When to Use an SEZ

At a Glance
  • SEZs can play a powerful role in attracting investment, generating jobs, supporting industrialization, and facilitating trade, and are most effective when problems faced in the wider economy are unlikely to be solved at a national level or in the medium-term (and even then, cheaper or more targeted options may still exist).
  • SEZs have the most potential when there are multiple constraints which act to impede investment, such as access to land and infrastructure, trade barriers, and problematic red-tape, along with pent-up local demand or a lack of accessto global or regional value chains.
  • For SEZs to succeed, there must be a commercial case for investment based on sufficient scale of opportunity and sustainable sources of competitiveness. This means they cannot rely exclusively on fiscal incentives (which can overcome certain barriers, but are rarely the main driver of investment decisions).
  • The national investment environment, as well as the capacity and capability within the local economy, will still largely determine the types of investment that can be attracted and, critically, which links to the local economy will be viable.
View footnotes

[1] Anthony Altbeker and Katie Mckeown and Ann Bernstein, Special Economic Zones: Lessons for South Africa from international evidence and local experience, (Johannesburg: Centre for Development and Enterprise, 2012)

[2] World Bank Group. Special Economic Zones: An Operational Review of Their Impacts, (Washington, DC: World Bank, 2017)

Key Resources

See more resources

Special Economic Zones in Africa: Comparing Performance and Learning from Global Experience

This resource outlines the requirements for a Special Economic Zone (SEZ) to succeed. Of specific interest is chapter 4 (pages 111 to 130) ...

Industrial Cluster: Case for Special Economic Zones in Africa

This article raises the question of whether spatial industrial policies can be designed to facilitate clustering, with a focus on creating ...

Topic Briefing

SEZs can play a powerful role in attracting investment, generating jobs, supporting industrialization, and facilitating trade. However, in many cases, they are not the most appropriate or viable tool. For example, most of the SEZs introduced in South Africa in the early 2000s failed to induce significant investment (instead many existing companies simply relocated into the zone) or job creation. This was partly due to the use of these zones for spatial development of poor regions–which SEZs are generally poorly suited to do.[1]

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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 more 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 which act to impede investment, including access to land and infrastructure, trade barriers, and problematic red-tape, along with pent-up local demand or a lack of access to global or regional value chains.

To succeed, SEZs need to tap into an underlying economic opportunity, and require pent-up demand which is being currently constrained by factors in the operating environment. There must be a commercial case for investment based on sufficient scale of opportunity, and sustainable sources of competitiveness rather than fiscal incentives (which can overcome certain barriers. But are rarely the main decision driver of investment). There also needs to be some existing concentration of relevant economic activity and opportunity within a geographical area e.g. the beginnings of a mining supplier cluster. This can be a challenge in extractive industry value chains where the locations are often remote from the main cities where other economic activity is located.

The national investment environment and the capacity and capability within the local economy will still determine the types of investment that can be attracted and, critically, the viable links to the local economy. In some contexts, there may also be opportunities around creating a different project finance environment within an SEZ during the project development or expansion stages e.g. to enable local suppliers to ramp up their capacity.  

Despite being designed to be different from their surrounding context, SEZs face the same constraints that they are trying to overcome, e.g. creating a single window business registration service in a highly bureaucratic context is hampered by the extent of coordination necessary across institutions (often with limited capacity). Evidence shows that the country-and region-specific contexts are the most important factors in determining the success of SEZs in emerging economies.[2] For example, attempting to attract high technology manufacturing investment such as specialized mining or oil and gas equipment suppliers into an area with low skills and capacity could either lead to an enclave industry (with little or no links and limited local employment) or a lack of investment as firms choose to locate elsewhere.

Figure 1 below shows the logical steps for the planning of an SEZ.

Figure 1: Steps to plan for an SEZ, reprinted from Thomas Farole and Claude Baissac and Jean-Paul Gauthier. Special Economic Zones: A Guidance Framework for Policymaking draft (June, 2013), 8