Zeng Aggarwal 2020

The Oxford Handbook of Industrial Hubs and Economic Development
Arkebe Oqubay (ed.), Justin Yifu Lin (ed.)
https://doi.org/10.1093/oxfordhb/9780198850434.001.0001
Published: 2020 Online ISBN: 9780191885518 Print ISBN: 9780198850434
Downloaded from https://academic.oup.com/edited-volume/40436/chapter/347486451 by Rijksuniversiteit Groningen user on 23 October 2023

CHAPTER
31 Special Economic Zones in China and India: A

Comparative Analysis 
Yu Zheng, Aradhna Aggarwal
https://doi.org/10.1093/oxfordhb/9780198850434.013.31 Pages 607–622

Published: 06 August 2020
Abstract
This chapter compares and contrasts the SEZ experiences of China and India, two fast-growing major
economies of the world, by revisiting the evolutionary process, institutional arrangements, and
performance of SEZs from a political-economy perspective. The objective is to reveal the contextual
factors that determine the outcome of the SEZ policy. Our analysis suggests that it is the broader
political and economic contexts within which SEZs are embedded that underlie the di erences in the
SEZ experiences of China and India. The study enriches the literature that focuses on the conditions
determining success and failures of SEZs.
Keywords: special economic zone, export processing zone, China, India, industrial policy, manufacturing,
IT service
Subject: Economic Development and Growth, Economics
Series: Oxford Handbooks
Collection: Oxford Handbooks Online
31.1 Introduction
INDIA was the rst Asian country to recognize the e ectiveness of SEZs in promoting trade when it set up an
export processing zone (EPZ) at Kandla Port in Gujarat in 1965. But it was China that rst demonstrated to
the world the dynamic potential of SEZs as instruments of economic development and structural
transformation. Starting in 1978, it used a home-grown model of SEZs as the lynchpin of economic growth
that is unparalleled in world economic history. Inspired by the success of China, in 2000 India also upgraded
its EPZ scheme and adopted an adapted version of the Chinese model of SEZs to promote manufacturing.
However, this met with limited success. While it failed to replicate Chinese success with SEZs in
manufacturing, it managed to propel service-sector growth, in particular IT and IT-enabled services, by
leveraging its SEZs.
The SEZ policy is one of the most contentious development policies, a ecting a large number of interest
groups with con icting agendas, mandates, and concerns. The success of the policy hinges on the e ective
management of these con icting agendas and the vested interests associated with the policy, which in turn
is contingent on the political economy that nations rely on. Using a political-economy perspective, this
chapter shows how, although both China and India embraced SEZs in the early stages of development, they
traversed vastly di erent paths, adopted di erent SEZ institutional arrangements, and met with diverse
success due to the di erent contexts in which they operate. Under China’s single-party system, the political
leadership, with a strong development focus, succeeded in aligning the interests of di erent political actors

in favour of economic liberalization and created a self-reinforcing mechanism that drove the expansion of
SEZs. In contrast, India’s multi-party parliamentary democracy, where policymakers seek to serve various
p. 608 interest groups, imposed a great many constraints on the state’s capacity and incentive to promote SEZ
development.
31.2 Evolution of SEZs
China’s SEZs have experienced four stages of development since 1980.
Stage 1 (1980–91): Early experiments with SEZs. China began by setting up four SEZs—Shenzhen, Zhuhai,
Shantou, and Xiamen—as the central plank of its economic liberalization. It de ed the conventional export-
processing model of ‘fenced-in small industrial estates’ to set up large city-like open SEZs. These SEZs were
deliberately located near Hong Kong, Macao, and Taiwan, not just to maximize locational advantage, but
also to minimize potential risks being spread to Beijing should any problems arise during their operation.
SEZs had an immediate impact on the national economy. They hosted more than half of equity joint-
venture projects established in China. Shenzhen grew at a phenomenal 58 per cent annually in 1980–4,
against a national average annual GDP growth of roughly 10 per cent (Yeung et al. 2009). The early success
of SEZs, particularly in Shenzhen, encouraged the Chinese government to expand the experiment. Between
1984 and 1986, fourteen smaller Economic Technological Development Zones (ETDZs) were set up along
China’s eastern seaboard. In 1988, the newly created Hainan province became the fth SEZ. In the same
year, the Ministry of Science and Technology launched the Torch Programme (huoju jihua) with a mission to
promote technological innovation and industrialization. Under the plan, the rst high-tech industrial
development zone (HTDZ) was established in the Zhongguancun area in Beijing, close to some of China’s
most prestigious universities and research institutes.
The key selling point of the SEZs was a variety of incentives. Foreign rms enjoyed a preferential tax regime
consisting of tax holidays, 50 per cent tax concessions for ve years, and an exemption (or concession) on
payment of import/export duties. Local governments could o er desirable investors other incentives, such
as tax rewards, accelerated depreciation, pro t rollovers, and subsidies. Moreover, as part of the package,
labour regulations granted foreign investors signi cant exibility and reduced burdens relating to the
employment of Chinese workers. The red tape associated with applications for and licensing of investments,
establishing plants, and importing and exporting was reduced so that foreign rms could start and run their
projects with minimal bureaucratic fuss. With these special arrangements, SEZs quickly became popular
destinations for FDI.
Stage 2 (1992–2008): Proliferation of SEZs. The development of SEZs experienced a setback in the wake of the
Tiananmen incident. Although Shanghai Pudong New District was established in 1990, it was not until 1992,
after Deng Xiaoping’s southern tour rea rming China’s commitment to economic liberalization, that the
Chinese government began to accelerate the expansion of the SEZ experiment to the national scale. At the
national level, ministries competed with each other to create SEZs that fell under their jurisdiction. The
Ministry of Commerce (MOFCOM) approved eighteen more ETDZs in inland regions and fourteen economic
cooperation zones in border areas (BECZs). The Ministry of Science and Technology established fty-three
HTDZs with the mission to promote innovation-led and high-end industrial clusters. The General

