Digital nomads open the door to new models SEZ | fDi Intelligence – Your source of information on foreign direct investment

Even though the world has passed the heights of the Covid-19 pandemic, analysts predict that 25% of workers will continue to work from home indefinitely.

The closure of office buildings is bad news for special economic zones (SEZs) that depend on traditional commercial real estate. The last three years have been marked by many shocks, all of which threaten to upend traditional business models. The pandemic, supply chain crisis, inflation, war in Ukraine and the OECD 15% minimum corporate tax have all taken their toll.

Unsurprisingly, over the past six months, a wave of SEZs have gone bankrupt, particularly in Vietnam, India and The Philippines.

A very different kind of ZES has emerged to cater to so-called “digital nomads” – office workers and entrepreneurs who, thanks to the internet and post-Covid-19 trends, no longer need to be tied down at a physical location.

Most SEZs look like industrial parks. Some, aimed at digital nomads, are more like resorts. To see examples of SEZs successfully tapping into this new market, look no further than the Cayman Enterprise City Where Prospera in Honduras. Some planned future SEZs – such as Malaysia’s $1.2 billion Iskandar waterfront — take this strategy to the extreme.

The most savvy digital nomads practice “min-maxing” – a video game term referring to the practice of using the math behind games in order to win more using fewer resources. In the context of digital nomads, the term means to maximize how far one’s income goes by deciding where to temporarily move. Typically, digital nomads try to minimize three key parameters: cost of living, tax rules, and standard of living.

If SEZs want to attract digital nomads, the first question they should ask themselves is whether they can offer a low cost of living.

Many digital nomads work for companies that pay in hard currencies, such as US dollars or euros. Their mobility gives them the ability to work from anywhere, and as a result, many choose to live in jurisdictions where their motto goes further. Although expensive jurisdictions such as the United Arab Emirates, Singapore and Monaco have a lot to offer, the cost of daily living is simply too high to attract digital nomads. On the other hand, low cost jurisdictions such as Thailand, Brazil and Morocco have a significant advantage.

The next metric digital nomads try to maximize is the personal income tax rate.

For those who hold passports from countries that tax foreign income (like the US or China), optimization is possible, but much more complicated. However, many digital nomads from countries like those in the EU manage to pay zero income tax. SEZs that expect to suffer from the OECD’s 15% global minimum corporate tax can instead change their incentives to offer personal income tax incentives if they want to attract digital nomads.

Finally, what matters most in the end is the quality of life.

Regardless of how a jurisdiction optimizes cost of living or taxes, intangible quality of life factors ultimately matter more than anything else. Many digital nomads base their decisions on factors such as scenic beauty, quality of nightlife, presence of services like Uber, quality of historical landmarks, and friendliness of locals.

Targeting digital nomads has drawbacks. They tend to create jobs in the service sector rather than export-oriented industries. They are also fickle and can leave at any time. Most SEZs currently in operation are zoned for industrial and commercial purposes rather than residential. Countries like Portugal now offer digital nomad visas; countries with clumsy visa policies will be left behind.

While most SEZs are unlikely to be good destinations for digital nomads, the few that successfully host them will become powerhouses over the next decade. As the world becomes more mobile, the collective economic power of digital nomads will become increasingly important.

This article first appeared in the August/September 2022 print edition of fDi Intelligence. See a digital edition of the magazine here.

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