PRM Policy Note

Pakistan Resident Mission
November 2007

Series No. 2

Special Economic Zones and Competitiveness
A Case Study of Shenzhen, the People's Republic of China

Wanda Guo and Yueqiu Feng

org).Pakistan Resident Mission Asian Development Bank 1st Floor. Feedback is welcome via e-mail (adbprm@adb. OPF Building Sharah-i-Jamhuriyat. The series is designed to provide concise non-technical accounts of issues of policy importance to Pakistan. PRM welcomes submission of brief papers from both ADB staff and external contributors for the PRM Policy Note Series. Pakistan Resident Mission Asian Development Bank Members: Emma Xiaoqin Fan. G 5/2 Islamabad. Economist Coordinator: Khurram Butt The PRM Policy Note Series is based on papers and notes prepared by PRM staff and resource persons. Country Director. Fedon. Khurram Butt ( and The papers can be submitted to Ms. Emma Xiaoqin Fan (xfan@adb. The views expressed in the series are those of the authors and do not necessarily reflect the views or policies of the ADB. . Pakistan © 2007 PRM Policy Note Series Review Committee Chair: Peter L. Senior Public Resource Management Specialist Safdar Parvez.

org/prm/publications. Wanda Guo is vice-president of the China Development Institute (CDI).adb. 2 Special Economic Zones and Competitiveness A Case Study of Shenzhen. the People's Republic of China Wanda Guo and Yueqiu Feng www. and Ms Yueqiu Feng is director of the CDI's International Cooperation Department. Maheen Pracha for copy editing. The authors thank Peter L.asp Dr. and Safdar Parvez for comments and suggestions. Emma Xiaoqin Fan.PRM Policy Note Pakistan’s Resident Mission November 2007 Series No. and Khurram Butt for coordinating the publication of this issue. . This paper was presented at the Pakistan Development Forum in April 2007. Fedon.

Contents Abbreviations 1 2 3 4 5 6 Introduction SEZs compared to Industrial/High-Tech Parks The Development of the Shenzhen SEZ Factors Underpinning Shenzhen's Success Key Policies Contributing to Shenzhen's Industrial Competitiveness Conclusion 1 3 5 7 9 11 Abbreviations ADB FDI GDP PRC PRM SEZ Asian Development Bank foreign direct investment gross domestic product People's Republic of China Pakistan Resident Mission special economic zone (i) In this paper. . "$" refers to US dollars.

There are useful lessons to be drawn from Shenzhen's experience by countries such as Pakistan in designing their economic reform policies. The major findings of this policy brief are summarized below.” A SEZ is a comprehensive laboratory in which fully fledged economic reforms can be 1 .1. The Shenzhen SEZ was the first SEZ to be set up in the PRC. The experience of Shenzhen has demonstrated the important differences between a “special economic zone” and an “industrial/high-tech park. served as a “laboratory” for piloting policies. This policy note briefly documents the experience of Shenzhen and analyzes the factors that have contributed to its emergence as a successful SEZ. Shenzhen has developed from being a small fishing village in Guangdong Province into a major industrial and financial center. benefiting substantially from the liberal economic policies granted by the Central Government to SEZs. Shenzhen's rapid development has showcased the advantages of “open door” policies and market-oriented reforms. in opening up its economy to the rest of the world. and propelled economic development in the rest of the country. Over the past few decades. particularly. Introduction Special economic zones (SEZs) have played an important role in advancing economic reform in the People's Republic of China (PRC) and.