Administration of Customs established fteen bonded zones, primarily used for the temporary storage of
p. 609
goods and to facilitate entrepôt trade. Despite their di erent supervising agencies and core functions, SEZs
were granted similar privileges and special arrangements in pursuit of their policy goals.
By the end of the 1990s, the original preferential policies attached to SEZs were about to expire. Instead of
phasing out SEZs, the Chinese government decided to extend the preferential policies for an inde nite
period of time. In the meantime, the central government launched the Western Development Programme
(WDP), through which Beijing committed to grant more resources and preferential policies to interior
provinces. In 2000, the central government approved sixteen ETDZs in inland provinces and o ered them
the same policy privileges to attract FDI. Between 2000 and 2006, the General Administration of Customs
established fty-eight EPZs in order to develop export-oriented industries and generate foreign exchange
earnings. These moves essentially put an end to speculation over possible abolition of the SEZ policy.
Encouraged by Beijing’s liberalization policy, local governments at every level rushed to create SEZs in their
jurisdictions, resulting in ‘zone fever’. The total number of zones skyrocketed. By July 2004, there were
2
6,866 various SEZs across the country with a total land area of 38,600 km . Concerned about the explosive
growth of unauthorized zones, the central government decided to rein in the excessively decentralized
experiments, and in 2006, it published a complete list of approved SEZs, including 222 national and 1,346
provincial SEZs (NDRC 2007).
Stage 3 (2008–13): A level playing eld for SEZs. Since the 2008 global nancial crisis, China’s export growth
has decelerated and FDI in ows have plateaued. It seems that the long-standing advantage in SEZs that
stems from low cost of labour and land is no longer sustainable. Taking cognisance of this and to comply
with its WTO obligations regarding subsidies, the Chinese government has implemented a rebalancing
strategy for SEZ development. On the one hand, with the establishment of the new enterprise income tax
law and new labour law in 2008, the tax bene ts given to SEZs have been rescinded. Foreign rms are no
longer granted preferential tax rates. The new labour law aimed to increase worker protection in response to
deteriorating employment relations. It restricts the use of xed-term contracts and encourages open
contracts for all rms. In line with the adjusted national strategy, SEZs began to shift their focus to value-
added industries and quality of economic growth.
On the other hand, the Chinese government accelerated approval of SEZs. The number of national-level
ETDZs increased from fty-four in 2008 to 219 in 2018 and HIDZs increased from fty-three to 156. At the
same time, many provincial-level zones were elevated to national-level status. By 2018, China had 552
national-level SEZs and 1,991 provincial-level SEZs (Table 31.1). There are at least seven types and more
than 2,500 national SEZs in China.
Table 31.1 Expansion of SEZs in China
Year Total national SEZ ETDZ HTDZ EPZ/bonded BECZ FTZ Other national Provincial
zones zone zones zones
1980 4 4
1991 20 5 14 1
2006 227 5 49 53 73 14 33 1,346

