Do Place-Based Policies Work? Lessons from China's Economic Zone Program

In the right environment, Special Economic Zones (SEZs) are an effective policy tool for attracting foreign direct investment (FDI) and increasing employment. There are large agglomeration benefits. The majority of FDI attracted by Chinese SEZs creates new activity rather than being diverted or reallocated from other non- SEZ areas. Due to poorly-developed institutions and markets in emerging China, SEZs provided better institutions which improve economic efficiency. The economic gains substantially outweigh the costs. But SEZs tend to cause more relocation distortions than agglomeration benefits in developed economies with better institutions and in areas that already have SEZs.