The free zone ecosystem: Triple mega-drivers - Challenges and opportunity

In recent weeks, Saudi Arabia made headlines by launching four special economic zones (SEZs) for the growth sectors of maritime, medical technology, cloud computing and advanced manufacturing. Saudi Minister of Investment, Khalid Al-Falih, also Chairman of Economic Cities and Special Zones Authority, encapsulated it: “These zones offer the chance for foreign investors to have a stake in the world’s fastest growing economy.”

Unique positioning and value propositions

The Gulf Cooperation Council (GCC) has been hosting SEZs since the 1990s, known regionally as free zone (FZ), free economic zone (FEZ), and free economic territory (FET). Central location amidst three continents, access to busy trade routes, cheap feedstock and financial prowess to invest in infrastructure are enviable advantages that has led to numerous success stories.

The GCC currently has more than 70 free zones, and an estimated 40,000 hectares are earmarked for major new projects within the next decade, with several zones already assigned and planned. As their economies try to reduce historical reliance on oil, the GCC nations use free zones to build and bolster non-oil GDP (gross domestic product), and create employment opportunities. Many are getting renewed mandates, while others are transforming their positioning or value propositions to prepare for the new industrial revolution, the sustainability imperative, and the realignment of economic governance.

“Free zones play a critical role in meeting future challenges and in developing more compliant, valuable, and sustainable business models,” says Martín Gustavo Ibarra Pardo, CEO of Araújo Ibarra, and Advisor to World Free Zones Organisation (World FZO) Board. “They can achieve this by implementing best practices, adopting innovative technologies, and collaborating with all stakeholders to address emerging issues. They also support economic growth by attracting foreign investment, creating job opportunities, and driving innovation and entrepreneurship.”

Whole entrepreneurial ecosystems

In the UAE, Foram Mehta, Managing Director, NIR1 FZCO, is in the business of helping new businesses set up, and she explains how its robust free zone ecosystem attracts and assists aspirants. “In this post-pandemic phase, there is an upswing in e-commerce trade and low-cost business ideas, resulting in larger numbers of individuals and SMEs (small and medium business) exploring business opportunities in the UAE.” She estimates that new entrants comprise 40 per cent SMEs, 35 per cent start-ups, and 10 per cent each of individuals, and branches of foreign companies.

“The systems and processes used by free zones are user-friendly and with digitalisation, it has become extremely convenient to comply with requirements – even remotely – saving time and improving efficiency,” she explains.

In turn, free zones are offering many motivations and attractions, she observes. “The best examples are Ras Al Khaimah Economic Zone (RAKEZ) offering visas for life, Sharjah International Airport Free Zone (SAIF) guaranteeing trade licenses in one day, and International Free Zone Authority (IFZA) offering a 30 per cent discount on five-year trade licenses.”

Hubert Joseph endorses the free zone ecosystem heartily after his recent experience relocating from India to establish Kelnor HR and IT Consultancy, at Sharjah Research Technology and Innovation Park. “The choices on offer were vast and varied for size, investment type and business specialisation, and the multilingual information caters to wide audiences. Setting up in a free zone is a sure fire way to get started in the UAE.”

Convenience was the most decisive factor for him: “I was impressed with the coupling of the entire ecosystem – office space, visas, single-window processing, and consulting firms who guided the entire process.”

Industrialisation and globalisation

Free zones have proven their mettle in fostering industrialisation and promoting economic development, but they are poised to do much more. “When free zones facilitate economic diversification, encourage entrepreneurship, and provide opportunities for SMEs to grow and thrive, they strengthen and enhance prosperity for a country and its citizens,” says Pardo. “They also serve as hubs for international trade, support the export of goods and services, and drive economic development.”

Industrials and logistics are two core pillars of diversification agendas and key drivers of foreign direct investments (FDI) into regional economies. In this context, special zones are key enablers of transformation programmes by offering investors the ability to enter new markets, and access to infrastructure, facilities and services. Concurrently, medtech, biotech, and biopharma are at the core of the Fourth Industrial Revolution, a fusion of the biological, physical, and digital worlds, and many free zones are embracing Industry 4.0 to maximise benefits.

A case in point is the $70.8 million deals signed in October 2022, to make medical equipment in the UAE. In the first agreement, healthcare provider PureHealth will work with Abu Dhabi Medical Devices Company, Abu Dhabi Ports Group, and Abu Dhabi Polymers Company (Borouge) to establish a Dh110 million medical-supplies production line. While Borouge will supply raw materials, Abu Dhabi Ports Group will provide land in the Industrial City of Abu Dhabi (ICAD) free zone.

