World FZO Next Practices
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The global socio-political and economic landscape is evolving constantly. With such evolution come challenges. By now it is well known that the policy context around the world is becoming increasingly complex. Countries face domestic political compulsions and simultaneously, have to meet international obligations. The policymakers in most countries face a dilemma – how best to judiciously reconcile the apparent conflict between domestic socio-political compulsions and international obligations. Free Zones around the world are not immune from the evolving global dynamics and policy imperatives. If anything, FZs have to anticipate what is in store for them in future and prepare for a ‘state of readiness’ to meet newer socio-political challenges as well as benefit from newer economic opportunities.
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World FZO Next Practices
- 1. RP 1 1 WORLD FZO RESEARCH PUBLICA- RP 1 | MAY 2016 WWW.WORLDFZO.ORG RESEARCH PUBLICATION WORLD FZO OBSERVATORY 1 The global socio-political and economic landscape is evolving constantly. With such evolution come challenges. By now it is well known that the policy context around the world is becoming increasingly complex. Countries face domestic political compulsions and simultaneously, have to meet international obligations. The policymakers in most countries face a dilemma – how best to judiciously reconcile the apparent conflict between domestic socio-political compulsions and international obligations. Free Zones around the world are not immune from the evolving global dynamics and policy imperatives. If anything, FZs have to anticipate what is in store for them in future and prepare for a ‘state of readiness’ to meet newer socio-political challenges as well as benefit from newer economic opportunities. Therefore, it is time to look ahead, anticipate and prepare for the future. This research report titled Next Prac- tices, Beyond Best in Class Practices, on FZ’s around the World has been prepared by World FZO’s Knowledge Management unit. As part of the research work, in addition to in-house analysis, a series of interviews with domain experts and persons of influence in the field were conducted to elicit views about future growth trajectory of FZ and strate- gies to make FZs more relevant. A semi-structured interview guideline was designed for this purpose highlighting the relevant areas associat- ed with the future practices of FZ’s. The questions primarily focused around factors influencing future growth trajectory of FZ’s and approaches recommended by domain experts to address them. The questions revolved around Dynamics of global economic growth and its linkages to FZ growth, Scale Economies, Strategies to iden- tify and address future expectations of customers, Convergence or Divergence of FZ practices in future, and Key drivers of competitive edge. Next Practices, Beyond Best in Class Practices By: Ms. Amna Al Saleh, Senior Project Officer, World FZO Dr. Mohan Guruswamy, Chief Knowledge Officer, World FZO Dr. Samir Hamrouni, Chief Executive Officer, World FZO (Continued on page 2) Research Report on Free Zones around the World
- 2. RP 1 2 WORLD FZO RESEARCH PUBLICATION Is growth of FZ’s linked to global economic growth? The positive relationship between global economic growth and growth of FZs is well recognized. Admittedly, in the coming years, the world economy and the FZs will grow in tandem. However, far from being uniform, the nature of FZ growth around the world is likely to be differentiated and varying. There will be regional differences in growth rates driven essentially by local conditions – regional growth dynamics, policy environment, incentive structure and so on. Take Africa for instance. At present there are an estimated 700 FZs operating. The number is forecast to double to 1,500 in about five years. As the world talks about Africa as ‘the next frontier’ to conquer, the huge growth Africa is poised for is sure to trigger massive growth in Africa’s FZs. This can potentially exert a cascading effect on the Continent’s economy as well as provide spin-off benefits for the world. Not only will there be regional differences, there will also be differences in the composition of goods and services basket. The proportion between trade in manufactured goods and trade in services is also likely to undergo changes. Importantly, Services are set to gain. While the role of Services has always been critical, technology has made inroads into the so-called traditional Services sector. With the emergence of technology driven trade (say, Ecommerce), the Service sector is poised to gain increasing prominence. FZs need to focus on effective use of modern technology, especially Information and Communication Technology (ICT), to meet the growing demand of fastidious consumers, shorten the supply chain and capture value through disintermediation and by bringing the suppliers and customers closer. In other words, FZ’s need to equip themselves