Clustering, which has been used as an industrial policy tool since the beginning of the 21st century to enable interaction between firms and increase productivity, is employed in the industrial policies of all advanced and emerging economies. It can be argued that clustering has a boosting effect on economic performance through various channels such as the sharing of resources and infrastructure, reduction of information asymmetries, development of common strategies in the face of risks and opportunities, and more efficient management of industrial policies and incentives.
Organized Industrial Zones (OIZs), which are generally manufacturing industry clusters, are at the forefront of clustering policies in our country. The weight, prevalence and effectiveness of OIZs in production are increasing in Türkiye. In this blog post, we examine the impact of OIZs, the largest cluster formations at the focus of industrial policy, on economic performance.
OIZs and Their Performance
Although there are studies measuring the effects of OIZs on economic performance in Türkiye, there is no up-to-date analysis covering all sectors and the whole country. Therefore, we examine the relationship between operating in an OIZ and firm performance by consolidating the OIZ subdivision records kept by the Ministry of Industry and Technology between the years 2015-2018 with the financial statements of firms and inter-firm trade data. [1] According to matched firm data, OIZ firms account for 38% of employment and approximately 45% of net sales in the manufacturing industry. These high rates are determined by particular sub-sectors. In terms of the median value of shares of manufacturing firms in total employment and sales in the sub-sectors they belong to, the rates reach approximately 13%. When we look at the employment and net sales shares of OIZ firms among all firms, we see that these rates were 18% and 20%, respectively, as of 2018 (Table 1).
We have conducted micro-econometric analyses to evaluate the effects of OIZ membership on sales, value added [2], exports, productivity [3], employment, resource efficiency [4] , and capital intensity [5] . As a starting point, models in which the fixed effects of sector-year, province-year, and employment size are controlled for have been estimated. [6] Although we cannot assert a causality for the effect of OIZs on economic performance with this analysis, we can measure the performance difference of OIZ firms, among other firms with similar characteristics, in percentage terms through fixed effects. According to results presented in Chart 1, there is a positive relation between the variable of OIZ membership and all economic variables employed in the analysis. The positive effect is particularly evident in net sales, capital intensity, and trade with other firms. Net sales and capital intensity of OIZ firms are 73% and 76% higher than non-OIZ firms, respectively. Operating in an OIZ increases the trade of both manufacturing firms and all firms in other sectors by more than 70%.
Likewise, when we estimate the effects of OIZ membership on the annual growth of firm performance variables, we see that OIZ firms’ economic performance in items analyzed is not only higher but also increases at a more rapid pace (Chart 2). [7] According to the estimated model, operating in an OIZ contributes by 6% to annual export growth and by 3% to annual employment growth. Moreover, it makes a positive growth contribution in terms of sales to other firms in particular, and in terms of both purchases and sales for manufacturing firms. On the other hand, we see that productivity growth is not faster in OIZ firms than in other firms, as both their inputs and outputs grow faster. In other words, as shown in Chart 1, although OIZs host more productive firms on average, the productivity gap between OIZ and non-OIZ firms has not widened recently.
The regional performance of OIZs is also important for industrial policies. Therefore, the extent to which OIZs affect the economic performance in different regions is also a subject of curiosity. Currently, the OIZ prevalence in the manufacturing industry is distributed across provinces and regions (Chart 3).
To establish a relationship between economic performance and regional development, we add to our estimating equation the term of interaction of the Gross Domestic Product (GDP) with the firm’s OIZ membership on a provincial basis, and measure the extent to which the relation between OIZs and firm performance differs by province. Our findings suggest that the strong relationship between OIZs and firm performance does not differ significantly according to the development status of provinces. In other words, the positive effect of an OIZ in a province with a smaller contribution to GDP is comparable to that in a bigger province.
Our results based on administrative records at firm level indicate that being an OIZ firm is very strongly related with important economic performance indicators of firms and their growth, and that the positive effects of OIZs are observed across the country. Our findings confirm the key position of OIZs, whose weight, prevalence and effectiveness in production has been constantly increasing, in the design and implementation of industrial policies.
Industrial Zones, Free Zones, and Specialization
Another aspect of growing importance that is not covered in our study but can provide a motivation for future studies is that the dispersal of OIZs is reaching saturation point and OIZs are increasingly specialized. Developments in this direction are promising in terms of increasing the quality and efficiency of exports, and improving economic sophistication and information-skill intensity in manufacturing. Another important element in this respect is the free zones. Since 1987, many free zones have started operating in Türkiye to promote export-based investment and production and expedite foreign direct investments and technological adaptation.
