SEZs & Opportunity Zones for Direct-To-Consumer & Small Businesses
Are SEZs (Special Economic Zones) & Opportunity Zones the proverbial “light at the end of the tunnel”?
It seems we had to go through the darkness of COVID-19 to re-discover old opportunities right in front of us.
The coronavirus, besides the health crisis, will create a massive restructuring of the global economy.
It other words,
In the future, the Coronavirus will impact how we live, how we work, and how we use technology. The population will experience uncertainty and financial stress.
A New Contactless World
The online world of contactless commerce. will change in ways never before imagined. Consumer behavior will forever get disrupted.
The aftermath of the pandemic will provide an opportunity to change business behaviors. These are ranging from employees working remotely from home to running entire companies online.
Displaced business owners in the service industry will face immense challenges. They now have to take their companies online and digitize many of their services.
Unemployed people will look for ways to build assets that produce income. They will search for solutions, so they never have to feel so hopeless again.
Institutions will reinvent themselves. Going to low-cost producers, and giving them 100% of their demand will now look very risky.
Paradigm Shift for all Types of Businesses
It will force many industries to redesign their existing supply chain.
Business owners will reassess their entire business system and plan for contingent actions. It will be critical for returning their companies to effective production at pace and scale.
Corporations will stabilize their supply chains by enlisting many suppliers—most of them located in different parts of the world.
There will be a massive paradigm shift. Multinationals will go from the relentless pursuit of efficiency to risk mitigation.
Reshoring & Technology Acceleration
It will give way to the end of supply-chain globalization as we know it now. Production and sourcing will move closer to the end-user.
Technology adoption (e.i. robotics, 3-D printing, Blockchain A.I.) will speed up. It will also tip the balance between offshoring and reshoring.
The result will be the acceleration of reshoring by developed nations. The aim will be to bring manufacturing back to their own country.
In particular, the U.S., Japan, and Europe will increase their reshoring efforts.
It has been happening already in the U.S., but all signs point to a more aggressive stance. Efforts to bring back American manufacturing jobs lost to China and Mexico will speed up.
It is because reshoring is the fastest and most efficient way to strengthen the U.S. economy.
In other words,
This will help balance the trade and budget deficits and reduce unemployment by creating productive jobs.
Supply chain executives now have to decide how to redesign their product structure. This will help them determine what part to build in each country.
That is due to components having much lower duty rates than finished products. By postponing the final assembly step in the market, they can save on duty fees.
The result: A stronger country. Lower business exposure to shocks and risk. Better productivity. And able to deliver quality products to customers faster.
Less Reliance On Low-Cost Labor
If manufacturing processes are changing, as they are fast evolving with the increase of technology and automation.
Developed nations are reshoring their manufacturing back to their own countries. Fueled by the COVID-19 pandemic.
The manufacturing employment decline in the United States is a big social problem. Mostly due to significant cost differences in labor from foreign countries.
Furthermore, technology and robots are now replacing tasks once only done by humans.
Companies will now become less reliant on low-cost labor. That was, after all, the primary reason most companies offshored to China in the past.
Then, why build more SEZs (Special Economic Zones) across the world?
The Future of Special Economic Zones
With all the reshoring by most developed nations, will they still be useful in the future?
Or will they increase the number of failed Special Economic Zones also known as SEZs?
Building generic market-based Special Economic Zones, as has been done in the past, has proven to be unproductive.
Having Multinational Enterprises (MNEs) of high-income countries be the main participants of such a fantastic wealth creation tool.
And keeping SMEs out of reach has been a recipe for disaster, considering Small & Medium Businesses are aggressively exporting using other platforms.
After all, it is the Multinationals reshoring.
- The disappointing performance and high failure of SEZ lead to questioning their usefulness?
- The problematic access by SMEs to most SEZs, lead to a reassessment of the existing model?
- Use new Special Economic Zones approaches instead?
Special Economic Zones & Their Future Impact on SMEs
Truth be told,
As we will see later, the current fast-evolving world economy is opening (not closing) SEZs opportunities for SMEs.
Not only in the two largest economies (U.S. and China) but also in other high, middle, and low-income countries.
SMEs, who contribute so much to their economies, seldom get anything from these wealth creation tools. After all, Special Economic Zones get mostly used by large MNEs (Multinational Enterprises.)
