Modern international economic relations cannot be imagined without investing capital in free (or special) economic zones (FEZs). Today, there are about 4,000 different types of free economic zones in the world, which indicates the huge popularity of such economic entities in the world. SEZs play an important role in stimulating foreign economic relations and are an instrument of national economic development; it is one of the new forms of the international division of labour.
According to the International Convention on the Simplification and Harmonization of Customs Procedures, adopted in the city of Kyoto
On May 18, 1973, a free zone (or “free zone”) means a part of the territory of a country in which imported goods are considered as objects located outside the national customs jurisdiction and, therefore, exempted from the usual customs control and taxation procedures in such cases.
In a broader interpretation characteristic of international practice, the FEZ is part of the national economic space with a preferential system of benefits and incentives for economic entities that is not applied in the rest of the territory.
When creating special economic zones, two conceptual approaches can be used: territorial and functional. According to the first approach, preferential treatment is enjoyed by enterprises and organizations located in a certain, specially specified territory. In the second case, benefits are established for certain types of entrepreneurial activity, regardless of the location of firms and enterprises engaged in this activity.
The choice of one of these two approaches depends on the specific tasks that the state wants to solve in the formation of a free economic zone. The territorial approach allows to solve to a greater extent the problem of the development of a region, and the functional one – the problem of the development of certain industries. In practice, the territorial approach to the formation of FEZ prevails.
The benefits provided to foreign investors in the territory of special economic zones can be divided into four main groups.
Foreign trade privileges providing for a simplified procedure for the implementation of foreign trade operations, as well as the reduction or complete abolition of export-import duties; Financial benefits, that is, setting low prices for utilities, reducing rents for land and industrial premises, obtaining preferential state loans; Fiscal benefits provide for stimulating the inflow of foreign capital by reducing or abolishing taxes on profits, income, property; Administrative benefits, which provide for a simplified procedure for the registration of firms, the regime of entry and exit of citizens, the provision of various services related to the registration of firms.
Benefits of various types can be applied in free economic zones in various combinations, depending on the priority goals of the formation of the FEZ.
The creation of free economic zones pursues various goals. First of all, attracted foreign investments are used to expand the production of goods for export, or import-substituting goods. Such productions are developed, as a rule, on the basis of the latest technologies. Some FEZs are created with a focus on the development of foreign tourism in the zone.
In both cases, the creation of the FEZ contributes to the accelerated development of the economy, the creation of modern infrastructure, the improvement of the skills of local workers, and, ultimately, an increase in the inflow of foreign exchange funds into the country.
However, to attract foreign investors, it is not enough just to proclaim certain benefits. Practice shows that the creation of a FEZ will be effective, from an economic point of view, only if the following conditions are present:
favorable geographical conditions, that is, proximity to the state border, to the main international transport highways; availability of modern infrastructure (electricity, water supply, telecommunications, etc.) on the territory of the zone, as well as the availability of favorable social infrastructure (housing that meets the necessary standards, kindergartens, schools, hospitals, etc.); a sufficiently high level of provision of financial services, communication with international financial markets; clarity in legislation, broad powers of local authorities in the field of FEZ management; overall political stability.
To create the prerequisites for the successful development of the FEZ, the state must make certain costs for the arrangement of the zone in accordance with the above requirements. Practice shows that the state needs to invest approximately $ 4 for every dollar of initial foreign investment in the FEZ.
However, the governments that create SEZs go for these
costs, based on the fact that the positive effect of the functioning of such zones will fully recoup them. The attracted foreign capital will create new jobs, organize production using the most modern technologies, which will contribute to improving the qualification level of workers.
A large export sector of the economy can be created in the country, due to which foreign exchange earnings to the country will increase. The experience of countries such as South Korea, Malaysia, the Philippines shows that about half of all foreign exchange earnings from FEZ are amounts paid to employees in the form of wages. The second, in importance, source of foreign exchange earnings is the supply of electricity by the enterprises of the host country for enterprises operating in the zone. It should be noted that large costs can be recouped only if the SEZs will operate for a long period with a consistently high return. Up to 30 varieties of SEZs are distinguished in the scientific literature and, although they have manifested themselves for a long time, nevertheless, there is no generally accepted classification of FEZ types. Without pretending to classify all types of existing FEZs, we will briefly describe those that have a clear economic profile:
Free trade zones, free ports, transit zones, duty-free warehouses and customs zones in individual enterprises. They are based on the abolition or reduction of customs duties and export-import control over goods entering and re-exporting from the zone. The organization of such zones is aimed at reducing the cost of transshipment and storage of goods for entrepreneurs. One example of such zones is the “foreign trade zones” common in the United States. They were created in the 30s of the XX century. to intensify US foreign trade. Goods entering these zones are not subject to customs control. But, if they move from the zone to the territory of the United States, then they are subject to the passage of all the prescribed customs procedures. Export industrial zones. They are based not only on the application of a preferential trade and customs regime, but also on a preferential financial and tax regime, including for foreign capital; are focused mainly on the production of export and import-substituting products. Initially, such a zone was created at the Irish airport of Shannon, which in the late 50s was threatened with significant job cuts due to the opening of transatlantic lines and the cancellation of the intermediate landing of aircraft at this airport. Later, the Irish experience became the basis for the creation of SEZs in many developing countries, especially in newly industrialized countries. The functioning of such zones is based on the fact that equipment and materials are imported into their territory, located near international ports, without customs formalities. Here, production is organized for the processing of certain products, which are then exported to other countries also without the intervention of the customs authorities of the host territory. Complex economic zones that combine the features of both free trade zones and export industrial zones. One example of such a zone is the Manaus Zone in Brazil. Since its formation in 1967, an economic complex has been gradually forming here, which is characterized by a rapid pace of economic development. In this case, only
3-5% of the products produced here are exported, the rest is consumed within the country. Banking and insurance zones with a preferential regime for banking, insurance operations (the so-called offshore centers and tax havens). These are territories where the procedures for registering new enterprises have been significantly simplified, broad tax and other benefits have been provided for foreign enterprises. For example, on the islands of Alderney and Jersey (in the English Channel), there is only an income tax of 20 percent. Foreign companies that are only registered on the island but do not conduct business there pay only an annual fee of £500 and an annual financial reporting fee of £100. In such territories, there are no currency restrictions, financial statements are simplified, and the identity of the owner is guaranteed. Offshore territories include Cyprus, Liechtenstein, Malta, Monaco, etc.