The role of special economic zones
In 1947, an Irish businessman by the name of Brendan O’Regan established what would be the world’s first duty-free shop in Ireland’s Shannon Airport. He also helped establish the Shannon Free Zone—an international business park near the airport—in 1959. The park provided tax breaks for companies on imported goods and materials used for export production, as well as grants to support research-and-development activities.
In time, different firms set up shop in Shannon. These include the healthcare company Zimmer Biomet, technology solutions provider Intel, and the airline Lufthansa.
Shannon Free Zone would eventually be known as the world’s first free-trade zone, a distinction significant to the former Chinese leader Wen Jiabao during his visit back in 2005. Through the decades since its founding, the site would inspire Chinese policymakers and governments worldwide to enact their own free trade areas.
The role of special economic zones is generally the same everywhere. These areas offer a way for investors to avoid different problems, including:
- Land ownership issues. Since these areas are typically created as separate areas, companies can avoid being entangled with conflicts with nearby property owners. The legal risks arising from resettlement also decrease.
- Deficient infrastructure. A city or province generally does not have the necessary infrastructure to support the production of specialized products. For example, semiconductor manufacturing requires ultra-pure water, a material devoid of gas, dirt particles, and minerals used by companies to clean sensitive equipment. Special economic zones contain facilities that treat wastewater from these manufacturing activities.
- Poor regulatory environments. Many countries remain in a bureaucratic deadlock regarding obtaining the necessary permits to start and develop businesses. Special economic zones provide “one-stop shop” services, a way for investors to submit essential legal documentswith minimal delay.
The view from Vietnam
In 1992, the first export processing zone was established in Vietnam, in Ho Chi Minh City’s District 7. Since then, the country has hosted foreign investment projects in its over 400 zones, from an economic zone that exports goods like chemicals, fertilizers, and minerals in Lào Cai—a province bordering China—to an area that provides support for investors participating in the hospitality industry, found in the tourist island of Phú Quốc.
The importance of special economic zones cannot be underestimated. More than 70% of the country’s export goods in 2018 were produced from foreign-invested firms. Around 34% of the country’s workforce was employed in FDI firms in 2020, and this segment grew by 22.5% from 2016.
How Decree No. 35/2022/ND-CP aims to modernize the country’s industrial park model
One of the highlights of this regulation is the incentives provided by the government for investors seeking to develop industrial parks as well as transform these zones into eco-industrial or hi-tech industrial parks. These incentives include:
- Priority access of State-offered investment loans.
- Land rent reduction or exemption.
- Priority access for personnel training and development services, as well as start-up assistance programs implemented and managed by state authorities.
Existing businesses and industrial parks aiming to obtain these incentives must perform the following initiatives:
- At least one industrial symbiosis through the environmental management system and production guidelines set by the International Organization for Standardization. Industrial symbiosisis defined as the process by which waste products from an enterprise can be used by another. An example is using landfill gases for power generation and soft drink manufacturing.
- At least 25% of the land area must be set aside for the development of social infrastructure and public technical utilities, as well as tree planting. Trees are shown to decrease the costs of air conditioning in detached houses by up to 30%,according to a U.S. study.
- Other important things to note:
- State incentives shall be given to businesses that construct residential buildings for staff members, employees, or workers. These accommodations must meet environmental, safety, quality, and aesthetic requirements.
- Vietnamese and foreign employees may be granted permission for short stays in industrial parks.
- Export processing enterprises are prohibited from using equipment, machinery, and property for purposes outside export production is not permitted, as there are tax incentives involved. Businesses that violate will have to reimburse these incentives. Additionally, firms must record revenues from export processing separately from other business activities.
Why is this important?
Vietnam is pursuing the goal of Net Zero by 2050 by setting caps on emissions produced from energy production, industrial activities, and agricultural work. One of the ways that the government can meet this goal is through the establishment and development of eco-industrial parks.
According to the United Nations Development Organization, eco-industrial parks promote resource efficiency, helping bridge the gap between industrial areas and the wider urban region through circular economy practices.
The need for efficiency is vital as logistics costs remain a challenge for firms throughout Vietnam. In a report from Vietnam Industry Research and Consultancy, costs of moving goods from point A to B account for 20% of the country’s GDP. This is significantly higher than Asia’s average (12.9%) and the global equivalent (10.8%). Implementing industrial symbiosis practices like turning waste into electricity and recycling can reduce logistics costs as companies turn to nearby firms for their raw materials.
Incentives for eco-industrial parks can also bring in higher quality foreign investments. Unlike firms that perform labor-intensive processes and use outdated technologies, enterprises operating in eco-industrial parks use significant amounts of investment capital and transfer clean technologies.
