Volume 1 Issue 6 - September 28, 2007
An Evaluation of the Investment Environment in International Logistics Zones: A Taiwanese Manufacturer’s Perspective
Chin-Shan Lu

Professor, Department of Transportation and Communication Management Science,
National Cheng Kung University,
1 University Road, Tainan City 701, Taiwan.
Tel: +886-6-2757575 ext. 53243
Fax: 06-2753882

With the development of international business, multinational firms have been pursuing greater efficiency in logistics and transportation systems. In particular, transport demand requires efficient integrated moves, premium package services, and the best use of available transport modes and logistics zones. Hence, the role of international logistics zones as home bases for merchandise transportation and distribution has become increasingly important. An international logistics zone in the logistics system provides a place for firms to store or hold their raw materials, semi-finished goods, or finished goods for varying periods of time. A number of countries’ governments have either constructed or plan to establish logistics zones to expand the capacity of existing air and maritime transport infrastructure. International logistics zones have been established at major Asian and European airports and seaports to provide many value-added activities, including manufacturing, warehousing, consolidation, packing, labeling, processing, and distribution. They include, but are not limited to, Kepple Distripark (Singapore), Alexandra Distripark (Singapore), Pasir Panjan Distripark (Singapore), Hong Kong International Distribution Center (Hong Kong), Foreign Access Zone (Yokohama), Maasvlakte Distripark (Rotterdam), Eemhaven Distripark (Rotterdam), Busan Logistics Park (Korea), and Kaohsiung Free Trade Port Zone (Taiwan). Manufacturers use international logistics zones to reduce their costs, provide more flexible linkages between the in-flows and out-flows of goods from country to country, and to expand their global markets.

From a manufacturer’s perspective, investment in international logistics zones is a type of foreign direct investment (FDI). Hence, the paper aims to evaluate the investment environment in international logistics zones based on the concept of FDI from a manufacturer’s viewpoint. Several studies have identified a number of factors as important determinants of FDI. These include economic growth and market size (e.g. Yurimoto and Masui, 1995; Bardi, 1999; Hausmann and Fernandez-Arias, 2000; Sethi et al., 2002; Oum and Park, 2004), political stability (e.g. Bardi, 1999; Lipsey, 1999; Hausmann and Fernandez-Arias, 2000; Wei, 2000; Ahmed et al., 2002; Oum and Park, 2004), labor quality and cost (e.g. Tong and Walter, 1980; Schneider and Frey, 1985; Wheeler and Mody, 1992; Tsai, 1994; Yurimoto and Masui, 1995; Gourevitch et al., 2002; Sethi et al., 2002; Oum and Park, 2004), infrastructure quality (e.g. Wheeler and Mody, 1992; Loree and Guisinger, 1995; Yurimoto and Masui, 1995; Bevan et al. 2004), as well as taxes and tariffs incentives (e.g. Yurimoto and Masui, 1995; Gastanage et al., 1998; Lipsey, 1999; Wei, 2000; Bhutta et al., 2003; Borgonovo and Peccati, 2006). To our knowledge, there have been few empirical studies examining the impact of environmental factors on firms´ decision to invest in international logistics zones. From the literature reviewed it would seem reasonable to assume that many of the theories relating to determinants influencing manufacturing firms’ FDI decisions can be applied to factors impacting on their decision to invest in logistics zones. Therefore, this research hypothesized that:

H1: The political factor has a positive effect on firms’ intention to invest in international logistics zones.

H2: The infrastructure factor has a positive effect on firms’ intention to invest in international logistics zones.

H3: The cost factor has a positive effect on firms’ intention to invest in international logistics zones.

H4: The market factor has a positive effect on firms’ intention to invest in international logistics zones.

