When to Use an SEZ

SEZs are more relevant when the problems faced in the wider economy are unlikely to be solved at a national level in the medium term. Even then, cheaper or better-targeted options may exist. For example, if access to land or infrastructure is the only constraint, then an industrial park may be a quicker and cheaper option. SEZs have the most potential when there are multiple constraints impeding investment (such as limited access to land and infrastructure, trade barriers, and problematic red tape), along with pent-up local demand or lack of access to global or regional value chains.

To succeed, SEZs need to tap into an underlying economic opportunity. They require pent-up demand that is being constrained by factors in the operating environment. There must be a commercial case for investment based on a sufficient scale of opportunities and sustainable sources of competitiveness; fiscal incentives can overcome certain barriers, but they are rarely the deciding factor in an investment decision. There also needs to be some existing concentration of relevant economic activity and opportunity within a geographical area (e.g., an emerging cluster of suppliers for the mining sector). This can be a challenge in extractive industry value chains, since the locations of extractive projects are often distant from the main cities where other economic activity occurs.

The national investment environment as well as the capacity and capability of the local economy determine which types of investment can be attracted and, critically, which links to the local economy are viable. Opportunities might also arise from creating a distinct project finance environment within an SEZ during the project development or expansion stages (for example, to enable local suppliers to expand their capacity).

.  

Although they are designed to be different from the surrounding context, SEZs face the same constraints that they are trying to overcome. For example, creating a single window business registration service in a highly bureaucratic context is hampered by the degree of coordination necessary across institutions that may have limited capacity. Evidence shows that the specific context of the region where an SEZ is located is the most important factor determining its success. This is especially so in emerging economies.^[2] For example, attempting to attract high-technology manufacturing investments (such as in specialized mining or oil and gas equipment suppliers) into an area with low skills and capacity could be ineffective; it might lead to an enclave industry (with minimal links to the local economy and limited local employment) or to a lack of investment as firms choose to locate elsewhere.

Figure 1 outlines the logical steps for planning an SEZ.