Ramachandran, 2005). While the relationship may be somewhat weaker in terms of attracting FDI, the research to date suggests that the investment climate remains a critical location determinant for multinational investors. This presents a clear challenge for low income countries, whose investment climates – by and large – are much poorer than in middle and high income countries, who have limited resources and capacity to implement major investment climate reforms quickly, and who face political economy barriers to such reforms. It is an even greater challenge in regions like Africa whose markets are mostly too small and poor to attract market‐seeking FDI. In such environments, targeted FDI regimes like economic zones are seen as one instrument of overcoming these constraints.

Several specific aspects of the investment climate are usually targeted for improvement inside economic zones. First, economic zones are designed to overcome _serviced land and infrastructure_ constraints that may hinder investment in the national economy by providing investors access to long‐term leases, pre‐ built factory shells, and reliable utilities (electricity, water, telecommunications). Second, economic zones normally aim to improve the overall _administrative environment_ , particularly with regard to the procedures required to register a business, acquire the licenses required to operate, obtain visas and work permits, and access key services like utilities and construction. This is often facilitated through the establishment of “single window” or “one‐stop shop” services, whereby the zone authority will be a single point of contact to arrange the delivery of these administrative services through coordination with the relevant government agencies. Finally, another important component of the administrative services offered in zones is a privileged and expedited _customs administration_ . Such services often involve the stationing of customs officers inside or at the gate of the free zone to offer on‐site clearance in order to speed up import and export procedures. It is usually also combined with a range of other advantages, including the ability to move and hold goods in bond as well as the removal of financial requirements for bonded and duty‐free inputs<sup>6</sup> .

But despite the relative orthodoxy in approach to economic zones, at least in terms of aiming to address the issues discussed above, it is not yet clear which, if any, of these factors has a bearing on the success of SEZ programs in meeting short‐term objectives of attracting investment and longer‐term objectives of generating quality employment and sustainable, diversified, exports. Empirical studies of zones have been limited, in a large part due to the poor availability of consistent, reliable data (Kusago and Tzannatos, 1998; Cling and Letilly, 2001). There are, however, a few studies in the past decade which provide some initial insight on these questions. Schrank (2001) conducts a cross‐country quantitative analysis testing the variation of national economic zones outcomes against measures of national institutions the size of the local market. He concludes that both measures play an important role in determining the success of zones and their ability to act as a catalyst for industrial upgrading and economic transformation. Rolf, Woodward & Kagira (2003) use a survey‐based experiment conducted with investors in Kenya’s export processing zones to determine investor incentive preferences. The findings suggest the importance of upfront corporate tax holidays and infrastructure to investors over

> 6 Many countries offer drawback mechanisms for exporters holding goods in bond or making use of duty‐free imported inputs for export production. However, these mechanisms usually require companies to post bonds and then claim refunds, a process which can tie up considerable capital. Most free zone arrangements allow exporters to avoid such payments.

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