Special Economic Zones and Sourcing Linkages with the Local Economy: Reality or Pipedream?

Abstract

In this study we investigate in how far firms in special economic zones (SEZs) have the potential to generate indirect benefits and knowledge spill-overs in the local economy through the creation of backward linkages with local suppliers. For this purpose, we map the linkages between SEZ firms and suppliers in the host economy in seven SEZs around the world, namely in Colombia, Ethiopia, Malaysia, Nigeria, Rwanda, South Africa and Vietnam, based on 103 interviews with SEZ firm managers. We furthermore analyse the challenges in the formation of these linkages. Overall, our findings suggest that, contrary to the objective of many of the zones, backward linkages between firms within SEZs as well as with firms outside the SEZs remain rather limited for the SEZs analysed. Firms primarily purchase services and minor inputs, such as packaging materials, from within or outside the SEZ. The sourcing of key inputs, however, is a major challenge due to a lack of local availability, high local prices and quality concerns. The majority of SEZ firms imports large parts of their inputs from abroad. This is true across a variety of sectors analysed, including garment, high-tech industries and services.