Looking at the export/industrial policy structure of countries such as China and South Korea, the close examination of which may be useful, it can be argued that just like in OIZs, specialization in free zones is also crucial. For instance, in China which initiated free zones after Türkiye, each free zone focuses on a field to achieve regional growth. For example, the Shandong Free Trade Zone focuses on marine economics while the Guangzxi Free Trade Zone focuses on the Association of Southeast Asian Nations (ASEAN) regional cooperation. Thus, companies that will operate in free zones gain advantage through proximity to suppliers, service providers, and a specialized labor pool. [8]
In South Korea, which launched free zones in 2003 and currently has nine free zones, the projects have been designed to serve as both trade and living spaces. As in China, free economic zones in South Korea are also specialized in certain fields: the Incheon Free Economic Zone is specialized in aviation logistics, the Gwangyang Bay Area Free Economic Zone in logistics, manufacturing, and tourism, and the East Coast Free Economic Zone in high-tech parts and materials. South Korea divides free zone businesses into two categories (as foreign-capital companies and developers), and applies tax incentives based on these categories.[9]
Specialized clustering is not peculiar to the manufacturing industry. As an example of financial clustering, the Istanbul Finance Center is also designed with a specialization perspective similar to the one discussed above. In this context, Türkiye is considered to have comparative advantages in similar specialization fields in health and care sectors. There is significant space in Türkiye for improving the value added generation capacity of clustering and free zone activities through specialization.
In Sum
The strong and stable economic performance of OIZs also inspires some policy recommendations. OIZs may play an important role in the targeted channeling of Turkish lira resources to areas that will increase investments and exports. In this context, contributions of OIZs to sustainable development can be boosted with steps such as OIZs’ utilization of existing targeted loan mechanisms such as advance loans against investment commitment on a broader scale in terms of both size and geographical location; facilitation of access to and utilization conditions of targeted loans by specialized organized industry zones from which a high performance is expected particularly in strategic areas such as agriculture, energy and technology, and more effective provision of information to them about these loans; and development of mechanisms that make use of OIZ organizations as well development of OIZ-focused banking implementations in order to provide solutions to credit access and asymmetric information problems.
[1] Cleaning of firm-level data used in this study and their aggregation with other data sets were carried out by the authors in order to conduct econometric analyses. Thus, statistics reported here may not strictly match the official data announced or to be announced regarding the OIZs. Any possible errors belong to the authors.
[2] Firm-level value added formula: Value Added = Net Sales - (Use of Intermediate Input) - (VAT Calculated + Other VAT + Period Profit Tax). The variables of net sales and tax are balance sheet variables. Use of intermediate input refers to firms’ purchases of input from other firms, which is included in the Purchase Declaration (PD)/Sales Declaration (SD) data. Taxes have been added to the definition to reflect the taxes on products sold.
[3] For the productivity variable, the ratio of the firm’s net sales to employment has been used.
[4] We define resource efficiency roughly by associating it with the share of resources a firm receives pro rata to its productivity. Using the following regression equation, we estimate the error terms denoting the deviations from the productivity-employee relation within the sector-year. These error terms, i.e. deviations from the average productivity-resource size relation observed within the sector and the year, have been interpreted as resource efficiency.
[5] Capital intensity has been obtained by calculating the ratio of the firm’s tangible fixed assets to its value added.
[6] Estimation model: 
In this equation,
refers to the logarithm of the variable of firm i’s performance in year t; 
refers to the indicator variable showing whether the firm was an OIZ firm that year; 
and 
refer to the fixed effects of sector-year, province-year, and employment size, respectively, at the four-digit NACE level. The 
value reported in Chart 1 denotes the relation between being an OIZ firm and the relevant variable in percentage terms.
[7] Estimation model: 
The
value reported in Chart 2 shows the extent to which operating in an OIZ changes the annual growth of the relevant variable in percentage terms.
[8] In addition to specialization differences across zones, tax implementations and market restrictions also vary. Sectoral restrictions on investments of foreign companies are applied by zones via a list. For example, a company that will invest in automotive manufacturing has to have a Chinese partner with a share of at least 50%. Moreover, a foreign investor is allowed to build maximum two collaborations in this sector in China. As an example of tax differences, high-skilled foreign workers are provided with state subsidies in their income tax payments for wages that exceed the taxable income by 15% in the Guangdong Free Trade Zone. An installment option is offered for corporate tax payments in the Shanghai Free Trade Zone, and corporate tax reduction is provided to businesses that work with supported industries in the Guangdong Free Trade Zone whereas no corporate tax incentive is offered in the Tianjin Free Trade Zone. In taxation of imports, value added tax incentives are implemented in imports of airplanes from local charter companies registered in the Shanghai Free Trade Zone to local airline companies.
[9] For example, concerning property tax, tax reductions are offered to foreign-capital companies for up to 15 years unconditionally whereas the same tax reduction for developers is conditional on making a foreign investment of over USD 30 million and development projects of over USD 500 million. There are also flexibilities in regulations concerning employees such as unpaid leave, and recruitment via the employment quota for disabled persons. Each free economic zone designates project managers who will provide consulting services throughout the investment process. Additionally, the designing of zones as living spaces is a great advantage for foreign employees. By enticing internationally recognized universities into opening campuses in these free economic zones, the road was paved for training highly-qualified personnel. Moreover, foreign investors are allowed to open establishments such as hospitals and schools in these zones and are even provided with state subsidy. Besides, spaces such as theme parks, shopping malls and theaters are also built for the people living in these zones.