Around the world, there are 4,300 special economic zones throughout more than 130 countries: the zones in Asian countries have been quite successful, while on the other hand, those of Africa and some other countries have not performed well so far. Especially, some special economic zones and business hubs in Asian countries such as South Korea, China, Hong Kong and Singapore, as well as Dubai, have been quite successful in terms of innovative and dynamic economic growth. Not all of the zones in the countries were successful: some of those were recognized as so-called “white elephants.” As successful cases received more and more attention, however, there has been a steady increase in the need to learn the secret of success from these cases in terms of policy implications. This paper was designed to fulfill these needs, and especially to be a fine policy guide book for developing countries which will introduce special economic zones as a way to boost their economies in the near future.

The subject cases of this study include the Masan Free Trade Zone and Incheon Free Economic Zone in Korea, the Shanghai special economic zone in China, Hong Kong, Singapore, and Dubai. In this study, special economic zones are classified into two types, industrial zones and business hubs, analyzing each type’s success factors and policy implications. The examples of successful SEZs in industrial zone-type included the Masan Free Trade Zone and Shanghai special economic zone. These zones are the representative SEZs which have functioned as industry and economy boosters, along with the industrial clusters of the surrounding areas. The examples in business hub-type zones were Singapore, Hong Kong, and Dubai. The Incheon Free Economic Zone in Korea was also considered in the same category, which focuses on switching to a new innovative economy and growing into a business hub for the Northeast Asian region.

In general, the types of special economic zones in a certain country are closely related to the level of its economic development. Most of the industrial zone-type special economic zones have begun in labor-intensive industries, and then shift into a more complex form of SEZ as the income level increases. Especially, the zones gradually evolve into a business hub which covers all the features of a city, such as better circumstances for living, R&D environment, and superior environment for investments. In general, special economic zones based on manufacturing industries, the so-called “1st generation of special economic zones,” have less forward and backward industrial effects through linkages with the domestic economy, and are very dependent on the financial support of the central government. However, in modern times, more and more countries are now introducing new special economic zones in areas which have strong linkages with the domestic economy and relaxed regulation systems. For example, special economic zones in China have functioned well as “test-beds” for new policies and deregulations, as well as for maximized freedom of economic activities. These are the 2nd generation of special economic zones. Global environmental change and the concern about the sustainability of the environment have led to a new type of SEZ, which is a high-ranked and correlated type of SEZ. It can be called the 3rd generation SEZ, which is a convergence of the first and second types of SEZs, pursuing such goals as low carbon, green growth, and eco-industrial parks. As such, regardless of the generation of the special economic zones, the success of special economic zones is highly dependent on a certain country’s economic circumstances and comparative advantages. Based on this precondition, the long-term development plan of the country, commercial feasibility, target markets, accessibility of SOC, skilled workers and technical innovation ability have become additional success factors.

First, as a part of this study, the Masan Free Trade Area (Chapter 2) and Shanghai special economic zone (Chapter 4) were introduced as successful industrial zones. The Masan Free Trade Zone has been rated as one of the most successful examples since it was first designated as an export processing zone in 1971. It has contributed to the advancement of Korea’s export industries in conjunction with neighboring industrial clusters, greatly facilitated by Masan’s superior geographical location. It has also contributed to the dynamic growth of Korean companies through job creation, technology transfer, and technical cooperation between domestic and foreign companies such as Sony and Nokia. Due to its great achievements, the Masan SEZ is considered to be one of the best EPZs (Export Processing Zone) in the world and was chosen as a success model of promoting foreign investment policy for developing countries by the World Economic Processing Zone Association.

In China, the central government has designated a number of special zones since 1980 to carry out economic reform. The purpose of the zones was not only to attract foreign investment zones to boost manufacturing industries, but also to create test-beds of to compare the market economy against the formal socialist planned economy. Shanghai has designated various types of zones depending on each phase of the economic development, and has made steady efforts to make Shanghai the center in terms of economy, finance, trade, logistics and innovative economy through mutual cooperation between the zones. In this study, Economic and Technological Development Zones, Pudong New Area, Export Processing Zones, and the recently designated Free Trade Zone were included as the subjects. The study aims to indicate the roles of special economic zones in the process of transition to a dynamic economic development and innovation in the economy, the success factors, and the problems they face.

Business hub-type special economic zones are bigger than industrial zones, designated in areas where trade and finance, logistics and services activity is very intense. Incheon Free Economic Zone, Hong Kong, Singapore, and Dubai, which aim to be the business hubs of Northeast Asia, serve as a logistics and financial hub as well as the regional headquarters of multinational companies. Business hub-type zones require a substantial period from their development to success. In order to attract multinational companies, a considerable period of time is required to establish confidence in the region’s bright future. Hard infrastructures such as ICT, transport and logistics infrastructure, better training conditions, and living environments that allow residents to enjoy their leisure time are very important. In addition, regulation should be minimized, English should be the official language, and efforts should be made to insure soft infrastructures, such as convenience in administration processes, are well developed.

