Industrial Free Economic Zones — an overview for investors

Free economic zones (FEZs) are created to develop industrial production in the country and attract foreign investment. The creation of free industrial zones helps to accelerate the inclusion of the national economy in world economic relations, as well as to stimulate the development of the country's economy as a whole.

Free economic zones of this type are industrial parks with standard production facilities that are rented out. They create such zones in areas with a favorable economic and geographical position in relation to the most important transport routes, near seaports and international airports, in border areas.

It is necessary to note a certain isolation of the SEZ from the rest of the country. In most cases, they have a special fence. A significant part of raw materials and materials is imported from other countries. Goods imported from the FEZ into the country are subject to customs duties. Enterprises located in such zones have little connection with the national economy.

Among the industrial sectors, the export processing zone is the most widespread.

Export production zones

Export production zones — this is a special type of SEZ, they are usually created in developing countries by their governments to promote industrial and commercial exports.

According to the World Bank, the — this is an industrial area, usually fenced with an area of ​​10 to 300 hectares, which specializes in the production of products for export. It offers firms free trade conditions and a liberal regulatory environment. Its aims are to attract foreign investors and buyers who can facilitate the entry into the world market of some of the industrial goods of the economy, thereby creating jobs and foreign exchange.

In the 60s, two SEZs of this type were created: the Kandla Free Zone in India (1965) and the Kaohsiung Export Production Zone on the island. Taiwan (1967). In the early 80s, there were 70 of them in 40 countries of the world. In 1997, 93 countries created such zones, employing 22.5 million people, and five years later, in 2003, 43 million people were employed in 116 countries. They produce clothes, shoes, sneakers, electronics and toys.

Brazil, Colombia, India, Indonesia, El Salvador, China, Philippines, Malaysia, Bangladesh, Nigeria, Pakistan, Mexico, Dominican Republic, Costa Rica, Honduras, Guatemala, Kenya, Sri Lanka, Mauritius and Madagascar have export zones production.

The main tasks of such zones are:

• increase in foreign exchange earnings,
• export development,
• Job creation

Wholesale trade in goods and other economic activities can also be carried out in such zones.

Free economic zones in Turkiye

Law N0:3218, which authorizes the creation and regulates the activities of free economic zones (FEZ) in Turkiye, was published in 1985 and has been in force since 1987, when the first free economic zones in Turkiye were created — in Mersin and Antalya. In 1990, their number was replenished with the Aegean Free Economic Zone in Izmir and the Istanbul Free Enterprise Zone, covering the area of the airport named after. Ataturk. In 1992, the SEZ was established in Trabzon, in 1993 — in Adana, in 1994-1995. Two FEZs were created in Erzurum and Mardin in eastern Turkiye with the aim of quickly developing these more economically backward regions. According to Wikipedia, there are more than 20 free economic zones in Turkiye.

Turkish free economic zones are designed to maximize the advantages of Turkiye's geographical position, its proximity to the markets of both the countries of the Middle East and the countries of Western and Eastern Europe. At the same time, the focus is on strengthening the export orientation of investment and production in Turkiye by attracting foreign capital and technology, ensuring regular and consistent contributions to the development of the economy, and expanding the use of external sources of financing and international trade opportunities.

The Aegean Free Economic Zone in the suburbs of Izmir (near the international airport and seaport) was established in 1989 at the expense of private companies and is the largest in Turkiye in terms of attracting foreign investment and in terms of the number of jobs created. There are companies from the USA, Germany, France, Canada, Great Britain and other countries. The management of the SEZ is carried out by the American company "Esbas", which is part of the EAC International holding.

More than 350 enterprises operate in the export production zone, the trade turnover is $5 billion a year, and the number of employees is 30 thousand people. The industrial park is dominated by the production of electronics, components for cars and aircraft, equipment for the production and packaging of food products. Large volumes in exports are occupied by trade in textile and leather products.

Free economic zones in Brazil

In Brazil, 25 export production zones have been authorized in 17 states, and 19 of them have been implemented. The Brazilian government created the first export production zones in 1988 in an effort to combat imbalances in the country. The first operational zone is located near the port of Pechem in Ceara. Companies in these zones enjoy tax incentives and ICMS (State Value Added Tax) tax relief. Some Brazilian states offer other regional incentives as well. Companies can also take advantage of the foreign exchange regime supported by the law that created the SEZ and the proximity of customs authorities to offices inside the SEZ.

