The economic benefits of special economic zones (SEZs) in Asia continue to be as varied as their sizes. SEZs, which are designated geographic regions that possess special economic regulations (such as tax incentives that are absent from the rest of the country), have evolved from their traditional enclave-like character, to newer and larger mega-SEZs. While city-states such as Hong Kong and Singapore function as one large free-trade zone (FTZ), China has designated five separate cities as SEZs, including Shenzhen, Xiamen, Shantou and Zhuhai. Moreover, to leverage the highly connected coastal cities along its eastern and southern seaboard, China has also created 14 coastal development areas in order to market itself as an accessible transportation hub for goods.

Indonesia has taken a different approach, creating FTZs in the Riau Islands of Batam, Bintan and Karimun. Moreover, in early 2014 the Indonesian government announced its plans to develop three new SEZs in Morotai, in North Maluku; Tanjung Api-Api in South Sumatra; and Mandalika in West Nusa Tenggara.

In contrast, Malaysia moved to designate three economic corridors, including the East Coast Economic Region; Iskandar Malaysia in Johor; and the Northern Corridor Economic Region. While some countries have had a long history of SEZ development – India hosts 564 formally approved SEZs and 192 operational SEZs; Bangladesh has nine economic processing zones (EPZs), and Cambodia and the Philippines each have 11 SEZs – there are countries in the region that have not followed this route of FDI attraction. Brunei, Japan and Mongolia have no SEZ as yet.

Although the Asian Development Bank reported that SEZs have produced significant benefits, including rapid employment growth, increased exports and improved skills and technology transfer for the host country, their performance is varied. While the supply of FTZs has exceeded market demand, public sector failures, including uncompetitive policies, a lack of integrated development procedures and inadequate institutional infrastructure, remain top challenges.

Yet, as it becomes increasingly apparent that the most profitable locations for SEZs in Asia are in the immediate hinterlands of global gateways – since they provide the largest market for skilled labour, are well connected nationally and internationally, and offer the cheapest search costs – newly developed SEZs are paying heed to these nuances. In 2013, Taiwan set up an SEZ in Kaohsiung, which in March 2014, Japan announced it was pursuing economic reforms by setting up six SEZs. Increased regional economic integration poses added opportunities to SEZ developers and good governance will continually be needed to ensure SEZs continue to meet countries’ expectations. 

Lawrence Yeo is CEO and principal consultant of AsiaBIZ Strategy, a Singapore-based management consulting firm providing Asia market research, business strategy development and export/FDI promotion services.