In an era of global connectivity and ever-increasing interdependence, cross-border trade has become a vital component of modern business. However, conducting business across national boundaries comes with its own set of unique challenges; from tariffs and Customs regulations to language barriers and cultural differences.
Special Economic Zones (SEZs) have emerged as a solution to these challenges, and they are transforming cross-border value chains – unlocking new business frontiers and revolutionising the way companies operate.
SEZs are designated geographical areas where businesses receive tax incentives, relaxed regulations and other favourable policies to attract foreign investment and promote export-oriented industries. These zones act as self-contained economies within a country, offering businesses an environment that is conducive to their growth and expansion. As a result, SEZs have become hotspots for global trade and investment; and they are driving economic growth in many developing countries.
Similarly, SEZs are also benefitting developed nations. For instance, China’s SEZs – which were established in the 1980s, played a crucial role in the country’s economic transformation. By offering a business-friendly environment and access to low-cost labour, China’s SEZs helped the country become a manufacturing powerhouse and a major player in global trade. Today, other developed countries like the United States, United Kingdom and Japan have also established their own SEZs to attract foreign investment and promote their export industries.
Moreover, SEZs are transforming the way businesses operate – particularly in the context of cross-border value chains. With SEZs, businesses can take advantage of the specialised skills and resources available in specific regions. For instance, companies in the automotive industry can set up manufacturing plants in SEZs that offer skilled labour and superior infrastructure. This enables businesses to streamline their operations and reduce costs by taking advantage of economies of scale.
Again, SEZs are also playing a crucial role in promoting innovation and technology transfer. By providing a favourable business environment, SEZs are attracting companies with cutting-edge technologies and encouraging knowledge-transfer to local businesses. This is leading to the development of local industries and creation of jobs, which in turn is contributing to economic growth of host countries.
Furthermore, SEZs are also promoting regional economic integration by creating linkages between businesses in different countries. For instance, the China-Pakistan Economic Corridor (CPEC) SEZs are connecting Chinese and Pakistani businesses while creating new opportunities for both countries. Similarly, the Africa Continental Free Trade Area (AfCFTA) SEZs are promoting trade and investment between African nations and creating a single market for goods and services.
SEZs are worth mentioning in the context of global supply chain resilience. In recent years, the COVID-19 pandemic has highlighted the vulnerability of global supply chains. With disruptions to transportation, labour and trade, businesses worldwide have faced significant challenges in maintaining their operations. However, SEZs can provide a solution to these challenges by offering local resources and reduced dependence on global supply chains. By setting up operations in SEZs, companies can reduce their exposure to global risks and ensure business continuity.
Given the benefits SEZs offer to both developed and developing nations, they are fast-becoming an integral part of the global business landscape. As businesses continue to expand their operations around the world and seek out new opportunities, SEZs will play a key role in bridging differences and promoting commercial relations between countries.
For example, as more business activities become digitised, businesses are increasingly relying on cross-border value chains to complete their operations. Cross-border value chains usually involve a number of parties located in different countries which jointly provide inputs and resources for the production process. Hence, cross-border value chains are becoming critical to the success of modern businesses. However, they face a number of challenges that can disrupt their operations.
For instance, the fragmentation of supply chains stemming from the different business regulations and policies in each country involved in the chain is one major challenge that is hindering cross-border value chains. Different regulatory requirements, business structures, rules, and filing requirements in each country involved in the chain make it difficult for businesses to conduct operations efficiently. Hence, fragmentation results in high transaction costs and delayed deliveries which can damage businesses’ profitability.
Differences in legal frameworks also prevent cross-border value chains from operating efficiently. For instance, the legal frameworks of each country involved in the chain may not be compatible or may not have adequate mechanisms to oversee the transactions happening across their borders. In such cases, businesses may face conflicting rules or different remedies which can further complicate their operations.
Also, differences in tax rules can significantly impact cross-border value chains and add to their cost of operations. For example, different tax rates and complexities in tax filing requirements of each country involved in the chain make it difficult for businesses to keep track of their taxes. As a result, they may suffer from back-taxes or penalties that can significantly dent their profitability.