The question then is: How can both, *SMEs and *D2Cs take advantage of *SEZs? These are, after all, the holy grail of economic development mostly used by powerful *MNEs.
- *SME: Small & Medium Enterprises
- *D2C: Direct-to-Consumer Businesses
- *MNE: Multinational Enterprises
- *SEZ: Special Economic Zones
Below are the topics we will cover in this complete guide to Special Economic Zones (SEZs):
- What Are Special Economic Zones
- Why Are SEZs Important?
- How Are Successful SEZ Structured?
- What Can SEZs Do For Your SME?
- Why Should Your SME Join A SEZ?
- How Do You Get Started?
Now that we have introduced the paradigm shift taking place around the world caused by COVID-19. It is time to learn how Special Economic Zones work.
How Special Economic Zones work
You see, when SEZs get developed, a country intends to increase rapid economic growth.
They do this by leveraging tax incentives to attract investors and technological advancement.
Today, there are over 5,400 Special Economic Zones in approximately 147 countries. More than 1,000 of them established in the past five years.
And at least 500 more zones (about 10% of the current total) are expected to open up in the coming years.
What industries use Special Economic Zones (SEZ)?
SEZs get built around old and new industries. Such as high-tech, financial services, tourism, environmental performance, and science commercialization. They also get built around regional development and urban regeneration projects.
Unfortunately, many of them have not delivered the expected outcomes.
There have been many booming macroeconomic commodity increases around the world. Unfortunately, living standards for most people in these countries have not improved.
To make matters worse,
Millions of young people in developing nations have no prospect of finding employment. Even though there are many SEZs there, the number of poor has not declined. Even in countries that have record high growth rates.
So, why do so many Special Economic Zones (SEZ) fail?
The main reason is that many industries attracted to these zones sometimes defied the Comparative Advantage of the host country. We will discuss Comparative Advantage further down in this post.
To make matters worse,
Many of them had poor design, ineffective management, and misguided policies: the result, a lack of interest from businesses in competitive industries.
According to WTO, the companies that joined these failing SEZs did not create enough backward linkages with local suppliers. Nor did they generate subcontracting relationships with other local enterprises.
Did you read that about Special Economic Zones (SEZ)?
One of the main reasons they failed; is because SMEs did not get included in their SEZs!
But truth be told,
Too often, local businesses had no interest in supplying SEZs-based companies. Many of them simply did not understand the benefits to them.
They failed to meet world market standards for quality, price, and delivery times, which is a must in this formal economy environment. You will hear more about this later.
But, before we continue discussing the pros and cons of SEZs, let us stop for a minute. It is critical that you understand the different types out there.
So, let’s first get the basics down.
SEZ sometimes go by different names. Including Free Economic Zones. Export Processing Zones and Industrial Parks. They also come in many varieties.
It can get confusing. So let us clarify the different Zone types that fall under the SEZ name. Then, once you get the different business models, we will dive into more details.
With that, here are the 17 primary Zone types you need to know in 2020.
Let us cover each one:
1. Free Economic Zones (FEZs):
FEZ are areas created to encourage economic activity. They get designated by the trade and commerce administration of their home country.
There is usually limited or not taxation for participating businesses.
FEZs remain among the fastest-growing parts of the global economy. Today, as automation increases, many are moving towards technology-related industries.
FEZs developments attract investors looking to make 2x to 50x land value gains, which usually gets accomplished through policy reforms.
2. Duty-Free Shopping Zone:
You find them located in the international zones of international airports. They can also get found in seaports and train stations.
These are retail outlets or complexes. They are exempt from paying local or national taxes and duties.
The idea behind them is that the goods sold will get bought by travelers who will take them out of the country.
South Korea Incheon Airport and Dubai Duty-Free have the most duty-free sales.
3. Commercial Free Zones (CFZs):
CFZs are fenced-in, duty-free areas. They offer warehousing and distribution facilities for transshipping and re-export.
Merchandise warehoused in a CFZ may get sold free of duty wholesale or retail.
In contrast with Industrial Free Zones, little product improvement occurs. For example, the Miami Foreign-Trade Zone (USA) and the Colon Free Zone (Panama) are CFZs.
4. Industrial Parks:
Industrial parks often attract a range of assembly and light manufacturing ventures. They may contain oil refineries, ports, warehouses, distribution centers, and factories.
