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UNIDO: Special Economic Zones: Boon or bane for emerging country firms?

An industrial policy measure to attract foreign investment to the private sector.

To enable firms to participate in the globalization process, governments in emerging economies may opt to implement policies aimed at increasing their countries’ attractiveness to foreign investors. One frequently used industrial policy measure in many emerging economies is the establishment of so-called Special Economic Zones (SEZs). These are geographically delineated areas within which governments promote industrial activity through infrastructure investment and fiscal and special regulatory incentives with the aim of attracting investments. There are currently an estimated 4,300 SEZs worldwide which account for at least 20 per cent of global trade1. Motivated by the success of SEZs in China2, India’s government announced the launch of the “SEZs Act” in 2005. The Act promotes the establishment of SEZs in the private sector by providing for high-quality infrastructure, attractive fiscal incentives and minimum regulation. The main objectives of establishing SEZs are (i) generating additional economic activities; (ii) promoting exports of goods and services; (iii) attracting domestic and foreign investment; (iv) creating employment opportunities, and (v) developing infrastructure facilities.

As of 2020, there were 354 notified SEZs in India, of which 262 were operational. SEZs are clustered in districts around the coast and are predominantly located in the southern part of the country (figure below), which is not surprising given the access to ports and well-developed infrastructure. Interestingly, there is also a within-district clustering of SEZs, i.e. up to 44 SEZs are concentrated in one district, while other districts have none.

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