adequately to become Tech-Ready Zones. Yet, the merchandise trade will still retain its importance. This is simply because, whether factories or people, consumers will continue to consume physical goods. So, trade in physical goods – whether raw material or intermediate products or finished goods – will very much be an integral part of business. Yet, one must add, given the evolving nature of consumer demand, trade in merchandise will increasingly tend towards value-added goods or high value goods. Is Convergence for real? ICT revolution has brought the world closer. Business houses today are ‘virtually’ closer than they have ever been before and geographically faster to access / reach. This proximity has meant there is so much for each other to learn from. Such learning process and resultant adoption of good practices has the potential to bring about a convergence of good business practices among FZs. These practices may cover laws, policy, governance, incentive and administration. But is the trend visible on the ground? Yes, there is emerging evidence, incipient though at this stage, that business practices are beginning to converge, admittedly rather slowly. Networking among FZs is enabling this convergence, and the process is likely to gather pace in future. Indeed, if a set of ‘Good Practices’ indicating ‘Dos and Don’ts’ is evolved and adopted, the pace of convergence will accelerate. Yet, one must hasten to add that such convergence is neither uniform nor universal. Convergence will depend to a large extent on the economic situation of the country of FZ location, its policies and legal framework. So, it is happening in some cases and in some others, not. The trend or the clarity of trend needs further evidence as we move into the future. Small is beautiful. Or, is it? The debate whether business organizations should be large or small is age old. Both have their merits and demerits. Small is manageable; small is efficient; small is in a position to withstand business cycles through quick adoption of innovative practices. But it is often argued that small may not enjoy scale
- 3. RP 1 3 MAY 2016 economies and face greater risk of being crushed by daunting challenges. So, is large the answer? Large organizations with large productive capacities benefit from scale economies and often exert clout in the marketplace. So, should organizations grow to a size that makes them ‘too big to fail’? Clearly, ‘one size fits all’ approach to FZs is inadvisable and impractical both. While small units are generally believed to be more service-oriented given the direct connect with customers and vendors, the large ones with huge productive capacities are the ones that generate more jobs and thereby more incomes. So, the classic question: Should there be many small FZs dotting the landscape or should there be a handful but really big FZs? Whether FZs should be small or big will be driven by several considerations including government policies, regulatory capacity, labor conditions, extent of technology adoption, financing options, logistics issues and so on. It is for the investors to take an informed decision about the size of FZs taking into account market size, product mix, level of investment, return on investment and more importantly, evolving business dynamics. Going forward, both small and large units will co-exist. Cooperation among them will ensure both will thrive and prosper. Small units will have the opportunity to scale up. Will FZs be bitten by the M&A bug? The global trend in businesses across sectors is of Mergers and Acquisitions (M&As). The result is consolidation of capacities and technology transfer. Such inorganic growth is often driven by market- share maximization objective and occasionally for technology acquisition and so on. But by their very nature, M&As reduce the number of market participants and can potentially create market dominance by a handful. M&As can be local, national or cross-border. Will FZs be bitten by the M&A bug? Experts believe, if consolidation were to gather pace, it would be a welcome development. There is also reason to believe, private FZs will have a greater propensity to witness and indeed trigger M&As. To accelerate the pace, it is necessary to launch an awareness campaign about the potential benefits. So, the M&A idea needs a push, some experts suggest. At the same time, there are those who believe, cooperation rather than acquisition may be the way forward. They argue that cooperation will create conditions to deliver greatest good for the greatest number. Eventually, however, the fittest and the fastest (to adopt and adapt) will survive. What are the Drivers of Competitive Edge? It is often said that competitive edge is key to business success. In the event, FZs must acquire that competitive edge, to not only survive but also prosper. A majority of experts rate technology adoption as a critical driver of competitive edge, especially in delivery of services. While technology adoption may be crucial for those who render leading edge services, location (say, near