They are a “heavyweight” version of a business park or office park.
A lot of Industrial parks offer extended temporary tax holidays. Used by governments in developing countries to help stimulate foreign investment. These also help compensate for relocation costs.
5. Cluster-Based Industrial Parks (CBIPs):
These are the development of large numbers of individual businesses established as clusters.
These specialized facilities get configured around specific industries and sectors and take advantage of economies of scale.
Also, intra-industry knowledge spillovers, and forward & backward linkages take place. As well as excellent supply chain/ logistics, and other agglomeration effects.
Cluster-Based Industrial Parks are the most effective tool for developing competitive industries. They also help generate employment in low-income countries.
Garment, footwear, motorcycle, and consumer electronics industries successfully use them. These and other labor-intensive sectors were key to the success of China. Other East Asian economies also followed suit.
6. Staple-Crops Processing Zones (SCPZs):
SCPZs are also known as Agro-Processing Zones or Agro-Industrial Parks. Other names used are Agribusiness Parks, Mega Food Parks, Agropoles, and Agro-Clusters.
These are Free Economic Zones that reduce taxes and customs duties. They also ease regulations for the production of agricultural goods.
Most focus on goods for export or re-export and do not always get granted SEZ status.
Their main concentration is on agro-processing activities within areas of high agricultural potential.
Their goal is to boost productivity. SCPZs aims to integrate production, processing, and marketing of selected commodities.
7. InfoServices Park:
An InfoService Park is usually a single building or campus-style Free Economic Zone. They focus on information services.
They cater to international Information and Communications Technology markets. Not manufacturing and logistics.
They may include telecenters, office parks, and data centers. And also enjoy tax and regulatory incentives.
8. Healthcare Zone:
These are areas that offer liberalized healthcare regulations. They provide cheaper, innovative healthcare procedures.
They are usually known for their healthcare tourism. In most cases, their health care system follows international standards.
Because demand for healthcare tourism has increased, this led to an increase in Healthcare Zones. They may include liberalized visas to encourage inflows of qualified healthcare practitioners.
Healthcare Zones offer medical R&D. Also, the approval of innovative treatments.
An example of an established free health care zone is The Free Healthcare Zone in Dubai. Dubai Healthcare City is the first healthcare zone in the world. It was established in 2002 and has been in operation since 2006.
9. Free Banking Zone:
Free Banking Zones are also known as Offshore Banking Units (OBUs). These are areas exempted from traditional banking regulations that apply to domestic banks.
These are usually bank shell branches located in International Financial Centers or Special Economic Zones.
Local monetary authorities and governments limit their restrictions. OBUs are also not allowed to accept domestic deposits. Nor make loans to residents of the country in which they are located.
OBUs can enjoy more flexibility in national regulations.
Investors consider moving money into OBUs because it helps them avoid taxation and keep privacy.
10. Innovative Zone:
Innovative Zones are incubators to fuel life science innovation. Their goal is to promote scientific research and development activities.
They are R&D Research Parks, Technology Parks, or Science Parks. Usually located in Free Economic Zones. They aim to foster economic development and world-class research.
The Leon County Research and Development Authority Innovation Park.
It is the home to the largest magnet laboratory. They are global leaders in high-performance materials, aero-propulsion, oil-less compressors, and energy.
A Board of Governors oversees the facility. They are composed of prominent academic, business, and community leaders who work together. Their goal is to help grow and develop research for high-tech companies.
Pilot Innovation Zones can exist in small facilities linked to networks of scientists and technologies. They can also provide fab labs and maker spaces to create and test inventions.
11. Freeport Zone:
Freeport Zones are areas usually located near airports or ports. They have relaxed jurisdiction of customs regulations. In some instances, they have no customs duties or controls for transshipment.
They can be in large areas or smaller ones. Most freeports range from 400 to 1,000 sq. Km.
They do not target single industries but a full range of productive activities. Many international airports have freeports, although they get called customs areas, customs zones, or international zones.
Some, such as Hong-Kong and Macau, are public companies. Others, such as Freeport Bahamas, are private developments. All get implemented under a national system of incentives.
12. Endowment Zone:
An endowment zone can pay a percentage of its land rents to support environmental causes. These could include education, scholarships, telemedicine, or healthcare.