In particular. Indeed. improving people's livelihoods. but also large inflows of foreign direct investment (FDI).500 industrial parks in the PRC. the PRC's experience on SEZs sheds light on the concept and potential of SEZs for other developing countries. but only 7 SEZs. By implementing comprehensive economic reforms. Too often policies of setting up isolated industrial parks lead to the development of enclaves which are unable to propel sustained economic growth. This openness to both financial and human capital has promoted fast economic growth. while most have industrial parks. Shenzhen has enjoyed by far the most open and market-oriented economic policies in the PRC. few countries in the world have SEZs. and reducing poverty. Shenzhen's experience indicates the benefits of open and market oriented economic polices. and generally encompass only part of a city. This has attracted not only young and skilled migrants from across the country. transforming a small village into a financial and industrial hub. industrial parks are authorized by provincial and municipal governments.piloted. In this sense. There are over 1. Shenzhen serves as a good example of how industrialization and urbanization can act as catalysts for economic development. but with an industrial focus. In contrast. in turn. The success of Shenzhen further demonstrates the importance of an enabling policy environment. Given the importance of SEZs in testing and showcasing the success of economic reforms. which has. SEZs in the PRC are authorized by the Central Government and cover large administrative areas such as an entire province or a city. been beneficial for generating employment. 2 . SEZs ultimately unify the industrialization and urbanization processes. while industrial parks are a supporting component of SEZs.

and (iii) ”1“ refers to the Newly Developed Area of Tianjin Binhai. (i) Essentially.2. or even part of a large city. 3 . Zhuhai. Shanghai's Pudong district is 522 square km. and Shantou. are often part of a city or province and are not organized as separate administrative divisions.” and accorded the ”the right to experiment” by the Central Government. Xiamen. (ii) SEZs in the PRC tend to cover large geographic areas. rarely average more than 10 square km. The Central Government has so far only authorized seven SEZs. These are occasionally referred to as the ”4+2+1. Industrial parks.000 square kilometers (km). for instance. SEZs compared to Industrial/High-Tech Parks SEZs were established in the PRC as early as 1980. both authorized as SEZs in 1990. and Shantou. Industrial and high-tech parks. however. (ii) ”2“ refers to the new Pudong district in Shanghai and Hainan province. This is equivalent to granting a SEZ a high degree of autonomy in implementing economic policies. Shenzhen. a SEZ is an administrative division: it can span an entire province.000 square km. spans nearly 2. which was authorized in 2006. The key differences between SEZs and industrial/high-tech parks are outlined below. (iii) A SEZ in the PRC is intended specifically as a pilot area in which comprehensive economic reforms can be carried out and the zone opened up to the rest of the world economy. 34. such as Shenzhen. such as Shanghai's Pudong district and Tianjin's Binhai's Newly Developed Area. entire cities. such as Hainan. Xiamen.” where (i) ”4” refers to the first group of SEZs that were authorized in 1980-Shenzhen. and Hainan. It is thus mandated to “experiment. on the other hand. Zhuhai.

taxation. customs clearance.China. In contrast.(iv) The PRC’s SEZs are located in coastal areas with easy access to ports and transport networks. Xiamen adjoins Taipei. The subsequent sections use the Shenzhen SEZ as a case study to illustrate how preferential policies and the advantages of location have substantially improved its industrial competitiveness. 4 . the use of foreign capital and profit repatriation by foreign investors. Such policies may be applied in many industrial parks following the practices of SEZs. (v) Finally. Zhuhai borders Macao. or neighboring countries. they are specially set up in areas adjacent to the PRC's “internationalized” cities. Moreover. the PRC's industrial parks are less bound by the geography of existing hubs and are located either in coastal areas or the interior provinces. imports and exports. SEZs are subject to “preferential policies” on land. Shenzhen borders Hong Kong. and logistics. economic hubs. China. and the Tianjin Binhai Newly Developed Area borders Japan and the Republic of Korea. finance. but generally only after they have been “tested” in a SEZ.

