Special Economic Zone

Updated on January 31, 2024
Article byPeter Johnson
Reviewed byDheeraj Vaidya, CFA, FRM

Special Economic Zone (SEZ) Meaning

Special economic zone (SEZ) refers to a particular region with specified boundaries providing competitive infrastructure and tailored laws to attract foreign direct investment into the nation. Compared to regulations outside the SEZ, the business and trade legislation inside the SEZ are often more investor-friendly.

SEZ directly contribute to economic growth by creating job opportunities, increasing exports and foreign exchange earnings. In addition, businesses outside the SEZ gain from SEZ operations, such as the indirect jobs created or the advantages directed to suppliers outside the zone.

Key Takeaways

  • Special economic zone is a delimited region in a country with several favorable characteristics attractive to investors.
  • SEZ offers special tax breaks and other incentives to promote a business-friendly environment. The incentives primarily include tax incentives, easy access to land and infrastructure, and hiring skilled labor.
  • SEZ is a commonly used idea that benefits governments in both direct and indirect ways. For example, it create jobs, increase exports, foreign exchange profits, technological dissemination, and economic prosperity.

Understanding Special Economic Zones

The special economic zone is a universal concept. However, the SEZ model and its management are not identical across the world; instead, it is country-specific. Nevertheless, an effective combination of foreign and domestic policies can create an outstanding SEZ system. Advanced Asian regimes are elevating their SEZ system by introducing high tech zones and large integrated zones.

Different stakeholders complete the effective institutionalization of SEZ. The government, as the most powerful stakeholder, develops SEZ policies and monitors their execution. SEZ authority, zone developer, zone operator, and zone user are the other significant players. SEZ authority usually carry out strategic planning, zone developers make land development and provide infrastructure, zone operators are in charge of the zone, and zone users start the business in the location.

The countries should focus on developing and providing prime consideration of investors like land, labor and infrastructure. The excellent advantage of establishing the SEZ are the following:

Special Economic Zone (SEZ)

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#1 – Tax Incentives

One of the primary forms of fiscal incentive manifested by SEZ is the tax incentives to investors. Consequently, it has a significant influence on the location decision of foreign investors. Tax incentives take the form of tax refunds, tax exemptionsTax ExemptionsTax-exempt refers to excluding an individual's or corporation's income, property or transaction from the tax liability imposed by the federal, local or state government. These exemptions either allow total relief from the taxes or provide reduced rates or charge tax on some items only.read more, custom duties, tariff exemptions, corporate tax privileges, high-tech tax breaksTax BreaksA tax break is a tax benefit or tax concession allowed by the government to encourage businesses to increase their investments, ultimately boosting the economy. It comes in a variety of ways, such as claiming tax deductions or excluding profits from tax returns.read more and so on. Tax incentive legislation may vary between different SEZs. For instance, some provide full tax holidays while others offer partial tax holidays.

#2 – Labor

The availability of skilled labor resources is an essential factor in the location decision of SEZ. Therefore, SEZ should manifest adherence to basic labor standards and welfare measures to ensure labors well-being. However, there are circumstances in which companies take advantage of the various legislations of the SEZ system. Employees have a hostile work environment as a result. Low wages or lengthy work hours substantiate the worst-case scenario.

#3 – Land and Infrastructure

SEZ provides businesses with easy access to land and infrastructure. Land becoming increasingly expensive, particularly in prime areas, providing low-cost land and globally competitive infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more is a big incentive for businesses requiring large spaces.

Under the special economic zone act in many countries, businesses can enjoy relaxation in regulations or real estate laws tied with land access. In addition, SEZ provides specific offerings that are not available outside the SEZ regime, like foreign ownership or long-term leases, providing space for free or at a reduced price and tax incentives.

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Types of SEZ

There are different types of SEZ. Let’s have a look at the most common type:

  • Free Trade Zones
  • Export Processing Zones
  • Enterprise Zones

#1 – Free Trade Zones

Free trade zones generally receive imported components and provide facilities for warehousing, manufacturing and distribution. Since most FTZs are near ports, it eliminates transportation bottlenecks and decreases the overall turnaround times. FTZ focuses on lowering the overall cost of doing business by reducing the amount of money spent on customs duties. The FTZ design results in avoiding paying hefty tariffs and going through customs. Thus, making international tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. read more considerably easier. In addition, it enhances the locality development by generating local employment.