Fig. 1 Analytical steps
Source:Chin-Shan Lu and Ching-Chiao Yang (2007, 05). An evaluation of the investment environment in international logistics zones: A Taiwanese manufacturer´s perspective. International Journal of Production Economics, 107(1), 279-300.
This study applies structural equation modeling (SEM) to investigate the impact of three sets of antecedent factors – political, infrastructure, cost, and market – on the firms´ intention to invest in international logistics zones. SEM is a modeling technique that can handle a large number of endogenous and exogenous variables, as well as latent (unobserved) variables specified as linear combinations (weighted averages) of the observed variables (Golob, 2003). SEM encompasses many different terms (Rigdon, 1998), such as causal models (Hulland et al., 1996), covariance structure analysis, latent variable analysis (Dunn et al., 1994), confirmatory factor analysis, path analysis, and LISREL analysis (the name of one of the more popular software packages for SEM). The analyses were carried out using the SPSS 12.0 for Windows and AMOS 5.0 statistical package. The research steps included instrument development, exploratory study, confirmatory study, and test of the structural model as shown in Figure 1.

The sample of manufacturing firms was selected from the List of Leading Firms with Good Export & Import Performance, published by the Board of Foreign Trade of the Ministry of Economic Affairs in Taiwan. The questionnaire survey was sent to investment division managers in the top 500 Taiwanese manufacturing firms. Generally, managers are involved in and anchor investment decisions in their companies, and are thus more knowledgeable and familiar with investment decisions and investment determinants than general employees such as sales representatives and clerks. The initial mailing elicited 51 usable responses. A follow-up mailing was sent two weeks after the initial mailing. Another 41 usable responses were returned. The total number of usable responses was therefore 92, yielding an overall response rate of 18.4%.

An evaluation of respondents’ aggregated perceptions of the importance of each investment criterion in international logistics zones. Notably, political stability was viewed as the most important investment criterion by respondents, followed by corporate tax incentives, government administration efficiency, labor cost, and energy cost (their mean scores were over 4.3, derived from a five point interval scale where 1 represented very unimportant and 5 signified very important). These most important investment criteria are associated with cost and political factors and are perceived as critically important when respondents are making investment decisions in international logistics zones. Five investment environment criteria were viewed as very good by respondents: transport linkage, labor quality and skilled labor force, communication system, and efficiency of port operations. The least satisfactory investment environment criteria were labor cost, cost of land acquired, economic growth, and market size. Results also indicated that respondents preferred to lease factory buildings rather than use private-owned and joint venture modes.

Based on the research steps, Table 1 shows the estimates of covariance results for the modified model. The market factor (estimate= 0.730, C.R.>1.96), cost factor (estimate = 0.603, C.R. > 1.96), and infrastructure factor (estimate = 0.353, C.R. > 1.96) were found to have significant relationship to firms’ intention in investing in international logistics zones. On the contrary, the political factor (estimate = 0.236, C.R. < 1.96) did not show close relationship to firms’ investment intention. From the detailed assessment it is evident that market, cost, and infrastructure factors are the most important investment determinants for respondents. Therefore, the findings suggest that port authorities or government administrators should focus on these three factors in order to attract investors to invest in international logistics zones.

From the perspective of theory and practice, this paper makes an important contribution to the field of Operations Management (OM), International Journal of Production Economics (IJPE), European Journal of Operational Research (EJOR), and International Journal of Operations and Production Management (IJOPM) in three ways. First, given the timely need for OM researchers to comprehend and adopt the research approach in examining firms operations and behavior, this paper will help in this instructional process. Second, because there seems to be a lack of investment incentive in the OM literature to date, this paper should provide the reader with a useful methodological guide to evaluate manufacturer behavior. Finally, this paper contributes to the body of OM literature with findings on the evaluation of manufacturers’ investment incentive preferences in international logi st ic s zones context.

Reference: Chin-Shan Lu and Ching-Chiao Yang (2007, 05). An evaluation of the investment environment in international logistics zones: A Taiwanese manufacturer´s perspective. International Journal of Production Economics, 107 (1), 279-300.
Table 1 Results of the structural equation modeling
a. S.E. is an estimate of the standard error of the covariance.
b. C.R. is the critical ratio obtained by dividing the covariance estimate by its standard error.
c. Underlined values are critical ratios exceeding 1.96, at the 0.05 level of significance.
Fit indices: χ2=91.309 (p=0.072), df=73, χ2/ df=1.251, GFI=0.879, AGFI=0.826, CFI=0.955, RMSEA=0.052
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