The Special Economic Zone (SEZ) is an area in a country that adheres to a unique set of economic regulations and is normally implemented in a demarcated geographical area specially chosen by the government. These economic regulations typically differ from the regulatory standards that are implemented in the rest of the host country.
The late 1950s saw many of these zones become the economic turning points for many underdeveloped civilisations in a vast number of countries. However, it is not a one-size-fits-all rule for the SEZ as each zone is specially curated and delineated for the interest of the community hosting the zone. Every country may yield a different execution of their ideal SEZ and encapsulate different sentiments from the people living in such zones. The establishment of Shenzhen as an SEZ in 1980 resulted in a leading innovation and financial centre in China with growth unimaginable by the city’s antecedent village-dwellers. On the other hand, India’s SEZs are underperforming as compared to their counterparts in other Asian countries despite it being the pioneer to introduce SEZ in the region. This article will discuss examples of SEZs and investigate why countries establish SEZs, and how SEZs can bring huge benefits to foreign entities.
Background of the Modern SEZ
Established 60 years ago, Ireland’s Shannon Free Zone is the pioneer of the free trade zone. Located two hours from Dublin, the zone was set up to promote tourism and industrial advancement when Shannon’s major source of revenue, plane refuelling for stopovers, was under threat due to the advent of jet aircraft which extended flight ranges. The Shannon Free Zone was fitted with technology that allowed innovation even in today’s day and age, allowing it to remain exemplary for trade zones around the globe.
Many economic zones have historically been established with four main objectives in mind, and countries continue to use SEZs to achieve the same agenda:
- Attraction of Foreign Direct Investments (FDI)
- Alleviation of widespread unemployment
- Support of an expansive economic reform strategy
- Laboratories or ‘sandboxes’ to experiment new economic policies
China has consistently been establishing SEZs, considering their benefits in attracting investments, sparking economic reform and usefulness as ‘sandboxes’ for new regulations. The country has now become one of the most prominent countries that come to mind when studying economic zones. Foreign Direct Investment (FDI) also manifests as a source of technology injection into the host country and has been seen benefitting the two fastest-growing populations in the world – China and India – wherein both are unequivocally involved in the establishment of SEZs to continue their growth.
The Attractiveness of Chinese SEZs
During the liberalisation of the Chinese economy in the 80s, four economic zones were set up in various parts of the country to propel agriculture, industry, national defense and technology. These SEZs were enacted along the southeastern coastal areas including Shenzhen, Zhuhai and Shantou in the Guangzhou province, and were set up on the same basis as SEZs established around the globe. They served a function of attracting and retaining continued foreign investments in the developing country.
The reform of the Chinese economy led to the establishment of one of the most eminent examples of SEZs: Shenzhen. What used to be a remote coastal town is now the largest SEZ not just in China, but also in the world. Preceding the success of Shenzhen is a specialised, tailored policy that allows it to retain a special status even amongst special economic concession zones.
Special Shenzhen was first conceived for the purpose of being a sandbox to observe habits of trade and regulations from the West; yet the delimitation of the zone prevents the trickling of other undesirable customs and philosophy of the West into the rest of Greater China. During the last decades of the past millennia, Shenzhen was the solution to a previously isolated dictatorial state and its geographical location is what made Shenzhen stood out as a prime SEZ location. The area of layover for travellers heading between the mainland and Hongkong was the choice for a country first opening up its doors. Now, the city’s history as a small-scale fishing village has been overshadowed by its signature neon lights on skyscrapers and its humming tech landscape thriving with drones and tech giants. Its GDP per capita has also impressively billowed more than 24,000% in the past four decades.
The success of Shenzhen’s receptiveness has paved the journey for China to extend its economic prowess into other regions to establish the next Belarusian Zhuhai or a Pakistani Shenzhen. Investors may look forward to multiple SEZs that will be established along the China-Pakistan Economic Corridor that is aligned with China’s illustrious One Belt, One Road policy. The Suzhou Industrial Park is also the brainchild of Singapore and China’s joint venture. As the first cross-government project between both countries, the Suzhou Industrial Park has since progressed beyond its initial stage and now houses emerging high-tech companies that specialise in areas such as biomedicine and nanotechnology. In recent years, it has been constantly ranked first by China’s Commerce Ministry out of more than 200 Economic and Technological Development Zones. Last year, it even grew by 20.2% from the previous year to reach US$2.02 billion in trade.
SEZs present a myriad of opportunities for foreign entities looking to venture into the host country. Despite this, careful treading is still essential to ensure that the full potential of a foreign SEZ venture is utilised. DesFran has a team of professionals, armed with the expertise to provide insights and assistance. Contact us today.
This article was written with the research assistance of Joyce Sun, a former strategic communications and research intern at DesFran.
Shannon Free Zone, Shannonchamber.ie
Special economic zones : progress, emerging challenges, and future directions (English), Documents.worldbank.org
Development of the Special Economic Zone in Shenzhen, The People’s Republic of China, Jstor.org
Pakistani PM Asks for Brisk Completion of CPEC’s Special Economic Zones, Xinhua news
Main Characteristics of Economic Zones Types: Latvia’s Experience, Llufb.llu.lv