SINGAPORE and Malaysia are working towards a special economic zone (SEZ) in Johor, having inked a memorandum of understanding on Thursday (Jan 11).

Both countries expect the initiative to improve investment and trade, and are hoping Johor would emulate the success story of China’s Shenzhen – which flourished due to its proximity to Hong Kong.

The Business Times delves into examples of SEZs and their economic impact.

What is an SEZ?

An SEZ benefits from special provisions designed to stimulate economic growth. Businesses within an SEZ may enjoy better tax incentives, for instance, or lower export or import tariffs.

The provisions will be devised to be conducive for foreign direct investment, and to facilitate exchanges of goods and talent.

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Shenzhen was China’s first SEZ, designated as such by late Chinese statesman Deng Xiaoping in 1980. That status is arguably responsible for transforming what was then a fishing village with just 300,000 people to a metropolis of more than 17 million people today.

While driving Chinese economic growth at its early stage of opening up, Shenzhen also became a thriving technological hub that incubated many large tech companies, including Tencent and Huawei.

What other SEZs are there in the region?

Malaysia has several SEZs, which it calls economic corridors. The one closest to Singapore is Iskandar, in the state of Johor.

Cambodia, Indonesia, Myanmar, the Philippines and Thailand all have SEZs, while Vietnam has some economic zones and state-supported industrial parks that operate on similar premises.

Among Indonesia’s SEZs, the one closest to Singapore is the BBK Free Trade Zone covering Batam, Bintan and Karimun.

What economic impact do SEZs have?

SEZs can have significant positive economic impact for countries. Indonesia, for instance, expected its SEZs to attract 92.3 trillion rupiah (S$8.7 billion) in local and foreign investment in 2021.

More foreign investment often means enhanced public infrastructure for developing regions. China and Laos established their first cross-border economic cooperation zone Boten Beautiful Land SEZ in 2003. The project included a railway connecting landlocked Laos to China.

Laos, however, is now struggling to repay billions of dollars in debt incurred as part of the project. Much of that debt is to China.

While research has shown that SEZs improve foreign entry and investment, some scholars have questioned if Shenzhen’s success story is replicable. Sluggish development of many new SEZs in China, such as Xiongan on the outskirts of Beijing, shows the diminishing appeal of SEZs when compared with well-developed top-tier cities.

Depending on an economy’s stage of growth, the boost from an SEZ could be limited.

Associate Professor Gu Qingyang of the Lee Kuan Yew School of Public Policy previously told The Straits Times that the lack of established ecosystems and clear growth trajectories can hold investors back from expanding into SEZs, in addition to discouraging talent exchange.

“Very few places can replicate the success of Shenzhen and the entire Pearl River Delta, where there’s an established supply chain,” he said.