Ever since China established its first economic zones in the early 1980s, areas free from the usual fiscal and regulatory constraints of traditional economies have become more and more popular. In short, their development as a tool of industrial policy to attract foreign direct investment (FDI) and stimulate economic growth has flourished.
Their popularity is also rising; from just a couple of hundred in the 1980s, the UN Conference on Trade and Development (UNCTAD) estimates that the world now has more than 5,000 economic zones and 80 different ways to describe them, although they are most commonly known as either free zones, special economic zones, free-trade zones, export processing zones or free economic zones.
According to the OECD, economic zones are responsible for exports worth about US$3.5 trillion a year, equivalent to around 20% of the global trade in goods. Whilst many countries have set up economic or free zones, China has been the most successful in using them to attract foreign capital.
What do free zones mean for Dubai, the UAE & GCC?
The Dubai Free Zones Council (DFZC) has forecast that free zones’ contribution to GDP is likely to hit nearly US$70 billion by 2030. There are around 40 free zones in the UAE, with Dubai alone hosting 25 of them. Indeed, the GCC has been a notable growth area, with the UAE leading the charge and KSA hot on their heels with recent announcements. Moreover, whether they cover manufacturing, or trade in goods and services, what is common to their success is that they all enjoy partial or total relief from local prevailing taxes, duties, fees, or regulatory requirements.
GCC economies are under pressure to create new employment opportunities for growing populations whilst moving away from a historical reliance on oil revenues. All GCC countries are looking to diversify their economies; both Abu Dhabi’s 2030 Vision and Kuwait’s National Development Plan 2035 are looking to create modernised and resilient national infrastructures to deliver the economic changes they’re looking for. On the other hand, Dubai’s Industrial Strategy 2030 aims to create a global platform for ‘knowledge-based, sustainable and innovation-focused businesses’, whilst Qatar’s National Vision 2030 sees investment in a modern infrastructure as key to expanding a diversified economy of industry and services.
In KSA, the National Industrial Development and Logistics Program (NIDLP) focuses on industry, mining, energy, and logistics to transform it into an industrial powerhouse and logistics hub.
The need to attract foreign investment to these regional economic transformations means that economic zones or free zones will play a big part in their strategic plans; new free zones will give future investors friction-free access to local and regional markets as well as modern and reliable infrastructures and necessary facilities.
What features have made economic zones successful?
1. Sector-specific free zones: In economic zones where the zone authority offers sector-only participation, as opposed to multi-disciplinary general-purpose zones, the full developmental potential of companies in these free zones is enabled by promoting sector-specific clusters, as well as connections to the mainland economy. According to the UN’s World Investment Report, companies operating in free zones benefit from network effects and economies of scale. In short, zone specialisation – whether in media, finance, health, tech, or sustainability – helps to promote clustering. Companies in the same or adjacent industries are more likely to collaborate and pool knowledge, resources, and facilities than those in generalist free zones operating in unconnected industries.
The UAE hosts a number of industry-specific free zones, from industrial, manufacturing and automotive zones to tech entrepreneurship, health, digital and financial services free zones, aligning with a world-wide trend. However, a World Free Zones Organization (WFZO) survey also shows that only 12% of economic zones worldwide specialise in a specific sector – financial services, healthcare, IT or high-tech sectors. Among those economic zones, Dubai’s own Dubai Silicon Oasis (DSO) is a noteworthy example of a successful technology-focused free zone specifically catering to tech entrepreneurs, home to more than 1,000 tech companies.
In the UAE, the results of sector-specific zones speak for themselves; Dubai’s specialised free zones helped attract record levels of FDI in 2021, ranking first globally in greenfield FDI projects worth more than US$20 billion.
KSA has announced its intention to launch a number of new sector-specific free zones. These will form part of its efforts to attract foreign investment to drive what it describes as qualitative growth, a feature that will see the emergence of specialist areas such as cloud computing and renewable energy. This signals a strategic plan to concentrate development, meaning KSA will likely choose very carefully which sectors it selects to underpin its economic diversification and transformation in the future. By doing so, it will be better placed to design the right value proposition for the new zones’ economic success.
2. Zone authority efficiency: Where economic zones around the world are managed well by competent and efficient zone operators, they are effective at offering entrepreneurs support to get through the red tape involved in setting up and running a business, from utilities to visas and permits. In short, independent free-zone authorities in the most successful zones provide a one-stop shop for bureaucracy where English is permitted for nearly all documentation. Many offer on-site immigration and customs clearance facilities; most free zones around the world provide customs clearance within one day, with more than 80% reporting on-site facilities for doing so.
