Special Economic Zones:

Pune, Maharashtra, India. (Image: onkar

gotale via Unsplash)

Boon or bane for emerging

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

Newsletter By Holger Görg and Alina Mulyukova

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To enable firms to participate in the globalization process, governments in emerging

Subscribe 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
trade 1.

Motivated by the success of SEZs in China 2, India’s government announced the

Special Economic Zones (SEZs) are
launch of the “SEZs Act” in 2005. The Act promotes the establishment of SEZs in the geographically delineated areas
private sector by providing for high-quality infrastructure, attractive fiscal incentives within which governments promote
and minimum regulation. The main objectives of establishing SEZs are (i) generating industrial activity.
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.
As of 2020, 262 out of 354
registered SEZs in India were SEZs are clustered in districts around the coast and are predominantly located in the

operational. 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.

List of registered SEZs in India - by district

Source: List of registered SEZs set up under the 2005 SEZs Act, Ministry of Commerce and
Industry, Department of Commerce.

India's country profile IAP Do domestic firms benefit from SEZs?

Discover how manufacturing production is
performing in India and which industries
In our study 3, we examined the impact of SEZs on Indian firms’ productivity growth
have a competitive edge in the country.
and other performance measures. We distinguished between two types of firms,
Country Profile IAP
namely those located inside an SEZ and those located in the vicinity of an SEZ. This
allowed us to differentiate between direct effects on ‘insider’ firms and spillover
effects on ’outsider’ firms. Using geocoded data and information on the total land
area of the SEZs, we created spatial rings of different radiuses around the SEZ
centres (Figure 2). The SEZs’ original size is the smallest of the circles which is called
ring inside. It is created using information on the land area of SEZ. The radius of each
outer ring is increased by five kilometres to create the following distance bands: (i)
inside the ring; (ii) 0–5km; (iii) 5–10km, and (iv) 10–15km. To evaluate the impact of
SEZs on firms, we compared the performance of firms before and after the
introduction of the SEZ programme in 2005 relative to a control group of similar firms
located at a distance of at least 40km from an SEZ (for details on constructing a
comparable control group, see the original study).

SEZ distance bands (in km)

Source: Prowess database and the List of Notified SEZs set up under 2005 SEZs Act, Ministry of
Commerce and Industry, Department of Commerce.

Our results reveal that the establishment of SEZs decreased the productivity growth
The establishment of SEZs
of firms located inside the zones by an average of 15.4 per cent. This result is decreased the productivity growth
primarily driven by relatively more productive firms, while less productive firms did of firms located inside the zones by
not register any significant changes. Domestic firms, large firms, manufacturing firms an average of 15.4 per cent.
and importing firms are those most adversely affected by the programme. We did not
find any evidence of spillover effects.

We also found that hi-tech SEZs are relatively more productive compared to SEZs
specializing in other industries. Moreover, we show that the presence of state-owned
industrial development corporations as mediators for the development of an SEZ
leads to only low productivity gains in practice.

There is, however, evidence of strong positive productivity growth increase for
SEZs may be beneficial if they form
a cluster and accumulate in one relatively large, i.e. above mean area, SEZs. This result may indicate the potential

specific region rather than across benefits of SEZs if they form a cluster and accumulate in one specific region rather
the country. than being spread out across the country.

Differences between SEZs in China and in India

What explains the stark differences between the effects of SEZs on Indian and
Chinese firms? First, initial waves of Chinese SEZs targeted coastal regions with easy
access to ports and transportation networks, whereas in India, no restrictions on the
geographic location of SEZs have been imposed. Second, unlike China’s SEZs which
are large open territories covering entire cities and spanning over hundreds of
thousands of hectares, SEZs in India are fenced-in zones, the smallest being 1
hectare. Third, in India, firms submit an application to establish an SEZ, which are
reviewed by the state and local governments and have to be approved by the Board
of Approval. By contrast, in China, the government assigns a given area SEZ status,
which attracts foreign and domestic firms due to preferential fiscal regulations.

Another likely reason for the differences in impact of SEZs on Indian and Chinese
firms may be the relatively small size of India’s SEZs. The Indian SEZ programme
allows private firms to develop an SEZ, i.e. SEZ status can even be assigned to a
single firm in India, whereas in China, the government is responsible for assigning
SEZ status and assigns such status to a specific area. Furthermore, the strategic
targeting of place-based policies in China has clearly been advantageous for firms,
while SEZs in India have been established in different areas across the country.

Holger Görg is Professor of International Economics at the University of Kiel and Head of the
Research Area “Global Division of Labour” at the Kiel Institute for the World Economy. He is also
Director of the Kiel Centre for Globalization (KCG).

Alina Mulyukova is Doctoral Researcher at the Kiel Institute for the World Economy and the Kiel
Centre for Globalization (KCG).

Disclaimer: The views expressed in this article are those of the authors based on their
experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

References

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