The Development of the Shenzhen SEZ On 26 August 1980.” From 1980 to 2005. Shenzhen has developed at a phenomenal pace. the Pearl River estuary in the west. In 2006. Shenzhen can thus 1 These figures are measured at current dollar prices. and very close to the third-ranked city. Shenzhen is located on the country's southern coast. Longgang. Shenzhen's per capita GDP was ranked first in the country at more than $8. Luohu. Futian. Shenzhen's GDP is expected to exceed that of Guangzhou in 2007.The growth rate recorded in 2006 was 15%. To date.0001. 5 . Shekou. now famously referred to as “Shenzhen speed. the State Council of the PRC approved the establishment of the Shenzhen SEZ. when GDP grew at an annual average rate of 29%. Shenzhen is still one of the largest and the most successful SEZs in the PRC. In 2006. adjacent to Dapeng Bay in the east. This growth can be divided roughly into three stages: (i) from 1980 to 1986. when it grew at 19% annualy . and (iii) from 1996 to 2003. China. and Yantian. During the last few decades. and Hong Kong. it is almost half that of Hong Kong. which was characterized by an annual average growth rate of 44%.3.000 square km and it has a population of about 12 million. ranking it fourth among the PRC's rapidly growing cities. Nanshan. as one of the important measures carried out to implement the PRC's new “open door” policy. China lying close to its southern perimeter. the average annual growth rate of the gross domestic product (GDP) of Shenzhen was 27%. (ii) from 1987 to 1995.3 billion. Shenzhen's total GDP was $71. Shenzhen consists of seven districts: Bao'an. Guangzhou. making it the PRC's first SEZ since the country's independence in 1949.619 compared with the national average of about $2. The total area of Shenzhen is about 2.

The output of micro-motors accounts for about 10% of the world's total.2 : 53. it had reached $3. Huawei and Zhongxing.7 million. In 2005. and electronics accounted for almost 60% of the total industrial output in Shenzhen. China International Marine Containers (Group) Ltd. Firms in Shenzhen have gradually established their own brand names. and (iii) from assembling and processing to independent manufacturing. computers. has ranked first in terms of container output. both large manufacturers of electronic and telecommunications equipment in Shenzhen.2% between 1980 and 2004. In 1979. This industrial structure is concentrated in certain sectors that account for large shares. accounting for more than 30% of the total share of the world market. the actual use of foreign capital amounted to $153. Many well-known brands have emerged from the areas of telecommunications equipment. there were five Shenzhen brands with sales of more than Yuan10 billion (about $1.3 billion. In regarded as one of the richest cities in the PRC. Since 1996. Shenzhen's industrial base has continued to grow rapidly. Its ratio of primary to secondary to tertiary industries was 0.2 : 46. flat panel display equipment. computer and related products.25 billion). By the end of 2005. Shenzhen remains an attractive destination for foreign investors. biomedicine. software. Since 1979. have become major suppliers in this sector not only in the PRC but also world wide. The area's industrial structure has undergone three key transformations: (i) from traditional industry to hi-tech industry. (ii) from small-scale and scattered operations to large-scale and group-based companies. telecommunications. digital audio and video.6. International companies of office automation in Shenzhen 6 . and the apparel sector. The average annual growth rate of industrial valueadded was 40. by 2006.

Compaq. Other major investors include Wal-Mart. Toshiba. Intel. Epson. 7 .include Ricoh. Their “Shenzhen plants” generate a total output equivalent to about 21% of the world's total outputs by these companies. and Siemens. Sony. In all. IBM. 141 of the world's top 500 multinational companies have currently invested in Shenzhen. and Xerox. Copier.

the PRC carried out reforms to unify the two tax rates. the Central Government has provided a special policy framework for the Shenzhen SEZ that has helped to create a “soft enabling environment” to enhance the city's industrial competitiveness. from overseas. An open and liberal policy environment is the most important reason behind Shenzhen's success. Second. the actual utilization of FDI increased by 10% annually from 1980 to 2006. Shenzhen has been home to migrants from across the country and. Shenzhen has been a testing ground for comprehensive reforms. As a result. the value of exports reached $136. While foreign investors paid a nominal tax burden of 15% and an actual tax burden of 11%. However. Shenzhen has enjoyed by far the most liberal economic policies in the PRC. In other words. The innovative spirit of the city stems in part from its vibrant and strongly motivated migrant community.7 billion. and other benefits provided to firms. In 2007. First. respectively . more recently. the tax burden of domestic enterprises was twice that of foreign investors' enterprises. As a SEZ. the corresponding figures for 2 domestic investors were 33% and 23%. tax holidays. some of which are discussed below. Migrants account for 83% of the 2 The actual tax rates take into account tax rebates. 8 . Factors Underpinning Shenzhen's Success Many factors have contributed to the success and competitiveness of Shenzhen.1 billion in 2006. For example. both in terms of attracting FDI and engaging in international trade.4. and most importantly. which eliminated the preferential tax rate of 15% for most enterprises. it was one of the first cities to apply differential corporate tax rates for foreign and domestic firms. this tax rate still applies to the hi-tech sector and small enterprises in the city. while imports reached $101.