It is a zone that dedicates a share of its land lease revenues to fund local causes.
A 1% share in the110-acre DIFC free zone located in Dubai, could provide $30 million towards public goods.
13. Foreign-Trade Zones (FTZs):
According to the United States Customs and Border Protection, Foreign-Trade Zones are secure areas. They fall under the U.S. Customs and Border Protection (CBP) supervision. Located in or near CBP ports of entry, they are the international free-trade zone version of the United States.
Foreign Trade Zones are the most successful form of free trade zones in the U.S. They act as territories outside the U.S. Customs.
These are the original Free Economic Zones created in the United States. Secured, designated areas in or near a Customs Port of Entry.
Within the zone, foreign and domestic merchandise fall outside U.S. Customs territory.
As a result, businesses operating in an FTZ can reduce or cut duties on imports altogether.
It encourages foreign commerce within the United States, including manufacturing and shipping.
General-purpose FTZs — a Commercial-Free Zone — can also create subzones.
These Subzones can be individual manufacturing plants. They can also import parts or re-export products on a customs duty-free basis.
They can do so without having to move within a general-purpose Foreign Trade Zone.
15. Enterprise Zones:
These zones get used to promote the revitalization of a city neighborhood.
They are geographic areas that get granted special tax breaks, offer regulatory exemptions, and other public help.
They aim to benefit businesses and residents in distressed urban or rural areas. Their goal is to improve living and working conditions and to create jobs.
16. Opportunity Zones:
Opportunity Zones got created by the U.S. Tax Cuts and Jobs Act of 2017. They allow certain investments in lower-income areas to enjoy corresponding tax advantages.
You find them in economically-distressed communities, where new investments may be eligible for preferential tax treatment.
The Opportunity Zones program provides three tax benefits for investing unrealized capital gains. They are:
- Temporary deferral of taxes on earned capital gains
- Basis step-up of earned capital gains invested
- Permanent exclusion of taxable income on new gains
17. Special Economic Zones (SEZ):
An SEZ is an area in which the business and trade laws are different from the rest of the country where they get built.
Worldwide, about 4,000 Zones exist spanning across 130 countries. Their focus is on regulatory as well as tax reforms.
They aim to increase trade balance, employment, foreign investment, and effective administration. SEZs are one of the few reliable tools for economic development.
Some of the best known SEZs are Shantou, Shenzhen, Zhuhai, and Xiamen. All located in China.
Data shows that the market size of Smart Cities will balloon to $2.57 trillion by 2025. We can then assume these mega Special Economic Zones will become more common.
Ok, now that we have that out of the way, let us dig deeper into what SEZs are and what they can do for you.
New opportunities for rapid growth and shared economic success are on the horizon.
Large emerging economies are creating unprecedented opportunities for low-income ones. Countries such as China, India, and Brazil are moving up the income ladder.
Endless Special Economic Zones (SEZ) Possibilities On The Horizon:
Large emerging economies are graduating into high middle-income status. This status shift will open up an immense amount of possibilities for the rest of the world.
Why does this happen?
Because these prosperous middle-income countries face the challenge of rising wages, this means they will soon become uncompetitive and get forced to move up the value chain.
Which, in turn, forces them to switch to more complex and capital intensive industries. Especially where they still have Comparative Advantage. (We will discuss what Comparative Advantage means later in this post.)
And leave the limited, light manufacturing to lower income economies
And opposed to contrary belief,
New technologies (such A.I., IoT, 5G, and Blockchain) will help — rather than hurt — the paradigm shift coming our way.
And all this is getting accelerated due to COVID-19.
Special Economic Zones (SEZ) As A Tool For Growth:
For developing nations, SEZs are an essential tool. Especially for channeling foreign know-how and capital into their economies.
SEZs allow them to bypass all the many obstacles of domestic business environments, which in turn, foster their industrialization.
With the increasing global market demand for customized manufacturing goods, the pie keeps growing, and any developing country can find its niche.
PROVIDED they specialize in the production of goods consistent with their Comparative Advantage. And ensuring the rapid development of competitive domestic companies.
Special Economic Zones (SEZ) are SME’s Best Kept Secret:
Herein lies the secret to SMEs & D2Cs becoming part of SEZs
We are living through a once-in-a-generation opportunity. SMEs & D2Cs are well placed to reap the benefits.
