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Foreign direct investment in the Dominican Republic: consequences and recommendations for sustainable growth

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An Erratum to this article was published on 21 June 2016

Abstract

This research, using a production function methodology, examines the effects of international trade and foreign direct investment (FDI) liberalization policies on the economy of the Dominican Republic during the 1990s. Most of the FDI was in the free trade zone (FTZ) sector. The results have important ramifications on current policies to promote sustainable economic growth. The econometric results indicate evidence of unbalanced growth characterized by regional and technological dualism: (a) an efficient FTZ sector, highly dependent on FDI, and operating under increasing returns to scale, and (b) a relatively inefficient primary/secondary sector operating under decreasing returns to scale. These growth strategies fail to establish economic linkages between different economic sectors; also they focus on the development of the FTZ sector whose contribution to GDP averages only about 3 %. Policies to promote sustainable growth necessitate strategies to develop and diversify the primary/service sectors. Importantly, recently revised agreements on international trade will lessen the competitiveness of the FTZ sector.

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Notes

  1. EPZs are geographical areas of the country, subject to special customs and tax controls established by law, in which companies manufacturing products or providing services for foreign markets receive certain tax incentives necessary for promoting development). Policy makers have identified some key pre-conditions for a successful EPZ. They include (i) general economic health, (ii) political stability, (iii) regional integration (trade agreements), (iv) infrastructure in the free trade zone, (v) tax regime and tax benefits, (vi) infrastructure of the port and of the airport, (vii) economic freedom, (viii) labor market and pay, and (ix) government support and investment. (www.tno.nl/en/news/)

  2. The ILO (2003) has provided an extensive database for countries with different structures of Free Trade Zones (FTZ), EPZ and industrial parks.

  3. Martin and Sunley (1996) provide an extensive critic of Krugman’s work

  4. The input-provision, derived demand, or backward linkage effects, that is, every non-primary economic activity, will induce attempts to supply through domestic production the inputs needed in that activity. The output-utilization or forward linkage effects, that is, every activity that does not by its nature cater exclusively to final demands; will induce attempts to utilize its outputs as inputs in some new activities. (see Meier and Rauch (1995), p.346)

  5. A new Foreign Investment Law, approved in November 1995, opened up key sectors, including the baking sector, to foreign investment, extended to foreign participants the guarantees granted to domestic investors, and eliminated all restrictions on profit remittances and capital repatriation. (see IMF, 2001, p 6)

  6. Industrial Tax Free Zones in the Dominican Republic (www.rvhb.com/faq).

  7. See Moroney (1967), Arrow et al. (1961) and Intrilligator (1978).

  8. This results in the long run average total cost curve (LRATC) being either constantly rising (decreasing return to scale), horizontal (constant returns to scale), or constantly falling (increasing returns to scale).

  9. See Staci Warden, CAER II Discussion paper No. 77 (www.cid.harvard.edu)

  10. Hornbeck (2005) The Dominican Republic-Central America-United States Free Trade Agreement (DR-CAFTA), CRS Report for Congress. Also see http://dr1.com/trade/articles/67/1/DR-CAFTA-Agreement. As a result if the DR-CAFTA having entered into force with respect to the DR in March 2007, about 80 percent of US industrial and consumer goods can enter the DR duty free immediately, with the remaining tariffs, which currently range up to 20 %, phased-out within 10 years. Nearly all textile and apparel goods that meet the agreement’s rules of origin are to enter duty-free and quota-free immediately, providing new opportunities for US and regional manufacturers of fibber, yarn, fabric and apparel. The agreement’s tariff treatment for textile and apparel goods is retroactive to 1 January 2004. In July 2006, the government eliminated an exchange surcharge that had levied a 13 % tax on all imports.

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Authors and Affiliations

  1. Department of Finance, College of Business, University of Akron, Akron, OH, 44325, USA

    Harri Ramcharran

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  1. Harri Ramcharran
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Correspondence to Harri Ramcharran.

Additional information

An erratum to this article is available at http://dx.doi.org/10.1007/s12197-016-9365-7.

Appendix

Appendix

  1. 1.

    The Free Trade Zone Law provides 100 % exemption on all taxes, duties, and charges affecting the productive and trade operations at Free Trade Zones (FTZs). These incentives are provided to specific beneficiaries for up to 20 years, depending on the location of the zone. This legislation is managed jointly by the Foreign Trade Zone National Council and the Dominican Customs Service. Investors operating in the Dominican Republic’s FTZs experience far fewer problems in dealing with the government than do investors working outside the zones. For example, materials coming into or being shipped out of the zones are reported to move quickly, without the kinds of bureaucratic difficulties mentioned above. (Source: 2001 Country Report on Economic Policy and Trade Practices, US Department of State, February, 2002)

  2. 2.

    The Export Incentive Law provides for tax and duty free treatment of inputs from overseas that are to be processed and re-exported as final products. The Dominican Export Promotion Centre and the Customs Service manage this legislation. In practice, use of the export incentive law to import raw materials for process and re-export is cumbersome and delays in clearing customs can take anywhere from 20 to 60 days. This customs clearance process has made completion of production contracts with specific deadlines difficult. As a result, non-free trade zone exporters rarely take advantage of the Export Incentive Law. Most prefer to import raw materials using the normal customs’ procedures which, although more costly, are more rapid and predictable. (Source: 2001 Country Report on Economic Policy and Trade Practices, US Department of State, February, 2002)

Table 3 Free trade zone activity
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Table 4 Sources of growth, 1974–93 (real annual growth rates)
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Table 5 Dominican Republic: GDP by sectors at constant prices (in millions of Pesos at 1970 prices)
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Table 6 Sect oral contribution to GDP (%)
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Table 7 Dominican Republic: GDP growth rate by sectors at constant prices
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Table 8 Dominican Republic: export performance ($mil.)
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Table 9 Dominican Republic exports by commodity groups (%)
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Ramcharran, H. Foreign direct investment in the Dominican Republic: consequences and recommendations for sustainable growth. J Econ Finan 41, 610–629 (2017). https://doi.org/10.1007/s12197-016-9361-y

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