How to design successful economic zones

First published on the website of our podcast, LED Confidential.

David and Mike are joined on LED Confidential by Pete Tyler, Professor of Urban and Regional Economics at the University of Cambridge (Episode Link). They discuss the UK’s forthcoming Investment Zones and the history of area-based initiatives, from the pioneering Enterprise Zones of the 1980s, through Freeports, and the more recent Opportunity Zones of the US. If you’re an economic developer who wants to design successful zones, don’t miss this episode!

As a class of economic development programme, ‘area-based’ or ‘zonal’ initiatives are now well established across the world. They work by designating geographical areas with a special status that confers tax incentives, regulatory reliefs, expedited development permissions, and other benefits to the businesses and investors that locate there or invest in them. They come in many flavours – some intended to spur commercial property development in cities, others to encourage growth in exports of manufactured goods through sea and airports. But typically, zones share the common objective of attracting businesses into struggling or underdeveloped areas.

The figures are startling: in England alone there are, as of Spring 2023, 48 active Enterprise Zones (EZs), 8 Freeports in development, and another 8 Investment Zones on the way. There are 12 further zonal initiatives like EZs across Scotland, Wales and Northern Ireland. In the US, there are over 3,000 EZs. Over the last five years, these have been joined by Opportunity Zones that include deferred taxes on capital gains and reduced taxes on re-invested gains.

The enduring popularity of zones with governments across the world hints at their potential to boost economic development in places – when they work well. The variety, number, and long history of zonal policies (dating back to the early 1980s) gives us a wealth of impact evaluation evidence on what makes for successful zones.

We cover these three lessons in the episode, and more:

1. The design and generosity of incentives matter. Unlike today’s EZs in the UK, and the forthcoming Investment Zones, their 1980s antecedents included tax reliefs on investment in property. While tax reliefs can become internalised in property prices, studies of the first wave of EZs show they did encourage the creation of special purpose investment vehicles that increased the flow of funds into EZs. Today’s US Opportunity Zones also include powerful fiscal incentives for property investors, with early evidence pointing to similar results. The incentives on offer for the new wave of UK zones are weak by comparison to earlier initiatives and their modern-day US equivalents. Their superiority to easements and reliefs already on offer nationwide is also open to debate.

2. Location, boundaries, and ownership matter. When selecting a zone, it is important to balance the need for investment in high-need areas with the potential for opportunity. Choosing larger, well-positioned sites, particularly if these are in public ownership, supports early development and effective marketing – critical when incentives are time-limited. Fragmented zones, especially those that require excessive time and money spent on site assembly and remediation in the early years, can undermine this. Quality infrastructure is crucial to making enterprise zones attractive places for investment, and to maximize access to opportunity. The new UK Investment Zones are restricted to 600 hectares – either as a single site or a maximum of 3 sub-sites. This is large by the standards of past UK zones, and more directive on ‘non-contiguous’ zoning: multi-site zones were a feature of the 2010s era of EZs.

3. ‘Boundary hopping’ and displacement can be minimised through careful design and industrial strategy, although it is unlikely to be entirely eliminated. Restricting incentives to one, or a small number of target sectors minimises the opportunity for businesses to move existing activity from just outside the zone to within it. It can also encourage local agglomeration of related industries. Ideally – the design of the zone should build out from solid, long-term economic and industrial strategies.