Special Economic Zones and FDI-Led Global Value Chains Upgrading Evidence from Emerging Economies

Abstract

Special Economic Zones (SEZs) are increasingly used by emerging economies to attract foreign direct investment (FDI), reduce trade frictions, and connect domestic producers to global value chains (GVCs). Yet the presence of SEZs does not necessarily imply higher domestic value capture. This study examines whether SEZ operational intensity amplifies the contribution of FDI to GVC upgrading and whether this relationship is conditioned by institutional governance. The analysis uses an unbalanced panel of 42 emerging economies covering 2000–2024 and evaluates two-way fixed-effects specifications, interaction models, and a two-step System GMM specification. The primary outcome is the domestic value-added share in gross exports (DVA_Ratio), complemented by a GVC-position measure. The reported estimates indicate three main patterns. First, operational SEZ intensity is positively associated with domestic value-added capture in the baseline TWFE specification (β=0.027, p<0.05). Second, the SEZ×FDI interaction is positive and statistically significant (β=0.019, p<0.01), implying that the contribution of FDI to domestic value capture becomes positive at an estimated break-even SEZ intensity of 0.421. Third, the SEZ×FDI×Governance interaction is positive and significant, indicating that institutional quality conditions the capacity of SEZs to convert foreign capital into domestic upgrading. The paper interprets these findings as evidence that SEZ policy should move beyond tax incentives toward supplier development, infrastructure quality, institutional reliability, and technology