Global economic and market conditions are rapidly changing, and, as a result, SEZs are also evolving over the time to suit with the new business and economic environment. While the early stage EPZs, which are now called “Industrial Zones 1.0”, were successful in many countries (in the sense that they mostly met their initial objectives of attracting FDI, promoting exports and earning foreign exchange), they also have their limitations – they tend to become enclaves, without much linkage with the local economy and rely heavily on fiscal incentives. Given these limitations and the changing global macroeconomic and regulatory environment, many countries began to move towards the modern concept of SEZs which have wider size, more linkages with the local economy and are multifunctional and less reliant on incentives. Such SEZs are called “Zones 2.0”. Some countries, such as China, even declared a city or a province as an SEZ to test market-oriented economic reforms. Such an approach played an important catalytic role in the rapid economic growth and transformation in many East Asian and Latin American countries. With the increasing concern on the global climate change and environmental sustainability, a new trend of industrial zones is gaining traction, which is heading toward an even more comprehensive and integrated approach. The “Zones 3.0” approach synthesizes the experiences of Zones 1.0 and 2.0 and works to create an integrated solution that addresses global new trends in low-carbon or green growth as well as trade and investment policies with domestic institutional frameworks, industries and communities (Kechichian and Jeong, 2016).
In order to succeed in this new environment, a zone of any type must be adapted to the host country’s specific situation, and must build on its comparative advantages. Having a long-term vision is particularly important because economic transformation can take decades. In this regard, it is important for policymakers to undertake joint actions in order to promote synergies and coordination among the different players.
Successful zones use a “holistic” or “systematic” approach.
This approach involves all the important aspects (both “soft” and “hard”) for building a conducive industrial or business eco-system. More specifically, based on the experiences of successful SEZ programs globally, the following are important:
- strong government support as part of the long-term national development strategy;
- a robust legal and regulatory framework and strong institutions, including effective one-stop-shop services;
- a prototype design for broader national reforms;
- a strategic location with sound infrastructure;
- strong commercial viability and significant economic and social returns; and
- an awareness of potential environmental concerns, and a willingness to address them to create an environmentally sustainable operation.
Make the SEZs an integral part of a long-term development strategy.
Strategies should be fully integrated into national or regional industrial policies and economic development strategies. Without exception, SEZ programs should be part of the broad national or regional development agenda. The programs should be designed to best complement and support comparative advantages, which themselves should be validated through a detailed strategic planning, feasibility and master-planning process, and take into account the commercial sustainability, target markets and businesses, growth trajectory, infrastructure availability, technology innovation capability, and environment sustainability. (Zeng, 2015a; Farole, 2011). This is the key to ensure their viability and long-term sustainability based on real market demand (Fruman & Zeng, 2015). The experiences of China, Korea, Dubai and Singapore (the whole country could be treated as an SEZ) all highlight this point. These countries treat SEZ programs as an important instrument in their national or regional economic and industrial development agenda, and ensured political support or endorsement from the very top level of the government. For example, in South Korea, exports had always been the top priority during the country’s industrialization process, and the government had put in place a great number of policy instruments to facilitate the export industries especially through SEZs. In China, the economic zones are mainly used as a way of implementing national and regional development strategies, and building growth poles of economic development and urbanizationi. Such a strategic vision plays a key role in the zones’ success, which depends on the long-term commitment of government and a stable macro environment. These initiatives should also be featured in national plans for research and innovation, thus reflecting the importance of parks in innovation policy. Similarly, regions and localities, as important players in industrialization and the knowledge-based economy, should focus on the integration of R&D and innovation into their development strategies. In this regard, it is important for policymakers to undertake horizontal, joint actions in order to promote synergies among the different instruments, to intensify governance and coordination between the different programs.
Establish sound legal and institutional frameworks with strong and long-term, well-coordinated government commitment.
A predictable and transparent legal and regulatory framework is needed to ensure the clarity of roles and responsibilities of various parties, and to provide protection and certainty to the developers and investors. Such a framework also helps to ensure that the zones attract the right investments, and are established with high business, social and environmental standards. A solid legal framework will also buffer zones from unpredictable risks, such as political setbacks or interference and land speculation, among other factors. In addition, strong and long-term government commitment provides additional support for a zone’s success by ensuring policy continuity and adequate provision of various public goods and services. At the same time, close coordination between the central and provincial/local governments and a clarity of the roles of each are very important for the smooth implementation of the different programs. In Singapore, the Republic of Korea, Malaysia, China, Mauritius, Jordan and other countries or economies with successful SEZ programs, relevant laws and regulations were already in place or were established when they first launched the programs; the various levels of government have implemented these laws and regulations with concerted, long-term support.