increasing its competitiveness. Shenzhen's harbor ranks fourth in the global container transportation business. 17. Shenzhen enjoys the advantage of location. China. A large share of investment to Shenzhen has come from Hong Kong. and Shenzhen's airport ranks third in PRC. Shenzhen's enabling financial environment ensures that finance is available even for relatively risky ventures. while people aged 60 and above account for less than 6% of the population. As a coastal city bordering Hong 24 yearolds comprise 13% of the population. China. the number of venture capital firms in Shenzhen accounted for one third of the total number in the whole country. By the end of 2005. Fifth. and other critical financial architecture. compared with the national average of 11%. with 18. also rank highly in the PRC. there is well established infrastructure in Shenzhen. telecommunications. 25. China as a major international financial. This has been important for the city's industrial transformation. Shenzhen is the PRC's most active city as far as the availability of venture capital is concerned. Indeed. Shenzhen's bid to upgrade its industrial structure and competitiveness has benefited hugely from its proximity to Hong 44 years-old make up 49%. and services center. Shenzhen's demographic profile favors economic development. information. Fourth. All of these conditions have built a favorable logistic environment for the upgrading of industrial competitiveness in the city. given that permanent citizens under the age of 16 make up 21% of the population. The supply and quality of other infrastructure. especially during the early years of Shenzhen's 9 . population. such as roads.4 million passengers in 2006. and utilities. The city also houses the Shenzhen Stock Exchange. the Shenzhen Small and Medium Sized Enterprise Guarantee Center.

Business approval procedures are currently under review and are expected to become even more business-friendly in the near future. The government has provided “convenient services. Finally. local opinion is sought and encouraged to increase the transparency and effectiveness of the government decisionmaking process. and apt to continuously reform and upgrade its administrative capacity. The Shenzhen government has also implemented personal service responsibility to ensure that firms' applications for various categories of government approval are processed within a specified period of time. Administrative transparency has improved over the years to strengthen the government's accountability. 10 . At the same time.development. Business procedures in Shenzhen are simple and streamlined. the Shenzhen government is efficiently run. a development plan formulated by the Shenzhen government must be submitted to the People's Congress for approval. For instance.” through direct one-stop services for large enterprises.

and (iv) favorable export and import polices. There are about 100 industrial parks located in 11 . Third. These include: (i) permission to set up wholly foreign-owned firms. (ii) stipulating preferential measures to attract the headquarters of multinational corporations. To upgrade its industrial structure. have become increasingly liberal. (iii) allowing the repatriation of profits. which undoubtedly lies behind much of the upgrading of the city's industrial structure and competitiveness. FDI policies in the PRC. and especially in its SEZs. increasingly large multinational corporations from technology-intensive industries have begun to enter the PRC. Output from foreign invested firms account for more than 40% of Shenzhen's GDP Over the last few .5. industrial parks are an integral component of the Shenzhen SEZ. the Shenzhen government has formulated a strategy to develop a “headquarter” economy by inviting multinational companies to move their headquarters into Shenzhen. and (iii) streamlining government procedures and enhancing government services for companies who choose to locate their headquarters in Shenzhen. This strategy consists of: (i) formulating systems to certify the headquarters of manufacturing companies. (ii) enabling easier access to land and infrastructure. Key Policies Contributing to Shenzhen's Industrial Competitiveness One of the most important factors helping to facilitate Shenzhen's industrial transformation has been its ability to attract foreign investment. While FDI inflow was earlier concentrated in labor-intensive and small-scale operations. decades.

