CHAPTER 6. Why Invest In Panama
6.1 Panama＇s Competitive Advantages and Risks
6.1.10. Special Economic Zones-
Currently there are seven export processing zones that fall under the special law; however their success has been limited. The main export processing zones were established in former US military bases at a time when they were handed to Panama in accordance with the Torrijos- Carter Treaty which deals with the final withdrawal of US military troops and an end to US administration of the Panama Canal at the beginning of the year 2000 (Figure 37). This left the government of Panama with a large inventory of prime real estate on both sides of the Pacific and Atlantic Oceans next to the main ports and the Panama Canal. Panama received a total of 364,000 acres of such territory in late 1999, including two large military bases, one of which was a major air base (Howard) that could be used as a air cargo hub or aircraft maintenance and repair facility.
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The Government is actively looking for investment in the fields of logistic and the multi-modal transportation center sector, tourism sector, service sector, information technology and communications sector and, primary and artisan sector; specifically in the marine services ports, tourism and in bond assembly and manufacturing. After nearly seven years since the U. S. return, investment in these transferred properties has not met expectations. Despite a recent high profile investment by DELL, in a 500 person call center. Below we have a map that outlines the location of the EPZ, the main maritime ports, in relation to the Panama Canal
Figure 39 DAVIS-EPZ zone. Source: ARI of Panama
Colon Port (Hutchison)
Colon Free Zone (FTZ)
Evergreen CCT
DAVIES-EPZ
Panama Canal Panama Ports
(Hutchison)
Figure 38: Arranged by author, Map of EPZ, FTZ, Panama Canal and Main Ports.
Source: Map from ARI
Originally the export processing zone (DAVIS) was estimated to attract investments to the amount of 90 million US dollars, however only a handful of companies have set up operations in the EPZ ( Figure 38). Some have cited the lack of success to insufficient international promotion, inflexible labor laws and high transport costs. However, there has been a recent impetus to promote the EPZ.
In an enclosed area of 400 hectares, the Colon Free Zone (CFZ) is located in the Province of Colon, located at the entrance to the Panama Canal on the Caribbean side. It is considered the second largest free zone in the world and the first in the Western Hemisphere. Due to its
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unequaled geographic position and its access to four important ports in the Caribbean and one in the Pacific, reputed to be the most modern in Latin America, it is what is often called an International Ports Center. The ports in this area are the following: Manzanillo International Terminal, Colon Ports Company (Hutchison Whampoa), Colon Container Terminal (Evergreen), and Panama Ports Company (Hutchinson Whampoa) with the Cristobal terminal in the Caribbean and the port of Balboa in the Pacific.
Figure 40 Colon Free Zone.
Source: ARI department
Today, the CFZ is more than just a traditional free zone;
it is a Global Logistic Center for the world. Its annual commercial transactions generate US$ 11,000 million in imports and exports. The success of the CFZ is reflected in the more than 400 hectares and 1,800 established companies and 250,000 visitors a year. The existence of the International Banking Center, the efficient maritime infrastructure, the free circulation of the US Dollar as legal tender, a great many fiscal incentives under an exceptional tax free system on sales or manufactures and on imports and re exportations to foreign countries, tax exemption on income generated abroad, and a sophisticated communication network are some of the factors that contribute to facilitate the operations from the CFZ and which make it an ideal center for international commerce. The CFZ offers investors many advantages: an exceptional tax free system on imports, re-exportations, manufacture and other activities, the dollar as the legal tender currency, low costs for land and store space, Lease Back System or recognition of the investment, protection and guardianship of intellectual property rights, and automated future commercial operations.
It is also important to note that in assessing the relative importance of location determinants for a distribution or logistics center, firms take into account the following factors in order of importance: 1. Geo-location, transport linkage and market accessibility, 2. Market size and growth of potential catchment regions, 3. Port, airport and inter-modal transport facilities. 4.
Political Stability, 5. Skilled labor force, and 6. Modern logistic services and cost fators.(27)
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As of the writing this paper, Panama has signed several Free Trade Agreements (FTA) (see details in appendix), one with the Republic of El Salvador and the other with Republic of China (Taiwan). Also, currently there is the last stage of negotiation to concluded sign a FTA with the United States of America. The FTA with El Salvador came into effect on April 11, 2003. El Salvador has a population of an approximately 6.6 million people with an area 21,476 sq. Km which is roughly a third of the size of Panama and two thirds the size of Taiwan. It is an importer of raw materials, consumer goods, capital goods, fuels, foodstuffs, oil, and electricity. In 2003 exports from Panama to El Salvador totaled 9,403 thousand of US dollars (FOB) compared to 7,675 thousand US dollars in 2002 and is currently the 13th most important destination for Panamanian Exports. (29)
6.1.12. Trade Patterns of Panama's External Sector
Due to the fact most of the trade that goes through Panama is what it could be called intraport trade it is necessary to differentiate trade figures between those whose main target market is the local Panamanian market and those who are routed through the Colon Free Zone where they are then redistributed to other countries. This distinction is also made in government statistic and is also useful to delineate the potential opportunities for long term manufacture or assemble operations in Panama with the objectives of reaching the wider North, Central and South American markets.
