Abstract:We investigate the influence of Indian Special Economic Zones (SEZs) on the local economy. Using nighttime lights data and firm- and worker-level survey data, we find that SEZs boost local economic activity. Moreover, we analyze the impact over a range of distances around the SEZs to show that the local effects are not due to zero-sum relocations but represent net gains up to the level of a district. Comparing districts with operating SEZs and those with approved SEZs that are pending operation, our work also reveals an important structural transformation in the economy. While firms in the formal sector gain in size and productivity, SEZs instigate a shift in economic activity from the informal sector to the formal sector. This economic formalization is an integral part of the development process. However, we find that only workers at the higher end of the income and education distributions gain from this development, thus raising a concern about its inclusiveness.