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Okinawa’s free-trade zones failing to attract companies

by Mayumi Negishi

GUSHIKAWA, Okinawa Pref. — The Acrorad Co. factory in Okinawa’s Nakagusuku Free Trade Zone looks out on more than 100 hectares of empty lots.

“We keep the window closed because of all the dust that blows in,” said Ryoichi Ono, the medical technology manufacturer’s Okinawa factory chief. The Tokyo-based firm plans to begin full production of its hospital-use gamma-ray cameras next year.

The 122-hectare free-trade area, launched four years ago on reclaimed land in central Okinawa, offers corporate tax deductions of 35 percent for 10 years or as much as a 15 percent tax deduction on initial capital expenditures for companies with 20 or more full-time employees.

But so far, only seven companies in seven different fields have rented factory space in three years. In less than six years, local government officials must attract more than 10 times as many firms to meet the goal of 91 companies by 2008.

The dismal showing is not stopping the prefecture from going ahead with more tax havens.

Besides Nakagusuku, the prefecture has a free-trade zone in Naha, a special tax haven for financial companies in Nago, 14 areas offering special corporate tax breaks, seven “incubator” facilities and four research facilities open to venture firms.

And that’s not all. The city of Okinawa is pushing for a free-trade zone of its own, just a 10-minute drive from the Nakagusuku Free Trade Zone.

Meanwhile, the prefecture is requesting approval to create even more special economic zones, including a “tourist zone” designed to attract more international flights to Naha while reducing visa requirements, and a “free-port zone” where regulations and tariffs on transshipments and cruise ships would be reduced.

For Okinawa, the creation of these special economic zones comes on top of three decades of effort and the use of more than 6.7 trillion yen in public funds on infrastructure to bring the prefecture’s economy up to par with the rest of Japan.

But prefectural officials are still unable to demonstrate how and whether the new zones will nurture job-producing industries.

Critics fear the zones and tax breaks are the latest crutch that will only increase Okinawa’s dependency on the national government, just as the government’s ability to sustain such support declines.

“If it weren’t for the preferential treatment programs and incentives from the local government, we wouldn’t be here today,” said Kazuto Hayashi, president of Hong Kong-based online securities firm United World Investments (Japan) K.K.

In June, the company moved its support and maintenance operations into the Nago Multimedia Building, which makes up the core part of Nago’s tax haven for financial firms.

On top of various tax breaks, Nago offers office space for financial firms at an estimated 1,000 yen to 1,600 yen per sq. meter, pays for 80 percent of communications costs, and provides subsidies of up to 100,000 yen per month for two years for local employees under 30.

Okinawa and the national government have invested 2.1 billion yen in land and construction costs to build the Nago Multimedia Building, which is supposed to support the operations of financial institutions and venture firms the city hopes will flock in.

The 29,409-sq.-meter concrete complex is located on the outskirts of a small district of 150 households. It houses a local area network, rent-free offices, software development equipment, and even state-of-the-art motion picture and music studios.

“We need to keep pushing forward in newly emerging industries,” Okinawa Gov. Keiichi Inamine said during a recent news conference in Tokyo.

“At the same time, we have to build a foundation in manufacturing. That’s the only way that we can rein in unemployment.”

With Okinawa’s unemployment reaching a high of 9.4 percent in calendar 2001, roughly twice the national average, the prefecture needs to secure 9,000 new jobs a year to keep the rate from rising further.

Inamine argues that Okinawa’s location relative to the rest of Asia makes it a competitive alternative to, say, building a factory in mainland China.

Keho Chen, president of Taiwan-based semiconductor maker Promax-Johnton Corp., said he made his decision to set up shop in Okinawa after simply looking at a map.

Chen’s company plans to begin production in the Nakagusuku Free Trade Zone next July.

“It made little sense to build a factory in Hong Kong or Singapore, to make shipments to China, when Naha was closer to both Taipei, Shanghai and other parts of China,” he said.

Taiwanese companies are prohibited from making shipments directly to China.

“We chose Okinawa over China,” said Masayuki Mieda, president of Okinawa Photonics Inc., a producer and distributor of photo-communication devices.