6.1.13. Main Exports- Imports by Country
By far the major parent of Panama is the United States of America and also the major destination of exports, followed by the European countries of Sweden, Spain and The Netherlands. It is important to note that almost 70% of Panama’s exports have destinations other than American countries mainly in Central America such as Guatemala, El Salvador, and Costa Rica. Then approximately 23% of exports go to the above mentioned European Countries while the remaining 3% are traded with Asian countries such as Mainland China, Hong Kong and Taiwan.
Moreover, the percentage by country to export goods in 2005 are United States 43.52%, Spain 8.88%, Sweden 5.64%, Holland 4.88%, Costa Rica 4.02%, Belgium 2.58%, Guatemala 2.22%, Nicaragua 2.22%, Taiwan 2.08%, United Kingdom 1.91%, Mexico 1.78%, Dominican Republic
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1.71%, Honduras 1.62%, Colombia 1.60%, Italy 1.57%, Puerto Rico 1.36%, Colon Free Zone 1.36%, Portugal 1.31%, Republic of China 1.06%, Rest of the World 8.67% (see figure) (29)
Figure 41 Main Exports by Country
Source: Directorate of Census and Statistics, National Comptrollers Office (NCO), Panama
The primary export products are mainly agricultural products such as melon, watermelon, pineapple, fish, shrimps, lobsters, tuna, beef, coffee, sugar and other services. Hence, it is evident that the there is not an important manufacturing component to the export production.
Also, by examining the next table, we see that the main source of import comes from the United States of America, followed by those that come indirectly from the Colon Free Zone. A major amount of the imports come from American countries and Japan and Korea being the main Asian importers into Panama. Additionally, the percentage by country to import goods in 2005 are from United States 27.21%, Colon Free Zone 12.18%, Curacao 11.44%, Costa Rica 4.68%, Japan 4.53%, Petroleum Free Zone 3.95%, Mexico 3.71%, Colombia 3.46%, Brazil 3.06%, South Korea 2.48%, Republic of China 2.38%, Guatemala 2.01%, Spain 1.52%, El Salvador 1.35%, Germany 1.27%, Venezuela 1.08%, Trinidad and Tobago 1.05%, Argentina 1.00%, Rest of the World 11.65%. With the major products for import to Panama are petroleum and its derivate products, automobiles, heavy equipment, electric and telecommunication devices, medicines,
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plastic and its manufacture, paper, cardboard and its manufactures, food, clothing, chemical products, shoes, furniture. Please refer to figure
Figure 42 Main Imports by Country
Source: Directorate of Census and Statistics, National Comptrollers Office (NCO), Panama.
Having briefly touched upon the major trading characteristics in terms of the international market, we will then proceed to examine the import and re-export activities of the Colon Free Zone. Most Free Zone merchandise is transshipped from Panama to other parts of the Western Hemisphere and Europe. Imports into the CFZ come mainly from the Far East. The largest individual supplier of the CFZ in 2004 was Hong Kong , Mainland China followed by Taiwan, European Union, United States, Japan and South Korea (Table 5). These five countries supplied nearly 70 percent of all CFZ imports in 2005. Colombia is the largest buyer of merchandise, buying nearly 25 percent of all CFZ experts. Other principal buyers are Ecuador, Panama (domestic market), Venezuela, Mexico, Brazil, the United States, Chile and Guatemala. These countries buy approximately 60% of all exports from the CFZ.
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Table 8 Imports from the Colon Free Zone: year 2004
Source: Directorate of Census and Statistics, National Comptrollers Office (NCO), Panama website: www.contraloria.gob.pa/dec/
6.1.14. Taxes and Labor
6.1.14.1 Taxes
As mentioned earlier, Panama does not assess any income tax income produced from sources outside the country, including the proceeds of sales made outside of Panama. This territorial method of taxation was only one of the many advantages of incorporated in Panama that has attracted the incorporation of over 35,000 companies. Income earned within Panama, including the proceeds of sales made within the country is subject to Panamanian tax.
