ELSEVIER Free Zones in E1 Salvador Esteban R. Brenes INCAE Vince Ruddy INCAE Ren~ Castro INCAE In this case study a recent graduate of a Central American MBA program is confronted with the design,formulation, and evaluation of an international investment project for establishing a private-sector free trade zone in El Salvador. The main objective of private and public free trade zones is to facilitate export-oriented industrial development. Most highly developed free trade zones around the world offer a variety of benefits to the companies that operate in them. These benefits include tax exemptions, duty-free imports, and personnel recruitment services. At the be~nning of the case, there is a checklist of all the items that should be taken into account properly to design, prepare, and evaluate a project of this kind. The case provides information about world demand characteristics for public and private free trade zones that any company that is potentially interested in doing business in a free trade zone should take into account. In addition, it offers ir!lormation about countries offering free trade zones and how each can compete to attract additional investors. The emphasis is placed on the Central American region, particularly E1 Salvador and Costa Rica. El Salvador is the site where the prospective investors are located, and Costa Rica is considered as an alternative site. When the case takes place, Costa Rica is considered to be the most advanced in terms of investments in and development of public and private free trade zones. The case provides detailed information on both macro and micro elements. It is therefore expected that the decision will be based not only on qualitalive considerations, but also on quantitative ones. The macro elements include the potential impact of changes in incentives granted to foreign investors and the image c{f instability such changes might convey to investors. As.for quantitative issues, information in the case is sufficient to develop a comprehensive financial analysis of the project. The basic purpose of the case study is to present the major factors to be considered in making decisions about international site location, including the impor- tance of macro environmental elements, the site itself, costs, prices, and market characteristics. The discussion emphasizes the importance of this Address correspondence to Esteban R. Brenes, INCAE, PO Box 960-4050, Alajuela, Costa Rica. Journal of Business Research 38, 57-65 (1997) © 1997 Elsevier Science Inc. 655 Avenue of the Americas, New York, NY 10010 final element, the market for public and private free trade zones. The case may also be used to achieve other secondary objectives, such as: • Understanding the role of the parties involved in the decision • Calculating the cost of the preinvestment stage • Understanding some of the typical problems arising from skipping stages without awaiting final results • Mastering the use offinancial analysis indicators such as the internal rate qf return ORR) when a political or country risk is involved. © 1997 Elsevier Science Inc. I BUSN RES 1997. 38.57--65 U 'pon returning home in January 1992 after finishing his MBA at a prestigious Latin American school, Mario Chavez decided to accept the challenge offered to him by an important Salvadoran business group, PROSAL. The project consisted of evaluating the feasibility of establishing a private free zone (PFZ) in E1 Salvador. PROSAL thought this could be the first investment it could make after a peace agreement was signed, and if things went well, it could also be the first of a series of investments in Central America. (See Appendix A for general information on E1 Salvador.) The first thing Ch~vez did was to submit a list of activities to be performed, including the estimated cost to cover his services for each. He presented his client with the following proposal: Prefeasibility study U.S.$5,000 Feasibility study U.S.$15,000 Site design and construction blueprints U.5.$35,000 He also submitted a checklist of the fundamental issues he would address in his analysis: ISSN 0148-2963/97/$17.00 PII S0148-2963(96)00118-X