Disruption is the new normal in business. Yet the world’s free zones are growing despite the biggest disruption in recent business history – not least because of their bespoke operating models and inventive responses to events. Now they are counting on agility and innovation strategies onboarded during the Covid-19 pandemic to maintain resilience in the years ahead.
“The fact that free zones are usually regulated and operated as distinct jurisdictions from their host countries provided them with some advantages in managing the disruptions of the pandemic,” said Patrick Cooke, Managing Editor for the Gulf and Asia regions at the Oxford Business Group (OBG) research consultancy.
Although companies operating in free zones faced the near-universal challenges of supply chain disruptions and health risks, they could maintain business continuity and reduce infection risks thanks to advanced infrastructure and management, he explains.
“At the same time, the inevitable slowdown in trade allowed free zone authorities the opportunity to focus on building their resilience and enhancing future-readiness. This includes planning investments in smart logistics solutions and digital business services to enhance efficiencies and minimise the risk of future disruptions,” Cooke adds.
As Vice-Chairman of World Free Zones Organisation, Engr Jose Thomas Contreras, who is also Executive Vice president, PIISA Industrial Park, Dominican Republic, has a global view of the industry.
“Free zones around the world have incorporated various resilience strategies since the pandemic to ensure business continuity and avoid future disruptions,” he says.
The industry has adopted a number of best practices, he adds.
Increasing investment in technology and digitisation enables remote working and communication while automating processes and improving supply chain efficiency. Likewise, free zones have been exploring options to diversify their supply chains to reduce the impact of pandemic-linked disruptions.
Finally, stronger health and safety measures, and enhancing communication with government, businesses and stakeholders has supported industry resilience, Contreras says.
Digital leadership with online services
In the UAE, free zones benefited from the emirate’s race to establish leadership in the digital economy.
Existing online services ensured continuity and avoided major service disruptions at the Ports, Customs, and Free Zone Corporation (PCFC), says Dr Hamad Al Falasi, Director of Licensing Department at the authority’s Department of Planning and Development – Trakhees. Such measures included online payment channels and a common email address for customers to reach Trakhees staff about applications or operations issues, he says.
The Government of Dubai body has several major entities under its umbrella, including Dubai Customs, Trakhees, Dubai Ports Authority, the Jebel Ali Free Zone and Dubai Maritime Authority.
Last April, PCFC launched a unified portal to bring its various entities’ services and procedures together in one place.
Additional measures during the pandemic included adopting the ISO 27001 business continuity plan to strengthen service availability, and waiving late renewal fees for free zone licenses, Dr Al Falasi says.
Over the first half of last year, PCFC recorded 16,000 transactions through its licensing department, a growth of 22 per cent over the same period in 2021. About a quarter were licence renewals or amendments, while new trade names and licences accounted for around a tenth of all transactions.
Tax incentives and specialised infrastructure
Free zones can be a powerful tool for governments looking to attract foreign investment and spur economic growth. These special economic zones (SEZs) are often characterised by targeted tax incentives and specialised infrastructure, enabling them to attract investment and support international trade.
For GCC countries, free zones also support the larger goal of economic diversification away from a historical reliance on fossil fuel revenue. In addition, foreign direct investment (FDI) strengthens regional economies’ non-oil gross domestic product (GDP) while creating new employment opportunities for growing populations.
In October, Saudi Arabia launched a new Special Integrated Logistics Zone (SILZ). It aims to bring the world’s largest companies to the Kingdom, Saleh bin Nasser AlJasser, the Minister of Transport and Logistics, said in a statement.
At 3 million square metres, the integrated facility in Riyadh will feature best-in-class inventory systems optimised for e-commerce to support annual cargo movements of up to 4.5 million tonnes. The zone will take the logistics sector’s contribution to the GDP from 6 per cent at present to 10 per cent.
“SILZ is a vital enabler for Saudi Arabia’s logistics sector because it offers a unique value proposition to multinationals based on enhanced fiscal and regulatory incentives,”
Consumer technology company Apple is an early investor.
Growing sector with record investments
Worldwide, free zones clocked a significant increase in capital investment compared with pre-pandemic levels. A record number of greenfield investments flowed into free zones in 2021, according to data from the fDi Markets publication, or 442 projects estimated at $46.6 billion. Between 2010 and 2019, global free zones averaged around 334 tracked projects and $21.6 billion in estimated capital expenditure.
However, investment slowed as onshore business returned to normal. Just under half the 2021 total was recorded over the first six months of 2022. From January to June, 173 projects recorded approximately $14.9 billion, as compared to 212 projects worth $28.5 billion over the corresponding previous period.
