Academic journal article International Journal of Management

Choosing Core Industries in Free Trade Zones: The Application of Value-Added Criteria

Academic journal article International Journal of Management

Choosing Core Industries in Free Trade Zones: The Application of Value-Added Criteria

Article excerpt

The functional role of ports in value-driven chains has been redefined due to the emergence of global logistics integration. This redefinition forces today's ports to adjust themselves to be more competitive to survive. While ports are vigorously setting up Free Trade Zones, however, little is known about what industries are most beneficial to a certain port. This study attempts to define core industries in Free Trade Zones and measure them through value-added analysis. The empirical study shows that "electrical machinery and equipment components", "toy, game, and sport requisites", "clocks and watches", and "inorganic chemicals" should be selected as the core industries in Taiwan's FTZs.

1. Introduction

The growth of global business has brought about more intense global competition. In order to face this challenge, firms are increasingly utilizing the value-driven global logistics management model. This model apportions raw material, technology development, warehousing, distribution and manufacturing between different countries while still maintaining close integration in order to obtain the cheapest and most efficient production and optimal resource allocation. When goods are distributed between different countries, ports become the major connection-nodes, and thus most transport hubs are set near ports. To enhance the function of ports, Free Trade Zones (FTZs) are frequently and strategically utilized by today's ports to shorten supply -chains and raise their added value, for example, Singapore, Yokohama (Japan), Busan (Korea). The concept of a FTZ is to develop the port as a logistics hub, while its proximity to a sea/air port is taken advantage to provide just-in-time services from the hinterland and shorten firm's logistics operation time.

The major research on FTZs has focused on trading gain (Facchini and Willmann, 1 999), location choice (Basu, 1996), key successful factors or willingness of entering FTZs (Chen, 2003; Lu and Yang, 2006; Pan, 2005; Yeng, 2006). However, little is known about what industries are most beneficial to a certain port or FTZ. The purpose of this study is to find the core industries for FTZs by examining the function and activities of ports and FTZs, and using a value-added transshipment model to achieve the competitiveness goal of FTZs. The remainder of this paper comprises five main sections. Section 2 discusses the new paradigm of port activities, the concept of a FTZ, and value-added services and activities within FTZs. Section 3 defines the concept of core industries of FTZs. Then, section 4 takes Taiwan as an example to select core industries for FTZs. Finally, section 5 and section 6 describe the findings with brief discussion and conclusions.

2. New Paradigm of Port Activities and Value-added Services of Free Trade Zones

The Changing Role of Ports

The traditional function of ports has two major operating components: shipping and cargo. UNCTAD (1999) defined four port-type generations, in which first and second generation ports are related to ship/shore and industrial interfaces, with second generationtypes being reliant more on capital than labor. Third generation ports are a product of the unitization of sea-trade and multimodal cargo packaging, which has led to the development of ports as logistics and intermodal centers offering value-added services. Fourth generation ports are mainly the result of port potential and functional change. Such classifications exemplify not only the functional evolution of ports, but also the diversification of port activities. According to Bichou and Gray (2005), while a port can have many roles and functions, a variety of activities and services can also take place within ports, and different port operations create different value-added services. In traditional ports, the activities focus on cargo handling services, but port services have gradually edged towards handling logistics services. In order to show their competitive advantage, such ports have moved toward productivity -advantage leadership, or moved upwards, towards value-added service leadership. …

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