Regardless of their geographic location!
Special Economic Zones (SEZ) Moving Forward Strategy:
But, to do so, they must be ready to fill at least some of the industrial void left by China, India, Brazil, and other markets.
These SMEs and D2Cs must be ready and willing to move up the industrial and technological ladder .
Also, understand their *Comparative Advantage (*more on this later.)
The reason is,
For Direct-To-Consumer & Small Businesses, the SEZs business model is the perfect fit for the rise of the 21st-century brand economy .
Here is why:
- For example, Shenzhen SEZ in China has accomplished critical infrastructure and talent growth.
- Networks of smaller manufacturers are nimble and interconnected. It allows for rapid prototyping, iterating, and scaling.
- Even giant Foxconn, a Taiwanese SEZ, has launched a micro-factory. Their goal is to target initial product runs of 1K-10K units to compete for this segment of the business.
- Each SEZ has a specialty. It could be electronics such as Shenzhen. Footwear like Fujian. Or motorcycles like Chongqing.
In other words,
Whether you are a domestic SME company located in a developing country, or a developed one, there is enough for everyone to share the wealth.
But you need to know how to get started .
No worries. We will delve into that further down in this post.
So, keep reading,
In short: three main components are a BIG reason for an SEZ success.
It all boils down to whether the country that hosts them made the correct choice.
Countries that build successful SEZs can break into global industrial markets. They also seem to find their niche.
But not any niche. Instead, a Comparative Advantage. So let us first discuss this component for a SEZs success.
1. Special Economic Zones (SEZ) & Comparative Advantage:
A comparative advantage is the ability to produce a specific economic activity. For example, make a particular product more efficient than other businesses. Either by a group or an individual.
The bottom line?
In the world of trade, the best use of your time will depend on the skill of others. It is this differentiation that will create the specialization required to create wealth.
In other words,
A Comparative Advantage gives a company the ability to sell goods and services at a lower price compared to its competition. It will help them realize more substantial sales margins.
To understand it further, read this post: Treasure Island: The Power of Trade. Part I. The Seemingly Simple Story of Comparative Advantage. It includes an excellent example illustrating Comparative Advantage.
2. Special Economic Zones (SEZ) & Factor Endowment:
It is the amount of land, labor, capital, and entrepreneurship a country possesses. The idea is to use it for manufacturing.
All things being equal,
Countries with a large endowment of resources are more prosperous than those with a smaller one.
A Factor Endowment determines the Comparative Advantage of a country. It is about the production of a particular commodity.
In other words,
It is the local availability of resources, such as labor, agricultural land, mineral resources, capital, or technology.
A Factor Endowment Example:
Egypt has a good supply of fertile irrigated land. They also have abundant cheap labor, which allowed them to specialize in cotton production. Their climate is well suited for this industry. So, for over a century, Egypt has traded cotton exports for imports of manufactured goods.
The Factor Endowment in an economy also determines the optimal industrial structure, which will change depending on the stage of their development.
In other words,
It will depend on the availability of various factors of production, including labor, capital, and natural resources.
Factor Endowments are not static
With education, for example, the characteristics of the labor force can change.
Over time, this increased knowledge can affect the Comparative Advantage in a country.
The labor force of a country can then take on more complicated jobs as they build more complex transportation systems, buildings, and public services.
As mentioned earlier, this is what is happening in Brazil, China, and other emerging markets.
The Flying Geese Paradigm:
It is essential to make a note here about the Flying Geese Paradigm. Comparative Advantage, Factor Endowment & The Flying Geese Paradigm, attributed to the success of many Asian countries.
The theory states that Asian nations will catch up with the West as a part of a regional hierarchy. Production of commoditized goods would move from advanced countries to the lesser ones.
In other words,
The underdeveloped nations in the region will align behind the advanced countries. They will imitate the wild geese flying formation pattern.
The lead goose in this pattern is Japan itself.
Then the second-tier of nations consists of the newer industrializing economies. These are China, South Korea, Singapore, Taiwan, and Hong Kong.
After these two groups come the ASEAN countries: Thailand, Malaysia, and Indonesia.
The least developed nations in the region make up the rearguard in the formation. These are Vietnam, the Philippines, etcetera.
