SEZ Investments: How Did They Rise From 40 Bn to 6 Tn?

Special Economic Zones (SEZs) are a global phenomenon, offering investors many opportunities backed by supportive economic policies. These zones are tailored to boost economic activity, attract foreign direct investment (FDI), and accelerate employment and growth. Today, we’ll explore SEZ investment options, focusing on relevant numbers highlighting their impact and potential.

The Global Landscape of SEZs: An Expanded View

Special Economic Zones (SEZs) have emerged as a dynamic force in the global economy, driving industrialization, fostering innovation, and facilitating international trade. The concept of SEZs is not new; it has evolved since the first modern zone was established in Shannon, Ireland. Over the years, SEZs have transformed from initial ‘enclave’ models to today’s integrated economic hubs that leverage digital technologies and contribute to urban development.

Historical Growth and Economic Impact

The SEZ investments have seen a meteoric rise, from 40 billion Indian rupees in 2006 to an astounding 6 trillion in 2022. This growth reflects the increasing confidence of investors in the SEZ model and its ability to generate substantial economic returns. The number of SEZs has also expanded significantly, with over 5,400 zones established across 147 countries as of 2021. These zones have played a pivotal role in the economic enrichment of developing countries, improving international business and technology transfer.

SEZs as a Policy Instrument

SEZs represent a strategic policy instrument governments use to promote industrialization and economic transformation. They offer a unique compromise between state and market forces, providing a business-friendly environment with a sound legal and regulatory framework. This approach has helped SEZs contribute to economic globalization, presenting themselves as complementary or alternative means to integrate with the global market.

China’s Shenzhen Special Economic Zone is a prominent example of an SEZ contributing significantly to economic globalization. Established in 1980, Shenzhen was one of China’s first SEZs and has since transformed from a small fishing village into a major global city. The zone was instrumental in China’s shift from a closed economy to becoming the world’s second-largest economy.

Shenzhen’s SEZ provided a business-friendly environment attracting domestic and foreign investments. It offered incentives such as tax breaks, eased regulations, and infrastructure support, which fostered an innovative and competitive market. The legal and regulatory framework within the SEZ was designed to be conducive to business, encouraging trade and investment.

The success of Shenzhen’s SEZ can be seen in its economic statistics:

• It attracted over 90,000 foreign enterprises.
• Between 2012–2016, the cultural and creative industries grew 14% annually.
• In 2016, these industries represented 10% of Shenzhen’s GDP.

This SEZ has contributed to the economic development of China and the global economy by integrating with international markets and supply chains.

The High-Risk, High-Reward Nature of SEZs

While the global results of SEZs in developing countries are mixed, regions like East Asia have shown more success than others, such as sub-Saharan Africa, which is still working to make their zones functional. The ‘high-risk, high-reward’ nature of SEZs requires a strategic location, integration with overall development strategies, understanding of the market, and leveraging comparative advantages.

Source: Statista

SEZs by the Numbers

• India’s SEZs: As a case study, India’s SEZs have shown significant growth. By the end of 2023, India had operational SEZs that contributed immensely to the country’s export-oriented manufacturing and services.
• Employment: Approximately 25.60 lakh people were employed in Indian SEZs as of September 30, 2021.
• Investment: A staggering Rs. 6,28,565.89 crore had been invested in these zones.
• Exports: The value of exports from Indian SEZs in the Financial Year 2021–22 was Rs. 5,29,333 crores, marking a 31% increase compared to the same period in FY 2020–21.

Investment Models in SEZs

As a Tenant or Investor

Companies can set up operations within SEZs to take advantage of the preferential policies. This can include manufacturing, services, or logistics operations that benefit from the zone’s strategic location and incentives. Infosys Technologies is a notable example of a tenant in an Indian SEZ. As reflected in the chart above, the company has set up operations in several SEZs across India, taking advantage of the preferential policies to operate its IT services.

Investing in Primary and Supporting Activities

SEZs often focus on specific industries such as palm oil, rubber, petrochemicals, agriculture, fisheries, manufacturing, logistics, and tourism. Investors can contribute to these sectors directly or through supporting activities. Companies like Huawei and Foxconn have invested heavily in the Shenzhen SEZ of China. These investments include their primary activities in electronics manufacturing and support services like R&D and logistics, contributing to the SEZ’s ecosystem.

Infrastructure Development

Investors can also participate in developing the SEZ’s infrastructure, contributing to the construction of facilities, utilities, and services that support the zone’s operations. The Jamnagar SEZ in India, which houses one of the world’s largest oil refineries, is an example of significant infrastructure development. The SEZ has seen the construction of roads, pipelines, and storage facilities to support its operations.

Benefits of Investing in SEZs

The benefits of investing in SEZs can be significant, including:

• Tax Incentives: Many SEZs offer tax holidays, reduced corporate tax rates, and exemptions from certain taxes for investors.
• Customs and Duty Advantages: Importing raw materials and exporting finished goods can be more cost-effective due to exemptions from import duties and streamlined customs procedures.
• Regulatory Ease: SEZs often have simplified processes for business registration, land acquisition, and obtaining permits and licenses.
• Strategic Locations: SEZs are typically located near major transportation hubs, making logistics and distribution more efficient.

Challenges and Considerations

While SEZs present attractive investment opportunities, there are challenges to consider. The success of an investment can depend on the zone’s strategic focus, regulatory environment, and governance model. Additionally, investors must navigate new challenges posed by sustainable development goals and the evolving landscape of international production.

Conclusion

Special Economic Zones offer a range of investment opportunities that can lead to mutually beneficial outcomes for both the investor and the host country. By providing a conducive environment for business, SEZs play a pivotal role in the global economy, helping to drive industrial activity and economic diversification. As the world economy evolves, SEZs will remain a key instrument for countries to attract investment and spur economic growth.

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