Article by Morten Johansen, courtesy of Forbes
Often overlooked by trendspotters chasing the big business angle of the moment, special economic zones (SEZs) have long been cornerstones of international trade. Also known as free trade zones (FTZs) or industrial parks, these government-backed geographic areas are designed to attract investment and spark economic growth through fiscal and regulatory incentives.
I find these zones to be masterclasses in business simplicity, designed to cut through bureaucratic red tape and smooth administrative processes. They provide world-class infrastructure support, which includes everything from reduced corporate tax rates and streamlined land access to exemptions on import and export duties, expedited customs processes and more flexible labor laws. Strategically positioned near key transportation hubs like ports, airports and major highways, they make it easier to move goods.
Given how they can simplify operations and amplify profitability, I believe SEZs merit closer examination by any entrepreneur, investor or executive looking to capitalize on growth opportunities.
The Role Of Special Economic Zones In Attracting Investment
When most people think of SEZs, they tend to think of the Jebel Ali Free Zone (JAFZA) in Dubai, United Arab Emirates. The largest SEZ in the world, JAFZA is home to more than 10,700 companies from over 100 countries. JAFZA helped diversify the UAE economy away from oil, turning it into a major logistics, trade and financial hub. Businesses registered in JAFZA generated $168.6 billion in trade value in 2023.
Shenzhen, China, is another example of how SEZs can revitalize a global economy. Shenzhen was a small fishing village before becoming China’s first SEZ in 1980. Today, Shenzhen is a global tech hub, home to companies like Huawei, Tencent and BYD, with $430 billion in import and export value.
In 2022, the United Nations Conference on Trade and Development (UNCTAD) recognized SEZs’ strategic importance by launching a global alliance to modernize these zones and maximize their contribution to the sustainable development goals (SDGs). UNCTAD Secretary-General Rebeca Grynspan specifically noted the “opportunity for special economic zones to attract investment by putting SDGs at the forefront of their value proposition.”
Connecting The Americas And Beyond
In the Americas, I see SEZs playing an increasingly strategic role as companies reconfigure their operational frameworks to include nearshoring—a strategy propelled by the necessity to mitigate global supply chain disruptions and bolster economic resilience across the region. By relocating production and other critical business operations closer to U.S. markets, American companies can not only reduce risk but respond more swiftly to market shifts.
In a striking endorsement of this trend, the Inter-American Development Bank in 2022 projected that nearshoring could boost annual exports by $78 billion across Latin America and the Caribbean in the near to medium term. Furthermore, A3, North America’s largest automation trade association, named nearshoring as a top factory automation trend of 2024.
The Caribbean: A Rising Hub
Within the Americas, I see the Caribbean quickly emerging as a dynamic hub for SEZs. Strategically located at the crossroads of the Americas, the Caribbean islands are positioned as ideal hubs for trade between North America, South America and Europe.
A combination of strategic location, supportive government policies, investment in infrastructure and a focus on sustainable and innovative industries is helping to reshape the economic landscape of the region, making it a significant player in the global SEZ arena.
This is clearly observable in the Dominican Republic. With the largest economy in the Caribbean and as a leading recipient of foreign direct investment (FDI) in the region, the Caribbean hosts more than 700 companies from around the world with around 79 different free trade zones (FTZs). These companies benefit from 100% foreign ownership, total repatriation of profits and exemptions from many local taxes and customs duties.
Unlocking Business Potential
As the world leans towards nearshoring to bolster global supply chain resilience, how can businesses start to engage with SEZs? Here are some key steps for evaluating these opportunities and addressing potential challenges:
• Understand SEZ incentives and benefits. Businesses considering SEZs must understand the range of incentives offered, such as tax breaks, reduced customs duties and streamlined regulatory processes. Engaging early with local SEZ authorities can uncover specific advantages.
• Evaluate location suitability. Conduct a detailed analysis of the SEZ’s location, including its proximity to raw materials, suppliers, target markets and transportation infrastructure like ports, airports and railways. Ensure that the SEZ aligns with your supply chain and operational needs to capitalize on logistical efficiencies.
• Assess regulatory and compliance frameworks. While SEZs are designed to ease regulatory burdens, businesses must still perform due diligence on compliance and operational requirements. I recommend that you engage legal counsel or consultants familiar with the specific SEZ regulations to avoid compliance missteps.
• Engage with local partners and ecosystems. SEZs often feature well-developed ecosystems, including suppliers, logistics providers and specialized service companies. Businesses should invest time in developing these partnerships to streamline operations and foster long-term success.
• Perform a risk assessment. Businesses must be mindful of potential risks such as political instability, fluctuating government policies and delays in infrastructure development. Conduct a thorough risk assessment, considering political, economic and operational factors.
• Consider workforce availability. Another key element to consider is workforce availability, including education and skill levels. Evaluate the local labor market to ensure a sufficient pool of skilled and semi-skilled workers aligned with your operational needs. Assess the region’s capacity for ongoing workforce development and training opportunities to maintain long-term productivity.
By following a structured evaluation process and addressing potential risks upfront, I believe companies can unlock the full potential of SEZs while mitigating common challenges. For those organizations seeking to boost the resilience of their supply chains, shift manufacturing and reduce emissions, investigating opportunities to leverage SEZs can be a component of a larger strategy.