2018 567 5 219 156 135 19 10 23 1,991
Source: National Development and Reform Commission (NDRC) 2007, 2018.
Stage 4 (2013–): Establishment of pilot free trade zones. While the SEZs focused on the facilitation of FDI and
exports, a new policy experiment was initiated when, in September 2013, China established the Shanghai
Pilot Free Trade Zone (SHFTZ) to deepen economic reforms and promote nancial liberalization. The
SHFTZ aims to create a more investment-friendly environment for multinationals to operate in China by
allowing foreign banks to directly establish a branch, wholly owned subsidiary, or majority-controlled
subsidiary with Chinese partners. In the following years, the Chinese government approved ten more FTZs
in Fujian, Tianjin, Guangdong, Chongqing, Sichuan, Henan, Hubei, Liaoning, Shaanxi, and Zhejiang. The
p. 610 major di erence between FTZs and previous SEZs is that the former aim to promote new and reformed
methods of economic development, not just to facilitate export and FDI.
Just as in China, the evolution of India’s SEZs also underwent four di erent stages. However, the fact that
the two countries rely on entirely di erent systems of political economy has had a signi cant impact on the
evolutionary process of their SEZs through the four stages. Unlike China, policy change in India entails a
gradual approach, dismantling existing institutions in a piecemeal manner while slowly adding new ones to
modulate resistance. The evolution in SEZ policy is no exception; it is also marked by scrutiny, caution,
restrained policy experimentation, and a lack of focus and commitment.
Stage 1: The EPZ regime (1965–2000). In 1965, India established its rst conventional EPZ as a small, fenced-
in industrial estate at Kandla. It took the government nine years to set up a second EPZ in 1974 in Santacruz
in the port city of Mumbai, and after more than a decade, in the wake of a deteriorating trade balance
situation in the mid-1980s, ve more small EPZs were set up, spread across the country: Noida (North
India), Falta (East India), Cochin (South India), Chennai (South East), and Visakhapatnam (South East). The
2
total area covered under the seven EPZs was a mere 8.94 km . This stands in stark contrast with China,
2
which started with four large open SEZs clustered around the east coast covering around 6000 km and
embarked on a fast-track strategy towards SEZs.
Further, while China was able to insulate its SEZs from the institutional environment prevailing outside
them, India’s EPZs were tightly regulated, developed, and managed by the central government. Tax
incentives were limited and their infrastructure was not necessarily better; zone authorities had limited
autonomy in day-to-day operations; and bureaucratic red tape was still high because there was no single-
window clearance within the zone (Kundra 2000). These institutional de ciencies, along with the highly
restrictive FDI policy, hindered the performance of EPZs. Major initiatives were launched by the government
to revamp EPZs in the 1990s, but these reforms were followed rather than preceded by the economic
liberalization process that was administered in the wider economy. Apparently, taking cognizance of the
controversial nature of the policy, the government was highly cautious in its support of EPZs.
Stage 2: Transition from EPZ to SEZ regime (2000–05). In the year 2000, India initiated a second phase of
liberalization in the broader economy. In a major initiative to boost export-led industrialization, and
motivated by the success of Chinese SEZs, the government introduced a new SEZ policy and phased out the
EPZ policy. While EPZs were industrial estates, SEZs were conceptualized as integrated industrial townships
p. 611 with social infrastructure along the lines of the Chinese model. The SEZ policy envisaged the setting up of
SEZs in the public, private, and joint sectors or by the state governments. It o ered several other new
features which distinguished SEZs from the existing EPZs. It was expected that FDI, which was getting
diverted to other Asian countries, would be attracted to India by these SEZs. But the policy evoked only a

lukewarm response from private investors. Only eleven new SEZs were set up under the scheme. Eventually,
all seven then existing EPZs were also converted into SEZs.
Stage 3: The SEZ-Act regime (2005–11). In order to impart stability to the SEZ policy and signal the
government’s commitment to it, the SEZ Act was enacted in 2005, which not only institutionalized the 2000
policy but further enhanced it. The Act, which came into e ect on 10 February 2006, heralded a new phase in
the evolution of SEZs and is said to have marked a paradigm shift from the EPZ policy by introducing radical
changes in vision, objectives, size, ownership, and almost every aspect of SEZ design and operation. The
enforcement of the SEZ Act, helped by a generous package of tax incentives and private ownership, led to
tremendous growth in India’s SEZs. Table 31.2 shows that on 10 February 2006, when the SEZ Act came into
2
force, India had eighteen operational SEZs with a combined area of 18.18 km and 123,000 employees; in
2
2012 the number of SEZs had risen to 407, occupying over 496.2 km of land. In 2006, six of the eighteen
SEZs (33 per cent) were privately owned; the share of privately developed SEZs shot up to 71 per cent in 2012.
Almost all zones, with a few exceptions, were dedicated to manufacturing in 2006; over 60 per cent of SEZs
in 2012 were in IT and IT-enabled services.
Table 31.2 Structure of Indiaʼs EPZ/SEZ sector
Ownership Sectoral distribution
Period Total notified Central State Private Total area (in Multi- Sector Service FTWZ
2
SEZs government government zones km ) product specific (IT-
SEZs)
2000 7 7 – – 8.94 6 1 – –
2006 18 7 5 6 18.18 8 8 2 –
(2)
2012 407 7 110 290 496.21 24 n.a.* n.a.* 7
2019 373 7 80 286 430.38 21 126 221 5
(216)
Source: Ministry of Commerce, various points in time.
* Note: not available.

Notwithstanding the above, there are marked commonalities between SEZs and EPZs. The typical
administrative structure of new SEZs, for instance, remains almost the same as that of erstwhile EPZs. Just
like EPZs, SEZs are also under the direct regulatory and administrative control of the central government.
Investment approvals within SEZs and day-to-day operations of all SEZs, irrespective of their ownership,
are overseen by centrally appointed o cials. Furthermore, just like their predecessors, processing areas of
p. 612 SEZs are secured by boundary walls for which strict norms are speci ed. Finally, with a few exceptions,
most SEZs are comparable to EPZs in size. Of the 355 SEZs (as of 22 January 2019) noti ed after 2005, 274
2 2
are below 1 km in size and the median size is 0.20 km .

