brand logo

Attracting investments, Dominican style 

10 Aug 2022

  • Economists and investors highlight what Sri Lanka can learn from the Dominican Republic
BY Sumudu Chamara One of the key strategies towards reviving Sri Lanka’s collapsing economy is by attracting investors, especially foreign investors, to start businesses in Sri Lanka, thereby providing jobs and bringing in foreign currency, among other benefits.  However, despite having massive projects designed for investors, such as the Colombo Port City, and also incentives such as huge tax cuts, the country has not been able to attract adequate investors. At a time when Sri Lanka has to look at every possible option, mainly foreign investments and exports, there are certain lessons that the country can learn from the Dominican Republic, which completely changed its economy by facilitating foreign investments.  This was extensively discussed during a panel discussion titled “The Case for Private Industrial Zones: Lessons from the Dominican Republic” which was part of the “Let’s Reset Sri Lanka: ReformNow” conference organised by the think tank, the Advocata Institute. The discussion was joined by Dominican economist and Apricus Consulting Group Managing Partner Juan Jimenez, TWCorp (Pvt.) Ltd. Chairman/Chief Executive Officer (CEO) Thilan Wijesinghe, and Advocata Institute Chairman Murtaza Jafferjee. The rise of the Dominican Republic and industrial parks The Caribbean nation, which had the highest economic growth in the region between 2014-2019, changed its development strategy through significant structural reforms and openness to the world in the 1970s and the 1980s. Today, it is one of the leading investor-friendly countries with a large number of export products.  Highlighting this, Jimenez explained how the country’s economy, which was in a dire situation before these reforms, changed: “In the 1970s and the 1980s, we had an economy that was dependent on an import substitution strategy and on agricultural exports. In the 1980s, we experienced a debt crisis that happened in almost all Latin American countries. At the beginning of the 1990s, we took advantage of the crisis.  “It was very tough. We had double-digit inflation and negative gross domestic product (GDP) growth. We took advantage of that crisis to promote certain structural reforms that ended up being very successful. We adopted an export promotion strategy, both in services i.e. tourism, and in goods i.e. goods manufactured in free trade zones. Since those reforms, we have had very high economic growth with price stability, and we have seen a reduction in poverty and improvement in almost all social indicators.” These developments have changed the Dominican Republic’s export basket as well, according to Jimenez.  As per the statistics presented, prior to the 1990s, agricultural products constituted almost 70% of the Dominican Republic’s exports. However, after3 the said reforms, most of that country’s exports consisted of services because of tourism and the free trade zone regime. At the same time, statistics showed an increased diversity in exports following the said reforms. In the Dominican Republic, there are 79 free trade zone industrial parks that offer world-class services and infrastructure, which he said are under public, private, or mixed administration (multi-company and single company). He emphasised that some of these parks have received awards and that this has been a very successful concept. It was also explained that the rapid growth of these parks has been observed since the 1990s. In 2010, there were 48 parks that accumulated investments worth $ 2,881.6 million, and by 2021, the number had increased to 79 parks, which accumulated investments worth $ 5,903.4 million. In 2021, these industrial parks recorded exports worth $ 7,177.7 million. With regard to global positioning, Jimenez explained that the said developments in the export sector have resulted in the Dominican Republic being the first global exporter of hand-rolled cigars, the first exporter of electric switches to the US, the fourth Latin American exporter of medical devices to the US, the third Latin American footwear exporter, the second exporter of women’s wool coats to the US, and the second Latin American exporter of aromatic candles. He added that five of the world’s top medical device manufacturers are located in the Dominican Republic and that a large number of international brands in various fields have been established in the country. He added: “At present, most of our companies are established in private industrial parks. A total of 50.1% of all companies that are located in the free trade zone regime are in private industrial parks. Only 15.7% of the companies are established in public industrial parks, while 11.4% are in mixed industrial parks. We have special zones for services and for certain agricultural exports in which around 22.8% of the companies are located.” Around 50% of the free trade zone companies provide call centre and business process outsourcing (BPO) services, and many Dominicans who lived abroad, especially in the US, have returned to their country to work in these companies.  Lessons for Sri Lanka Jimenez explained the factors that have attracted foreign companies to establish themselves in the Dominican Republic. Among them are tax exemptions, excellent infrastructure (private provisions), preferential access to the US and European Union (EU) markets, proximity to the US, legal stability, and rapid Government response to private sector needs. In terms of tax exemptions, he said that the Dominican Republic offers 100% tax exemptions from national and municipal taxes including income tax, value-added tax, import taxes, selected taxes on insurance and fuel among other services and goods, and taxes on patents, assets, and patrimony. These tax exemptions are applicable during the entire period of a company’s operations in the Dominican Republic, and can be renewed every 15 years.  