Understanding Development Zones in Asia

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By Chris Devonshire-Ellis, Principal & Founder, Dezan Shira & Associates

May 22 – With the success of China’s special economic zone in Shenzhen in the 1980s, development zones across Asia have proliferated as catalysts for economic reform and foreign investment.

While the Shenzhen example originated as an entire city area cordoned off from the rest of China in case the experiment with capitalism went wrong, the concept, while not new, caught on quickly. Shenzhen was rapidly divided into a variety of different zones, some focusing on the oil and gas drilling sector (Shekou Port) while later, other variations catering for export manufacturing. Later still, high-tech and other specific industrial applications followed. Shanghai (and later towns all over China) followed suit, and this model has now spread across Asia.

However, this has given rise to regional terminology issues, and it can be difficult to work out initially what benefits certain zones can provide. It has also given rise to zones being set up by local governments not actually adhering to central government guidelines, and in India’s case, the somewhat haphazard establishment of private sector zones which have not always proven well managed or which do not possess optimal infrastructure. Due diligence is essential to sorting out which zones can really help and which ones are purely cosmetic in nature. It remains key when seeking to understand what a development zone can accomplish for your business – and whether its stated capabilities actually match up with the sales brochure.

There remains no doubt, however, that utilizing the services of a well-managed development zone with great infrastructure can significantly enhance your success and help develop opportunities across emerging markets throughout Asia and beyond.

Benefits of locating in development zones
There are a large number of benefits associated with development zones, which are attractive draws for investors looking for an easier way to take advantage of labor and other inputs.

  • Preferential policies;
  • Support and participation of government;
  • Autonomy;
  • Resource availability; and
  • Technology, learning, and innovation.

Preferential policies compared to non-development zone areas
Development zones receive a number of regulatory benefits and privileges aimed at reducing the cost of investment and facilitating imports and exports. These include lowered land costs, tax awards and exemptions, facilitated customs clearance and ease of access to domestic markets. In particular, some higher-ranked zones have the ability to provide certain exemptions from certain national taxes.

Support and participation of government
Governmental support of development zones causes foreign investors to receive support in different terms and scopes. First, eager to attract foreign investors and boost the area’s employment and economic wealth, zone management will often be quick to respond to changes in needs related to regulatory or market fluctuations. Local governments can also provide accounting, legal, marketing and consulting services to help investors, albeit with mixed results. This does indicate a willingness to aid in the growth of these areas by implementing an improved policy framework, leading to clearer legal and regulatory standards.

While some development zones are privately run, government-backed zones are generally preferable. This is because they tend to be better regulated and have essential government-supported services such as customs, bonded zones and better infrastructure at their fingertips.

Resource availability
Zones that specialize in certain industries/sectors will likely have access to specific resources and expertise favorable to investors.

Technology, learning and innovation
Development zones are often hubs for creativity and innovation, stemming from the provision of government incentives, competition between tenants and the presence of highly skilled labor.

Factors to consider when choosing a zone
Above all, the right type of development zone for an investor will depend on their specific business needs – such as industry, import/export plans, location of suppliers, labor/land/power requirements, and scale of operations. The factors which draw one investor to a particular development zone and another investor elsewhere are generally unique to the investor. So, the first step to development zone selection is a self-evaluation of your company’s priorities.

Once you have established these priorities, work with a consultancy firm to narrow down a list of zones. In any location of interest, seek out a list of companies that are already located in that zone. If you find that the zone is occupied by companies with a similar background to yours (in terms of country or region of origin and line of business), it is valuable to reach out and gauge what their experience has been like.

Be mindful of the zone’s management and administrative practices. A well-run zone will be up to date on changes in regulations or in the marketplace which will affect you and will be able/willing to help you make the necessary adjustments.

Be sure to also investigate the quality and scope of infrastructure networks; do not take statements about location lightly. A high quality infrastructure will increase efficiency and lower transportation costs significantly. Keep a future-focused mind-set and take plans for expansion or repair of these networks into account.

When narrowing down a list of sites, recruit professional assistance. Typically, due diligence in this field requires an assessment of the site itself in addition to the legal and tax implications of locating there.

The ASEAN factor
The ASEAN region in Southeast Asia encompasses 10 countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. They are a free trade area collectively known as the ASEAN Economic Community, and are currently focused on reducing tariff rates to zero for all signatories to the area’s agreement by 2015. This will lead to duty-free trade among these countries, which are also major drivers behind the rise of new development zones springing up across the region.

Significantly, ASEAN already has free trade agreements with China on some 7,000 products, with India on some 4,500 products and numerous other with various countries. This means that manufacturing can be placed in an ASEAN development zone at lower labor and duty costs and re-exported to ASEAN’s treaty countries duty-free.

Qualifying as an ASEAN-based company purely means having an established subsidiary in the region. Singapore, given the quality of its services, ease of doing business, and international standards of transparency, is one of the most popular bases for such enterprises.

Please see a full list of all ASEAN agreements and the extent of these with your own country of origin on ASEAN Briefing.

2 responses to “Understanding Development Zones in Asia”

  1. chouteau says:

    In the factors to choose a development zone, I think you forgot at least 2 majors aspects. The first one is the culture & thinking. It is more easy for managers who work in Confucianism influenced countries such as China, Japan & Korea, to continue to work there. Than to adapt let’s say to South Asia mentality of countries like Thaïland…
    The second one, maybe the most important one, is the political stability. The obvious example is the economic development zone of Kaesong between north & south Korea. Without it, you can directly throw your money in the air… There was a previous example with the economic development zone or Rajin in North Korea. In that particular situation I would insist again about culture & thinking which is different from one country to another. For people who worked with Korean, especially North Korean, everything is political, and therefore, can change overnight. Also, flexibility and adaptability, is an alien concept in the North…

  2. @Choataeu – thank you for your comments. I don’t think we “forgot” anything – the cultural aspect you mention applies to investing overseas in general and isn’t a specific issue for Development Zones. Our target readers are internationally experienced executives so I think the cultural difference issue is a given. As for China being confuscian influenced, I haven’t seen that extend into hard business dealings, ever.
    You are correct about political stability, hwoever we didn’t comment on the differences between North & South Korea in this piece for three reasons; firstly a matter of space, secondly no-one is really seriously considering the Rajin zone in North Korea right now, and thirdly the majority of our readers would not be interested in the country anyway. It is I agree a fascinating side issue, but not on the radar for contemporary MNC foreign investors.
    Thanks – Chris

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