Special economic zone
A special economic zone is an area in which the business and trade laws are different from the rest of the country. SEZs are located within a country's national borders, and their aims include increasing trade balance, employment, increased investment, job creation and effective administration. To encourage businesses to set up in the zone, financial policies are introduced. These policies typically encompass investing, taxation, trading, quotas, customs and labour regulations. Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.
The creation of special economic zones by the host country may be motivated by the desire to attract foreign direct investment. The benefits a company gains by being in a special economic zone may mean that it can produce and trade goods at a lower price, aimed at being globally competitive. In some countries, the zones have been criticized for being little more than labor camps, with workers denied fundamental labor rights. In some areas, especially Southeast Asia, some SEZs have been repurposed to house illicit activities, including illegal online gambling and cyber-enabled fraud.
Definition
The definition of an SEZ is determined individually by each country. According to the World Bank in 2008, the modern-day special economic zone typically includes a "geographically limited area, usually physically secured ; single management or administration; eligibility for benefits based upon physical location within the zone; separate customs area and streamlined procedures."History
The United States has long applied special economic rules to its outlying territories for the purpose of economic development. Section 936 corporate tax exemptions for Puerto Rico began with Operation Bootstrap in the 1940s and ended in 2006. The federal minimum wage for U.S. territories has in the past been lower than in the states, and as of 2024, American Samoa is still adjusting upward to the nationwide minimum.Modern SEZs appeared from the late-1950s in industrial countries. The first was in Shannon Airport in County Clare, Ireland. Some tax-free jurisdictions such as the Cayman Islands offer technology companies a way to keep their IP offshore in a Special Economic Zone.
From the 1970s onward, zones providing labour-intensive manufacturing have been established, starting in Latin America and East Asia. The first in China, following the Chinese economic reform, was the Shenzhen Special Economic Zone, which encouraged foreign investment and simultaneously accelerated industrialization in this region. These zones attracted investment from multinational corporations and allowed export-oriented Chinese businesses to respond quickly to demand in foreign markets. China continues to maintain Special Economic Zones and certain open coastal areas. Most of China's SEZs are located in former treaty ports and therefore have symbolic significance in demonstrating a "reversal of fortunes" in China's dealings with foreigners since the century of humiliation. Researcher Zongyuan Zoe Liu writes that "he success of these cities as 'red' treaty ports represented another step in China's overall reform and opening-up plan while legitimizing the leadership of the CPC over the Chinese state and people."
Vietnam established 18 coastal economic zones as part of its industrialization process. These included incentives to attract foreign direct investment as well as major investment in worker education and training.
Numerous African countries have set up SEZs in connection with China, including over the period 1990 to 2018 establishing SEZs in Nigeria, Zambia, Djibouti, Kenya, Mauritius, Mauritania, Egypt, and Algeria. Generally, the Chinese government takes a hands-off approach, leaving it to Chinese enterprises to work to establish such zones. The Forum on China-Africa Cooperation promotes these SEZs heavily.
As of at least 2024, there is a trend of southeast Asian countries to develop and increase their SEZs. Since 2015, Thailand developed ten SEZs. As of 2024, Indonesia has 13 SEZs, the Philippines has 12 SEZs, and Cambodia has 31 SEZs.
Economic impacts
SEZs have a significant impact on the economies where they are established, offering several key benefits that contribute to economic growth and development. One of the most important effects is the attraction of Foreign Direct Investment. By offering tax breaks, streamlined regulations, and enhanced infrastructure, SEZs provide a favorable environment for foreign companies looking to invest. This influx of capital can generate substantial economic activity, including job creation within the zones and in related sectors such as logistics, transportation, and services.SEZ's can lead to growth in Gross Regional Product per capita, reflecting an increase in the economic output of the region. Similarly, they can contribute to higher personal income levels and attract more FDI projects, which bring in both capital and expertise. These economic improvements can contribute to higher living standards for the local population.
In addition to attracting investment, SEZs are crucial for generating employment. The businesses that establish themselves in these zones require workers, leading to an increase in jobs for the local population. This can, in turn, result in higher income levels and better living standards for people in the surrounding areas. However, it is important to note that the positive economic effects of SEZs do not always translate into positive social impacts. For instance, despite the economic growth they bring, SEZs may not always lead to a significant reduction in unemployment rates, as some regions may experience a mismatch between job creation and local labor market needs.
