What happens when relative costs increase in export processing zones? Technology, regional production networks, and Mexico's maquiladoras

Policy makers that view export processing zones (EPZs) as a useful development initiative frequently argue that while low wages and tax incentives may be needed to attract investment in a newly created zone, over time participating firms will evolve toward a higher value-added, technology-intensive production model. Once this stage is reached, the expectation is EPZ firms will be able to support a higher cost structure yet still view the host country as an attractive production location. Based on data collected from 55 maquiladoras in Mexico employing more than 67,000 people, we identify the reasons why transnational companies continue to produce in a mature, higher cost zone. Rather than the ability to use advanced technology, our sample firms remain in Mexico because it allows them to meet the needs of demanding North American customers that are willing to pay a higher price for nonstandardized products. With technology appearing to be more of a generic commodity than previous research would suggest, we conclude by examining the policy implications of this study for Mexico as well as other developing countries that have incorporated EPZs as an integral component of their development strategy. (C) 2004 Elsevier Ltd. All rights reserved.