a port) and quick access to support services will help sharpen the competitive edge of those in goods trade, especially export-import trade. Additionally, at the micro level, strong product knowledge and market knowledge coupled with ability to foresee the emerging trends would foster increased competitiveness. Are FZ’s ready to meet future Customer expectations? Because the idea of Free Zones is still evolving, most FZs attempt to understand the needs of their customers with a view to fulfilling the needs. Yet, customer expectations remain either unfilled or partially fulfilled; and often, expectations keep changing / evolving. These expectations will largely depend on the nature of business units that operate within the FZ and evolution of market conditions they are exposed to. Do FZs know what the future needs of customers will be and are FZs ready to meet the future needs of customers / FZ user companies? Customer expectations in the future are likely to be wide and varied. There will continue to be expectation
- 4. RP 1 4 WORLD FZO RESEARCH PUBLICATION of better incentives, availability of workforce with requisite skill sets, economical and readily accessible logistics support. Importantly, customers with progressive mindset, with keen desire to promote sustainability and evolved corporate social responsibility are more likely to demand ‘Green and Smart Free Zones’. Heightened expectation of improving the ‘Ease of Doing Business’ is another customer-centric issue that deserves attention. How important is Public Private Partnership (PPP)? In addition to private sector invested and managed Free Zones and government-supported (often, funded) free zones, a partnership between the private sector and the public sector (read, government) in establishing FZs is often referred to as PPP model. Free Zones developed on the PPP model have attracted attention. PPP model can take various forms including financial and resource involvement of government and creating a positive policy environment for the success of FZs while the private sector will bring in investment and technology. Opinion is of course divided on the desirability of PPP model. Because FZs are usually outside the ambit of various laws applicable to domestic tariff area, it may be both desirable and necessary for the government to be a partner in FZ and ensure sustainability, safety and security of operations. Yet, there is a thin line of difference between monitoring and regulating. Somewhere along the line, there may be suspicion that monitoring can morph into regulation. It is important that monitoring by government should be non-intrusive and the process should be predictable. The government shall act as a facilitator rather than seek to control, for instance the movement of goods. Conclusion: Very clearly, the idea of FZs is still evolving even while the global marketplace is undergoing constant changes. Free Zone promoters have to keep a constant tab of the evolving situation and as much as possible be proactive in gearing to meet the emerging needs. It may call for building multiple scenarios for the future. Technology is sure to play an increasingly vital role in every aspect of human endeavor and those associated with FZ in whatever manner must recognize and exploit it. Summing up, with clear evidence of constant evolution of global socio-political and economic landscape, FZ’s need to anticipate emerging trends and prepare themselves to adopt as well as adapt and get ready for a paradigm shift. Specifically, the focus of FZ’s in future has to be on the following: 1. Technology adoption by becoming Tech-Ready zones 2. Anticipate future customer expectations and tailor-make services proactively 3. Develop Eco-friendly Green Zones 4. Ensure safe and secure operations leading to sustainable zones 5. Look beyond competition and develop cooperative mechanisms for mutual benefit of zones 6. Fostering a synergistic partnership between public and private sectors 7. Encourage Innovation and develop requisite competencies amongst human resources In order to address the focus areas, there is a strong need to design and implement a comprehensive global program which will enable the FZ’s across the world in gearing towards meeting the emerging needs.
- 5. RP 1 5 MAY 2016 Acknowledgement: The following domain experts were interviewed for the purpose of this research and they made valuable contribution by sharing their knowledge-base: Isidoro Hodara - Vice President of Zona America, Uruguay Martin Ibarra - Honorary President and Founder of Americas Free Zone Association, Colombia Lewis Leibowitz - The Law Office of Lewis Leibowitz, USA Edvar Mum - General Manager of Mersin Free Zone Operator, Turkey Daniel Griswold - President of National Association of Foreign-Trade Zones, USA Mehdi Tazi - Managing Director of Tangier Free Zone, Morocco Nasser Al Madani - Assistant Director General of Dubai Airport Free Zone Authority, UAE Chris Ndibe - Executive Secretary of Africa Free Zone Association, Nigeria Dr. Mohammed Alzarooni - Chairman of World FZO, UAE