The representative examples of successful business hubs in Asia would be Singapore and Hong Kong. Singapore has rapidly grown from an underdeveloped country into one of the most affluent countries in the world within a mere 50 years. Since its independence in 1965, it has transformed into one of the most dynamic and innovative economies, and one of the most successful business hubs in the world today. All institutions in Singapore work with the most transparent and advanced systems, and operate training facilities which can foster skilled workers and professionals. In particular, the nation is equipped with the hard and soft infrastructures mentioned above as a precondition of business hubs. With the government’s active support and one-stop services, a business-friendly environment and excellent human resources, it is recognized as one of the most successful business hubs in the world, with its geographical advantages. The fifth chapter of this report provides an analysis of this method of dynamic and innovative economic growth as a business hub. An analysis on Singapore’s economic policies after the 2000s, which have focused on the transition to an innovative economy, is also included in the chapter. Hong Kong is another city located in the most advanced and opened area, which operates as a representative business hub for the Asian region. Chapter 6 of this report indicates how Hong Kong has developed into Asia's business and financial center, and into a dynamic and innovative economy.

Dubai is one of the most dynamic and efficient business hubs in the world thanks to its various geographical advantages, linking Asian and European continents. The success of Dubai was based on huge investment in the infrastructure sector by the Dubai government, which has made Dubai one of the world’s most important trade hubs in a relatively short period. Dubai International Airport is the largest airport in the world, attracting 70 million passengers a year. Air freight has also increased exponentially ─ approximately 250 million tons of logistics passed through Dubai in 2015. The Jebel Ali Free Zone (JAFZ), founded in 1985, has been rated as the most successful free trade area in the world and become a benchmark target due to its success based on global linkages (connectivity) and the supply chain. The JAFZ currently generates approximately 20% of Dubai’s total GDP, and contributes to expanding the manufacturing base and the dynamic growth of Dubai’s economy. Chapter 7 provides a detailed analysis on the JAFZ in conjunction with the success story of Dubai. In particular, the success factors of the JAFZ, its roles in the process of Dubai’s growth into a global logistics hub, and JAFZ’s current challenges and the policy difficulties are discussed.

Finally, the Incheon Free Economic Zone is included as a subject of this study because it is seeking to transition into an innovative economy and attract foreign investors through deregulations, and finally aims to become a Northeast Asian business hub. South Korea designated the Free Economic Zone in 2003 as a measure to shift toward higher value-added industries and strengthen service industries after the Asian financial crisis in 1998. The Free Economic Zone was dedicated to attracting foreign investment by ensuring the maximum level of economic freedom and improving living environments for foreigners. The background of promoting the policy was to become a business hub of Northeast Asia, because Korea can utilize its geopolitical and economic advantages, located between Japan and China. The Incheon Free Economic Zone, introduced in Chapter 3 of this report, has the highest potential for success among the eight free economic zones in South Korea due to its advantageous geographical location. Incheon Free Economic Zone is drawing a huge amount of attention in terms of Korean SEZ policy, and a number of international media have expressed their interest. The Incheon Free Economic Zone is close to Incheon International Airport, which is one of the most competitive airports in the world in terms of service, and is also adjacent to Seoul and other industrial clusters in Korea, as well as to China. Based on this superior infrastructure, service industries and high-tech industries have been fostered intensively. Incheon Free Economic Zone serves as a test bed for the introduction of new technologies, as well as a shelter for leading research institutions for R&D, world-class universities, and a number of international organizations. Despite the achievements so far, many challenges lie ahead for the Incheon Free Economic Zone. This study provides a wide range of policy proposals for the success of the Incheon Free Economic Zone.

Chapter 8 provides the conclusion, drawn from the analysis of the success stories of the six special economic zones, and a summary of key success factors. In conclusion, the success factors of industrial zones and business hubs are each explained, together with the appropriate types of special economic zones for each step of economic growth. In addition, a well-run special economic zone policy enables dynamic and innovative growth, but an inappropriate special economic zone policy leads to a waste of high costs and effort, ending with a “white elephant” situation. The policy implications provided in the conclusion of this study were derived from the case studies in the previous chapters.
 

