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A special economic zone (SEZ) is an area in a country that is designed to generate positive economic growth. An SEZ is normally subject to different and more favorable economic regulations compared to other regions in the same country, including tax incentives and the opportunity to pay lower tariffs. SEZ economic regulations tend to be conducive to—and attract—foreign direct investment (FDI). FDI refers to any investment made by a firm or individual in one country into business interests located in another country.
Special economic zones are special areas designated within a country that have different business and trade regulations. They are normally established to facilitate rapid economic growth and development in certain geographic regions.
Economic growth may come locally, regionally, and/or internationally. The growth that results from special economic zones is accomplished by leveraging tax incentives as a way of attracting foreign dollars through FDI and technological advancement.
SEZs may increase export levels for the implementing country and other countries that supply it with intermediate products. However, there is a risk that countries may abuse the system and use it to retain protectionist barriers in the form of taxes and fees. SEZs can also create a high level of bureaucracy due to their regulatory requirements. This can have the effect of funneling money away from the system, making it less efficient.
Types of SEZs include free-trade zones, industrial parks, and specialized zones. We go into more detail about these and other types of SEZs below.
While there are benefits for businesses, individuals, or entities operating within an SEZ, the macroeconomic and socioeconomic benefits for a country using an SEZ strategy are subject to debate.
The first SEZs appeared in the late 1950s in industrialized countries. They were designed to attract foreign investment from multinational corporations. The first was at Shannon Airport in Clare, Ireland. In the 1970s, SEZs were also established in Latin American and East Asian countries. The most successful SEZs to date have been in China.
There were more than 7,000 SEZs as of 2022, according to the United Nations Conference on Trade and Development. They are found in every part of the world—notably in developing and transitional economies that use them as a tool for industrialization.
As noted above, there are a number of different types of special economic zones. The following are some of the most common categories.
While many countries have set up SEZs, China has been the most successful in using SEZs to attract foreign capital. The first four SEZs in China were created in 1979 in the Southeastern coastal region: Shenzhen, Zhuhai, and Shantou in Guangdong province, and Xiamen in Fujian province.
China added Hainan Island to its list of SEZs in 1983. The success of the original SEZs prompted the government to create 14 open coastal cities in 1984. These cities enjoy similar benefits as SEZs such as the power to approve investment projects, offer incentives to foreign investors, and import equipment and technology tax-free.
Within China, the SEZs essentially act as liberal economic environments that promote innovation and advancement. The Chinese government continues to allow these areas to offer tax incentives to foreign investors as a way of further developing the infrastructure of these regions.
Mainstream economists agree that the country's SEZs helped to liberalize the formerly traditional state. Without the SEZs, China may not have been able to successfully implement the same level of national reform.
Special economic zones are designed to create and boost economic growth. One of their main goals is to capitalize on foreign direct investment. SEZs are specially designated areas that are clearly defined with physical barriers and management is done by a single authority. Users and investors within SEZs can take advantage of certain benefits, including favorable regulations and taxation.
Some of the most common types of special economic zones are free-trade zones, export processing zones, industrial parks, and specialized zones. Many of these offer users tax incentives, such as exemption on duties and other fees, and access to foreign direct investment.
Special economic zones are found all around the world. But some of the most successful ones are found in China. The country started to develop SEZs in the 1980s as a way to boost economic growth in order to take advantage of global capital as foreign firms and investors showed interest in the country's economic potential. The federal government revitalized existing SEZs and established new ones in the 1990s to continue fueling this growth.
Special economic zones are widely used around the world as a way to boost economic growth. These areas are specially designed zones that promote investment, primarily through foreign dollars. SEZs provide incentives, such as favorable tax and tariff regulations. Some of the most common types of SEZs include free-trade zones and industrial parks, which you've probably come across in many major cities across the country.
