
3 25 Broward County, Florida
4 68 El Paso, Texas
5 281 Miami-Dade County, Florida
6 94 Laredo, Texas
7 38 Spartanburg County, South Carolina
8 114 Peoria, Illinois
9 1 New York, New York
10 148 Knoxville, Tennessee
11 26 Atlanta, Georgia
12 84 Harris County, Texas
13 32 Miami, Florida
14 9 Honolulu, Hawaii
15 70 Detroit, Michigan
16 64 Jacksonville, Florida
17 202 Los Angeles, California
18 160 Anchorage, Alaska
19 27 Boston, Massachusetts
20 77 Memphis, Tennessee
21 49 Newark/Elizabeth, New Jersey
22 61 San Juan, Puerto Rico
23 40 Cleveland, Ohio
24 2 New Orleans, Louisiana
25 35 Philadelphia, Pennsylvania

Source: Annual Report of the Foreign-Trade Zones Board 2015

Always bear in mind the role incentives play in investment decisions. Corporate investors make investment and location decisions based on numerous factors and take into account many elements of a competitive business environment. Crucial factors are prioritized differently per industry and value chain activity. What is similar is that incentives are often the “cherry on top” of any investment project. Companies look at the fundamentals of a business environment within or near a free zone. As noted elsewhere, these include the availability, productivity and cost of qualified staff, infrastructure (both IT and transport connectivity), and availability of appropriate facilities (e.g. offices, warehouses, etc.). Incentives can only compensate for a particular weakness in the business environment — not for the competitiveness of the entire investment climate.

GPA Garden City Terminal Port of Savannah
The Maersk Drummond prepares to pull away from the dock as the 964-foot post-Panamax container ship MSC Ornella is loaded at the Georgia Ports Authority Garden City Terminal.
Photo courtesy of Georgia Ports Authority

It is important for any corporate investor to understand the motives behind the incentive program. These can include attracting new industries, capital, skill and management transfer, attracting investments to economically deprived areas in a country, diversifying an economy, solving unemployment challenges, etc. All these reasons may be very legitimate and valid from a national or regional economic development policy objective, but they are not the key reason why they invest in a country or free zone. 

Top 25 Production Operations at US Foreign Trade Zones by Exports

Rank Zone Location
1 75J Honeywell Aerospace, Inc.
2 98A Mercedes-Benz U.S. International
3 124E Marathon Petroleum Company
4 116C The Premcor Refining Group
5 92D Chevron Corporation
6 199A Marathon Petroleum Corporation
7 177A AstraZeneca Pharmaceuticals, LP
8 87B CITGO Petroleum Corporation
9 122I Citgo Refining
10 122J Valero Refining - Texas, LP
11 78A Nissan North America, Inc.
12 115B ExxonMobil Oil Corporation
13 199C Valero Refining - Texas, LP
14 87A Phillips 66 Company
15 38A BMW Manufacturing Company, LLC
16 154A ExxonMobil Oil Corporation
17 84H Varco Shaffer, Inc.
18 29E Toyota Motor Manufacturing Kentucky
19 129A BP Products North America, Inc.
20 84O ExxonMobil Corporation
21 124A Valero Refining-New Orleans, LLC
22 84M Hydril Company
23 158D Nissan North America, Inc.
24 7K Lilly del Caribe, Inc.
25 116B Total Petrochemicals USA, Inc.

Top US States for FTZ Activity in 2015

Merchandise Received Exports
1 Texas 1 Texas
2 Louisiana 2 Arizona
3 California 3 South Carolina
4 South Carolina 4 Louisiana
5 Arizona 5 Alabama
6 Tennessee 6 Florida
7 Pennsylvania 7 Mississippi
8 Kentucky 8 Indiana
9 Illinois 9 California
10 New Jersey 10 Tennessee
11 Ohio 11 Puerto Rico
12 Alabama 12 Kentucky
13 Mississippi 13 Washington
14 New York 14 Illinois
15 Georgia 15 New York
16 Puerto Rico 16 Georgia
17 Washington 17 Hawaii
18 Maryland 18 Virginia
19 Florida 19 New Jersey
20 Indiana 20 Michigan
21 Hawaii 21 Ohio
22 Michigan 22 Alaska
23 Delaware 23 Pennsylvania
24 Alaska 24 Massachusetts
25 North Carolina 25 Wisconsin

source: Annual Report of the Foreign-Trade Zones Board 2015

Clarity: Many incentive policies are the result of a long and difficult policy negotiation process among many departments and ministries of a national government. In this process, many concessions have had to be made in order to finally get the approval. Although this is understandable, this difficult and challenging process must not be reflected in a difficult incentive policy framework in which the eligibility criteria and incentive application process is non-transparent and subject to multiple interpretations. Investors value simplicity and transparency, and are often attracted to places where they instantly understand what types of incentives are being offered, the value of these incentives and how they can apply for them.

Any company looking to directly or indirectly enter the FDI sphere should have an explicit understanding of its goals and its tolerance for risk. Once these are known, the company will have a sound basis for understanding what form of foreign investment will work best to achieve those goals, the parameters to be used to evaluate possible location options, and the knowledge needed to evaluate any incentive program offered to sweeten the deal.

Tailored: Make sure the incentives are compatible with your industry and activities. Programs can often hamstring supposedly desired companies by misunderstanding the needs of those companies. Be careful that your programs don’t become an anchor, rather than something that lightens your load.

WBCT Container Ships at Port 222
FTZ #202 in Los Angeles continues to top the list of zones by merchandise received.
Photo courtesy of Port of Los Angeles

Look for the soft incentive — rather than a grant or credit, it may be in your greater interest to ease doing business or start-up operations in your new location. A business environment that facilitates the speed to market can be the greatest advantage when going abroad and investing in new markets. Free zones should increasingly distinguish themselves by providing unique soft incentives aimed at streamlining and simplifying administrative procedures or provide a unique set of specialized services to facilitate investment in their zones. 

Tapping into the new reservoirs of investments (like strategic alliances and partnerships) and being more creative in the services they provide to investors can be very profitable for free zones in the future.


Douglas Van Den Berghe
Douglas van den Berghe
Chris Steele
Chris Steele

Douglas van den Berghe is CEO and Chris Steele is COO of Investment Consulting Associates, a global management advisory firm based in Amsterdam and Boston Visit ic-associates.com for more information.


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