Selecting the Best Location

At a Glance
  • SEZs tend to perform best where there is already an industrial agglomeration and access to trade infrastructure.
  • Without a natural spatial advantage (conditioned by production and transportation cost efficiencies) downstream production will be determined by the usual competitive drivers such as cost of labor, capital, and utilities.
  • When looking to set up an SEZ, policy makers would do well to consider the quantity, quality, and price of critical factors of production: land, labor, utilities, business services, and international connectivity.

Case Studies

Key Resources

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China's Special Economic Zones: An Analysis of Policy to Reduce Regional Disparities

This paper recommends that policy makers consider regional economic disparity when deciding the location of a special economic zone (SEZ). ...

SEZs in Select Countries: A Comparison with India

This resource provides an overview and examples of things to consider when choosing a location for a special economic zone (SEZ). Of ...

Special Economic Zones & Development: Geography and Linkages in the Indian EOU Scheme

This resource explores India’s export-oriented unit (EOU) scheme and its contributions to recent structural transformation. The scheme ...

Topic Briefing

Selecting the best location (or locations) for an SEZ is an iterative process with many variables to consider. For a government to contribute land to an SEZ, either the government must already own the land, or a budget needs to be determined before a location is selected. Land acquisition can be problematic; for example, violent protests erupted in India in 2007 due to objections over who was compensated (and who was not) during the land acquisition process for several SEZs.[1]

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SEZs tend to perform better if the location has some existing industry and if agglomeration offers access to trade infrastructure (e.g., by being near a port) or has a natural competitive advantage (e.g., for the downstream processing of minerals or onshore processing of offshore oil). However, being close to a mine or oil site is only an advantage if (i) the unprocessed product costs substantially more to transport than the processed product, (ii) transport costs contribute significantly to the overall cost structure, or (iii) the material can be accessed in a form (e.g., a specialized salt or solution) that improves the efficiency of the production process. Without this natural advantage, downstream production will be determined by the usual competitive drivers—such as the costs of labor, capital, and utilities. Utility costs are especially important to consider, because electricity is often a large component of initial processing.

Ultimately, the location needs to be chosen based on the quantity, quality, and price of the critical factors of production: land, labor, utilities, business services, and international connectivity.[2] Environmental impacts also need to be taken into account. These factors should contribute to the competitive advantage of the SEZ and enhance its offerings to investors. The infrastructure available beyond the SEZ must also be considered; this helps to ensure linkages with the local economy, and makes the location more attractive to investors. Nigeria’s establishment of a flagship export processing zone in the city of Calabar in the Cross River State is an example of a poor location choice. While this 1990s program emphasized manufacturing for export, Calabar was neither a major manufacturing nor an important logistics area for the country. The zone failed to develop, and the port—and the zone—remain insignificant.

View footnotes

[1] The Economist, “Prowling Tiger: India Pushes Anew for Special Economic Zones,” The Economist, July 9, 2007.

[2] Thomas Farole, Claude Baissac, and Jean-Paul Gauthier, “Special Economic Zones: A Guidance Framework for Policymaking: Draft,” World Bank, Washington, DC, June 2013.