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What Are Economic Development Zones?

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  • Written By: Terry Masters
  • Edited By: Shereen Skola
  • Last Modified Date: 02 September 2016
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Economic development zones are government-designated geographic regions that offer special economic incentives to businesses to encourage growth. They are also known as Special Economic Zones (SEZs), enterprise zones and opportunity zones. In some countries, economic development zones are labeled based on the benefits they offer to businesses. For example, some areas are called free trade zones or export processing zones. This type of business development model has been employed successfully all over the world, in countries such as China, India, the US and Brazil.

Governments can adopt economic development goals for geographic regions that are underdeveloped or blighted. Economists often believe that spurring business investment improves the surrounding community by creating jobs, stabilizing neighborhoods and increasing access to goods and services. In some instances, areas are targeted for a specific type of business growth. For example, a government might target an area for job growth and create economic development zones that offer incentives to manufacturing businesses to locate to one of the areas. Likewise, a government might want to spur the economy by increasing exports so will set up economic development zones for export processing that provide incentives for businesses conducting the desired activity in the target areas.

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Economic development zones have exact geographical boundaries that can be outlined on a map. Businesses that locate to the targeted area are usually eligible for various types of government incentives, including tax breaks, special loans, government loan guarantees and equity investments. The government may also issue municipal bonds designed to benefit businesses within the zone. From a business standpoint, the incentives offered by the zone can increase overall profitability by a high margin. For example, tax breaks for locating to a zone typically involve tax abatements for property taxes and tax credits for hiring local workers that can be good for 10 years or more.

India has made effective use of economic development zones to spur foreign direct investment. The country set up a slate of economic incentives for foreign corporations to locate to targeted areas and set up outsourcing operations. This resulted in the development of an entire outsourcing industry, particularly in customer service, where foreign corporations would relocate part of their operations to India or form a partnership with an Indian company to provide services remotely to the corporation's customer base in their home country.

China is another country that has successfully used economic development zones. Foreign corporations that locate to the zones are eligible for many government incentives that improve profitability. The country may also benefit from this strategy through economic growth and increased job opportunities for the country's workforce.

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