The proliferation of GVCs has revolutionised the world economy by opening new industrial development paths for developing countries. Instead of building up industrial capacities from scratch, these countries can join existing supply chains and upgrade along with them.164 This opportunity has unleashed intense competition among developing countries to attract GVC-linked investment using various policy tools. One policy tool that is potent in this drive is special economic zones (SEZs).
SEZs are physically delineated areas where host countries relax rules and regulations, build efficient infrastructure, and offer substantial fiscal and non-fiscal incentives in the hope of attracting GVC activities, which are highly responsive to business environments and costs. There is a general presumption that by facilitating the host country’s insertion into GVCs, SEZs can drive trade, FDI inflows, and technology transfers, which generate spillover effects and catalyse economic transformation on the broader economy.165 However, the evidence indicates that very few countries have managed to leverage SEZs to achieve far-reaching economic transformation.166 In several countries, SEZs have succeeded in driving FDI, exports, production and employment, but they have had limited or little impact on the development process of the broader economy.167 In many other countries, SEZs are utterly unsuccessful even in attracting investment and economic activity.168 Economically transformative or not, SEZs have been increasing in recent years. To have the desired spillovers for MSMEs, SEZ should be established and supported by policies that support skills and cluster development (see Box 15 below).
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Box 15. Thailand’s BUILD programme In June 1992, the BOI Unit for Industrial Linkage Development or BUILD was established under Thailand Board of Investment (BOI) to support industrial linkage and use of industrial parts manufactured in Thailand. BUILD services offer channels to connect competitive Thai SMEs and large manufacturers with parts and component suppliers. With the success of its activities, BUILD has been upgraded into a division under the BOI, the Industrial Linkage Development Division or ILDD. ILDD will continue to encourage growth in supporting industries in Thailand through providing information on subcontracting opportunities by linking parts suppliers with the right manufacturers. ILDD also assists Thai MSMEs to achieve industrial standards required for entering into productive subcontracting arrangements. With its extensive database on subcontractors in Thailand, ILDD provides sourcing and business matching services. With these services, firms can be assured that their procurement process is well facilitated while saving production costs and time spent in finding domestic parts manufacturers. ILDD will further strengthen its activities by organizing seminars, workshops, and networking forums in targeted industries of Thailand to provide in-depth information and help support Thai SMEs to be part of global supply chain of the growing next-generation industries. |
SEZs can be useful for MSME development through supply-side capacity-building and greater market access; they increase industrial output and attract FDI. They also allow host governments to develop and diversify exports while maintaining protective barriers, creating employment and incorporating new policies. According to the Foreign Investment Advisory Service169, the principles embodied in the basic concept of the special economic zone include: (a) a geographically delimited area (usually physically secured); (b) a single administration; (c) eligibility for benefits based upon physical location within the zone and a separate customs area (duty-free benefits); and (d) streamlined procedures. The phenomenon of SEZs has been successfully utilized to modernize economies in recent years due to the ability to customize SEZs to fit specific needs.
SEZs can start as a pilot project for more comprehensive economic reform and almost always involve the attraction of FDI170. In many cases, SEZs are open to domestic companies (suppliers) as well.171 SEZs have played an essential role in the expansion of GVCs. While rules differ among individual countries, zones typically operate outside the country’s boundaries for customs purposes even though they are geographically located inside the country. As a result, the supply chain of products may be scattered among zones worldwide without the impact of tariffs, quotas, and detailed customs procedures, until they finally exit the zone system in the country where the final product is produced. But the spread of backward linkages has varied dramatically across countries. Countries can adapt their SEZ strategy as a comprehensive strategy for cluster development. The sub-section provides an example of an SEZ and how it has impacted the area in which it is located. Box 22 below illustrates the contents of Savan-Seno SEZ in Lao PDR.
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Box 16. Savan-Seno SEZ in Lao PDR The Savan-Seno Special Economic zone is situated along the East-West Economic Corridor (EWEC). This SEZ made little progress until the Second Lao–Thai Friendship Bridge opened in 2007. As of 2019, around 70 enterprises, including China, Thailand, Japan, Canada, the Netherlands and France, have registered in the Savan-Seno SEZ. The impact of the second bridge and the SEZ on the tourism industry is notable. Tourist arrivals increased substantially after the bridge's opening; the number of tourists in Savannakhet risen from just below half a million in 2008 to more than a million in 2015.172 The supporting tourism industries expanded markedly in Savannakhet, where the number of accommodation establishments (hotels, resorts, guest houses) increased from 115 in 2009 to 196 in 2015. The number of rooms rose from 2,302 in 2009 to 4,351 in 2015.173 The hotel/casino in the SEZ was exceptionally high profile in attracting tourists from Thailand, where casinos are not permitted. In a 2012 ADB report174, concerns were expressed that the casino was the principal outcome of the SEZ and had substantial negative externalities. Still, the people flow and easing of border trade following the bridge's opening helped establish the cross-border transport infrastructure that would encourage manufacturing activity within the SEZ. The primary drivers of this SEZ175 relate to its strategic geographic location, low labour costs, low electricity costs, good access to water, its preferential trade schemes that allow easy access to the EU, Japanese and the US markets, and investment incentives offered by Lao’s government. Political stability was also a determining factor for its success. However, the development of SEZ is impacted by several challenges. The lack of policy coordination between SEZ and Lao PDR's provincial and central government creates numerous difficulties for the SEZ. Connectivity is an issue as the only airport, Savannakhet, is very small, serves only a few flights per week, and cannot serve large planes due to its short runway. The other challenges related to waste and wastewater treatment systems that exist only in one of four sub-zones, and shortage of skilled labour and engineers. |
163 Lipsey, R.E. (2002), Home and host country effects of FDI, NBER Working Paper No. 9293, Cambridge, Mass.: National Bureau of Economic Research.
164 Baldwin, R. (2013). Global supply chains: Why they emerged, why they matter, and where they are going, in Deborah, K.E. and Patrick, L. (eds.), Global Value Chains in a Changing World. Switzerland: Fung Global Institute, Nanyang Technological University, and World Trade Organization Secretariat.
165 UNCTAD, 2019. World Investment Report 2019: Special Economic Zones. New York and Geneva: United Nations.
166 Aggarwal, A. (2012a). Social and economic impact of SEZs in India. OUP Catalogue. New Delhi: Oxford University Press.
167 Frick, S.A., Rodríguez-Pose, A. and Wong, M. D. (2018). Towards economically dynamic Special Economic Zones in emerging countries. Journal of Economic Geography, 95(1), 30-64.
168 Farole, T. (2011). Special Economic Zones in Africa: Comparing Performance and Learning from Global Experiences. Washington, DC: World Bank Publications.
169 FIAS (2008) Special Economic Zones: Performance, Lessons Learned, and Implications for Zone Development. The World Bank, Washington DC, E3.
170 Ibid.
171 UNESCAP 2017, Handbook on Policies, Promotion and Facilitation of Foreign Direct Investment for Sustainable Development in the Asia and the Pacific.
172 Asian Development Bank. The Role of Special Economic Zones in Improving Effectiveness of GMS Economic Corridors . Mandaluyong City, Philippines: Asian Development Bank, 2016.
173 Asian Development Bank. The Role of Special Economic Zones in Improving Effectiveness of GMS Economic Corridors . Mandaluyong City, Philippines: Asian Development Bank, 2016.
174 Lord, Montague. 2012. An Evaluation of Support to Lao PDR’s Special Economic Zones (SEZs). Report presented to ADB, Manila.
175 OECD 2018, Integrating Southeast Asian SMEs in Global Value Chains Enabling Linkages with Foreign Investors.
