Export processing zones in developing economies: Theoretical and empirical considerations

It is widely recognized that establishment of an export processing zone (EPZ) can improve welfare by expanding employment in a nation with a large pool of unemployed or underemployed labor. In this dissertation we extend the theoretical and empirical literature on EPZs to explore other avenues through which EPZs can improve national welfare. The theoretical part of the thesis develops a formal model that allows for the simultaneous participation of foreign and domestic capital in the zone. In our model, domestic investment creates an additional avenue through which the host nation can benefit from establishment of an EPZ even when there is no unemployed labor. The host nation may benefit in two ways. First, by attracting domestic capital, an EPZ can serve as a countervailing mechanism to offset the welfare-decreasing impact of pre-existing tariffs. Secondly, domestic capital that flows into the zone will do so only if the return earned there is higher than the return earned in other sectors of the economy.;The empirical part of the thesis develops new measures to rank EPZ enterprises with respect to their ability to forge backward linkages in the host economy. These linkages constitute another avenue through which EPZs can increase domestic welfare in a nation with little or no unemployment. Using data from EPZ firms in Costa Rica, we perform an econometric analysis of firm- and industry-specific characteristics thought to affect EPZ backward linkages. The results suggest that the industry of the firm, the firm's capital intensity, its age, and the proportion of its output sold in the local market all affect the extent of those linkages. The significant effects of these attributes may respectively be explained by the nature of the products manufactured in different EPZ industries, the "footlooseness" of investment in the zones, the increasing familiarity of EPZ firms with the local environment as they become older, and differences in company policy with regard to keeping close business ties in the host nation.