3. Special Economic Zones (SEZ) & Global Value Chains (GVC):
Another factor that seems to drive successful SEZs is GVCs (Global Value Chains.)
A global value chain (GVC) is a series of stages in the production of a product or service for sale to consumers .
Each stage adds value, and at least two steps get built in different countries.
A GVC would be a bike assembled in Finland. With parts from Italy, Japan, and Malaysia. Then the bicycle gets exported to the Arab Republic of Egypt.
By this definition, a country, sector, or company participates in a GVC if it engages in (at least) one stage in a GVC.
Boeing owns one of the best known GVCs. It uses parts of many nations to build their 787 planes.
In short: A SEZ is a BIG source of global trade for SMEs and D2Cs.
Thanks to technology and distributed ecosystems, small businesses can access the world market. They can also find a niche and establish themselves as global manufacturers.
Unknown Direct-to-Consumer companies (D2Cs) , have become powerhouses, nibbling big brands to death.
Special Economic Zones (SEZ) & Direct-to-Consumer Success Drivers:
The increasing success of Direct-to-Consumer companies is driven by:
- Online store technology which made it much easier to find and sell to customers outside of the U.S.
- Online merchant accounts (such as Paypal, Google Pay & Stripe) simplify transactions and payments.
- Video and audio conferencing software made it easy and efficient to chat. It also helps communicate with remote customers.
- *CRM software has increased the ability to service customers outside of the U.S.
- New technology, such as A.I. and Blockchain, have improved trust and logistics. They have also reduced costs and simplified the physical delivery of products. Not only for local markets but also across the world.
*CRM = Customer Relationship Management
By all accounts, the trend shows that D2C exports will continue to grow.
SME’s Self-Defeating Prophecy:
Today, there are still thousands of SMEs that do not have an online presence . Even though they already have a loyal client base, they can tap into right away.
Thanks to COVID-19, many of them had a rude awakening. SMEs now realize they have to digitize. Otherwise, next time another one comes our way, they will jeopardize their companies.
For example, Amazon’s stock was on the decline before the pandemic. Today, thanks to a new digital world, it’s value keeps increasing.
In other words,
Today, digitization and industrialization will help businesses survive and thrive.
Let’s now get into some of the significant benefits of joining SEZs.
1. Special Economic Zones (SEZ) & Access to New Markets:
Global trade flows are shifting from goods to services.
The focus is on digital skills, infrastructure , service capabilities, and innovation.
This shift gives a massive opportunity to SMEs and D2Cs to expand their knowledge and offer it as a service. Especially to countries where there is a demand for high-value services.
Trade based on product cycles is dying.
In other words,
Low-income countries are no longer receiving older, outmoded products from high-income economies. After all, as we mentioned previously, a substantial share of human labor is being replaced by robots.
Instead, they are moving towards leading-edge goods and services.
So if you are an SME, you should update your technology . Then offer high-value services online, regardless of your location.
It can get done from remote locations, creating new services and data flows.
A High-Value Offer Example:
Let’s illustrate the importance of a high-value activity with an example.
Let’s say that you are a medical surgeon.
Your practice would join a Science or Medical SEZ. Then offer Remote Surgeries, which thanks to the new 5G technology, it is becoming a lot easier.
But, to do this, you have to be willing to move into the formal economy and increase your productivity.
You will then have an online Direct-to-Consumer Store with scheduling and pre-pay capabilities.
Which means you will have expanded globally , and collected your fees ahead of time.
You no longer have to wait months for insurance companies to pay you.
An Example Of Offshoring High-Value Services Needed:
With that in mind, here are other offshoring high-value services needed:
- I.T. services, such as telecom, business services, and I.P. royalties.
- Production embedded services such as engineering and design, financial services, distribution, and marketing.
- eLearning: Certificates, new-tech training, administrative and managerial skills.
- And much, much more.
Below is an example of an SEZ and the sectors they are looking for:
In summary: SMEs & D2Cs should rush to set operations in those recently opened markets . It will help them carve out brand recognition and a market share in expanding markets.
2. Access to G20 Countries for Rapid International Growth :
If you already run a business, you most likely have a good idea of whom your target customer is.
You most likely also know which products are your most successful ones.
So why not expand what you already offer across the world?
G20 countries are key trading partners for low-income countries.
And, close to 80% of low-income countries’ export to G20 countries.
