Export Processing Zones, Backward Linkages and Unemployment

This paper investigates the effects of export processing zones (EPZs) on factor rewards, national income and the output of the domestic intermediate good producing sector (backward linkage effect) in surpluslabor developing countries. It is shown that if the intermediate good is internationally traded, an increase in foreign capital investment in the EPZs will not change factor rewards and then national income irrespective of the existence of unemployment. It is also shown that, contrary to the conventional wisdom, an increase in foreign capital investment decreases production of the intermediate good and increases unemployment. The effects of factor accumulation on outputs and unemployment are also examined.