Decline of SEZs: 2011 onwards. The proliferation of SEZs triggered a erce nationwide debate over their
usefulness. Massive intellectual support for criticism of SEZs came from the media, activists, and academia.
While the debate touched upon almost every aspect of SEZs—from macro-economic issues related to their
impact on government revenue, employment, trade, and foreign exchange earnings to social issues
including labour rights, regional inequities, and environmental protection—land acquisition emerged as
the most prominent issue (Banerjee 2008). Unlike China where a exible land management system for the
conversion of agricultural land into industrial land facilitated the proliferation of large SEZs across the
country, in India the institutional contexts led to country-wide protests against land acquisition for SEZs
(Levien 2011). The government, fearful of losing popular support, responded to the controversy by back-
pedalling. It dissipated the resistance to SEZs by diluting the tax incentives in 2011 and 2012. First it rolled
back exemptions from Minimum Alternate Tax (MAT) o ered to SEZ units and developers, and dividend
distribution tax (DDT) o ered to SEZ developers without any amendment to the Act and with immediate
e ect. Then it introduced a ‘sunset clause’ on income tax exemptions. Under the clause, from 31 March
2016, tax incentives to SEZ developers were withdrawn and in 2020, SEZ tenants will lose all direct tax
incentives. While SEZ bene ts are being withdrawn, there has been an upgrading of incentives in the rest of
the economy. Thus, SEZs are increasingly becoming less attractive for developers, investors, and
companies, and there has been a signi cant increase in the number of applications from companies seeking
denoti cations of their SEZs or withdrawing their SEZ plans, and a decline in the number of new
applications (Mukherjee et al. 2017). Between September 2012 and January 2018, the area under SEZs
2 2
declined steeply from 496km to around 430 km .
In sum, the evolutionary process in SEZ policy was conditioned by the political contexts of the two
countries. While in China, a strong development state continued to drive SEZs in newer directions, in India
policy changes remained path dependent. Despite the fact that new generation SEZs in India were inspired
by the Chinese SEZs, they essentially remain in the traditional mould of EPZs in terms of design and
governance. Further, while the SEZ evolutionary process in China was driven by a progressive approach as
part of a broad spectrum of economic reforms aimed at economic transformation, in India policy changes
had been in search of a model that could moderate the agendas of various interest groups. Finally, unlike
China, which placed SEZs at the centre of its development strategy, India could not show commitment to
this policy due to popular resistance. The government back-pedalled, succumbing to heavy criticism of SEZs
that came from academics, NGOs, and political heavyweights.
31.3 Institutional Arrangement of SEZs
The political contexts shaped not only the ways in which SEZ policy evolved over time but also their
institutional arrangements. China’s strong political leadership, supported by a centralized and one-party
system, allowed considerable experimentation with a de facto federal structure, even in the absence of
p. 613 legally based political and bureaucratic institutions of federalism. Through scal decentralization, the
central leadership provided local governments with the incentives and capacity to promote investments and

industrial activities. This functional federal arrangement, in the absence of a fully developed inter-
governmental governance structure and codi ed rules, is re ected in the institutional arrangements of
SEZs. Thus, except for the three original SEZs in Guangdong province, which were subject to the Regulations
on Special Economic Zones in Guangdong Province approved by the National People’s Congress (NPC),
other SEZs have never established their legal status through national legislation. Instead, the regulatory
framework for SEZs was established through various provisional directives created by the State Council and
its ministries (i.e. Ministry of Commerce and Ministry of Science and Technology), which are not
constitutionally binding. In the absence of legal status for SEZs at the national level, provincial
governments were allowed to promulgate their own regulations to govern SEZs. The rst provincial
regulation was passed by the Tianjin municipal legislature in 1985. At present, most provinces have
approved regulations for SEZs in their jurisdictions.
An important institutional arrangement for SEZ policy is to create a single-window agency to deliver
streamlined, e cient services. In order to facilitate fast decision-making, SEZs are managed by a quasi-
governmental agency called the administrative commission. The administrative commission’s primary
mission is to expedite regulatory and administrative tasks to facilitate investment projects. Additional
administrative powers in areas such as taxation, customs, and labour were granted to the administrative
commission to allow them more freedom to create a capital-friendly environment.
The administrative commission often follows two models. One is the autonomous model in which the
administrative commission was appointed by the superior government and operates independently from
the local government where the zone is located. The other is the integrated model in which managerial
functions are shared by the administrative commission and the local government. Under the autonomous
model, the SEZ has an advantage in reducing bureaucratic red tape and facilitating fast decision-making,
but its incentives tend to be in con ict with the local government. While the SEZ administrative commission
pursues returns on its investment, the local government is responsible for the provision of public goods and
services. Under the integrated model, both the administrative commission and the local government are
stakeholders of the SEZ. This model realigns the incentives of the two parties to support the development of
the SEZ, thus mitigating the coordination problem despite the fact that having dual authorities means that
the SEZ is likely to be subject to more bureaucratic barriers (Zheng 2014).
In contrast, India, a constitutional democracy with formal federal arrangements embedded in the
constitution, is endowed with well-developed codi ed rules for inter-governmental devolution of
responsibility for revenue and expenditure. SEZs in India are strictly regulated within the constitutional
provisions of federalism. Since international trade and investment is exclusively the responsibility of the
centre, in particular the Ministry of Commerce, regulation of SEZs is highly centralized. Until 2005, India
had no overriding EPZ legislation or EPZ authority, yet EPZ policy was contained within the foreign trade
policy, while incentives and other facilities o ered to EPZ units were implemented through various
noti cations and circulars issued by the relevant ministries or departments. State-level issues, such as state
commercial taxes and duties, local taxes and duties, land, power, water, environmental and pollution
controls, labour, law and order, governance rules and regulations, and company registrations, were covered
by various state government provisions.
p. 614 The 2005 SEZ Act provides an umbrella legal framework for each of the three principal stakeholders:
developer (and co-developers), operator, and tenant/units. The provisions of the Act override the provisions
contained in any other Act of the central government, but do not cover subjects which are the exclusive
legislative prerogatives of the state government. State governments are advised to formulate an SEZ policy
or Act to cover such subjects, to be implemented through state and municipal government departments.
Apparently, the overriding powers have not been used to reduce interference by di erent layers of
government, so implementation of the policy is contingent upon political cooperation between them. Since
the state government may not necessarily be the political ally of the central government, party politics

