Academic journal article Multinational Business Review

The Role of Foreign-Trade Zones in U.S. Exporting

Academic journal article Multinational Business Review

The Role of Foreign-Trade Zones in U.S. Exporting

Article excerpt

INTRODUCTION

Even as international firms consolidate their gains overseas, they have to face established firms and upstarts not only these overseas markets, but also on their home turfs. The resultant increase in competition produces pressures to decrease trade costs in order to gain advantages, or at least to maintain them. Foreign-trade zones (FTZs) provide U.S. firms with precisely such a mechanism.

The Foreign-Trade Zone Act (the FTZ Act) was passed in 1934. It provides for the establishment of FTZs in order to stimulate U.S. domestic and international commerce by allowing firms to decrease tariff-related costs through their trade operations in FTZs.

For firms operating in FTZs, the major benefits of FTZ use are financial savings from decreased tariff-related costs. The savings are primarily generated from tariff reduction, deferral, or avoidance, and vary with the level and breadth of FTZ activities undertaken, the volume of tariffable goods used, and the length of time the goods remain in FTZs. FTZ export manufacturing may have the most potential for decreasing tariff-related costs because it increases the level and breadth of FTZ activities, the volume of goods used, and the time that tariffable goods are in FTZs. By combining domestic and export manufacturing in FTZs, firms may maximize that potential because of tariff avoidance. Combined manufacturing often occurs to maximize scale economies; thus, combined FTZ manufacturing is a natural extension of business operations.

The purposes of this paper are to extend the limited set of studies to date on FTZs by analyzing the relative importance of background and financial characteristics of FTZ and non-FTZ export manufacturers, and by examining the differences in these characteristics for these two sets of firms. The paper is organized as follows. Issues and hypotheses related to FTZ use and non-use are presented in the following section. The research methodology and the results are presented in the second and third sections, respectively, while the conclusions and implications are discussed in the last section.

ISSUES AND HYPOTHESES

A variety of factors such as a firm's background and financial characteristics, U.S. Customs (Customs) strategies, and logistical support for exporting may affect its ability to effectively utilize FTZ export manufacturing.

Background Characteristics

FTZ export manufacturing may be affected by these characteristics of firms. This study examines the firm's size, activities, manufacturing scale, product type, commitment to exporting, and the relevance of the use of foreign goods to the firm.

Size does not by itself result in exports but is a proxy for advantages of size, such as increased production and enhanced financial and managerial resources. Cavusgil et al (1979) found that management expectations of exporting's impact on market development are better for export manufacturers of $1 million or more in sales. Johanson and Vahlne (1977) proposed that exporting information for small-and medium-sized manufacturers is usually external and used to theorize about opportunities while that for large firms is mostly internal and used to perceive and create opportunities. Sales volume and number of employees are typical measures of size used in previous studies.

Growth in manufacturing activities increases managerial concerns for improving operating cost efficiencies. As managers investigate methods to facilitate improvement, their awareness of the FTZ may increase. The type and volume of FTZ activities undertaken, combined with the volume of tariffable goods used and the length of time the goods are in FTZs, affect the potential to decrease costs.

FTZ use must be considered in conjunction with the manufacturing scale. The FTZ provides some flexibility for manufacturing scale with its general purpose zone (GPZ) form, into which a firm must relocate, and its subzone (SZ) form, which is part of a firm's original operations modified to FTZ requirements. …

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