Across the world, the time required to set up business operations in free zones varies widely. In around 20% of free zones that participated in the WFZO’s Business Excellence and Economic Contribution (BEEC) survey, it can take more than 20 days to register a business. In the UAE, incorporation in a zone can be significantly faster than most jurisdictions, at around two weeks.
3. Incentive schemes & regulatory sandpits: One of the most important features of a successful economic zone is the exemption from duties on imported and exported goods. In addition, economic zones offer a wide array of benefits for foreign investors. The majority of free zones offer a 100% exemption for corporate taxes, value-added taxes and duties and around half go even further to incentivise business, giving full personal income tax exemption. In the UAE, for example, companies in free zones do not require UAE shareholders. Dubai Silicon Oasis, along with Dubai’s 24 other free zones also offer 100% foreign ownership for a wider range of businesses, as well as 100% repatriation of profits and capital among many other value-added benefits.
In more than 40% of free zones around the world, investors are supported with special regulatory arrangements. The majority offer some form of protection for investors, whilst around half of economic zones globally offer mechanisms to access credit, and some sort of forum to resolve disputes.
4. Developed infrastructure & ease of access: Successful free zones offer high-quality infrastructure and services to investors, including access to airports and ports. The UAE has seven international airports, with two in Dubai alone. The Dubai International Airport currently serves non-stop flights to more than 200 destinations in over 100 countries.
Across the world, economic zones report an average distance to the nearest port of 170km. Dubai alone has two major shipping ports far closer to free-zone areas, with access to a further four major general cargo and container ports across the UAE.
What trends are emerging?
Attracting FDI will remain the key purpose of future free zone development, but they are more likely to feature new industries in knowledge-based or emerging sectors, such as financial services, high-tech industries, tourism and sustainability, as well as science commercialisation and environmental performance. Incentives are therefore likely to move away from traditional labour-intensive sectors such as manufacturing.
In the future, free zone development is also likely to be characterised by far more international cooperation. According to the WFZO’s BEEC survey, around two-thirds of free zones around the world are government-owned, 20% privately owned, and 15% structured as public-private partnerships. But, according to the UN’s World Investment Report, international cooperation on zone development is becoming more common, featuring support from investor home countries. Developing countries can share development costs with partners, and gain access to their expertise and investor networks. And as the WFZO demonstrates, international cooperation between free zones is already well under way, helping economic zones around the world share expertise, resources and tools to achieve each free zone’s strategic objectives and promote the economic benefits they bring.
What might the emerging free zones look like?
The UN’s 2030 Agenda for Sustainable Development, along with its Sustainability Development Goals (SGDs), arguably provides a blueprint for how future free zones might develop; sustainability is currently a major challenge for governments and business, and according to the World Investment Report, it provides an opportunity to develop new economic zones along the lines of what it calls the ‘SDG model zone’. Such zones, it argues, could serve as FDI hubs for investment in SDG-oriented goals whilst adopting ESG standards and compliance.
The World Investment Report argues that SDG model zones could help redefine what has previously been seen as a ‘race to the bottom’ – free zones with lower taxes and looser regulatory environments – into a ‘race to the top’ for sustainability models. In short, it suggests that new free zones could act as instruments of enforcement for the UN’s SDGs, turning what it calls ‘privileged enclaves’ into something that could in theory promote widespread benefits.
A key driver of economic diversification for the future
Whether the World Investment Report’s assessment turns out to be true or even workable is, to some extent, a moot point; there is currently little data available globally to demonstrate how free zones with extra layers of regulatory obligations might act as engines for economic diversification in the way that they have so far in existing regulatory sandpits.
Free zones around the world have succeeded in driving FDI into their economies, resulting in increased employment as well as spillover into the wider economy as a result of specialised economic clusters.
In the UAE alone, free zones are responsible for over 50% of non-oil exports. In order to continue to transform local and regional economies away from the oil sector, they have an important part to play in stimulating and sustaining the inflow of friction-free investment into private enterprise in order to help drive entrepreneurship and achieve diversification.
Without the facilities to attract FDI, it may prove hard to achieve the region’s strategic plans to gradually reduce economic dependence on oil and provide the necessary employment to support a growing local population.