Streiβler, 1982; Feldstein, 1979; Kay, 1977). Therefore, in periods with inflation generous
tax concession measures do not adequately promote private investment in the FETA as
designed, but only (or partly) compensate the losses caused by inflation.
Free Economic and Trade Zones as an Instrument of Economic Growth
and Transformation
Over the last two decades, many developing (as well as developed) countries have
established free economic and trade zones with the aim of attracting foreign capital
through the provision of tax incentives, promoting exports, creating employment
opportunities and promoting regional development (Chen, 1993). Regarding the general
effects of tax incentives (and other public policy measures such as easing of foreign
currency regulations, decentralisation of development policy making, etc.) on firms’
location in the FETA and other types of enterprise zones, Bartik (1991) and Ge (1995)
argue that there are positive relationships between the presence of such incentives and
increased economic activity. In this context the success of a zone is frequently measured
by the amount of investment undertaken after the designation, the increase in the number
of firms in the zone, and the change in zone employment (Papke, 1992). In many cases,
the zone’s achievements have also been measured in terms of exports, technology transfer
and industrial modernisation, diversification of local economies, etc. (Tuppen, 1993;
United Nations Centre on Transnational Corporations, 1990).
For example, in the context of the so-called open-door policy which has been
promulagated since 1978, the central government of China granted the coastal regions
(special economic zones — SEZs) more autonomy in foreign trade and allowed them to
charge foreign-invested firms lower taxes than permissible in other regions. In this special
economic zone, the corporate tax rate presently amounts to 15%. This compares to the
55% tax rate Chinese firms pay elsewhere in the country and the 33% levied on foreign-
funded enterprises in the hinterland. Furthermore, (a) regions and provinces are authorised
to set up various types of trading corporations for their own territories, (b) some selected
enterprises can conduct foreign trade negotiations independently (without the control of
the central government), (c) local governments at different levels and enterprises can retain
part of their foreign currency earnings, and (d) some provinces such as Guangdong and
Fujian were allowed to transfer a smaller share of tax revenue to the central government.
Not surprisingly, these special economic zones have made major contributions to the
remarkable growth of Chinese exports and national income. By attracting investments
from abroad, SEZs have also provided access to business know-how in light industry and
the service sector. To a certain extent, they have also had significant impact on the inflow