Selecting the Appropriate Policy Instruments

At a Glance 

  • SEZs are supported using policy instruments that foster industrial innovation and efficiency.
  • Key examples include the provision of shared infrastructure, customs areas where firms can benefit from duty-free imports and exports, and fiscal incentives (e.g., special tax incentives, direct subsidies, the easing of currency restrictions).

Case Studies

Key Resources

Topic Briefing

SEZs are created and supported using a variety of policy tools to attract investment and foster industrial synergies.

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Several tools that can help an SEZ attract the participation of firms and investors include the following.

  • Infrastructure, including access to serviced land, utilities (electricity grid access can be particularly important in countries with low grid availability), transport infrastructure (e.g., road, rail, port or airport access to major trading areas), top structures (e.g., warehousing), or shared infrastructure (e.g., research facilities). Broadband infrastructure is also becoming the norm. Although infrastructure is typically contributed by governments, where governments have tight budgets and limited capacity, extractive companies might also provide infrastructure, especially if they can expect to recoup the costs during a long operational stage.
  • Streamlined bureaucracy: Many SEZs offer one-stop shops that give firms a single contact point to deal with all government licensing and administration. Note that creating a one-stop shop is itself a major bureaucratic undertaking that can involve a long lead time. Other operational and licensing incentives include alternative labor and environmental requirements. For example, firms in Philippine SEZs face lower environmental clearances.
  • Customs areas offer firms duty-free imports and exports. Setting them up can involve stationing customs officers inside or at the gate of the free zone to offer onsite clearance to speed up import and export procedures. They are usually combined with other privileges, including the ability to move and hold goods in bond, and the removal of financial requirements for bonded and duty-free inputs.[1]
  • Other specialist services: these include help in finding skilled staff (providing skills databases or setting up a labor marketplace within the zone), specialized training for the workforce in the zone, help finding schools and housing for expats’ families, security services, business or technology incubators, and IT value-added services
  • Fiscal incentives can take the form of special tax incentives (e.g., lower company tax rates, higher rebates on specific activities such as R&D), direct subsidies, eased profit repatriation, and eased currency restrictions. In India and Thailand, firms operating in the SEZs are exempt from sales tax and service tax, while Gabon offers a tax holiday for the first 10 years. Research has found that the provision of corporate tax breaks has only been of marginal importance to the success of SEZs.[2]

These tools and instruments all come with costs. It can be difficult for host countries to achieve an appropriate budget balance between creating an attractive SEZ and overspending. This balance will ultimately determine the success of the zone; even if a zone is able to attract investment, this should be measured against the opportunity cost of the budget spent to attract it. The cost should be carefully determined, particularly when it requires massive government capital outlays for onsite or offsite infrastructure development.

View footnotes

[1] Thomas Farole, Special Economic Zones in Africa: Comparing Performance and Learning from Global Experience (Washington, DC: World Bank, 2011).

[2] Farole, Special Economic Zones in Africa.