Finally, lack of local knowledge is another major challenge that businesses face when utilising cross-border value chains. It is not easy to understand the legal and regulatory framework of a foreign country without adequate knowledge about its business environment. Moreover, cultural differences, too, can hinder businesses’ operations by affecting their ability to communicate with people in other countries and get new employees accustomed to the corporate culture.
As businesses grow and invest in new technology, they look for ways to implement their operations across borders. SEZs are proving to be a solution to many of the issues that businesses face in coping with cross-border value chains. For instance, SEZs are offering businesses a business-friendly environment and making key regulatory changes that promote cross-border value chains.
In Africa, SEZs have been tailored to encourage businesses to operate out of the country by dismantling regulations that inhibit local firms from operating globally. Also, they have introduced rules that give a major boost to companies with global operations by easing the transfer of capital, preventing competition from national firms and promoting free trade.
Additionally, SEZs are also encouraging business connectivity by taking steps to simplify international trade processes. For instance, they are encouraging Customs improvements and simplifying trade procedures by reducing the time-frame required to get clearance.
In the light of these benefits, SEZs have equally become a popular target for IT companies. By offering SEZs as a service, these companies can expand and extend their business reach across the globe. This helps them tap into domestic and international markets and gain an edge over their competitors. For instance, Amazon has established its Amazon Web Services (AWS) in the United Arab Emirates. This access to advanced IT infrastructure enables the company to provide faster services to customers all over the world, especially to its own customers in Europe and Asia. Similarly, Microsoft has established its Azure Data Centre at Okha in India. This proximity to the latest data-centre facilities enables Microsoft to provide better services to customers in the region, from small businesses to large corporations.
Thus, there is a common misconception that SEZs are only available to manufacturing and export-oriented industries. In reality, they offer a favourable business environment for nearly all sectors and cater to the needs of both developed and developing countries. By choosing an SEZ as their base of operations, companies can set up their global headquarters and take advantage of these zones as launching pads for their international expansion plans.
In Ghana, the Meridian Industrial Park and Dawa Industrial Zone have played and continue to play a crucial role in promoting business connectivity and increasing the flow of exports. For instance, Meridian Industrial Park has enabled the expansion of companies like Barry Callebaut, 3F Fats and Oils Limited, Toyota, et al. These companies have been able to increase their market share in the domestic and international markets due to this zone’s facility for international-quality operations.
Also, the Dawa Industrial Zone encourages investment in a number of sectors including garments, food processing, textiles and automotive. Through this zone, companies can overcome the limitations faced by single-company industrial parks and enjoy a business-friendly environment. In addition to these zones’ mandate of facilitating export-oriented industries, they are also helping improve infrastructure and reliability in Ghana.
Countries with small or relatively small economies are using SEZs as tools for spurring economic growth by attracting additional investment and increasing the scale of domestic operations of existing firms. In essence, SEZs are playing a vital role in increasing industrialization and food security initiatives while simultaneously reaching national economic goals.
This global trend of cross-border trade cannot be sustained without SEZs, which have emerged as the driving force behind globalisation. These zones provide the ideal business environment for companies looking to operate beyond borders, which is why they are emerging as a key component of modern business. The different models of SEZs that exist around the world are allowing businesses in these zones to develop effective supply chains, integrate into global value chains, and play a crucial role in the growth of economies worldwide. In addition to the above, they are helping to improve productivity by providing a platform for talent-mobility and knowledge-sharing.
To conclude, SEZs are proving to be a solution for businesses facing cross-border value chain challenges. They are offering a business-friendly environment and key regulatory changes that allow for easy expansion of operations across borders. Also, SEZs offer proximity to advanced technology; simplified trade procedures; Customs improvements and more. These advantages have helped not only businesses but also governments in developing countries by enabling them to achieve their economic development goals.
The writer is an award-winning financial advisory, trade and transformation consulting professional, with almost two decades of enterprise leadership experience across EMEA.
