The $300 Million Illusion: Foreign Direct Investment, Special Economic Zones, and Economic Leakage in Guatemala’s Apparel Sector

Abstract   

Loveitstitchitkeepit.com examine the political economy of Hansae’s $300 million investment in a vertically integrated apparel complex in Guatemala’s Michatoya Industrial Park. While the investment is publicly framed as a catalyst for development, employment, and nearshoring competitiveness, the structure of Guatemala’s Special Public Economic Development Zones (ZDEEP) generates significant economic leakage through tax exemptions, profit repatriation, imported inputs, and externalized environmental and social costs. Drawing on global value chain analysis and dependency theory, we develop a numerical model—hypothetical but calibrated to industry norms—to estimate the long‑term fiscal implications of the investment. The findings suggest that Guatemala may transfer more value to the foreign investor, via foregone tax revenue and profit outflows, than the total value of the initial investment within 10–15 years. The analysis contributes to debates on export‑oriented industrialization, fiscal sovereignty, and the developmental limits of special economic zones.

1. Introduction

Foreign direct investment (FDI) in export‑oriented manufacturing is widely promoted as a pathway to economic development, job creation, and integration into global value chains. In Central America, apparel manufacturing has long been positioned as a strategic sector, supported by the Central America–Dominican Republic Free Trade Agreement (CAFTA‑DR) and by the proliferation of special economic zones (SEZs) offering extensive tax incentives to foreign firms. These zones are often justified on the grounds that they attract capital, generate employment, and enhance competitiveness in global markets.

In 2024, Hansae—a major Korean apparel manufacturer—announced a $300 million investment to construct a 500,000‑square‑meter vertically integrated production complex in Guatemala’s Michatoya Industrial Park. The project has been celebrated by political leaders as evidence of Guatemala’s attractiveness as a nearshoring destination for U.S. brands. Yet the fiscal and developmental implications of such investments remain under‑examined. We interrogate the economic leakage associated with Hansae’s investment and argue that the structure of Guatemala’s SEZ regime, combined with the global organization of apparel value chains, results in a net transfer of value from Guatemala to the foreign investor over time.

2. Literature Review

2.1 Export‑Oriented Industrialization and SEZs

SEZs have been central to export‑oriented industrialization strategies across the Global South. Scholars highlight their role in attracting FDI, generating employment, and facilitating integration into global production networks (Farole 2011; Zeng 2015). However, critics argue that SEZs often function as enclaves with limited linkages to the domestic economy, weak spillovers, and substantial fiscal costs (Gallagher & Zarsky 2007; Milberg & Winkler 2013).

2.2 Global Value Chains and Value Capture

Global value chain (GVC) analysis emphasizes how lead firms in the Global North retain control over high‑value functions—design, branding, logistics—while production is outsourced to low‑wage regions (Gereffi 1999; Ponte & Sturgeon 2014). In apparel, supplier countries frequently capture only a small share of total value added.

2.3 Dependency and Economic Leakage

Dependency theorists argue that peripheral economies often experience structural leakage through profit repatriation, unequal exchange, and fiscal concessions to foreign capital (Cardoso & Faletto 1979; Amin 1976). Contemporary analyses show that SEZs can reproduce these dynamics by institutionalizing tax exemptions and facilitating capital outflows (Khan & Christiansen 2020).

We build on these literatures by applying a leakage framework to a contemporary nearshoring investment in Central America.

3. Guatemala’s ZDEEP Regime and the Hansae Investment

Michatoya Industrial Park operates under Guatemala’s ZDEEP regime, which provides one of the most generous incentive structures in the region. Firms operating within ZDEEP receive:

•          full exemption from corporate income tax;

•          exemption from value‑added tax (VAT) on goods and services;

•          exemption from customs duties on imports and exports;

•          unrestricted profit repatriation rights;

•          subsidized infrastructure, including water, electricity, and logistics support.

These incentives dramatically reduce the fiscal benefits typically associated with FDI. While the state bears the cost of infrastructure, regulatory oversight, and environmental monitoring, the foreign firm retains the majority of the value generated.

4. Methodology

We have constructed a numerical model to estimate the long‑term fiscal implications of Hansae’s investment. The model is hypothetical but calibrated to industry benchmarks for vertically integrated apparel manufacturing. It estimates:

1.         annual export revenue;

2.         operating profit margins;

3.         profit repatriation rates;

4.         foregone tax revenue under ZDEEP;

5.         cumulative leakage over 10–15 years.

The objective is not to predict exact financial outcomes but to illustrate the structural dynamics of value extraction inherent in the investment regime.

5. Findings

5.1 Annual Value Flows

Assuming annual exports of $400 million and an operating profit margin of 12 percent, the complex would generate approximately $48 million in annual profit. If 80 percent of profits are repatriated—a common practice in foreign‑owned apparel manufacturing—approximately $38.4 million would leave the country each year.

Under a normal tax regime, Guatemala would collect roughly $12 million in corporate income tax and $12 million in VAT/customs revenue. Under ZDEEP, these revenues fall to near zero. Thus, Guatemala forfeits approximately $24 million in tax revenue annually.

Combined, annual leakage through profit repatriation and foregone taxes totals approximately $62.4 million.

5.2 Cumulative Leakage Over Time

Over a 10‑year period, cumulative leakage reaches approximately $624 million—more than double Hansae’s initial $300 million investment. Over 15 years, cumulative leakage approaches $936 million, more than triple the initial investment. These figures exclude additional leakages from imported inputs, royalties, management fees, and environmental externalities.

6. Discussion

The findings illustrate a structural contradiction at the heart of Guatemala’s export‑oriented development strategy. While the state subsidizes foreign capital through tax exemptions and infrastructure provision, the foreign firm retains control over high‑value functions and extracts significant profits. Guatemala captures low‑wage employment, limited local sourcing, minimal tax revenue, and modest skill upgrading. Hansae captures tax‑free profits, unrestricted access to U.S. markets, vertically integrated control over production, and the ability to extract value over decades.

The result is a net transfer of value from Guatemala to the foreign investor, consistent with patterns documented in global value chain and dependency scholarship.

7. Conclusion

Hansae’s $300 million investment is widely celebrated as evidence of Guatemala’s competitiveness in the global apparel industry. Yet when examined through the lens of economic leakage, the investment reveals a deeper structural dynamic: the host country may ultimately transfer more value to the foreign firm—via foregone taxes and profit repatriation—than the total value of the initial investment. Without mechanisms to retain value domestically, SEZ‑based development strategies risk reinforcing dependency rather than fostering sustainable development.

References

Amin, S. (1976). Unequal Development.

Cardoso, F. H., & Faletto, E. (1979). Dependency and Development in Latin America.

Farole, T. (2011). Special Economic Zones in Africa.

Gallagher, K., & Zarsky, L. (2007). The Enclave Economy.

Gereffi, G. (1999). “International Trade and Industrial Upgrading.”

Khan, M., & Christiansen, J. (2020). “Rent‑Seeking and Industrial Policy.”

Milberg, W., & Winkler, D. (2013). Outsourcing Economics.

Ponte, S., & Sturgeon, T. (2014). “Explaining Governance in Global Value Chains.”

Zeng, D. (2015). Global Experiences with SEZs.