between them may also a ect the implementation of the policy (Jenkins et al. 2014).
Furthermore, the federal administrative structure of SEZs has not been able to institute single-window
facilities. Government agencies at the central, state, and municipal level need to be coordinated to
operationalize a single window. However, there is no institutional mechanism built into SEZ administration
that ensures coordination amongst these administrative agencies. Evidence suggests that if state and
municipal government departments do not align their rules with SEZ rules, state o cials override the latter
due to lack of knowledge, and sometimes out of insecurity (Aggarwal 2012a).
Finally, while state governments are empowered to enact laws on state subjects and the SEZ Act also grants
them some powers over establishment of SEZs and investment approvals, their regulatory powers over SEZs
remain limited. Even the SEZs developed by them are managed by central government-appointed o cials.
The state bureaucracy feels alienated by this arrangement, which a ects their involvement in its
implementation (Aggarwal 2012a). The Act has not only been subjected to the vagaries of federalism but is
also exposed to vulnerabilities in terms of the lack of inter-ministerial coordination and cooperation. The
top regulatory body is a nineteen-member inter-ministerial body chaired by the Commerce Secretary. In
this horizontal set-up, inter-ministerial con icts can cause serious disruption to the implementation of the
policy.
31.4 Economic Performance
The e ects of SEZ policy and institutional arrangements are re ected in the performance of SEZs in the two
countries. China seized the opportunity of participating in the global value chains of labour-intensive
industries, used SEZs as the platform for leveraging its low-cost labour advantage, and rose to become the
global manufactory. SEZs have made a disproportionally large contribution to the Chinese economy. China’s
industrial value added has grown 53 times since 1978, reaching 28 trillion yuan in 2017 (Xinhua 2018). SEZs’
annual growth rate was more than twice that of national industrial growth. As shown in Figure 31.1, major
SEZs’ share of national GDP increased from 7 per cent in 2001 to 25 per cent in 2017. Their share of national
exports increased from 30 per cent to 52.5 per cent. Major SEZs—Shenzhen, ETDZs, and HTDZs—contribute
a signi cant portion of China’s industrial value added (43 per cent in 2016).
Figure 31.1

Contribution of SEZs to Chinaʼs economy, 2001–17
Source: China Statistical Yearbook, China Commerce Yearbook, China Torch Statistical Yearbook, Shenzhen Statistical Yearbook,
various years.
Notwithstanding the above, various types of SEZs di er in their contributions. Shenzhen, the agship of
p. 615 SEZs, served as a catalyst for China’s economic transformation, linking the Chinese economy with global
markets. In 1980, Shenzhen’s GDP was 270 million yuan, accounting for 0.05 per cent of China’s GDP. In
2018, Shenzhen’s GDP reached 2.42 trillion yuan (US$361 billion), surpassing that of Hong Kong for the rst
time (Chen and Leng 2019). Industrialization is the key driver behind Shenzhen’s miraculous growth. Its
industrial output grew at 28.3 per cent annually during this period. The economic impact of Shenzhen on the
Chinese economy has been far reaching. Compared with Shenzhen’s growth experience, ETDZs were not an
immediate success. They had a relatively slow start but a steady growth trajectory. ETDZs’ contributions to
the Chinese economy were mainly through attracting FDI and promoting exports. In 1986, fourteen ETDZs
only received 2 per cent of FDI in ows to China. In 2017, 216 national ETDZs accounted for 11 per cent of
China’s GDP, but they contributed 20 per cent of exports and 40 per cent of FDI in ows to China.
With an organizational framework similar to that of ETDZs, HTDZs served primarily as a platform to
promote technological innovations and upgrading. In 2017, 168 national HIDZs contributed about 11 per cent
of China’s GDP, similar to that of 216 ETDZs, but HTDZs hosted more than one-third of China’s high-tech
companies and contributed about 35 per cent of national R&D spending (People’s Daily 2018). Evidence
indicates that rms located in an HTDZ tend to have higher productivity gains than rms located in an
ETDZ, suggesting that industrial policies that focus on promoting technological upgrading are more
e ective than the ones that focus on promoting exports (Howell 2018).
There is tremendous heterogeneity even within the ve original SEZs. The economic performance of
Xiamen, Zhuhai, Shantou, and Hainan has been far from impressive (Yeung et al. 2009). However, empirical
assessment of the performance of SEZs in China are generally positive. Wang (2013) nds that the SEZ
policy increases per capita FDI signi cantly. In addition, both foreign-owned and domestic rms have
higher productivity in SEZs. Li and Shen (2015) nd that SEZs have a more positive e ect on industrial
transformation when their goals are consistent with the speci c comparative advantage of the region.
p. 616 Industrial parks featuring a higher level of human capital, a greater level of co-agglomeration amongst
rms within the park, and a smaller share of SOEs generate greater spillover e ects (S. Zheng et al. 2016).
The uneven development in China across both regions and sectors (Alder et al. 2016) is in itself proof that
SEZs have been a driving force in the regional economic development of China.
With the expansion of SEZs, the Chinese government’s industrial policy goals have also evolved. In the early
stages of SEZ development, the government relied on direct intervention to attract FDI, promote exports,
and subsidize essentially labour-intensive industries. SEZs provided an important platform to implement
these policies. As China opens further and approaches the technological frontier, many SEZs have rede ned
the priorities of industrial development, aiming to accelerate the transformation and upgrading of
traditional industries. While attracting FDI was the primary policy goal pursued by SEZs in their early
stages, building production networks is now an important strategy for them to achieve sustainable
development.