SEZs also play a vital role in boosting exports. Many companies operating in these zones focus on manufacturing goods for international markets, helping to increase a country's exports, which can improve the trade balance and generate foreign exchange earnings.
Furthermore, SEZs contribute to local economic development by stimulating demand for local goods and services. As businesses in the zones require input from local suppliers, this creates additional economic activity and encourages further investments in the region.
Infrastructure development is another major benefit. The establishment of SEZs often leads to improvements in transportation networks, utilities, and communication systems, which can have positive effects beyond the zone itself, benefiting the wider economy.
Additionally, SEZs can serve as hubs for technology transfer and innovation. Foreign companies often bring advanced technologies and expertise, which can help local firms improve their own operations and boost their competitiveness. This knowledge transfer is essential for skill development within the local workforce, enhancing their capabilities and preparing them for future economic challenges.
However, SEZs also have some drawbacks, such as a possible increase in inequalities between regions or the potential for inefficient resource diversification. Indeed, the economic benefits of SEZs are unevenly distributed. Critics argue that these zones often benefit large multinational corporations disproportionately while providing limited gains for local businesses and communities. In Poland, for example, SEZs have concentrated economic activity in select regions, creating significant disparities in development. Moreover, the focus on foreign investors can result in dependency on external capital, which may not always align with the host country's long-term economic priorities. This is directly linked to the theory of a balanced economy, which claims that an economy can only grow if all sectors are financed simultaneously. In contrast, the unbalanced development theory argues that investing in certain sectors—or, in this context, specific regions—can lead to the development of other sectors.
Another drawback is the fact that tax incentives can disrupt the equilibrium between the state and companies. When companies make sufficient profits, they pay higher taxes, which allows the government to invest without raising taxes. However, if this is not the case, the government may need to increase taxes. In a tax incentive system, to maintain equilibrium, the revenue generated by the system must be high enough to prevent the state from having to raise taxes.
Another issue is the so-called "race to the bottom" among EU member states. The lack of harmonized tax policies enables countries to compete aggressively by offering increasingly generous incentives to attract investors. While this may benefit individual SEZs in the short term, it undermines collective EU goals of equitable economic development and cohesion. Furthermore, these tax breaks often fail to deliver proportional benefits, as many foreign firms bring their own labor force, limiting local job creation and exacerbating inequalities.
Finally, while SEZs are heralded for their ability to attract Foreign Direct Investment, their broader economic implications often reveal significant shortcomings. One major concern is their role in facilitating tax evasion. By offering highly competitive tax rates and other financial incentives, SEZs sometimes create conditions where corporations exploit loopholes to minimize their tax liabilities. This practice undermines state revenues, limiting the ability of governments to invest in public services and infrastructure. For instance, Ireland's Shannon SEZ, while successful in drawing foreign investment, has been criticized for perpetuating "tax haven" dynamics that weaken EU fiscal cohesion.
SEZ location
The location of an SEZ and the presence of good infrastructure can determine whether an SEZ will be productive or not. The incentive is to establish SEZs in decentralized areas to promote employment and economic activities. However, SEZs located near large cities tend to be more productive. This is especially true if the SEZs have access to efficient communication and transportation systems, such as proximity to a port or an airport.Many zones are deliberately positioned near borders to facilitate cross-border trade by allowing businesses to leverage tariff advantages and access multiple markets efficiently. For instance, companies operating in border zones can easily source raw materials from neighboring countries or export finished goods to nearby markets.
Another important consideration is why firms choose SEZs inside or outside the EU. SEZs in the EU offer unparalleled access to the European market, political stability, and high production standards, which enhance the reputation of products. Additionally, the advanced infrastructure and strong emphasis on sustainability in EU SEZs attract firms focused on long-term investments. Conversely, SEZs in non-EU countries may appeal to businesses seeking lower labor costs, less stringent regulations, or tax incentives that might not comply with EU competition rules. For example, firms targeting high-growth emerging markets or wishing to bypass stricter EU regulations might opt for SEZs outside the EU.