Types of Tax Concessions for Promoting Investment in Free Economic and Trade Areas

In recent years the concept of FETA has evolved and has been diversified. The
following facts illustrate this development. Instead of being further concentrated in a well-
defined territorial area, investment and other types of incentives provided in FETAs (like
tax concessions, easing of foreign currency regulations, etc.) were gradually extended —
in the course of time — to other (local or foreign-owned) enterprises, operating elsewhere
in the country (see cases in Hungary).

A number of export-processing zones additionally acquired import-processing functions
(see the case of Manaus Free Zone in Brazil that now operates almost exclusively for the
domestic market). Major factors which have made such trends towards import processing
almost inevitably include:

• the technical difficulty of controlling smuggling (products and technologies) from the
zone into other parts of the host country,

• the combined pressures of local consumers (who would like to have access to and can
also afford the high-quality goods produced in the zone) and foreign investors (who are
attracted by the potentially high profitability of sales in the local market, as is the case
in China), and

• governments’ policy to encourage local linkages in exchange for access to the local
market.

A third important development was the establishment of domestic firms in the FETA. In
countries such as India local participation is compulsory when a foreign firm wants to
invest in the country’s FETA. This growing importance of domestic enterprises is well-
illustrated by the fact that over two thirds of all enterprises located in the FETA of
developing countries are presently either fully-owned indigenous firms or joint ventures
between domestic companies and foreign partners.

In China the special economic zones were rapidly expanded along the large coastal
areas, rather than remaining as small industrial enclaves. The selection of initially four
SEZs in the southern part of China in 1978/79 was mainly aimed at achieving a
geographic proximity to Hong Kong, Macao and Taiwan in order to fully exploit the
advantage of the highest concentration of overseas Chinese. Regarding the foreign
investment activities, some significant shifts were made thereafter. These include, for
example, moving away from the SEZ to a broader geographical spread leading to the
subsequent expansion of SEZs along the coast, shifting concentration from real estate
development (including hotels and other tourist facilities) towards industry, and turning
away from joint-venture-based investment to wholly owned enterprises (Wall, 1993).

In the near future the evolution of classical manufacturing-oriented FETA into a modern
service-oriented zone is expected. This mainly reflects the growing importance of the
service sector in total economic activities and the increased tradability caused by the rapid
development of information and telecommunication technology. In other words, the

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