In 2010, the Chinese government identi ed seven ‘strategic emerging industries’ (zhanluexing xinxing
1
chanye) as the priority industries to be supported, with a target share in GDP for 2020 of 15 per cent. In line
with this new industrial policy orientation, SEZs have adjusted their priority industries. Shenzhen
earmarked a fund to support the strategic emerging industries, and each priority industry has received
subsidies of 500 million yuan each year since 2011. Private investors were also encouraged to invest in these
industries. From 2010 to 2015, the total output of strategic emerging industries increased from 875 billion
yuan to 2.3 trillion yuan, contributing 40 per cent of the city’s GDP (Shenzhen NDRC 2016). Shenzhen has
moved beyond its reputation for making cheap low-tech products and become a hub that connects
innovation, manufacturing, and knowledge all over the world.
China leveraged the potential of SEZs, rst to integrate with low value-added global value chains and then
to shift to sophisticated production networks driven by R&D and innovation. In 2015, China launched Made
in China 2025, the industrial master plan that aims to turn the country into a manufacturing superpower by
2025. With a more active industrial policy supporting domestic companies to pursue innovation-driven
development, China seeks to gradually replace foreign with Chinese technology at home—and to prepare
the ground for Chinese technology companies entering international markets.
India could not match the scale and success of China’s SEZs. The SEZs set up under the EPZ regime made a
limited contribution to the Indian economy. In 2003–4 when they were completely phased out, all seven
2
EPZs created under the regime together covered a mere 8.94 km and employed 88,700 workers (1 per cent
of formal manufacturing employment). The contribution of EPZs to overall exports remained minuscule
during the rst fteen years of their existence. It grew from 0.01 per cent in 1966–7 to 0.07 per cent by
1980–1. In 1978, a bilateral trade agreement between the former Soviet Union and India based on
‘rupee/ruble payment’ became e ective. Several companies used Kandla and Santa Cruz EPZs as the base for
exports to Russia. This led to a quantum leap in export growth for EPZs (Aggarwal 2004) and the share of
these zones in total exports increased to 3 per cent. In the late 1980s when the USSR collapsed, several zone
p. 617 units shut down and the EPZ exports from these zones declined sharply (Figure 31.2). The setting up of
more EPZs and the policy reforms after 1991 did not yield signi cant results. In 2002–3, the share of EPZs in
total exports stood at 4 per cent.
Figure 31.2

EPZ employment and share in manufacturing exports in India
Source: The Ministry of Commerce, data compiled over years.
In addition to the poor investment climate, the comparative advantage-defying development strategy of
promoting heavy industrialization adopted by the government also in uenced the contribution of SEZs. The
government discouraged labour-intensive low-value-added processing activities even within SEZs with a
minimum value-added criterion under which EPZ tenants had to generate 40 per cent value addition
domestically. In the initial phases, EPZs attracted mainly pharmaceuticals and engineering products, and
textiles companies which were targeted at the former USSR. Their relative importance declined after the
collapse of the Soviet Union. India thus failed to bene t from the relocation to Asian EPZs of labour-
intensive shoe, clothing, toy, and electric and electronics processing plants that was begun in the late 1960s
by mainly American investors. The role of SEZs in promoting new production sectors and exporting new
products has therefore been rather limited in India in comparison with China (Aggarwal 2006). Amongst a
few notable exceptions is the modern jewellery industry in India. Its foundations were laid in Santacruz EPZ
in Mumbai in 1987–8. Over the years, diamond/gold jewellery has become one of the top ve exports from
India, with EPZs as the drivers of this export. In 2010–11, SEZs accounted for over 86 per cent of total gold
jewellery exports from India. In 2017, SEZ exports of gold jewellery were nearly double those from DTA.
Zones have also been instrumental in creating the basis of the growth of the electronics industry through
technology transfers, spillovers, and demonstration e ects. Until the early 1980s, electronic hardware
exports originated primarily from EPZs. Even during 2000–02, the share of SEZs in total hardware exports
was as much as 26 per cent (Aggarwal 2004). However, India could not come anywhere near the success
stories of East Asia in the electronics sector.
The enforcement of the SEZ Act in 2005 led to tremendous growth in the establishment and contribution of
p. 618 SEZs in India. In 2005–06 there were eighteen SEZs employing 134,704 people and contributing less than
5 per cent of exports. Within two years, by January 2008, 198 new SEZs had been added and employment
almost doubled. By 2018, 373 SEZs employed 2 million workers contributing over 20 per cent of total goods
and services exports (Figure 31.2).
While the contribution of SEZs to employment, exports, and industrial diversi cation looks impressive at
rst glance, there is a signi cant gap between the actual performance of SEZs and the potential of the
sector. Of the 373 SEZs noti ed, only 64.6 per cent (241 out of 373) are operational. More importantly,
however, a large chunk of land is lying vacant even in those SEZs that are functional.
There is a signi cant gap between intended and actual employment. In eighty out of 223 operational SEZs,
actual employment fell more than 50 per cent short of proposed employment. Overall, the actual
employment is 700,000 short of the proposed employment, indicating the extent of under-utilization of the
installed capacity.
Furthermore, an analysis over time shows that the expansion of SEZs has slowed down (Figure 31.3). As of 17
2
July 2012, the number of newly noti ed SEZs stood at 389, covering an area of 478 km , in addition to the
eighteen SEZs which came into existence prior to the SEZ Act. Since 2012, due to the global economic