#2 – Export Processing Zones

Export processing zone aims at developing industrial estates by facilitating raw materialRaw MaterialRaw materials refer to unfinished substances or unrefined natural resources used to manufacture finished goods.read more import, warehousing, manufacturing and manufactured goods export facilities with attractive incentives like tariff exemptions to lure FDIs. EPZs are established in developing nations to join the international economy and ultimately encourage economic growth by focusing on foreign markets.

The main benefits of EPZ are:

#3 – Enterprise Zones

Enterprise zones are another type of SEZ designed in a neighborhood offering tax credits and other subsidies to promote the local area’s economic growth. Unlike different kinds of SEZ, enterprise zones are typically neighborhoods or areas looking to rebuild and encourage development. A few goals of enterprise zones include:

  • Job creation
  • Economic growth in the neighborhood
  • Increase tax revenues

Special Economic Zones in India

India was one of the first Asian countries to develop SEZ to attract foreign direct investmentForeign Direct InvestmentA foreign direct investment (FDI) is made by an individual or an organization, into a business located in a foreign country. The host nation receives job creation prospects, advanced technology, a higher standard of living, infrastructural development, and overall economic growth.read more. In 1965, India established the first export processing zone of Asia in Kandla, Gujarat. In 2021, the total number of operational special economic zone in Gujarat is 21.

The government designed and introduced the SEZ policy in April 2000. The SEZ act 2005 came into effect in 2006.  By providing internationally competitive infrastructure, economic stimulus packageEconomic Stimulus PackageAn economic stimulus package is an attempt by any nation to stabilize the economy through monetary and fiscal policy expansion. It attempts to avert the economic slowdown, and getting out of recession by helping the private sector to recover and flourish, resulting in economic growth.read more, and easing the control and clearance processes, the policy supports exports and foreign investments growth.

According to sezindia, as of 31.07.2021, there are 267 operational SEZs. Few states with a significant number of operational SEZ are the following:

  • Tamil Nadu (49)
  • Karnataka (34)
  • Maharashtra (37)
  • Telangana (35)
  • Gujarat (21)
  • Andhra Pradesh (24)

SEZ formed by the central government are the following:

  • Kandla SEZ
  • Cochin SEZ
  • Madras SEZ
  • Visakhapatnam SEZ
  • Falta SEZ
  • Noida EPZ

Special Economic Zones in China

The first four special economic zones Shenzhen, Zhuhai, Shantou, and Xiamen, were formed in 1979 after China ended its isolation policy and adopted an open-door policy to encourage fair trade with other nations. In the development of SEZs, access to port infrastructure and overseas markets remained the essential element.

China successfully experimented with economic policies in attracting foreign direct investments. As a result, the Chinese system laid the groundwork for contemporary SEZ development, and its influence has spread internationally.

The following statistics of 2015 from the World bank reveal just how successful the SEZ in China is:

  • 22% contribution to GDP
  • 45% total FDI
  • 60% of exports
  • Created around 30 million jobs
  • 30% increase in participating farmers income

Frequently Asked Questions (FAQs)

What is a special economic zone?

SEZ refers to the area in a country developed to host businesses. The delimited area exhibits globally competitive infrastructure and investor-friendly rules and regulations. The prime goal is to attract foreign direct investment and associated economic development.

Where is Special Economic Zone in India?

In India, there are 267 operational SEZs, indicating the wide distribution in the country. The state of Tamil Nadu is home to the highest number of operational SEZs that is 49. The central government formed SEEPZ SEZ, Kandla SEZ, Cochin SEZ, Madras SEZ, Visakhapatnam SEZ, Falta SEZ and Noida EPZ.

What are the features of a special economic zone?

The features of SEZ are the following:

• It is a differentiated area with specific boundaries.
• It offers customized business and trade laws to ease the business process and reduce the cost of operation.
• It provides globally competitive infrastructure usually not available or affordable to investors in the area outside SEZ.

This has been a guide to what is Special Economic Zone (SEZ) & their meaning. Here we discuss how it works along with types, benefits, SEZs in India & China. You may also have a look at the following articles to learn more –