Preface

Chapter 1. Introduction - Are SEZs and Business Hubs the Best Tools for Development?(Douglas Zhihua ZENG and Hyung-Gon JEONG)

1. Special Economic Zones
2. Business Hubs
3. Structure
4. SEZs and Business Hubs Are Contextualized Policy Tools

Chapter 2. Special Economic Zones as a Tool of Industrial Development: case of Masan FTZ in South Korea (Hyung-Gon JEONG and Jong-Hun PEK)

1. Introduction
2. Export Processing Zone as a Tool of Industrialization: Case of Seven Zones in South Korea
2-1. Background
2-2. Evaluation of the FTZ Policy in South Korea
2-3. The Success Factors of Masan FTZ
2-4. Challenges Regarding Continued Success

Chapter 3. Free Economic Zone as a Tool of Transition to an Innovative Economic Growth: Case of IFEZ in South Korea (Hyung-Gon JEONG and Jong-Hun PEK)

1. Introduction
2. Incheon Free Economic Zone: Its Performances and Future
3. Evaluation of Incheon Free Economic Zone (IFEZ)
3-1. Evaluation of Development
3-2. Evaluation of FDI Attraction
4. Possible Measures for Success of IFEZ
4-1. Improving Competitiveness by Attracting More Domestic Firms
4-2. Consolidation through De-designation
4-3. Strengthening Linkage between SEZ Policy and Overall Industrial Development Policy
5. Key Lessons Learned from Korean Special Economic Zone Policies
5-1. Offering Overarching Development Strategy and Vision for SEZs
5-2. Designation of SEZs Should Be Based on Economic Demand
5-3. Reducing the Overlaps among SEZs
5-4. Establishing an Efficient Governance System
5-5. One-Stop-Shop Service and Customized Support
5-6. Building an Outcome Evaluation and Exit System Appendixes

Chapter 4. Innovation and Structural Transformation: The Case of Shanghai Free Economic Zones and Free Trade Zones (Guangwen MENG and Douglas Zhihua ZENG)

1. Economic Development in Shanghai
1.1 The Rapid Growth of Economy
1.2 Service-oriented Industrial Structure
2. Development of Shanghai Free Economic Zones
2.1 Phase of ETDZs (1984-1990)
2.2 Phase of Comprehensive FEZs (1991-2012)
2.3 Phase of Pilot Free Trade Zones (2013-Present)
3. Successes and Challenges of Shanghai FEZs
3.1 Factors Leading to Success of Shanghai FEZs
3.2 Challenges Faced by Shanghai FEZs in Its Development
4. The Major Lessons Learned

Chapter 5. Invitation Strategy for Cutting Edge Industries through MNCs and Global Talents: The Case of Singapore (Kim Song TAN)

1. Introduction
2. Business Hub for MNCs: 1960s to Late 1990s
3. Business Hub for Global Creative Talents: From Early 2000s to Date
4. The Singapore Experience: Success Factors and Lessons
5. Conclusion
Appendix

Chapter 6. Hong Kong’s Business and Financial Hub Development: Factors, Challenges and Policy Implications (Yan DONG)

1. Introduction
2. Profile of Hong Kong Business and Financial Hub
3. Hong Kong Financial Sector’s Development History
4. Key Factors for Success
4.1 Policy Factors
4.2 Internal Factors
4.3 External Factors
5. Challenges regarding Continued Success
5.1 Regional Challenge from Other Business and Financial Hubs
5.2 Trade Modes Changing and Prevalent of Intra-firm Trade 239
5.3 Industrial Hollowing and Comparatively Slow Economic Growth
5.4 Economic Independence
6. Key Lessons Learned
6.1 Innovation and Industry Promotion Polices are Important
6.2 Free Market Environment Invigorates the Economy
6.3 Sound Legal System and Effective Regulation Policies Should Be Adopted
6.4 Fair Competition are Embodied in Economic Policies
6.5 Skilled labor and Talented Professionals are Crucial to Industry Development
6.6 Improving the Autonomy of the Economy
7. Policy Implications
7.1 Foster an Innovation-led Growth Mechanism
7.2 Further Optimize Free Market Economic Environment
7.3 Promote Manufacturing Sector Development
7.4 Construct a Politically Stable Society
7.5 Strengthen Economic Relations with Mainland China
7.6 Provide Better Physical Infrastructure
7.7 Harmonizing the Relation between Hong Kong, Shanghai and Beijing

Chapter 7. Building a Successful Logistics and Production Hub: The Case of Dubai with Special Reference to the Jebel Ali Free Zone (Sherif MUHTASEB)

1. Introduction
2. Profile of Dubai and the JAFZ
3. Background and History of Zones in Dubai
4. Key Factors for Success
5. Challenges for Continued Success
6. Key Lessons
7. Policy Implications

Chapter 8. Policy Implications of SEZ and Business Hub Development in Asia (Douglas Zhihua ZENG and Hyung-Gon JEONG)

1. Key Elements of a Holistic Approach
2. A Sound Legal and Institutional Framework
3. An Attractive Business Environment
4. Careful Planning, Design, and Operations
5. Persistent Skills Training
6. Constant Technology Learning, Innovation, and Industrial Upgrading
7. Strategic Location and Strong Connectivity
8. Linkages With Local Economy
9. A Good Balance Between Industrial Development and Social/Urban Development
10. A Monitoring, Evaluation, and Exit System
11. Some Factors Specific to SEZs or Business Hubs
12. Conclusion
References

Executive Summary