A special economic zone (SEZ) is a territory where trade and business laws differ from other parts of the country. Many governments implement tax incentives and other economic policies to increase trade among countries, increase employment, and attract foreign direct investment.
Some successful SEZs include Shenzhen and Zhuhai in China. Since their establishment in 1979 and 1980 respectively, Shenzhen’s economy has grown 13,711 times while Zhuhai’s Gross Domestic Product (GDP) has grown from approximately S$113,150 to S$76.12 billion in 2021.
Key Policies in Special Economic Zones
To incentivise businesses to set up in SEZs, governments have introduced favourable policies with regard to infrastructure and resources, taxation, customs clearance, and labour.
Infrastructure and Resources
Some SEZs provide infrastructure and resources to companies keen on setting up businesses in the area. This includes soft infrastructure, such as education and training, and hard infrastructure like buildings, machinery, and roads.
In China, the government has developed transport and building infrastructure around coastal SEZs such as Zhuhai, Shantou, and Xiamen to attract companies. They also subsidise the rental costs of office buildings, thus reducing the financial risk associated with setting up a new branch in the zone.
Within SEZs, governments often offer subsidised tax rates or tax waivers to facilitate trade and investment. For example, they may not impose Value-Added Tax (VAT) and sales tax on imported and/or exported goods, depending on the region. Also, customs duties may be waived.
Furthermore, they may offer corporate tax allowances to businesses following a fixed amount invested in the country.
To import goods into a country, the importer is usually required to obtain a customs permit. However, in numerous SEZs, this permit may not be required.
Governments may encourage companies operating in SEZs to offer more employment opportunities to locals and incentivise skilled workers to work in these areas.
For example, Japanese companies that wish to set up a branch within Thailand’s industrial zones are required to employ the Plus One business model. Under this business model, companies are required to hire locals and train them.
Advantages of Special Economic Zones
Businesses and locals have benefited from these SEZs. Some common advantages include the promotion of trade and innovation, the creation of jobs, and an increase in investments.
Promotion of Trade
With economic incentives in place, many businesses are encouraged to establish a branch in SEZs. This includes companies specialising in the manufacturing and exporting of goods outside of the SEZ. This helps to boost trade and exports for the country.
Promotion of Innovation
SEZs can help to promote innovation. For example, from 1985 to 2011, the number of patents granted to companies from China’s economic zones increased from 7.6% to 21.8%. This illustrates the increase in technological innovations resulting from the establishment of these zones.
Creation of Jobs
By attracting more businesses to the SEZ, more job opportunities are made available to locals. Foreign talents that accompany these businesses also help locals upskill by educating them on how to use different technologies from around the world.
Promotion of Investment
SEZs are conducive to attracting foreign direct investments – many investors find reduced taxes, and favourable customs and economic policies attractive.
To encourage more investments, the East Coast Economic Region (ECER) in Malaysia grants an income tax exemption to businesses for 10 years. The government also allows for stamp duty exemptions on buildings or land purchased for business purposes.
Disadvantages of Special Economic Zones
While these zones offer numerous benefits, there are also some disadvantages involved. The main drawbacks are bureaucracy and red tape, facilitation of the arms trade and increase in criminal activity.
Bureaucracy and Red Tape
Although there may be many tax incentives offered in an SEZ, there are still regulatory requirements that businesses need to fulfil. They may need to file the paperwork for various permits before establishing their businesses in these zones.
Facilitation of the Arms Trade
A poorly managed SEZ may encourage corruption and the illegal import and export of arms. Weapons dealers have been able to repackage or relabel arms, or manufacture and assemble them in these very areas.
Increase in Organised Crime
Some zones end up facilitating organised crime, such as drug, wildlife, and human trafficking. For example, the Golden Triangle Special Economic Zone (GTSEZ) in Laos is known to have facilitated such activities. In particular, mismanagement and a disregard for human rights in the area resulted in many illegally immigrated women being sent to work in the Kings Roman Casino.
Special Economic Zones and Free Trade Zones
A Free Trade Zone (FTZ) is a delineated area where goods are manufactured, stored, handled and imported without the intervention of customs authorities. It is classified as a type of SEZ.
Although these territories are both for business purposes, there are some key differences.
Goods which are manufactured, stored or handled in an FTZ are not subject to the scrutiny of customs authorities. However, when these goods are transported to consumers outside the zone, they are subject to customs duties.
This may not be the case for SEZs, where goods are not taxed when they leave the area.
FTZs are situated around airports, seaports, and other areas that facilitate the rapid movement of goods. In contrast, SEZs may be located in non-processing areas, which are neighbourhoods where workers live in. They may include commercial and social infrastructures such as schools, banks, and recreational centres.
Examples of Special Economic Zones Globally
SEZs have emerged around the world since the 1950s, with the first one established at Shannon Airport in Clare, Ireland. In the 1970s, the manufacturing boom resulted in an increasing number of such zones. To date, there are approximately 5,400 SEZs globally.
These are some examples:
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