Opportunities and Impact
At a Glance
- Most SEZs are set up to attract foreign investment and create jobs, among other key objectives.
- Their success in realizing these objectives depends on a range of factors that are often out of a government’s immediate control.
- Building Engines for Growth and Competitiveness in China: Experience with Special Economic Zones and Industrial Clusters (Douglas Zeng)
- Exporting and Foreign Direct Investment Spillovers: Cambodia's Experience (Sokty Chhair, Luyna Ung)
- FDI Technology Spillovers in the Mining Industry: Lessons from South Africa's Mining Sector (Ghebrihiwet)
Building Engines for Growth and Competitiveness in China: Experience with Special Economic Zones and Industrial Clusters
This resource educates users on the role of special economic zones (SEZs) and economic reform of industrial clusters in China. It is ...
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Common policy objectives informing the establishment of SEZs include attracting foreign direct investment (FDI), creating employment, supporting a wider economic reform strategy, and developing experimental laboratories for the application of new policies and approaches.
SEZs are normally established with the aim of achieving one or more of the following four policy objectives:
- To attract foreign direct investment (FDI). Virtually all SEZ programs aim to attract FDI, which can benefit the economy through knowledge transfer and agglomeration. Knowledge transfer to local firms (mainly suppliers) and employees (via training and learning on the job) can raise productivity and competitiveness in the local economy—although this depends on the economy’s capacity to absorb knowledge transfers. Attracting investment into a specific area also allows for agglomeration benefits and allows potential clusters to develop. Recent studies in Cambodia, Ethiopia, Tunisia, and Vietnam found strong evidence for productivity spillovers associated with agglomeration.
- To create employment. SEZ programs in Tunisia and the Dominican Republic, for example, did not catalyze dramatic structural economic change—but nevertheless bolstered job creation. Job creation is often seen as a tool to reduce poverty and inequality, but it also has wider effects, including health and education outcomes.
- In support of a wider economic reform strategy. SEZs can support countries in developing and diversifying exports, as they can reduce anti-export bias while maintaining protective barriers. The SEZs in China, Republic of Korea, Mauritius, and Taiwan follow this pattern. This can be particularly important for countries that depend on oil or mineral exports and aim to leverage their competitive advantage to move into upstream or downstream industries while diversifying exports. Diversification increases an economy’s resilience to shocks and improves its growth potential. Mauritius used its SEZ regime over several decades as a bulwark for reform, introducing labor reforms and gradually shifting the economy’s focus from import substitution to export promotion.
- As experimental laboratories for the application of new policies and approaches. Testing policies in SEZs makes it easier to avoid or revise ineffective policies, while policies that prove successful within an SEZ can build a strong case for wider reforms. China’s large-scale SEZs are classic examples; FDI, legal, land, labor, and even pricing policies were first introduced and tested within SEZs before being extended to the rest of the economy.
  Gokhan Akinci and James Crittle, Special Economic Zones: Performance, Lessons Learned, and Implication for Zone Development (Washington, DC: World Bank, 2008).
 United Nations University UNU- WIDER, Brookings Institute, and the African Development Bank, “Learning to Compete (L2C)—Accelerating Industrial Development in Africa,” https://www.wider.unu.edu/project/learning-compete-l2c-accelerating-industrial-development-africa