With regard to the institutional framework applicable to companies, he said that there is a public-private committee known as the National Free Trade Zones Council, which acts as the supervisor and regulator of the sector. It is in charge of approving new industrial parks and establishing new firms under the free trade zone regime and also handling tax exemptions. It acts as the co-ordination body for the Government’s response to the needs and problems of free trade zones, and it also co-ordinates the promotion of the country in international forums. It consists of an equal number of members from the public and private sectors. In industrial parks, there is a real estate business that provides all the necessary infrastructure and services to the companies that establish themselves in these parks. When it comes to foreign direct investments (FDIs), Jimenez said that through the said Council, the Government promotes FDIs in the country in general and in specialised fairs, magazines, and articles, among others. What is more, the Dominican Republic’s Government contacts firms in different countries via the Foreign Affairs Ministry. He noted that industrial parks invest heavily in promotional activities, as competition for big companies is fierce. When potential investors have special requirements, they require Government assistance.  During the session, the history of industrial parks in Sri Lanka was extensively described by Wijesinghe, who highlighted both successes and failures due to a plethora of reasons. It was also highlighted that Sri Lanka has to improve in many ways as far as attracting investments is concerned. Wijesinghe said that either the Board of Investment (BOI) Law should be amended, or Sri Lanka should be looking at introducing a new special economic zone law to cover the Colombo Port City and the Hambantota Port.  “We have not modified the BOI Law since 1992 if I am not mistaken”, he said, adding that he believes that Sri Lanka as a country should look at agricultural economic zones where you bring in principles of real estate. Highlighting that 82% of Sri Lanka’s lands are owned by the Government, Jafferjee queried how the Dominican Republic allocated massive lands for the setting up of industrial parks, to which Jimenez responded that most of the lands in that country are owned by the private sector. Jimenez explained: “The Government had big agricultural areas because the sugar industry was in the public sector about 50 years ago. The Government is happy to sell land if the private sector wants it because it would be better used as an asset. We have about 12 industrial parks owned by the Government, the only reason being that the private sector does not want those lands.  “In our country, we do not see that the Government should manage industrial parks or do business. We are very convinced that the Government needs to legislate, protect citizens, and give good public services, and not be in the economic sector. So it is really easy to get lands here.” In the Dominican Republic, foreigners can own land, according to Jimenez. He also pointed out that foreign investors willing to start businesses in that country receive massive support from the Government, and that the Government acts more as a business partner that provides facilities rather than a land owner. What is more, he said that the success of the authorities in charge of facilitating the process of foreigners setting up businesses is often measured by how successfully these businesses are set up. With regard to Sri Lanka’s situation, Wijesinghe said: “In the late 1990s and the early 2000s, we had a problem where the BOI would subsidise the lands, and often, the private sector might find it difficult to compete in order to get a return on investments. But, now, virtually all the zones are full. So, if you should create a policy to say that the BOI can compete only on equal terms, then we can look at public-private partnerships.” With regard to the Government supporting investment zones, Wijesinghe said that when allowing investors to set up such zones, it is crucial to look at what would be the value chain of those zones in terms of what the country is trying to achieve. He said that at this juncture, Sri Lanka needs to be more niche market-oriented as opposed to pursuing other conventional industrial parks. Meanwhile, in response to a question about competing with other companies or countries, Jimenez said that when competing with other countries, several factors matter. They are, having fewer costs pertaining to businesses such as electricity and labour costs, training programmes for employees, and the quality of the industrial parks.  The Dominican Republic’s quest to become an investor-friendly country teaches Sri Lanka several lessons. However, having adequate funds to develop infrastructure, which is often cited as the main challenge in Sri Lanka’s case, is just one issue. Investors seek other qualities such as convenience in obtaining necessary approvals, the support of the Government and of the authorities, investor-friendly laws, and a trained workforce for their businesses, to which Sri Lanka should perhaps pay more attention. Such efforts will help the country make use of massive projects such as the port and the airport in Hambantota and the Colombo Port City, which have become white elephants.


More News..