Create an attractive business environment, including efficient public services (such as a one-stop shop) and good infrastructures.
One of the key objective of zone programs is to overcome the constraints (both soft and hard) of doing business in an economy. Instead of focusing largely on fiscal incentives such as tax holidays, zones should strive to provide an environment conducive to business. Such programs must provide good infrastructure, such as power, water, roads and telecom. Meanwhile, zones can be used to “pilot” policy and regulatory reforms to support economic development, as evidenced in many East Asian countries. What’s important is to make sure that benefits (e.g., the simplification of customs procedures) can then be made available economy-wide (Fruman and Zeng 2015). In almost all the successful zones in the world, basic infrastructure is of high quality, and one-stop-shop services and aftercare are efficient and effective. These features – characteristic of model zones in Singapore, China, Malaysia, Korea, and Dubai - make the zones very attractive to investors.
Carefully plan and design and manage operations.
Because developing a zone is a very expensive undertaking, the process requires very careful planning, design and management. The planning process should include a rigorous assessment of the demand situation, local market conditions, connectivity, the industrial base, the supply chain, the business environment, and land and labor supplies. Ensuring that the zone programs are actually based on the business demand is of paramount importance in order to avoid creating the poorly performing “white elephant” zones. To ensure smooth and efficient operations of zones, private-sector participation can be encouraged through a public-private partnership (PPP) approach. In such cases, experienced private-sector partners can help with the planning, management, and even the provision of certain infrastructures and services.
Offer ongoing skills training and provide strong human power.
One of the highest priorities of any zone is to provide the customized and specialized education and training that generate, upgrade and deepen knowledge and skills. This issue has become an indispensable part of the overall business environment, and investors are increasingly recognizing its importance. The content and training modalities may vary based on the different needs of different zones and sectors. Without exception, training must be constant updated to keep pace with changing business and industrial development needs. Certain policy incentives can also be provided to encourage firms to provide skills training and retraining to their employees. When certain talents are not available locally, policies can be implemented to attract these skills from other parts of the county or overseas.
Undertake continuous technological and industrial learning, innovation, upgrading.
For zones to enhance productivity and sustain long-term competitiveness, they must keep pace with technological and industrial innovation. In order for zones to remain relevant and to be sustainable in the face of changing economic needs, it is important to catalyze and facilitate industrial upgrading by promoting technology innovation/transfer and high-valued sectors targeted toward different development stages. These efforts include expanding well-focused, applicable R&D expenditures; strengthening university-industry linkages; supporting targeted business incubators; and attracting talent (Zhang, 2008). Fostering both “hardware” (such as science and technology (S&T) bases and platforms, innovation labs, incubators and pioneering parks), and “software” (such as sound regulatory regimes, and targeted incentives and, most importantly, talent-recruiting strategies that attract businesses that employ workers with high-end skills).
Generally speaking, an SEZ or FTZ has its own life cycle. As production costs or the costs of doing business increase, zones need to be more innovative to move up the global value chains. Most economies start with relatively low-tech and labor-intensive sectors, and then gradually move towards high-end of the value chains and more knowledge-intensive service sectors. However, this is not an easy process. Making a successful transition requires skillful leveraging of both market forces and governmental support.
Provide strategic and strong connectivity.
Connectivity among individuals, firms, countries, and regions is increasingly understood as a key factor in achieving competitiveness and sustainable, inclusive economic growth. Connectivity has both physical and policy dimensions. Trade, migration, information, transport and transit, energy, and financial flows interact in complex ways. To be a catalyst for structural transformation, zones need the following: to have or to be linked to key elements of infrastructure (like ports, railways and highways) with good trade logistics and customs services; to be well-matched to local resources that leverage the nation or city’s comparative advantages (e.g. agro-processing or electronics); to be part of the global value chain; to be focused not only on exports, but also on the domestic market.
Create linkages with local economy.
