3.2c

Special economic zones (SEZs)

These are specific areas in which foreign direct investment is heavily incentivised. This is done in a number of ways:

• Low or no tariffs/quotas reduces the cost of production for firms, maximising profits.

• All profits can be sent back overseas to the company HQ tax free.

• There are very limited regulations (in countries like China, worker exploitation and environmental regulations are absent).

• Union power is significantly diluted, or they are banned altogether, reducing the likelihood of worker strikes.

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Since the 1950's, their use in countries has grown in popularity. Today, over 200 million people work in them. In the UK, London's Canary Wharf is somewhat of a special economic zone, as financial sector firms have access to reduced taxes and regulations from the UK government. In the 1960's, Indonesia's President Suharto made the Jakarta Export Zone in order to attract FDI from US and European TNC's. In the interest of supporting economic development in an LIC, the World Bank (refer back to 3.2b) funded construction of ports, power and roads to facilitate easy trade at no cost to investors. This attracted investment from large TNC's such as Gap and Levis.

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Government subsidies

Subsidies are a grant from the government to incentivise production in a particular industry in their economy. They can be used to attract FDI, as offering foreign firms money to cover some of the costs of investment makes them more likely to invest. For example, in 2000 the UK government gave Motorola an investment subsidy for the construction of a new production plant in Kent (in order to create jobs and encourage FDI). However, the WTO prohibits this, as the injection of income lowers firms cost of production, allowing them to charge lower prices, therefore outcompeting other producers in the market. But, subsidies used in the construction of SEZs is accepted by the WTO, as this promotes trade.

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Attitudes to FDI

Foreign direct investment (FDI) is the investment from foreign entities into a sovereign nation (KEY DEFINITION). After WW2, there was a political divide in the world between the Western free-market democracy ideology, and the Soviet's communist autocracy economic structure. This meant that many countries were opposed to the concept of encouraging free trade for political reasons (its association with the West), and so had a negative attitude towards FDI. Also, during the period of decolonisation (1950's-1970's) some countries rejected FDI out of fear of exploitation from previous colonial powers. In place of encouraging trade and FDI, these nations remained self-sufficient through import substitution.

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However, the rapid growth in the Asian Tiger Economies (Hong Kong, Singapore, South Korea and Taiwan) due to a focus on export-led growth made the majority of these opposing countries change their tune on FDI by the 1980's. They saw FDI as a means of opportunity for job creation, new technology, higher wages and overall economic prosperity.

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China's 1978 Open Door Policy

Arguably the most influential policy in shaping today's economic climate, the 1978 Open Door Policy was the beginning of China's transformation from a relatively switched off country (refer to 3.3c) to the world's biggest exporter. Introduced by Deng Xiaoping, it embraced economic liberalisation and encouraged more FDI. Some general facts about its economic impacts are listed below:

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• The opening of the Shenzhen SEZ in 1980 significantly aided China's economic growth, seeing a growth rate itself of 40% per year from 1981 to 1993. From 1978-2023 the average GDP growth rate has been 9% per year (although this has slowed a lot in recent years, largely due to the impact of the COVID pandemic).

• In 1980 the total value of Chinese exports was $2 billion, but by 2021 it was $3550 billion. In 2013, they overtook the US as the world's largest exporter of goods and services.

• Joining the WTO in 2001 guaranteed reductions in trade barriers (tariffs, quotas, etc.). Due to the 'Most Favoured Nation' Policy (refer back to 3.2b), China took full advantage of a highly significant reduction in the cost of trade, increasing their international competitiveness and overall boosting their export volumes.

• 800 million people have been lifted out of extreme poverty.

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Despite the opening up of the economic aspects of their economy, the Chinese government has taken many measures to reduce cultural erosion as much as possible. For example, whilst most citizens can access the internet, it is heavily restricted, with access to global TNC's such as Google and Facebook being limited. In cinemas, there is a regulation which only permits the screening of 34 foreign films per year. Foreign music providers like Spotify are not available.

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Also, it is important to note that this economic growth has come at the cost of worker welfare and the environment. The lack of social safety net laws in China and the absence of worker exploitation regulations, particularly in SEZs, has led to the widespread mistreating of employees, with a common lack of consideration for their health and wellbeing. As there is no minimum wage, many work in these unbearable conditions for little to no financial reward. However, now other Southeast Asian countries like Vietnam offer even lower wages, undercutting the amount of FDI into China as firms can have a lower cost of production through investment into other countries. Also, China's focus on manufacturing (making up 40% of its economy) has made it one of the largest emitters of green house gases globally, significantly contributing to global warming (refer to 3.4b for more facts and statistics on this topic).

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