Industrial zones under the BRI: policy tools for economic development

Under the Belt and Road Initiative (BRI), participating countries are backed by China in exploring the possibilities presented by industrial zones

Written by The Economist Intelligence Group on behalf of HSBC

Under the Belt and Road Initiative (BRI), participating countries are backed by China in exploring the possibilities presented by industrial zones. Successful zones can attract multinational corporations and domestic firms, contributing to business investment, employment generation and economic development. However, mixed results throughout China show that industrial zones are not a panacea. Tailoring them to the host country’s specific economic environment can help maximise their spillover effects and economic benefits.

The Chinese model of industrial zones

An industrial zone or park is generally defined as a designated area for the development of interconnected firms in a particular field with links to related institutions. These zones normally enjoy a unique legal and economic status to promote investment from firms that might not otherwise be attracted.

In the early 1980s China began establishing industrial zones to accomplish a series of policy objectives, including attracting foreign direct investment (FDI) and promoting industrialisation and exports. Industrial zones also served as pressure valves to alleviate unemployment and supported China’s overall economic reforms by acting as laboratories for market forces.

Estimates from a 2007 report shows that China’s special economic zones (SEZs)—of which industrial parks are a significant part—accounted for more than 30m jobs, 46% of FDI, 60% of exports and around 22% of national GDP.1

China’s massive investment in building industrial parks over three decades has not just contributed to economic growth, but has also significantly increased economic activity around the parks themselves. According to a recent study, on average, between 1998 and 2007 employment increased 41%, total factory productivity increased 8%, and wages increased 3% within a 2 km radius of the parks.2

Over time, many industrial zones in China have become industrialised towns or urban districts with large migrant populations. Shenzhen, probably China’s most successful SEZ and home to some of China’s most innovative industrial parks, is basically a migrant city—around 70% of its 10m-plus population was born outside Shenzhen.3 The emergence of tertiary sectors and residential areas in or adjacent to the parks has meant that such places have increasingly taken on an urban economic and social setting.

Industrial zones spring up supported by the BRI

The role of overseas industrial parks supported by the BRI is to establish international cooperation platforms for sustainable industrial development. Industrial parks are to become the basis for Chinese firms and their local counterparts to work in tandem to improve the division of labour and distribution of industrial chains by encouraging related industries to develop in concert.

According to China’s Belt and Road Portal, as of the end of 2016, Chinese businesses had helped build 56 industrial and trade cooperation zones in 20 countries along BRI routes, with a combined investment of over US$18.5bn.4

For multinational corporations and foreign investors, BRI support for these initiatives and the existence of a common set of standards can provide convincing arguments in favour of investment, including reduced risk of pollution incidents, greater transparency, and higher environmental performance. For companies in the host countries, the agglomeration of public services, the shared infrastructure, and improved waste-disposal mechanisms can also prove economically beneficial.

The newly-built Hawassa Industrial Park (HIP) in Ethiopia is a case in point. It is expected to employ 60,000 people and create an additional 150,000 indirect jobs.5 Prospective investors are carefully selected by the Ethiopian Investment Commission (EIC) to ensure compliance with HIP’s environmental standards. The park also comprises housing units for foreign workers, a water treatment plant, and a textile mill (currently the largest in Ethiopia) which will eventually meet 100% of the textile needs of the zone’s companies.

“We believe that it is a model that could be taken to work not in just parts of Ethiopia but throughout Africa. In time, we are sure Ethiopia will become the major apparel hub for Africa and an exporter of talent as well,” notes Mark Green, Executive Vice President of Global Supply at PVH, a New York-listed clothing company operating in HIP.6

Another example is the Thai-Chinese Rayong Industrial Zone (TCRIZ) established in Thailand in 2006. The park has attracted over US$2.5bn in Chinese investment to the country and achieved a cumulative industrial value of US$8bn.7 Its administration conducts a screening process when a new firm is introduced, aiming to create a sustainable industrial chain between firms and maximising agglomeration effects, while at the same time avoiding homogeneity competition among Chinese-funded enterprises. All Chinese firms in the zone are required to build their facilities in accordance with international and local environmental standards.

Are industrial parks silver bullets for economic development?

While industrial parks have played an important role in China’s economic development model, in some cases they have become enclaves relying heavily on fiscal incentives and without substantial linkages to the broader economy. This could be avoided by considering the construction of industrial parks within master urban planning, hence ensuring effective integration between the zones and their surroundings in terms of infrastructure and social services.

China’s more modern industrial parks demonstrate that, in the long run, zones with strong linkages to the broader economy tend to be most successful. Facilitating access to intermediate goods and raw materials from local suppliers, and the use of subcontracting mechanisms of local producers by zone investors have proven to be effective in promoting such linkages between industrial zones and the broader economy. These linkages hold the potential to maximise the spillover effects and economic benefits industrial zones have to offer.

1 Zeng, Douglas Zhihua, ed. 2010. Building Engines for Growth and Competitiveness in China: Experience with Special Economic Zones and Industrial Clusters. Washington, DC: World Bank.

2 Wu, Jianfeng, Zheng, Siqi, Sun, Weizeng and Kahn, Matthew. 2017. “The Birth of Edge Cities in China: Measuring the Spillover Effects of Industrial Parks”. Journal of Urban Economics 100, 80-103, May.

3 Watanabe, Mariko. 2014. The Disintegration of Production: Firm Strategy and Industrial Development in China. Cheltenham, UK: Edward Elgar.