Mieda, who once headed a factory in China for a major semiconductor company, said smooth communications and many shared assumptions concerning worker responsibility in Okinawa more than make up for higher wage costs.

” ‘Made in Japan’ still has name-brand value,” he said.

But the hopes that local leaders place on the special economic zones often fail to match the corporate realities.

For most manufacturers, Okinawa means high shipping costs to and from other parts of Japan.

It also means shortages in skilled labor and a small local market of 1.3 million people, just 1 percent of Japan’s population.

Shipping costs are especially severe for newcomers, which are typically the first companies in their respective fields to venture into Okinawa. Until their firms grow large enough to receive bulk discounts or competitors move in, they must often pay special-order prices for shipment of raw materials to Okinawa.

Because there are few predecessors, many drawbacks do not come to light until companies have already committed to Okinawa.

“We only found out later that there is only one regular ship that leaves the local port each week,” said Yasuho Shigeno, executive manager and head of motorcycle parts manufacturer Speed Industries Co.’s Okinawa factory.

Critics say the Nakagusuku Free Trade Zone is bound to suffer the same fate as Naha’s Free Trade Area, which launched in 1988. In 14 years, only one company has purchased land in the 2.7-hectare zone.

Hit hard by Asia’s currency crisis or the subsequent burst of the information-technology bubble, the firms that hoped to use Okinawa as an export base to other parts of Asia withdrew. In 1990, 27 companies were operating in the free-trade zone. Now, there are only 14.

And so, 30 years after its reversion to Japan, Okinawa remains heavily dependent on public funds. Roughly 77 percent of the prefecture’s revenue comes from national government coffers, according to fiscal 1999 figures.

But at a time when outstanding debt for both the national and local governments stands at over 666 trillion yen, or 112 percent of the gross domestic product, critics say it is imperative that Okinawa cultivate more goods and services on its own, fast.

“Public funds are no longer very effective at stimulating the private sector,” said Mahito Uchida, head of the Bank of Japan’s Naha branch.

“Instead, the funds tend to hinder growth, as companies become accustomed to, and feel entitled to, government support and tax exemptions.”

The success of Okinawa’s projects depends on the prefecture’s ability to focus on industries that match its strengths, like tourism, information technology and health-related industries, Uchida said.

“A grab-bag approach will only dilute the effects of economic stimulation plans, and we’ll still be calling for further industrial development in Okinawa.”

Also, other parts of Japan are now lobbying the national government with often innovative ideas for special economic zones of their own. These could potentially lessen the appeal of the tax breaks Okinawa currently offers.

Outlined under Prime Minister Junichiro Koizumi’s reform program announced in June, the government plans to experiment with deregulating certain industries in designated areas and promote competition among municipalities.

For example, Kanagawa Prefecture wants to promote robotics development by reducing visa requirements for foreign researchers, and Gifu Prefecture wants health insurance coverage to be widened to include clinical treatment at its hot spring resorts.

According to Yuji Kinjo, who heads the nonprofit Citizens’ Council to Prevent the Heliport Construction in Nago’s Henoko district, Okinawa’s plans too readily assume that technology and infrastructure will automatically spur innovation.

“The only people who will benefit from a tax haven are the big corporations,” Kinjo said.

Nago received 22 billion yen from the national government for development projects and another 52 billion yen to construct a port to make it more attractive to companies.

So far, the 18 tenants in the Multimedia Center and the 16 companies in its incubator facilities have yet to generate significant demand for workers in the area.

Through its programs, Okinawa has succeeded in bringing 80 information technology-related companies into the prefecture, creating 4,200 new jobs since 1996, but that pace is slowing.

“There is a gap between the skills that venture companies in places like the Multimedia Building require and the skills job hunters have,” said Katsumi Gushiken, head of Nago’s Hello Work public employment security office. “Most job seekers want administrative assistant positions; venture companies are looking for people who can start work with minimal training right away.”

On the bright side, he said, Okinawa has launched training programs to cultivate the skills firms are looking for.

If lessons from the past are of any value, new tax breaks might draw companies to Okinawa, but there is no guarantee they will stay.

“I sometimes wonder if our company needed to come to Okinawa,” said Ono of Acrorad. “It all hinges on how we are performing a year from now.”