Despite the past successes of some “enclave” model zones (especially, export-processing zones), the success of contemporary zones is increasingly entwined with the local economy. Zones need to build on local comparative advantages, and to have local suppliers as part of their value chains. In many countries, such as India and some SSA countries, zones are often criticized as being “enclaves” without much linkage to the local economy. While this criticism might not be fully justified for EPZs, which are deliberately devised to be “enclaves” to attract foreign investors, modern SEZs are meant to incorporate for both foreign and local businesses. Evidence from East Asia shows that, in the long run, zones with strong linkages to the local economy tend to be the very successful ones. To fully benefit from the zone programs, governments and zone management need to consider the local comparative advantages as they target priority sectors. Governments and zone management should also help local firms to link with zone investors through supply chains or sub-contracting relations (Zeng, 2015a). These backward and forward linkages hold the potential to maximize spillover effects on the economic benefits that accrue beyond the zone itself.
In China, most zones are well plugged into existing local clusters. As a result the zones and local clusters reinforce each other through business linkages. Chinese zones also encourage foreign investors to establish joint ventures with local counterparts. In Taiwan and South Korea, governments also encourage the backward linkages through technical assistance and other policy interventions. The Masan Free Zone in South Korea offers a good example in this regard. The zone administrators actively promoted inter-linkages between local firms and investors in the zone by allowing preferential access to intermediate goods and raw materials to local companies supplying FTZ firms. In addition, the zone administration provided technical assistance to subcontracting firms. According to Engman et al. (2007), granting “equal footing” to local suppliers of capital and intermediate goods, and the use of subcontracting mechanisms from zone investors to local producers are very effective measures. Combined with trade and investment reforms, these measures help to generate strong linkages between the foreign multi-national firms and local economy.
Strike a good balance between industrial development and social/urban development.
The impacts of zones on host societies go well beyond economic efficiency – an issue that merits attention. Zone programs are unlikely to succeed if they fail to offer opportunities for quality employment and upward mobility for trained staff, neglect environmental sustainability, and/or if they derive their competitive advantage from exploiting low-wage workers. Programs that use such tactics fail to achieve the possible dynamic benefits, and they are likely to be forced into a “race to the bottom.” By contrast, zone programs that recognize the value of skilled workers, and seek to provide the social infrastructure and working and physical environment in which such workers thrive will be in a position to facilitate upgrading (Farole and Akinci 2011). The quality and cost of housing, health services, schooling, along with the incidence of crime are uppermost concerns for any group of workers, and not just the technically qualified. For knowledge workers, recreational amenities, the cleanliness of the environment, and the state of the physical infrastructure (transportation and telecommunications, for example) are also very important (Yusuf and Nabeshima, 2006). In this regard, the Sino-Singapore Suzhou Industrial Park serves a model example (Box 1).
Box 1: Sino-Singapore Suzhou Industrial Park (SIP): A Garden-like, Modern Industrial TownThe Sino-Singapore Suzhou Industrial Park (SIP) is well‐known for its “‘first‐class living environment” and sound industrial-urban integration. It strives to be an “internationally competitive high‐technology industrial park and a modern, garden‐like township.” Thanks to its sound design and planning, the zone is not just an industrial area but also a very livable city, which is essential for attracting high‐end investments and talent. The park features well-conserved na-ture areas and scenic views, high‐quality urban and social amenities, and highly regarded education options (such as the Suzhou Singapore International School). Distinct areas are designated to serve different functions as residential neighborhoods, centers of education and training, and sites for recreation and leisure (a culture and art center, museums, an opera house, stadium, exhibition center, etc.), and many green spaces and eco‐gardens. It also has well-established, industrial and consumer service sectors, including banks, schools, hospitals, health clinics, postal services, retailers, and hotels.Source: Zeng (2016)
Create and use a monitoring and evaluation system.
Despite the positive impact of successful SEZ programs in facilitating structural transformation, they are very expensive and highly risky endeavors. Creating an industrial zone is an undertaking that should never be taken lightly. Legislation must be put in place and implemented effectively to stipulate the performance criteria of zone programs, and to set conditions for handling the transitions necessary when zones reach the end of their productive lifecycles, and/or for dealing with underachieving programs. This requires a rigorous monitoring and evaluation system to regularly monitor and evaluate their performances. In the absence of such a system, SEZs may diverge from their initial purposes. To ensure policy efficacy, it’s important to evaluate the economic feasibility of zones before their set-up and the outcomes after their set up, and incentives should be designed to match their performances. In addition, based on the experience of South Korea, where, following the initial success, many zones were created without proper business demand and ran into trouble and were then cancelled, it might be necessary to have rules for closing a zone program that is not performing to expectations.