The normal corporate tax starts at 30% on incomes up to $100,000 U.S. dollars and graduates to 42% on incomes over 500,000. Corporate dividends and earnings of branches of foreign corporations are subject to a 10% withholding tax. Interest paid or credited to the account of a foreign lender is subject to a 6 % withholding tax. Interest on bonds, notes and other registered securities is taxed at a flat rate of 5% withholding tax unless trade is on a registered exchange in Panama. Royalties paid to a foreign movie or television production company or distributor are also subject to a 6% withholding tax. Companies also must withhold a 10.75% social security tax on employee’s salaries.
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The tax rate begins at $3,000 dollars, and individual income is taxable at 52% between $3,000 and $3,250 or tax of $130, then falls to 4% between $3,250 and $4,000, rising to 33% between
$50,000 and $200,000, and then dropping back to 30% over $200,000, at which the tax amount payable is $59,905. the first $3,000 of income are not taxable. Employees also must pay a 7.25%
social security tax on wage and salaries withheld by the employer.
6.1.14.2 Labor
According to the ministry of Labor Figures, Panama’s labor force in 2004 was approximately 1.1 million, with 83% employed in the private sector and 17% in the public sector. Unemployment in 2004 officially crept up to 14.3% from 14.0%.
Pockets of chronic high unemployment, notably in Colon, Panama’s second city abound.
Various economists estimate that Panama’s underemployment could be as high as 20-25%.
Minimum wages, raised by the government in August 2004, range from $0.89/hr to 1.68/hr, depending on the job’s sector and location.
Economic Activity Wage per
hour (USD) Agriculture, small enterprise 0.89
Fisheries 1.17
Manufacturing, Small enterprise
Manufacturing, large enterprise
1.18 1.24
Construction 1.33 to 1.68
Finance intermediation
Cooperativas de Ahorro y Crédito
1.34
1.34
Activity real state 1.34
Table 9 Panama’s labor force in 2004 Source: Arranged by author, data from Ministry of Labor, Panama website:
http://www.mitradel.gob.pa/html/Salario/Salario_minimo.htm
Labor unions hold some political influence in Panamanian society and often protest in order to further objectives. While the Government of Panama has periodically revised its labor code,
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including a modest revision in 1995, it remains highly restrictive. Several sectors are exempt from all or part of the labor code, including the Panama Canal Authority, the Colon Free Zone, Public sector employees, and export processing zone. Employers outside of areas have called for greater flexibility easier termination of workers, and the elimination of many constraints on productivity-based pay. (33)
6.1.15. Information Technology Infrastructure
Panama is trying to position itself as the “Connectivity Hub” of The Americas, by improving on its 58-eighth position overall in the Network Readiness Index (NRI) issued by the World Economic Forum in 2004. The NRI is defined as a nation’s or community’s degree of preparation to participate in and benefit from information and communication technology developments. Panama’s potential could be achieved thanks to several fiber-optic backbones passing alongside the Panama Canal.
Hence access to first-mile broadband is widely available. Also an e-commerce law was signed in July 2001 that granted electronic documents and signatures the same validity passage some call a data center operation. As well as web-hosting and e-commerce firms have been launched.
However, we can see the comparison with other American countries it is still behind other neighboring countries such as Chile (ranked 32nd), Mexico (ranked 44th), and Costa Rica (ranked 49th).
6.1.16. Other sector for investment opportunities in Panama
According to the Foreign Direct Investment in its June 2007 edition located Panama as the country with best economic potential, naming the steady growth of 6%, inward investment, FDI per capita, FDI deals, central office space, cost of employing middle management, universities, and promotion strategy. Panama has been ranked first in the region for low cost of living, operational cost and index of labor by the Economic Commission for Latin America and the Caribbean (ECLAC) and the Organization of American States (OAS). For instance, following are some currently opportunities offer to FDI by Panama Government.
6.1.16.1. Investment Opportunities in Howard
Figure 43 Howard map. Source:
ARI department, Panama
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The Government of Panama with the advisory of the World Bank’s international Finance Corporation (IFC) was designed Howard air force into a special economic area. This Project will have a high impact due to the Free Trade Agreement with the United States, the approval of a program for multimillion expansion of the Canal to increase its traffic capacity, measures to increase the competitiveness of the private sector and the construction of a mega container port in the entrance of the Panama Canal.
