What Is a Special Economic Zone (SEZ)?

A special economic zone (SEZ) is an area in a country that is designed to generate positive economic growth. An SEZ is normally subject to different and more favorable economic regulations compared to other regions in the same country, including tax incentives and the opportunity to pay lower tariffs. SEZ economic regulations tend to be conducive to—and attract—foreign direct investment (FDI). FDI refers to any investment made by a firm or individual in one country into business interests located in another country.

Understanding How Special Economic Zones (SEZs)

Special economic zones are special areas designated within a country that have different business and trade regulations. They are normally established to facilitate rapid economic growth and development in certain geographic regions.

Economic growth may come locally, regionally, and/or internationally. The growth that results from special economic zones is accomplished by leveraging tax incentives as a way of attracting foreign dollars through FDI and technological advancement.

SEZs may increase export levels for the implementing country and other countries that supply it with intermediate products. However, there is a risk that countries may abuse the system and use it to retain protectionist barriers in the form of taxes and fees. SEZs can also create a high level of bureaucracy due to their regulatory requirements. This can have the effect of funneling money away from the system, making it less efficient.

Types of SEZs include free-trade zones, industrial parks, and specialized zones. We go into more detail about these and other types of SEZs below.

History of Special Economic Zones (SEZs)

The first SEZs appeared in the late 1950s in industrialized countries. They were designed to attract foreign investment from multinational corporations. The first was at Shannon Airport in Clare, Ireland. In the 1970s, SEZs were also established in Latin American and East Asian countries. The most successful SEZs to date have been in China.

There were more than 7,000 SEZs as of 2022, according to the United Nations Conference on Trade and Development. They are found in every part of the world—notably in developing and transitional economies that use them as a tool for industrialization.

Types of Special Economic Zones (SEZs)

As noted above, there are a number of different types of special economic zones. The following are some of the most common categories.

• Free-Trade Zone: Free-trade zones are specially secured areas that are designated for the processing of imported and exported goods. Also called commercial-free or foreign-trade zones, these areas involve special customs procedures and duty-free treatment.
• Export Processing Zone: These zones are generally meant for commercial and industrial exports. The goal is to encourage economic growth through foreign investment. Export processing zones offer certain benefits, such as tax and import duty exemptions, and little to no barriers.
• Industrial Park: As the name suggests, industrial areas or parks are designed to be used for industrial instead of commercial or residential purposes. Tax-related incentives are common benefits for those that use these special zones.
• Specialized Zone: Some of the most common uses for these areas include technology hubs, airport-based zones, and logistics parks.

Example of Special Economic Zones (SEZs)

While many countries have set up SEZs, China has been the most successful in using SEZs to attract foreign capital. The first four SEZs in China were created in 1979 in the Southeastern coastal region: Shenzhen, Zhuhai, and Shantou in Guangdong province, and Xiamen in Fujian province.

China added Hainan Island to its list of SEZs in 1983. The success of the original SEZs prompted the government to create 14 open coastal cities in 1984. These cities enjoy similar benefits as SEZs such as the power to approve investment projects, offer incentives to foreign investors, and import equipment and technology tax-free.

Within China, the SEZs essentially act as liberal economic environments that promote innovation and advancement. The Chinese government continues to allow these areas to offer tax incentives to foreign investors as a way of further developing the infrastructure of these regions.

Mainstream economists agree that the country's SEZs helped to liberalize the formerly traditional state. Without the SEZs, China may not have been able to successfully implement the same level of national reform.

The Bottom Line

Special economic zones are widely used around the world as a way to boost economic growth. These areas are specially designed zones that promote investment, primarily through foreign dollars. SEZs provide incentives, such as favorable tax and tariff regulations. Some of the most common types of SEZs include free-trade zones and industrial parks, which you've probably come across in many major cities across the country.