One common benefit cited by advocates for Special Economic Zones (SEZs) is that they can provide job training for workers in the surrounding area. This is sometimes referred to as “knowledge transfer” or “technology spillover” by academics and development professionals. But do SEZs actually provide real knowledge transfers?

The majority of mainstream academic research supports the idea that SEZs cause technology spillover.

Case and point - a 2016 Harvard University Growth Lab study examined statistical evidence from Panamanian SEZs and concluded that:

“There is an effective diffusion of tacit knowledge or know-how from immigrants to local workers.”

However, digging deeper, cracks appear that suggest that while the study may hold true for Panama, it might not apply elsewhere.

First, Panama is home to uniquely education-centric SEZs such as the City of Knowledge. The City of Knowledge is a technology hub centered around a university - in order words designed to facilitate knowledge transfer. The study also admits that Panama also tends to have higher-income immigrants, which might skew the results:

“We find that immigrants in Panama are more educated, more likely to be entrepreneurs, work in industries that are more complex and earn higher wages than nationals.”

Interestingly enough, the knowledge transfer effect observed in Panama’s high tech SEZs also seems to be occurring in India’s low-tech textile production zones.

A 2007 study commissioned by the Indian Council for Research on International Economic Relations interviewed hundreds of Indian SEZ workers to see what they thought of working conditions in the zone. The study confirmed the findings of the Panamanian research. 

The study explained that SEZs contribute to skill formation in three key ways:

-Foreign companies provide job training otherwise unavailable from local companies

-They upgrade the local educational systems to cater to the needs of the zone’s tenants

-They create macro-economic conditions ripe for knowledge transfer

The researchers pointed out that even the least education and most unskilled workers still benefited from knowledge transfers occurring in SEZs:

“Skill formation for the poor unskilled workers also occurs through assimilation of industrial discipline. This might increase the welfare of poor unskilled workers by increasing the range of job opportunities available to them. Improved skills and productivity increase workers’ income earning capacity. Given the high labor turnover rate in the SEZs, domestic firms can benefit from this training by hiring workers previously employed in the zone firms.”

However, the Indian study cautioned that:

“Critics argue that such training is of short duration and covers assembly type of activities. [...] The training is mostly task-specific, geared to enhancing productivity and efficiency in the firm’s operation. In some cases, workers in SEZs receive more substantial training but this is typically restricted to the high end skills at a small scale. In Taiwan, only 1,500 workers received overseas training between 1968 and 1986 - a little over 80 on average per year.”

It is also important to note that there are over 7,500 SEZs located in more than 100 countries. Individual conditions are bound to vary significantly.

A Deloitte study of Middle Eastern SEZs pointed out that zones in the region frequently struggled recruiting enough employees. They recommended:

“Institutions can help address these challenges by offering better recruitment of employees, better training options and more relevant training materials. Linkages between training institutions and industry are especially important to make effective training available to the local workforce. Such ‘demand-led’ training programs are facilitated by the physical infrastructure, but they include a strong policy dimension as well, as a number of public and private stakeholders involved in training, education and human resource management should be brought together to provide the required facilities.”

Deloitte also stressed the importance of designing buildings from the ground up to facilitate training:

“As physical planning evolves, developers should allocate sufficient space for people to interact and exchange ideas.”

The knowledge transfer benefits of SEZs are universally lauded, even by otherwise critical researchers. Workers within SEZs self-report benefiting from job training, even if it can sometimes be overly “task-specific.”

SEZs would do well to listen to Deloitte’s recommendations, focusing on job-training. Doing so will allow them to amplify their existing advantages, and improve the local economy.