downturn and the withdrawal of key bene ts o ered to SEZ units, the number of SEZs and the area covered
have started declining (Table 31.2). There was a rush for de-noti cation after the sunset clause on tax
breaks became e ective. The situation was further aggravated by the fact that the incentives o ered to
exporters outside the zones were becoming increasingly attractive. Figure 31.3 shows that while SEZ
investment and employment continued to increase due to an increasing number of SEZs becoming
functional, their growth rates have declined.
Figure 31.3
Trends in SEZ employment and investment growth rate in India, per cent
Source: Ministry of Commerce, various years.
One of the refrains held against India’s SEZs is that they could not attract FDI. In China, a principal reason
for the establishment of SEZs was attracting FDI. However, this was never the key objective of the Indian
EPZ/SEZ policy. The share of FDI in total EPZ investment was as low as 25 per cent in 2003. With the
expansion of SEZ investment, the share of FDI has declined to 5 per cent. Domestic investment growth has
also waned since 2011–12, and the level of investment in SEZs has even declined during the past year.
Since the 2005 Act, the foundations of several new technology- and knowledge-based manufacturing
industries have been laid in SEZs. These include the electronics manufacturing services industry (EMS),
aerospace, semi-conductors, alternative energy, and bio-tech industries. Capital and scale intensive, these
p. 619 industries bene t immensely from externalities associated with agglomerations such as lower input and
services costs, access to skilled labour, and knowledge spillovers. However, the policy uncertainty appears
to have dampened their future growth prospects.
A disaggregated analysis of SEZs dispels some pessimism around their contribution to the Indian economy.
It shows that while manufacturing did not show much momentum, the erstwhile EPZs became instrumental
in launching India on the path towards software export-led growth when the Tata family established a unit
in 1977 in Santacruz Electronics EPZ (SEEPZ) in partnership with Burroughs, an American company, to
export software and peripherals. A breakthrough in the progress of the industry occurred when, in 1985,
Citibank established a 100 per cent foreign-owned, export-oriented, o shore software company in SEEPZ
(Heeks 1996). This company drew attention to the possibilities for o shore software development in India,
even though a major breakthrough in software exports was achieved in the late 1990s when India came into

prominence as one of the top destinations for outsourcing IT services.
India’s competitive advantages in the IT sector are owed largely to the government policy of promoting
higher education since the early stage of its development process, which helped build a skilled labour force,
and to a number of policies launched in the mid-1980s, including software technology parks which became
instrumental in IT cluster development. A survey conducted by NASSCOM in 2004–5 found that the total
value of outsourcing to India (US$17.2 billion) was as much as 44 per cent of the worldwide total (David
2005). In 2005, when EPZs were upgraded to SEZs, the latter became a powerhouse of IT growth. Newly
noti ed SEZs o ered an opportunity to software companies and other developers to set up IT-speci c SEZs
and expand the scale of businesses to take advantage of economies of scale. Table 31.3 presents a
comparative framework showing the contributions of the manufacturing and IT sectors to SEZ areas,
employment, investment, and exports. It is clear that the IT sector alone contributed almost 90 per cent of
employment and 41 per cent of exports in SEZs. If exports from Jam Nagar re nery, which in ates
manufacturing exports, are excluded then the IT sector is found to contribute over 51 per cent of total SEZ
exports. Actual employment fell 85 per cent short of the target in manufacturing zones; in IT-SEZs this
ratio is above one.
Table 31.3 Status of manufacturing and IT/ITES SEZs in 2018
IT/ITES Manufacturing
Notified a er 2005 218 129

2
Total area (km ) 50.16 356.7
2
Area under SEZs reporting employment in km 30.17 (132) 297.19 (84)
Direct employment* 1,363,509 (112) 158,281 (75)
Proposed employment* 1,382,769 (112) 981,910 (75)
Ratio of actual to proposed employment 1.1 0.16
Exports share (2017–18) (%) 40.5 59.5
Exports share excluding Jam Nagar refinery (%) 51.4 48.6
Source: Ministry of Commerce, India.
* Note: Covers only those SEZs for which data was available for both proposed and direct employment (number of zones in
parentheses).
p. 620
31.5 Conclusion
It can be seen that almost every aspect of SEZ policy in China and India, including the objectives, design,
institutional characteristics, and economic outcomes, is shaped by their political economy contexts. China’s
strong central leadership experimented with amorphous performance-based governance systems to
leverage its labour-driven comparative advantage to drive miraculous industrial growth and transformation
through its SEZs. In contrast, in India, ercely competitive political systems, a highly structured