That is a massive platform from the get-go!
In other words,
SMEs and D2Cs can now expand their companies globally . They can also offer functions that would have needed the complexity of a large MNE only 20 years ago.
For example, that was Instagram’s case. The company only had 13 employees and a US$1 billion valuation back in 2012 when it got acquired by Facebook.
In summary: Your company can experience rapid international growth . You can do this by joining a GVC though a SEZ and selling directly to the European Union and the other 19 countries in the G20 group.
The G20 countries are:
- Russian Federation,
- Saudi Arabia,
- South Africa,
- South Korea,
- United Kingdom
- The United States.
- European Union
3. Special Economic Zones (SEZ) & Access to GVCs (Global Value Chains):
SEZs allow you to join GVCs (Global Value Chains.)
You see, according to the WTO, SEZs — especially those that are part of a GVC — account for about half of the world trade today.
Unfortunately, today large Multinational Enterprises (MNEs) run GVC’s.
There’s a reason, however.
Complex global production systems and markets need sophisticated and coordinated efforts.
Special Economic Zones (SEZ) & The Formal Economy:
Different countries specializing in specific aspects and stages of production can get messy.
In other words,
Productive companies benefit more from Global Value Chains (GVCs.); this is because they are better equipped to compete in global markets .
But, the main reason SMEs do not take part in GVC’s is that they are not “Formal Economy” ready.
In other words,
SMEs must be able to produce world-class standard products and top of the line services required by GVCs.
Which unfortunately, only a tiny percentage of local SMEs do.
High-Value, High-Productive SMEs:
Here is where high-value, high-productive SMEs will shine.
With technological progress, becoming a mainstay of the global economy is easier.
What before had to get done within the confines of large MNEs can now get outsourced.
Competent suppliers and service providers today can get reached from around the world —regardless of their office or factory location.
This is huge!
Because GVCs no longer have to manage their complex production process in-house. They can now offer opportunities to already established SMEs from across the world.
They do this by selecting SMEs that specialize in limited business functions and niche activities. And add them to their supply chain process. Just like the Boeing GVC image you saw above.
So how do SMEs take advantage of this Special Economic Zones (SEZ) market shift?
The majority of SMEs and D2Cs are informal and thus excluded from GVC participation.
For SMEs to capitalize on GVCs, they must first address the informality of their operations. Also, create the right business environment—especially the immediate integration of business processes.
These changes will increase their chances of being considered to participate in CVGs across the world.
In other words,
SMEs must first produce world-class standard products and services as required by GVCs. It is the only way they will be able to reap the rewards.
And to do this, the first step is to upgrade their technology .
Benefits of Upgrading Technology:
Upgrading technology gives SMEs higher chances of getting accepted into a GVC.
It’s simple. The upgrade of technology will help SMEs increase productivity. It will also help them lower defect rates.
A huge issue, especially if SMEs want to join GVCs and enter the formal economy!
In summary: If you have a company with a Comparative Advantage and high productivity. You are also ready for the formal economy and have a high-value offer. Then a GVC is a perfect platform to expand your company globally .
4. Special Economic Zones (SEZ) & Tax Benefits:
SEZs are business-friendly for companies that establish a presence within them. The country’s Government, where they get built, usually grants many globally competitive concessions.
Imagine not having to pay a large percentage of your profits in taxes to the Government.
Think what you can do if your company had an office in a jurisdiction where you could earn 100% tax-exempt revenues.
And a tax-free international business outside the United States, without breaking any laws.
By saving on taxes, your company would become more profitable. Which means it can become more competitive in the global market.
It also means you can get access to cheaper capital and increase shareholder value.
Companies flock to these Zones to save on corporate, income, sales, or capital gains tax.
5. Special Economic Zones (SEZ) & An Offshore Business Presence:
Starting an international business and moving to a new country can be daunting.
Special Economic Zones usually cut red-tape and high costs. They also reduce the uncertainty one would experience when opening a business offshore.
Most SEZs have established flexible packages for a business’ offshore physical presence. They offer services for one-person start-ups, midsize enterprises, or large corporations.
Most also offer turnkey packages. These are scalable and flexible to meet the demands of a growing company.
They provide the highest levels of connectivity and I.T. infrastructure and full business center amenities.