In a change from the early days when most zones were developed by government, more zones today are developed through public-private partnerships (PPPs), with increasing participation from the private sector. In such cases, the functions of the public sector typically include implementation of a transparent and clear regulatory framework, provision of land and efficient public services, financing of basic infrastructure, and oversight of private developers or operators. The private-sector partner(s), on the other hand, takes responsibility for zone development and operation, provision of certain on-site infrastructure, and services, like asset management, global outreach and investor relations.
Address environmental and sustainability issues.
A main manifestation of the “Zones 3.0” approach is the Eco-Industrial Parks (EIPs). EIPs cover a wide spectrum of approaches but they all lead to more sustainable economic development. Depending on the different priorities of park programs, EIPs may be given different names. These could be influenced by the national industrial estate framework (e.g. industrial zones vs. parks) and development priorities of the country or zone developer (e.g., greenhouse gas emissions reductions vs. ecology or waste management) (Kechichian and Jeong, 2016). Box 2 lists different varieties of EIPs.
Box 2. EIPs: Different Approaches and Names, but Similar GoalsLow-carbon zones or parks aim to lower carbon emissions within the industrial area through rigorous greenhouse gas emissions calculations and annual target setting. Measures are imple-mented at both zone and firm levels, and are focused on largest emissions reduction opportu-nities.Eco-industrial zones or parks focus on reducing waste and improving the environmental performance of firms. Korea uses this term primarily for its work on industrial symbiosis (an association between two or more industrial facilities or companies in which the wastes or by-products of one become the raw materials for another) , the use of wastes or byproducts of one industry as raw materials for another.Green zones aim to reduce resource use within the zone’s infrastructure and among tenant firms, via an Efficiency in Production process (through adoption of energy-saving technolo-gies, alternative energies and industrial symbiosis systems, etc.). These zones also focus on gen-erating investments in green manufacturing and services.Sustainable Industrial Areas focus on the management level of an industrial zone or park with the intent of leading the industrial area as a whole to become more sustainable. Although such zones do not directly determine policies for individual companies, the sustainability framework on park level is likely to lead companies in the zone to initiate and promote positive company-level changes as well.Eco-towns refer to an urban planning and environmental management approach where indus-tries located in the designated area pursue synergies in resource utilization, waste management, environmental preservation; resource efficiency within their manufacturing processes and be-tween the industries; and promotion of industrial and economic development.Circular economy zones (or Circular Transformation of Industrial Parks) aim to pro-mote resource efficiency, waste management and emissions control in firms, zones and regions through circular economy patterns.Source: Kechichian and Jeong (2016)
Eco-industrial Parks (EIPs) can help reduce the operational cost and greenhouse gas emissions, and as a spillover impact they can lead to cleaner production by avoiding air emissions that most conventional power plants cause. A recent World Bank project in Bangladesh aimed to develop a roadmap for low carbon growth, and to design an optimal policy framework to facilitate it for Chittagong Export Processing Zone (CEPZ). Through the project, 785 electric poles with solar panels have been installed to provide ecofriendly lighting at the CEPZ (World Bank Group, 2014; Kechichian and Jeong, 2016). A yearly 244 ton CO2-eGHG reduction and 331 megawatt-equivalent energy consumption avoidance is expected as a result of this intervention. The impact of green factories or buildings is far more holistic, leading to multiple benefits in terms of energy and water consumption saved, emissions avoided, and reduced waste. In 2011, an efficiency survey found that, compared with a typical factory, a Leadership in Energy and Environmental Design–certified shoe factory in southern Vietnam that produces exclusively for Nike uses 18 percent less electricity and fuel, and 53 percent less water (Ives, 2014).
The roots of EIPs go back as far as the late 19th century in European industrial zones. However, the concept truly began to develop in the post-World War II period in Denmark, Germany and Finland in an unplanned, organic way as a result of resource constraints and high energy costs. These early steps mainly arose in the form of industrial symbiosis and efficiency measures. In the 1990s, other European countries and non-European developed countries such as the United States, Japan and Canada started incorporating EIP concepts, partially or fully, in their design of industrial zones. In the 2000s, Japan, China and South Korea boosted their efforts to support EIPs with national policies as a means to strengthen their global competitiveness. Hence, over the past five years, EIPs have become a prominent global tool for industrial zones/parks, while retrofit activities continue in over 40 countries. An estimated one dozen EIPs are under construction, and over 30 new development retrofit projects are in the pipeline globally (Kechichian and Jeong, 2016).