administrative machinery which is dominated by decision-making at the centre, democratic social changes,
a rigid federalist governance structure, and the comparative advantage-defying economic strategy, all
interacted together to create a context marked by policy inertia and policy uncertainty regarding SEZs. A
comparative analysis of their performance and growth trajectories in di erent contexts yields three useful
lessons.
First, SEZs build on the competitive advantage, rather than the static comparative advantage, of the country. While
both India and China have comparative advantages in labour-intensive manufacturing, they followed
di erent policies towards infrastructure, education, R&D, and labour and capital markets, which have
shaped their competitive advantages di erently. In particular, the institutions governing labour markets
play quite di erent roles in shaping competitive advantages in China and India. China’s pro-capital labour
regulations and state-controlled trade unions reinforced the comparative advantages to build competitive
advantages in labour-intensive manufacturing. Building on China’s competitive advantage, SEZs serve as a
platform that transformed China into a global manufacturing powerhouse and a primary destination of FDI.
In contrast, despite its relative abundance in unskilled labour, India lost comparative advantage in labour-
intensive production at an early stage of development due to highly restrictive labour regulations and
powerful trade unions in the formal sector (Ahluwalia et al. 2018). Low labour mobility solidi es
segmentation of the labour market, pushing up wages in the formal sector (Zheng 2016). However, over
time India developed competitive advantages in the skill-intensive IT sector which was leveraged by the
SEZs.
Second, whether SEZs can generate positive externalities depends on both their distinction from the
national regulatory environment and their integration into the global economy. China’s SEZ policy served as
a policy experiment to facilitate institutional innovations and structural transformation. Some controversial
policies, such as tax incentives, land transfers, and labour-market liberalization, were rst tested in SEZs
before being implemented nationwide. These experiments have created an unusual adaptive capacity that
facilitated China’s economic transition (Heilmann 2008). From the very beginning, SEZs were viewed as
windows of economic reform which would bring foreign capital and technology to modernize the industrial
base of China into the twenty- rst century. Attracting FDI and promoting exports have been the key
objectives of SEZ development. India’s SEZs could not be insulated from their broader institutional
contexts, and in fact, their regulations and deregulations followed economic reforms in the national
economy. The policy was marked by caution and scrutiny to avoid con icts amongst interest groups. The
constitutional federalist governance structure created barriers preventing SEZs from generating signi cant
momentum to reduce bureaucratic burdens and break the political gridlock.
p. 621 Third, the success of SEZ policy requires strong political will and alignment of interests. SEZs can be the lynchpin
of the growth process but this requires strong commitment, a spirit of experimentation, legal and
institutional frameworks, and a continuously unfolding and dynamic set of policies (Aggarwal 2012b). China
succeeded in implementing its SEZ-led strategy not just due to its strong development-state role, but also
by motivating local governments to engage in competitive liberalization. Having the interests of di erent
political actors aligned in favour of economic liberalization created a self-reinforcing mechanism that
alleviated foreign investors’ concerns about the credibility of SEZ policy (Zheng 2014). In contrast, India
adopted a cautious approach to SEZ policy in order to moderate academic, political, and civil-society

resistance. However, the SEZ policy sparked unprecedented turmoil due to the large scale of land acquisition
for SEZs disturbing the social and economic systems of rural areas. Amidst widespread public discontent
and misconceptions about the policy, the government became increasingly convinced that SEZs had no
public appeal or political returns. Thus, instead of systematically addressing the challenges of carrying the
policy forward, it started backtracking, creating uncertainty and confusion regarding SEZs. Zones lost their
lustre once preferential tax bene ts were withdrawn. A lack of inter- and intra-governmental coordination
due to a rigid constitutional structure further a ected the attractiveness of the policy. Foreign investors
largely stayed away. Although the SEZ Act 2005 had created an atmosphere of positive investment growth, it
soon gave way to pessimism.
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Notes
1 The original list of strategic emerging industries included: next-generation information technology, high-end equipment
manufacturing, new materials, biotechnology, new-energy vehicles, new energy, and energy-saving and environmental
protection technologies. The list was revised in 2013 and then again in 2016.

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The Oxford Handbook of Industrial Hubs and Economic Development

Arkebe Oqubay (ed.), Justin Yifu Lin (ed.)

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31 Special Economic Zones in China and India: A

https://doi.org/10.1093/oxfordhb/9780198850434.013.31 Pages 607–622

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31.2 Evolution of SEZs

China’s SEZs have experienced four stages of development since 1980.

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2006 227 5 49 53 73 14 33 1,346

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Ownership Sectoral distribution

2012 407 7 110 290 496.21 24 n.a.* n.a.* 7

2019 373 7 80 286 430.38 21 126 221 5

* Note: not available.

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31.4 Economic Performance

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Source: The Ministry of Commerce, data compiled over years.

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Source: Ministry of Commerce, various years.

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Table 31.3 Status of manufacturing and IT/ITES SEZs in 2018

Notified a er 2005 218 129

Direct employment* 1,363,509 (112) 158,281 (75)

Proposed employment* 1,382,769 (112) 981,910 (75)

Ratio of actual to proposed employment 1.1 0.16

Exports share (2017–18) (%) 40.5 59.5

Exports share excluding Jam Nagar refinery (%) 51.4 48.6

Source: Ministry of Commerce, India.

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NDRC (2007) The List of Chinaʼs Development Zones (2006). Available at

NDRC (2018) The List of Chinaʼs Development Zones (2018). Available at

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