Free zones are, without a doubt, the most powerful FDI attraction mechanism, and they offer an increase in competitiveness for goods and services companies for international markets. But, to be successful, a free zone must be carefully designed from the beginning. There are six factors to consider when designing a free zone.
First, once the vocation of a free zone is defined, a country must understand which are its five main trade competitors to design incentives that exceed those given by its competitors.
Second, a free zone must also determine its value proposition to have a cost advantage that can attract investors in greater numbers than any other location. The value proposition must consider the following factors:
Costs: in addition to fiscal incentives, free zones must aim to have the lowest costs in the market (property and admin costs, labour, etc).
Labour force availability and training: for free zones specialising in services or labour-intensive goods, the availability of a trained labour force is a decisive factor for investors. Some of the best free zones in the world also provide health services, psychological support and training programmes.
Location: the great mantra for a free zone is 'location, location, location'. But a great location depends on its purpose. If it is a service-oriented free zone, it should be located near employee training centres or neighbourhoods where trained professionals live; if logistics-oriented, it should be near ports or airports; and if it is industry-oriented, it should be near raw material suppliers.
Third, to promote the international competitiveness of its users, free zones should have world-class infrastructure. Nowadays, the design of a product is as important as its functionality. The same applies to free zones: they should be modern, with a low density, have beautiful gardens, and be as close to paradise as possible to be appealing to potential investors and employees. Moreover, they should at least have wide streets with pavements, reliable power supplies, and they must have an internal security system.
Fourth, the best free zones in the world respect the environment, so they should aim at creating sustainable procedures. For example, some free zones own sewage and solid waste treatment plants to treat and reuse water and solids, turning them into zero-waste zones.
Fifth, free zones must be the safest places for trade in the world. All free zones must have security protocols to prevent and stop illicit trade practices, counterfeits and intellectual property infringement without this becoming an obstacle to trade facilitation.
Finally – the most important factor for potential investors – is the certainty that the legal conditions and incentives under which the investment is performed will not change. Therefore, a successful free zone must have legal stability and clear rules.
Only a free zone that has clearly defined its purpose, and whose benefits and incentives exceed those of its competitors, will attract the best investments.
Martín Ibarra Pardo is the chairman of Araújo Ibarra & Asociados, a law firm based in Bogotá. He also serves as vice-president of the World Free Zones Organization.