A Special Economic Zone (SEZ) is an area in which business and trade laws are different from the rest of the country. They are located within a country’s national borders and the aim is to increase trade balance, investment, job creation and more. Within the UK, you may know Special Economic Zones as Enterprise Zones, but elsewhere they are called Free Zones, International Financial Centres and, more recently, Free Cities.
To encourage businesses to operate within these zones, policies are introduced to encourage investment, reduce taxation, trading, quotas and customs regulations. Additionally, zones may offer tax holidays to businesses looking to establish themselves in the zone. Many see Free Cities as an opportunity to free themselves from the shackles of inefficient legacy systems that have been built up over so many generations. These special economic zones boast their own laws, justice systems and regulations, allowing them to break away from legacy systems and discover new efficiencies.
Unsurprisingly, special economic zones are often motivated by the host country to attract foreign investment; The benefits offered within the zone means that businesses can operate at a lower price, with the view of sustaining a global competitive advantage.
How do we define Special Economic Zones?
Broadly, Special Economic Zones are defined (FIAS, 2008) as:
A geographically delineated area, usually physically secured
It has a single management or administration
It offers benefits for investors physically within the zone
It has a separate customers area (duty-free benefits) and streamlined procedures
Additionally, these zones share features that contribute to nature of special economic zones, including:
Special regulatory regime: zones typically operate under liberal economic laws
Serviced with efficient customs, fast-track registration and licensing, offering a one-stop-shop of services
Capital freedoms and certain levels of tax incentives and subsidies.
What are the benefits of Special Economic Zones?
SEZs serve as “pressure valves” to alleviate large-scale unemployment, support a wider economic reform strategy and experiments for the application of new policies and approaches. The benefits offered within the zone means that businesses can operate at a lower price, with the view of sustaining a global competitive advantage. By tearing down barriers to economic growth, SEZ policies can create incentives for businesses and investors that overcome constraints such as infrastructure and trade logistics. They also offer a controlled environment to experiment with new approaches and policies, with the aim of bolstering economic growth and industrial development.
What I find inspiring about free cities is the availability to create an environment of opportunities, security, liberty and prosperity. Free Cities create an environment where all have access to justice, where disputes are avoided and promises are upheld. However, Special Economic Zones can be perceived badly by the domestic business environments as they still have to labour under traditional and often inefficient systems.
How could your business take advantage?
Businesses exploring Special Economic Zones are able to take advantage of environments that have been designed with the purpose of fortifying business growth.
Within Special Economic Zones businesses will be able to take advantage of:
A more liberal legal and regulatory framework
Efficient public services
Better infrastructure, including roads, transportation, power, and water quality.
Perhaps even better, we have seen some SEZ’s such as the Astana International Financial Centre spearheading green development and eco-friendly industrial cities.
A great example of an SEZ is China, and estimates show that the national level SEZ’s (including various parks) account for more than 30 million jobs and around 22% of national GDP. The introduction of SEZs also led to a 46% boost in foreign direct investment and created an average GDP boost of 12%.
Other examples include Dubai (where they are commonly referred to as Free Zones, Abu Dhabi (with the prestigious Abu Dhabi Global Market), Qatar (where for former Lord Chief Justice of England and Wales presides over the independent, English language Court system) and Kazakhstan.
Economically, when done well, SEZs can reduce the cost of credit to businesses by up to 200bp, enhance economic growth by around 50bp a year and create tens of thousands of new jobs, whilst diversifying the economy. Put another way, they can start to pay back all of their set up costs for an economy within 2 years of opening.
However, if done badly, the tax benefits, poor take up and concessions end up costing the country’s taxpayers and citizens more than before the SEZ was set up, and the host economy is drained rather than enhanced. Businesses can avoid becoming swept up in these issues by thoroughly researching special economic zones and seeking guidance from a specialist prior to setting up within a SEZ.