The free zone model worldwide has arrived at a critical moment. The interest of governments and development blocs in promoting regional free trade is booming, countries with single product or otherwise undiversified economies are looking for alternative routes to growth, and international companies are looking to maximise their geographic and logistical advantages to access new markets.
In the face of volatility in petrochemicals and other commodities markets, models that will produce value chains for raw materials, provide sustainable employment, and integrate countries with regional and transregional trade partners are more attractive than ever. Development communities from Europe to Africa to the Americas are negotiating free trade agreements at an unprecedented rate. Yet domestic political considerations, geopolitical factors, and infrastructure obstacles may make for slow liberalisation in real terms. Free zones are thus potentially an important liberalising frontier, allowing governments and private sector actors to create better conditions for international investors without applying wholesale reforms at a national level.
Diverse and dynamic zones: We use the term “free zone” to encompass free trade zones (FTZs), free economic zones (FEZs), free trade-industrial zones (FTIZs), special economic zones (SEZs), export-processing zones (EPZs), freeports, industrial parks and cities, creative cities, and any other such clearly-defined areas which aim to facilitate business development by liberalising elements of customs regimes, labour, and trade policy.
The free zone model has been grown and developed over more than half a century, manifesting in diverse forms, from the large industrial SEZ aimed at fast-tracking light and heavy industries’ export growth, to the creative city or logistics park building the presence of dynamic high-end sectors in transitioning countries. The aims of free zones, broadly speaking, are to
- boost a country’s regional trade competitiveness
- encourage foreign direct investment, foreign capitalisation, joint ventures, and public-private partnerships
- created backward linkages with local industry
- raise a particular sector to global standards
- increase exports and produce new value chains
- create local employment opportunities
- develop a highly-trained, globally competitive labour force
- facilitate technology transfer to a sector of desired growth
Each free zone offers international investors a unique cocktail of geography, hard and soft incentives, services, logistics, and supply chain integration. Beyond that, there is the macroeconomic environment, political stability, and level of support for free zones in the host country. These are the primary parameters investors need to assess when choosing to set up in a free zone. Rental costs for offices and industrial spaces, ease of setup and incorporation, and banking also weigh heavily. More broadly speaking, the outlook and dynamism of the free zone’s leadership (whether public, private, or jointly operated), and the business community and perception of an open, collegial environment, play an important role in successfully courting investors.
Taking the next step: Though it is easy to point to examples of hugely successful free zones, from China to Dubai to the Dominican Republic, many zones face hurdles in attracting foreign investment and raising trade volumes. Countries which have approved free zone regimes have sometimes found the programmes difficult to implement, or have lost interest after an initial period of development. The reasons for such setbacks are manifold: disagreement between governments and free zone operators over the extent of the application of existing customs policy to the zones; changing political administrations de-prioritising free zones; and a deficit in coordinated strategies to market free zones to potential investors over the long term.
Multimedia, in-depth content marketing, social media outreach, and regular updates on new and existing opportunities, are underutilised or nonexistent in many free zones’ planning. Such tools are a conduit for the attraction of well-informed, timely investment, helping all free zones, from fledglings to established successes, reach out to high-quality foreign investors, and vice versa.
Free zone operators, users, and organisations are further presented with the challenge of evolving in the realm of information sharing, implementing international ethical and environmental guidelines, and developing universal standards of best practices.
We can realistically expect to see growth in the utilisation of free zones in the coming years, with major economies like China adding more zones, and developing and transitioning countries around the world launching programmes and working with foreign investors to develop new areas. The key going forward will be adapting these zones to the changing currents of the global economy, and utilising the best available means to attract sustainable, well-matched investment.