Chapter 2 The history and theory of Free Economic Zones in both the Chinese economy and the world economy

Before conducting this study，it is necessary to fully review the history and theory of Free Economic Zones（FEZs）^[1]. This chapter will help the reader to know more about FEZs，what has been studied as regards FEZs and how these FEZs have been developing in both the Chinese economy and the world economy. Furthermore，it will help this research to define what Yantai Economic and Technological Development Zone/Area（YEDA）is，before actually doing research on it.

At first，trade creation and trade transfer in a cross-national “Free Trade Area” were discussed by Viner（1950）. In addition，numerous studies have focused on the economic effects and roles of Export Processing Zones（EPZs）and Special Economic Zones（SEZs）in developing countries（Wall，1976；Spinanger，1984；Chu，1985；Yuan，1993；Park，1997；Lin，2001；Yeung，Lee and Kee，2009）. Several studies have provided various general theories for FEZs and EPZs（e. g. Grubel，1982；Balasubramanyan，1988）. Some studies have provided a discussion on the structural and spatial evolution of FEZs（McCalla，1990；Chen，1995）. There are also various studies focused on the relationship between political economic policies and the development of SEZs in China（Stefani，1983；Phillips，1986；Crane，1990）. Wall（1991）focused his study on the administrative system and regulatory framework of SEZs in China. Meng（2005a）in his global overview presented definitions for each type of FEZ and devised an evolutionary model for FEZs. Meng（2005b）focused on the experiences and perspectives of FEZs in China. Meng（2003）produced a type of combination of the two studies above，and dealt with the study of FEZs in China and globally by using Tianjin ETDZ（known as TEDA）as a case study.

The broad diffusion of free economic zones（FEZs，also known as free enterprise zones，free industrial zones，free trade zones，etc.）is among the most significant institutional innovations in international economic relations in the past few decades（Manezhev，1995）. In the last decades，world economic integration，including trade liberation，financial internationalisation and production integration，has made a great progress，and an increasing number of countries have become involved in the international division of labour（Meng，2003）. This means that，in this environment，larger enterprises began to shift their focus on to less-developed countries to achieve greater profits；these enterprises were looking to move part of their production lines to these countries. Therefore “the old idea of attracting foreign manufacturers and traders by the establishment of Free Zones has been developed in a variety of forms during the last few decades”（Stefani，1983）. For many less-developed countries，this seems to be a possibility to develop and expand their national economy（Meng，2003）. Against this backdrop，many less-developed countries，particularly some socialist countries，opened some of their cities or areas with more liberal laws，economic privileges and economic systems which are different from traditional socialist economic systems in order to “intensify the attraction of foreign investment” and thereby obtaining “leading technology from abroad，the improvement of the branch structure of production and regional socioeconomic development，the expansion of the export base and increased hard-currency earnings，the training of skilled technical and managerial personnel”（Manezhev，1995）. By utilising these “special” or “free” areas，these less-developed countries can then be involved in the world economy and achieve specific economic objectives. “These objectives coincide with a trend of internationalisation of production in the world economy and China’s strive to gain access to global markets”（Nee 1994；Sassen 1988）. These areas are also used as a trial fields to implement the “Chinese socialist market economy” in order to achieve a sustained development under a socialist political system in China. The “Chinese socialist market economy” was first incorporated in the “Constitution” of PRC in 1993. Its conception was developed by Deng Xiaoping in 1978. Gittings（2005）in “The Changing face of China：from Mao to Market” quotes Deng Xiaoping as stating：“Planning and market forces are not the essential difference between socialism and capitalism. A planned economy is not the definition of socialism，because there is planning under capitalism；the market economy happens under socialism，too. Planning and market forces are both ways of controlling economic activity.” Within these special areas（FEZs），China would then be able to try out capitalist economic activities under a socialist system. FEZs in China have the responsibility of being “Trial fields” and “open windows” for Chinese economic reform.

In order to gauge the significance of FEZs，especially ETDZs，in the People’s Republic of China，different generations and models of FEZs throughout the world in different historical periods will be reviewed. The various studies mentioned above have offered a strong theoretical background for this study and will be reviewed，discussed and extended in this chapter. First，a definition of FEZs will be reviewed and discussed.