Nevertheless, the region’s free zone authorities are continuing to update how they do business by deploying digital technologies and catering to new types of business activity.
New strategies for business continuity
The Dubai World Trade Centre Authority, whose free zone adjoins the emirate’s central business district, will use the digital strategies from the pandemic to strengthen future continuity.
“Pandemic learnings have proved invaluable in shaping DWTC Authority’s business strategies,” says Abdalla Al Banna, VP - Free Zone Regulatory Operations. “Digital transformation was already an inevitability, but with unexpected accelerated global reliance on access to critical online services and e-commerce, we were quick to embrace the opportunity to stay relevant and resilient.”
Such measures included standard pivots such as e-services, hybrid working, virtual events and improved employee safety measures, but the Authority also launched new services.
“We have been an early adopter in leveraging new opportunities, such as announcing new regulations to encourage family businesses to establish single and multiple family office licenses with the free zone,” he says. “In remaining agile and adaptable, we are well placed to not only navigate future global challenges but to ensure we are a world-leading and preferred location where entrepreneurs, SMEs and large companies can thrive.”
Test beds for emerging industries
But perhaps the biggest resilience play for free zones could be strengthening their role as catalysts for nascent industries. Creating a platform for start-ups to test ideas and business models in new and developing industries can help free zones establish competitive advantages and strengthen local economies.
“We’re seeing zonal authorities working in tandem with national governments to target new investments in high-potential emerging industries – such as hydrogen and green technology – in order to generate early-mover advantages and provide long-term sustainable growth,” OBG’s Cooke says.
Similarly, a number of regional free zones are looking to establish themselves as business hubs for the financial technology sector.
The Dubai Multi Commodities Centre (DMCC), which has helped establish Dubai as the world’s largest trading centre for rough diamonds, created an ecosystem to support the development and operation of blockchain and other cryptographic technologies in 2021.
The DMCC Crypto Centre has since seen significant interest, with 14 per cent of new company registrations in the first half of last year relating to crypto activities. The zone is now the region’s largest crypto hub, with more than 450 blockchain-enabled and metaverse businesses. New business areas for long-term growth include Web3 and gaming.
A total of 708 new companies joined the business district in the first quarter of this year, an 8.4 per cent year-on-year increase and its best Q1 performance since launching in 2002. DMCC contributes 10% of Dubai emirate’s GDP.
In February, the emirate of Ras Al Khaimah (RAK) launched RAK Digital Assets Oasis, a free zone dedicated to digital and virtual asset companies. The new zone will support entrepreneurs through advisory and professional services, accelerators and incubators, sandboxes and access to funding.
Capacity building and developing partnerships
To ensure they stay ahead of the curve, free zones must capitalise on their efficient new ways of doing business.
Digital transformation is essential to doing so, as is building more agile supply chains, Contreras says.
Continuing to improve resilience through innovation, ecosystem partnerships and capacity building remains equally important, he added.
“Free zones can strengthen partnerships with local communities, businesses, and government bodies to build resilience and promote sustainable development,” Contreras says.
“Free zones can build their capacity for crisis management by developing contingency plans, training staff, and conducting regular drills.”
Only a holistic approach will ensure free zones maintain their role as economic engines.
Free zones will establish the UAE as R&D destination
In their role as incubators for innovation, the UAE’s free zones will support the growth of advanced industries in the country, according to Jochen Knecht, CEO of IFZA
“By 2040, we see UAE free zones as hubs of innovation and entrepreneurship, fostering the growth of emerging industries such as artificial intelligence, robotics, and renewable energy. We will leverage emerging technologies such as blockchain and the metaverse to create new opportunities for investors in a secure and immersive digital environment,” says Knecht.
He says IFZA is working to support businesses and entrepreneurs with targeted support services that align with the UAE’s long-term strategic goals.
The nation’s free zones have been quick to support advanced technology start-ups as the UAE looks to become a global research and development destination for future industrial innovation. In tandem, they and other free zones are rolling out new measures to become more attractive to investors, from special rates to industry-focused services, such as those supporting the digital economy.
“As the global investment landscape continues to evolve, UAE free zones have implemented several innovative measures such as digital transformation, developing specialised clusters, flexible policies, and prioritising sustainability. Specialised clusters or ecosystems have also been developed, catering to specific industries and offering value-added services.”
Free zones serve as a bridge to transfer technology and knowledge into adjacent regions, making them an important mechanism for development.