3.2C: Special Economic Zones and Attitudes to FDI

• Attitudes to FDI

  • During the period of decolonisation in the 1950s, 1960s and 1970s, many newly independent countries rejected international trade as exploitative.
  • However, Singapore, Taiwan, South Korea, Hong Kong chose export led growth and experienced much faster economic growth than countries following import substitution, and became known as 'Asian Tiger economies'.
  • By the 1980s, most countries had changed their attitudes towards FDI and globalisation and instead viewed FDI as positive - creating new (better paying) jobs with reliable wages and better working conditions.
• Subsidies

  • Subsidies are payments by the government to a company to promote a particular activity.
  • Governments may provide subsidies to attract FDI, e.g. a subsidy to cover relocation costs, payment per worker employed &c.
  • WTO usually prohibits subsidies to domestic firms as this acts as a trade barrier - the government payment allows a firm to accept a lower market price, undercutting the price of imports.
  • WTO may accept a subsidy for FDI, e.g. in SEZs, as this promotes trade.
• Special Economic Zones (SEZs)

  • Special economic zones are enclaves where investors receive special tax, tariff and regulatory incentives.
  • About 50 million people in more than 100 countries work in such locations.
  • SEZs are used by some countries to attract FDI, spreading globalisation to new regions.
  • Successful SEZs need good infrastructure, close proximity to trade routes or emerging markets, minimum bureaucracy and rule of law (contract security, minimal corruption, freedom from crime and violence.)
• SEZs attract FDI for a number of reasons:

  • They are tariff and quota free, allowing manufactured goods to be exported at no cost.
  • Unions are usually banned, so workers cannot neither strike nor complain.
  • Infrastructure such as port facilities, roads, power and water connections are provided by the government, providing a subsidy for investors and lowering their cost.
  • All profits made can be sent to the company HQ overseas.
  • Taxes are usually very low, and often there is a tax-free period of up to 10 years, after a business invests.
  • Environmental regulations are usually limited.
• China's 1978 Open Door Policy

  • Mao Zedong isolated China from the global economy.
  • Deng Xiaoping's 'Open Door Policy' in 1978 initiated economic reforms.
  • Special Economic Zones (SEZs) attracted FDI, including Shenzhen in 1980.
  • Exports increased from $2 billion in 1980 to $200 billion in 2000.
  • China joined WTO in 2001, reducing export tariffs.
  • China received $60 billion in FDI annually by 2006.
  • Achieved 10% annual economic growth in the 1990s, lifting 400 million from poverty.
  • China's sovereign wealth fund and TNCs became major sources of FDI.