and to provide government procurement and policy support for developing industries that are environmentally-friendly and energy-efficient. They were set up at the time when Shenzhen SEZ was established. the Shenzhen Government has decided to implement a new innovation strategy in early 2006. Shenzhen plans to integrate the existing parks and develop 52 larger parks. most of the industrial parks are set up outside. in order to upgrade its industrial competitiveness. Since the space for development within the checkpoint. and semi-conductor industries.the city. Shenzhen passed its Recycling Economy Promotion Rules. On 16 March 2006. Sixth. Various industrial clusters have been formed in the city. Shenzhen encourages the formation of industrial clusters or concentrations to benefit from economies of scale and scope. the Shenzhen Municipal Government has proposed policies to develop a recycling economy. 3 12 . more than 90% of these located outside Shenzhen checkpoint3. and about 70% based in villages and small towns. Based on this decision. The output value of high-tech products is expected to grow at an annual average rate of 20% over the next few years. is quite limited. All these clusters have gained substantially from economies of scale and scope. Fifth. enforcing more than 10 key procedures and systems to assess a firm's mid and long-term performance and planning. furniture. which was connected with Hong Kong. research and development investment will account for nearly 4% of the city's total GDP by 2010. The PRC Central Government gave Shenzhen a special policy to circle the area with wire to reduce the management pressure of the border. with the aim of improving the city's environment and saving resources. There are 9 checkpoints in Shenzhen. in order to improve industrial competitiveness. in the last 3 years. Fourth. bicycles. which is also where the city center is located. People who are not permanent citizens of Shenzhen must have a certification issued by the Police Bureau to enter Shenzhen. The aim is to structure Shenzhen as a “National Innovative City” in the PRC. including clusters for the garments. China.

From this perspective. A driving force in this transformation has been the implementation of economic reforms opening up the country to the world economy. In the late 1960s. A key factor in facilitating the industrialization and urbanization processes. not only for PRC. the question of how to continually promote sustainable economic development and upgrade industrial structures in tandem with urbanization has become a significant issue for the whole country. however. Hong Kong.China made considerable progress in industrialization and urbanization. and Taipei.6 Conclusion What can Pakistan learn from Shenzhen's experience of rapidly increasing its industrial competitiveness? Since the Industrial Revolution. China. Shenzhen's ability to undergo rapid industrialization and urbanization in a short span of time serves as an illuminating example. but also for other developing countries. and (ii) urbanization. economic development has been driven primarily by (i) industrialization. The key point is that SEZs ultimately regenerate the 13 . Singapore. The experience of Shenzhen has also demonstrated the important difference between a SEZ and an industrial/hightech. In the process. is the provision of open and liberal economic policies. The development experience of Shenzhen shows that the development trajectory of developing economies also needs to proceed along this arc. They serve as good examples and models demonstrating how industrialization and urbanization can act as catalysts for the process of economic development. the Republic of Korea. Industrialization and urbanization have taken place in the PRC in parallel with its transition from a planned to a market economy.

In Shenzhen. Shenzhen has the most open policy in the PRC for accommodating and attracting migrants from all over the country. This. especially FDI. It has also been open to foreign trade and foreign capital inflow.unification of the industrialization and urbanization processes through comprehensive reforms. improving people's livelihoods. in turn. This is a critical lesson for Pakistan as it embarks on economic reforms and development. and reducing poverty. 14 . the comprehensive reforms implemented in the SEZs by the Central Government have been supplemented by the local government's open and business-friendly policies. is beneficial for generating employment. The openness to both financial and human capital has promoted fast economic growth. proving a powerful combination of forces driving economic growth and development. Too often policies of setting up isolated industrial parks lead to the development of enclaves that fail to propel sustainable economic growth.

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