Are Corruption and Regulation Less Burdensome in Special Economic Zones?

Many developing country governments would like to attract investment and create jobs in manufacturing and high-tech industries. Heavy and unpredictable laws and regulations, frequent demands for bribes, high taxes, poor-quality roads, slow and inefficient ports, and unreliable power, however, deter private investors. Moreover, political opposition and fiscal constraints prevent governments from resolving the numerous issues. Rather than attempting to solve everything everywhere, many governments have tried to fix problems in only small regions. These special economic zones (SEZs) often have lower taxes, more liberal regulation, and better infrastructure. This paper asks whether firms located in African and South Asian SEZs report less regulation and corruption than other firms in the same countries. We find, on average, being located in an SEZ is associated with lower burdens due to corruption and regulation. Firms in the zones are less likely to report paying bribes than firms outside the zones and report spending less time dealing with inspections and regulations. However, this is not true in Africa; firms in African zones report that corruption and regulation are as troublesome as for similar firms outside the zones.