Free economic zones in India

The development of SEZs in India began in the mid-1960s. Until 2000 they were called export production zones. India was one of the first countries in Asia to recognize the effectiveness of the zone establishment model in promoting exports.

In order to give stability to the functioning of SEZs, the Government of India adopted: the law on special economic zones (SEZ Act, 2005) and the rules for the creation and operation of SEZs (SEZ Rules, 2006), which are fundamental documents regulating their activities.

There are more than 200 free economic zones in the country.

The most famous export production zones in India:

• Kandla Special Economic Zone (KASEZ), Kandla, Gujarat (established in 1965, Kandla Port SEZ is the largest multi-purpose SEZ in the country). Kandla — the first export production zone, covering over 310 hectares, is located just nine kilometers from the port of Kandla.
• Santa Cruz Electronic Export Processing Zone (SEEPZ), S. Cruz, Maharashtra (only for the export of electronics, gems and jewelry)
• Cochin Export Processing Zone (CEPZ), Cochin, Kerala
• Falta Export Processing Zone (FEPZ), Falta, West Bengal
• Madras Export Processing Zone (MEPZ), Madras, Tamil Nadu
• Noida Export Production Zone (NEPZ), Noida, Uttar Pradesh
• Vishakhapatnam Export Processing Zone (VEPZ), Visakhapatnam, Andhra Pradesh

2000 was a year of upheaval for Indian SEZs. The new SEZ program included the transfer of a successful Chinese concept. One of the important achievements of the new FEZ regulation policy is the establishment of clear goals to be followed by Indian special zones:

• creating incremental economic activity;
• promoting and supporting the export of goods and services;
• encouraging foreign and domestic investment;
• creating new jobs;
• infrastructure development;
• ensuring the sovereignty and integrity of India, the security of the states, and maintaining friendly relations with neighboring states.

Exports from FEZ India have steadily increased from 2016 to 2019, from Rs 5.23 million to Rs 7.87 million, representing a whopping 50% increase in just 4 years.

Disadvantages of export production zones

Many economists have concluded that FEZ employment means:

• low wages (wages in FEZs are higher than in rural areas of the same country, especially for women),
• high labor intensity,
• unsafe working conditions (workers work long hours in physically hazardous environments, including excessive noise and heat, unsafe work equipment and unprotected buildings),
• Suppression of labor rights (various restrictions on labor movements adopted by governments include total or partial bans on trade union activity, restrictions on the scope of collective bargaining, and bans on union organizers).

As more and more EPZs are created, there is an incentive to keep costs as low as possible in order to be competitive with other developing countries. This means that workers continue to suffer the consequences of unsafe working conditions.

Features of industrial free economic zones

• The development of transport and means of communication made it possible to place individual stages of production in the most favorable areas for them. As a rule, the initial (primary processing of raw materials, the manufacture of individual parts and assemblies) or the final stages of production (assembly of finished products) are placed in export production zones.
• One of the most important factors in the spread of this type of SEZ in developing countries — availability of cheap, but disciplined and ready for hard work labor force. This meets the needs of many industries — from clothing to electronics.
• The main industries represented in the export production zones are electronics, electrical engineering, clothing and footwear. In such zones, the most labor-intensive stages of production are carried out.
• High mobility of foreign capital leads to high competition between SEZs in developing countries.
• A significant proportion of those employed in SEZs in developing countries are women between the ages of 18 and 24. For example, in Panama, the share of women among those employed in export production zones is 95%, in Guatemala and Nicaragua — 80%.
• Export production zones change the specialization of individual countries and even regions. The development of clothing production in the SEZ has turned the countries of the Caribbean and Central America from "banana republics" in «pajama». Malaysia became the world's largest exporter of electronic components in the late 80s.
• In economically developed countries, industrial free zones are created to increase the competitiveness of national companies and attract foreign companies that produce high-tech products and use "green technologies" (technologies whose production processes are environmentally friendly or less harmful compared to traditional production methods).