In the second, PureHealth and Gulf Pharmaceutical Industries Company (Julphar) will establish a Dh150 million factory in Ras Al Khaimah, as the first in the region to produce glargine, a biological alternative to insulin in treating diabetes. The location will enable cheaper supplies, and facilitate exports to several global markets.

Sustainability and longevity

Mehta of NIR1 FZCO believes free zones can propel aspects of sustainability. A lawyer and company secretary, she says that from an economic viewpoint, free zones are very mindful about pricing, and do their best to keep licencing fees competitive, as costing is a principal deciding factor.

“Besides pricing, they try and provide ancillary and support services, with the view that to sustain their business, they must ensure that entrepreneurs’ businesses also grow and sustain themselves. This is a perfect world ideal.”

Mehta also lists societal and environmental sustainability with examples: “IFZA runs IFZA Cares to plant a tree for every new company they incorporate, Masdar City Free Zone embodies sustainability, while many are adopting a more sustainable approach towards society and nature.”

From competition to collaboration

Joseph of Kelnor HR and IT Consultancy believes that although free zones use their platforms for networking, the frequency and periodicity of events could increase. “In the short term, it will interest and attract investors with opportunities right at their doorstep. In the long term, this can lead to viable and sustainable collaborations.”

The clustering of interconnected businesses may make similar companies strive harder for market share, but proximity also drives innovation, encourages replication, and fosters partnerships that can lead to new products, services and revenue streams that drive sectoral growth.

Pardo has advice for those eyeing a new start: “To stand out and make an impact, it is important to focus on differentiating factors such as unique products or services, exceptional customer service, and innovative business practices.

“Companies should prioritise building strong relationships with customers, partners and stakeholders in the free zone community to establish a reputation for reliability and trustworthiness.”

PIONEERING ROLE

Free zones can streamline operations, reduce costs for SMEs and corporations — Martin G. Pedersen, Chairman, IFZA

How best can free zones strengthen, enable, and enhance a more prosperous phase for a country and its citizens?

Free zones stimulate economic growth by attracting foreign investment and fostering local entrepreneurship. By providing an attractive environment for businesses to operate and grow, free zones can create jobs, generate income, and contribute to the overall development of the country. Free Zone communities like IFZA focus on supporting small and medium enterprises (SMEs) by providing a platform for growth and expansion. We enable SMEs to overcome the challenges of limited resources and access to capital, leading to increased innovation, and economic growth.

Looking beyond SMEs or MSMEs, what are the advantages for multinational corporations to have a presence at established free zones?

Free zones have traditionally been viewed as a hub for SMEs, but larger firms and multinational corporations can also benefit equally or perhaps even more. Establishing a presence at an established free zone like IFZA can provide larger firms and multinational corporations with access to a favourable business environment, specialised infrastructure and services, a skilled workforce, and a broader market. These benefits can help to streamline operations and reduce costs.

Free zones play formative roles in their respective industries and specialisations. Do you have any personal or professional example to highlight this aspect?

At IFZA, we have seen first-hand how our free zone community has helped to transform the UAE’s business landscape by offering a range of specialised services and support to businesses across various sectors. By fostering a business-friendly environment, providing access to advanced technology and specialised infrastructure, and offering streamlined procedures and support services, we have been able to help businesses thrive and grow in the UAE and beyond.

THE SHANNON SUCCESS STORY

How an Irish model charmed China and conquered the world

Shannon, a tiny town in rural Ireland, is famous for becoming the world’s first SEZ. In the 1950s, local authorities made an audacious move to attract international investors by offering tax holidays and tariff reductions, mostly to avert closure of their small refuelling airport. Less famous is the fact that this town played a huge part in the economic growth of China, who in turn propelled the global growth of such zones.

Shannon’s revolutionary idea was so successful that their advisers soon began work on projects in Taiwan, Malaysia, Egypt and Sri Lanka, and hosting international training programmes on how to develop free zones. In 1980, Jiang Zemin, who later became China’s president, completed one such three-week training programme in Shannon, and Shenzhen SEZ, the first economic zone in China, opened months after his return home.

Three decades later, Chinese premier Wen Jiabao went to Shannon to pay his respects, joining several high-level Chinese dignitaries who continued to visit the site where they believe China’s rise to superpower status really began.

Today, with thousands of SEZs around the world, some of most successful models are seen in China, where they are credited with the astronomic economic boom the nation has enjoyed in the last 25 years. Other major successes include the UAE, South Korea, Malaysia and the Philippines.

Today, SEZs remain a major policy prescription recommended to developing countries by the World Bank. In the six decades since the Shannon success story, the model has taken on many guises that range from industrial innovation to infrastructure solution and rapid urbanisation.