As I make my way across the time zones to Dar es Salaam (the capital city of Tanzania, with a population of about 3 million), I want to fill in a bit more on the background for my trip, described in my prior post. My research on free zones is about understanding how multinational companies adjust their worldwide operations in response to taxation, and what side effects emerge.

Most multinational companies are formed in developed countries, like the United States. But most of their operations are in developing countries, where manufacturing, processing, and other functions take place. There are many reasons to set up a manufacturing facility offshore, including the desire to have a factory located close to a target market (though in our age of cheap shipping, this is much less of a problem than it has been historically) and reduced labor costs (a dominant factor). Another major factor, however, is taxation: most developed countries, led by the US, have determined that multinationals should not generally be burdened by taxation on active business profits earned offshore. US multinationals with money to invest in starting up a plant can look around the globe for the most appropriate offshore location.

As it turns out, the most appropriate location for manufacturing and processing is usually one that provides a suitable workforce and legal structure but that doesn’t impose very much taxation. As developing countries compete to attract multinationals’ outbound investment, reducing tax burdens has become de rigueur. The proliferation of free zones around the world illustrates the result of tax competition: there are over 100 free zones currently in existence, with more countries enacting legislation all the time.  Next post: why attracting foreign investment is so important.

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