Howard offers an enormous variety of opportunities for investment, raising the competitiveness and positioning as a business area of world class: Industrial and commercial properties, 726 housing units and 25 buildings, Sport and entertainment structures, Transportation assets:
category 7 airport accommodating for large aircrafts and 4 hangars, Air cargo terminal and deposits ready to be used, Telecommunications logistics infrastructure with NOC access point, Basic services, System for the supply of fuel, Hospital complex, Educational centers and others
The Howard Special Economic Area was conceived to turn into a Business Center of the America.
Offers benefits to develop commercial and service activities: Tax, immigration and labor incentives, Simplification of installment, operation processes, the best connectivity of the continent, excellent lifestyle, availability of qualified workforce, training for personnel, special customs regime
Thousands of hectares remain available for development in the areas next to the Canal waterway. These were used as military facilities and many remain vacant, available for prospective investors. Some of the projects already underway include manufacturing, warehousing, real estate and tourist centers.
Dollar / Banking system
Figure 44 Banking Area. Source: ARI department, Panama
6.1.16.2. Banking and Financial Services
Panama is the most developed country in the region in terms of Financial Services. Panama’s banking sector is one the most dynamic areas of the economy. A new banking law enacted in March 1998, modernized the banking system and increased government supervision. Under the
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new law, the system meets Basle Accord standards. Foreign and Panamanian banks, just over 80 in total, compete on equal terms. In 2004, these banks had total assets for US$27 billion dollars.
Banks are licensed and regulated by the Banking Superintendence. Counter-measures to neutralize illegal activities in the sector will require goods and services from countries with experience in this sphere, such as the UK. Specialized financial software too is also required for counter-measure operations.
6.1.16.3. Telecommunications
The telecommunication sector in Panama was privatized in 1998. Panama is becoming a hub for communications in the Latin American Region. With a few exceptions, the market became fully opened recently. The main operator is Cable & Wireless from the UK. Privatization has increased competition and offer interesting market opportunities for UK companies.
The main fiber optic cables connecting the Americas interest at the Canal has attracted providers of data warehousing services, which serve information technology companies and users worldwide. Main opportunities include internet access, internet kiosks, value added mobile services, public network infrastructure equipment, VPN/Intranet, network security and call centre equipment.
6.1.16.4. Tourism
The tourism industry in Panama has substantial growth potential and the Government ranks tourism as a priority sector. Foreign investment in the tourist industry has been the stimulant for sector growth, demonstrating strong confidence in the potential for these activities.
Panama passed Law No. 8 of June 14, 1994. Law 8 offers incentives such as 20-year exemptions from import duties, fees for construction materials and equipment, income, real estate and other taxes.
Panama has potential for the expansion of Eco-tourism and Eco-tourism adventures. Other tourism related opportunities include: know-how in development of tourism and infrastructure, supply of hotel kitchen equipment, tableware, decoration (carpets, furniture) and leisure items.(34)
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CHAPTER 7. Taiwanese Investments in Panama
7.1. Taiwan’s Economic Basis
According to the study of Taiwan’s Competitive advantages done by Wong Maher, Wang and Long (2001), Taiwan has relied on the fields of Original Equipment Manufacturing (OEM) and Original Design Manufacturing (ODM) in the production and export of products in the high tech area for the past two decades. The result has made is the world’s third largest supplier of information products. Taiwan accounts for production of a third of the world laptop computers.
The computer industry in Taiwan is surpassed only by brand name giants such as Dell, HP and IBM. A number of variables have been suggested to explain Taiwan’s success; however we will elucidate them using the components of Porter’s Diamond model of National Competitive Advantage. (35)
With regard to the Factor Conditions Element, Wong, they argue that Confucianism has given Taiwan a culture that epitomizes diligence, thrift, harmony, loyalty, education and respect for authority. Investing heavily in education, as an integral component of its economic plan, Taiwan is also one of the most cash-rich countries in the world. Although it was the recipient of foreign aid in the 1960’s, It recognized the important of self-help and quickly embarked upon a course of economic independence. Its personal saving rate of 30% to 40% of the income became one of the highest in the world. With dynamic and fluid capital markets, Taiwan has been able to make funds available to small and medium sized firms, and its export-led national policy has made it one of the largest holders of foreign exchange reserves. As for its soft infrastructure, it has transformed itself from an agricultural economy to an industrial economy. It provides a stable and democratic political environment that people and businesses can pursue their economic objectives.
This environment also attracts foreign investors.
The Demand Conditions of Taiwan is characterized by a domestic market that accounts for only a very small portion of its total production. Foreign demand for Low- Cost Manufacturing
The Demand Conditions of Taiwan is characterized by a domestic market that accounts for only a very small portion of its total production. Foreign demand for Low- Cost Manufacturing