China's Special Economic Zones

Source: adapted from World Bank (2009) World Development Report 2009: Reshaping Economic Geography.

China's Special Economic Zones

Special economic zones (SEZ) played an instrumental role in the integration of China to the global economy and in its economic development. Their setting aims at attracting foreign investment and technology, many through the setting of joint ventures, provide employment, utilize Chinese and imported resources, and support capital formation. The bulk of the output is to be exported to foreign markets, underlining that SEZ are part of an export oriented strategy that has characterized many Asian economies since World War II (Japan being the first to develop the strategy). The following incentives are offered to foreign investors:

Labor. The ability to use the Chinese vast pool of low cost labor was a powerful incentive to locate in SEZs. Foreign firms have also the right to hire and fire labor, which was different from the then prevailing Chinese lifetime system of public or collective firms.
Land use. SEZs were physically developed as planned entities with infrastructures and access to a container port complex so that parts and raw material could easily be brought in for processing and shipped to foreign markets. A degree of protection of private property is also significant since until 2004, there was no constitutional protection of private property outside SEZs.
Tax incentives. SEZs offered reduced corporate income tax rate, including income tax exemptions for foreign nationals working in SEZs. No custom duties are levied on imported materials and parts as long as they are for re-exports.

The development of SEZ went through several stages which were linked with the setting and expansion of major container port infrastructure:

In 1980, the first four SEZs were established in proximity to Hong Kong (Shenzhen), Macau (Zhuhai) and Taiwan (Shantou and Xiamen). Their location was aimed at attracting "overseas" Chinese capital and also as a showcase for the potential impacts of such a reform, which was dramatically different from the centrally planned policies that have taken place since the setting of the People's Republic of China in 1949. These SEZs were also close to Hong Kong, the only modern port facility of the time, which had effective access to the global shipping network.
By 1984, the SEZ model was judged to be successful and could be expanded. The initial setting of the four SEZs was solely concerning southern China, so 14 coastal port cities, from the Dalian to Beihai, were selected to become SEZs. This triggered the development of modern port infrastructures, particularly container ports, which were essential to support an export-oriented strategy.
The importance of specific economic clusters was acknowledged in 1985 when the status of SEZ was expanded to the Yangtze River Delta, the Pearl River Delta, and the Xiamen-Zhangzhou-Quanzhou Triangle (Min River delta). This also provided additional space for the setting of industrial districts. In time, the Pearl River Delta would become the world's most important manufacturing cluster. The development of manufacturing clusters was also accompanied by the development of port terminal clusters.
In 1988, the status of SEZ was expanded to Hainan Province which mostly developed the touristic and agribusiness sector.
Since their inception, SEZs and their positive economic impacts were solely a coastal endeavor with interior provinces lagging behind. By the late 1980s, a substantial migration of labor from interior to coastal provinces was beginning to be observed. In an attempt to counterbalance this trend, six Yangtze River ports and 11 border cities were granted the SEZ status, in addition to all the capital cities of interior provinces and autonomous regions. Yet, accessibility to port infrastructures and foreign markets remained the dominant factor in the dynamism of SEZs.

China's geography of production is therefore strongly coordinated by its proximity to coastal areas and their capabilities to access global markets through port and airport terminals.