They offer offices and workspaces of all sizes and shapes to fit different demands.
SMEs and D2Cs companies can also take advantage of fast-track business licensing, fast visa process, and sometimes a free corporate relocation service.
In short: SEZs are a significant source of wealth.
Below is an example of the advantages for businesses setting up an office (physical or remote ) in an SEZ.
They vary depending on the SEZ you select, but this list gives you an idea of what you can expect.
- No or reduced corporate, income, sales or capital gains tax
- 100% of foreign company ownership permitted
- A 4-6 week fast-track business licensing regime
- Renewable 5-year work/residency visas granted in a few days
- Cutting-edge I.T. and business infrastructure
- Offshore hosting & payment gateway
- A regulated environment
- No Government reporting or filing requirements
- A tech cluster with massive cross-marketing opportunities
- A skilled labor force and more accessible recruitment procedures
- One-stop-shop to administrative services
- Easy access to the U.S., Canada, & London
- Rapid international growth
The Risk of Informality:
Informality is one of the top 5 limitations for SMEs not integrating with GVCs.
In the “Formal Economy,” suppliers’ main challenge is to increase productivity, especially if they want to integrate with a GVC.
In other words,
Having access to the necessary knowledge and technology is a must. It’s the only way SMEs will be able to offer high-value services. It is essential if they want to compete in international markets.
If you have not yet, moving your business online should be your first priority!
Benefits of Broadening Skill-Sets:
Broadening their skill-set allows SMEs to increase their chances of joining GVCs. So does innovation, and being able to access current technology.
Below are factors that help SMEs take part in SEZs. Especially those that belong to GVCs. These include:
- Global online platform
- Technology adoption (i.e., IoT, A.I., 5G, Blockchain, and 3D Printing.)
- Excellent statistical and data capacity, especially 1st-party (company-level) data
- Managerial and workforce skills
- Human Capital
- Good ICT (Internet and Communication Technology) connectivity
- A productive capacity that enables SMEs to reach scale
- Service sector efficiency
- Efficient Logistics
- Quality and product certification
- International standard certification
- Preferable, access to financing
At first, this looks overwhelming and expensive to set up.
First: Upgrade your technology
Most likely, you already got started. It is crucial that you position your company with new technology, such as 5G, A.I., and Blockchain, to name a few.
If you do not know how; feel free to reach out to us .
Or if you are interested in our Limited Edition Custom Built Stores, click here .
Second: Work on your Comparative Advantage.
This free tool is GREAT for finding Comparative Advantages in different countries.
For example, if you run a visualization for Bolivia‘s Comparative Advantage,
It will show you all the potential Comparative Advantages Bolivia has. You’d get things like Chemical Products: Inorganic Salts, Essential Oils & Detonating Fuses.
Third: Get Your Company Ready
If you are new to SEZ, you want to focus on getting your company SEZ ready .
Because if you want to join a GVC, being “Formal Economy,” ready is a must. It makes formalizing your company to make it more competitive a priority.
Work on your processes and systems. Make sure your human capital is ready.
The process is not as difficult or expensive as you may think. The hardest thing is getting started.
Finally: Locate and contact a SEZ
Make sure you find one that fits your Comparative Advantage and Factor Endowment.
Ask all the necessary questions, and make sure your business qualifies.
Conclusion & Final Thoughts
I hope you enjoyed this SEZ guide for beginners. I wanted to go beyond answering “what are SEZs?” and give you a few concrete steps to get started.
As you can see, there’s a lot to learn about Special Economic Zones. It is important to consider how much wealth and rapid international growth it can bring you. But, it’s worth the time and effort.
So I recommend getting started with the basics:
- Make sure you start thinking about your Comparative Advantage.
- Then get your business “Formal Economy” ready.
- Finally, build your brand .
Those three steps are the foundation of getting SEZ ready, especially if you want to add your company to a GVC.
Once you feel like you’ve mastered SEZs (Special Economic Zones), start looking into the more advanced stuff, like logistics and warehousing.
Now It’s Your Turn
So that’s it for my guide to Special Economic Zones
Now I’d like to hear what you have to say:
- Which strategy from this guide are you going to try first?
- Will you be joining a SEZ?
- Do you already offer a high-value service? (Do tell!)
Either way, let me know by leaving a quick comment below (bottom of this page.)