Next-Generation Specialised Free Zones

In their fields, free zones have played an important role in increasing foreign trade, attracting international investments, and providing technology transfer to our country, and performing production and export with more added value. Therefore, the establishment of free zones in many countries is regulated by the government, and significant incentives have been provided for companies operating in these zones.

Development of Free Zones Around the World

It is observed that free zones go through four basic stages according to the trends of general investment and trade around the world. The zones, which were designed as free ports, free customs zones, and tax-exempt free zones in the first stage, started to gain importance as free zones for export purposes and free zones with an inward processing regime in the second stage. In the period known as the third generation, free zones specialised in IT, software, and hardware also began to stand out with the prominence of service exports. Recently, free zones that produce high-technology products & services as “next-generation” and aim to export them have started to stand out.

The free zones that have recently come into prominence in this field around the world are as follows:

• Jebel Ali (United Arab Emirates (UAE) – Dubai) Free Zone: A total of 6 thousand 400 companies, 120 of which are among the top 500 companies around the world, operate in the zone specialised in biotechnology, nanotechnology, and IT. The zone performs 50% of the exports of the Sheikhdom of Dubai, makes up 25% of the economy of Dubai and 20% of direct international investments to the UAE, and provides direct employment to 160 thousand people. The share of high-technology products in total exports in the zone is 27%.
• Suzhou (China) Free Zone: There are 4 thousand 400 projects from 70 different countries in the zone specialised in advanced technology, software, IT, and integrated circuit manufacturing. 156 of these projects belong to Fortune 500 companies. In the zone with a production volume of 257 billion Yuan, companies with foreign capital of $31.3 billion are performing production. The share of high-technology products in exports is 31%.
• Ramanujan (India) IT City: The zone specialised in the field of IT has the most distinguished IT investments in the country. The share of high-technology products in exports is 10%.
• Incheon (South Korea) Free Zone: The zone specialised in the fields of IT, biotechnology, and R&D activities has become a centre of attraction for companies with its trained workforce, logistics, geostrategic location, infrastructure, and high-technology production. The share of high-technology products in exports is 32%.
• Jurong (Singapore) Free Zone: The world’s largest petrochemical companies operate in this zone that is specialised in petrochemicals. Hosting a total of $33 billion investment, the zone provides direct employment to 30 thousand people, and significant productivity increases are achieved through clustering, economies of scale, and vertical integration facilities. In addition, it enables savings of 25-30% in establishment costs and 10-15% in logistics costs. The share of high-technology products in total exports in the zone is 52%.

Free Zones in Turkey

Free zones have historically had an important mission since the 1980s in increasing the investment and export potential of Turkey. Following the establishment of the first free zone in Turkey in 1985, 80 thousand people are employed now in 18 free zones with 1,900 companies. After the establishment of the last three free zones (Denizli, Bursa, and Kocaeli free zones) in 2000, no new free zones have been established for the last 20 years.

Also used as an important policy tool in foreign trade, the export rate of these zones is around 60%. However, when we look at the export of high-technology products, it is obvious that we have a long way to go in both our country and the free zones.

While the share of high-technology products in exports is around 3 to 4 per cent in our country, this rate is around 9 per cent in free zones. While this rate is 17 per cent in developed countries, the OECD average is 14 per cent. In order to close this gap, our country has turned to the strategy of establishing Specialised Free Zones, also known as the next-generation free zones.

Next-Generation Free Zones in Turkey: Specialised Free Zones

The main motivation behind Turkey’s tendency towards the policy of establishing next-generation free zones is to support high-technology production for export with new approaches, increasing the share of these products in exports to the OECD average of 14 per cent. Therefore, promoting the production of R&D-induced, value-added, and high-technology products and services has been the main purpose of the next-generation specialised free zones.

Since the aforementioned approach is new, incentives and supports provided by the government have also been redesigned in line with this approach. The most important issue to be underlined here is that all incentives given in the other free zones are given in the next-generation specialised free zones, but additional supports are also provided to these specialised zones in line with the new mission undertaken by them.

All of these supports can be summarized as follows:

• Tax supports: Corporate, income tax, and customs duty exemption. VAT, stamp duty, charges, and duties exemption.
• Employment supports: Qualified personnel support (50% of the gross wage for 10 people), income tax withholding support with 85% export requirement, facility of employing personnel with foreign nationality.
• Financial supports: Lease support (50%), insurance premium employer’s share support, interest support (Five points in TRY loans, two points in foreign currency loans).
• Infrastructure supports: Interest/dividend support for zone founder and operator companies (50% of the interest expenses of the loan to be used up to 10 million dollars, provided that it does not exceed 50% of the investment amount).
• Other supports: Supports for the industry of export-oriented goods and foreign currency earning services.

The companies to take part in the specialised free zones are expected by the T.R. Ministry of Trade to fulfil several conditions within the framework of the “mission to increase the export of high-technology products” of the zones. Accordingly:

• Domestic applications: They must be companies established at least three years ago, with at least 10% of their sales in the last three years originating from exports, and must have the export revenue to be determined by the T.R. Ministry of Trade.
• Foreign applications: They must be companies established at least three years ago and have sales revenue to be determined by the T.R. Ministry of Trade.

Istanbul Specialised Free Zone

The first specialised free zone established in this context is the Istanbul Specialised Free Zone. Basic services such as consultancy, security, customs consultancy, stock management, storage, unloading, insurance, and modern infrastructure services are provided to companies in the zone established for the production of high technology in the software, game development, and IT industries. A total of 88 companies operates mainly in the industries of computer software/hardware, textile, medical devices, electricity, electronics, machinery hardware, chemistry, and automotive supply industry.

Conclusion and Evaluation

It is considered that the specialised free zones will be an important political tool in increasing our country’s high-technology product exports to the OECD average rate of 14% and reaching the export target of 500 billion dollars and that they will fill a significant gap. In this new structuring, where companies in priority industries will come together with a mindset of clustering, government incentives designed to satisfy the essential needs of companies will also be an important tool in increasing investment, production, and exports.

The export of our country in software and software services has exceeded 3 billion dollars. It is evident that this amount will be much higher with the launch Istanbul Specialised Free Zone, formed by the combination of companies specialised in this field.

Increasing the number of such specialised free zones to include different industries and gathering companies in these attraction centres by benefiting from generous incentives will both increase our export amount and significantly increase the share of high-technology products in our exports.

 

DEİK Chief Economist Hakkı Karataş