Thailand: Investment Climate, Firm Competitiveness,

1
Thailand Investment Climate, Firm
Competitiveness, Growth

• Kazi M. Matin, World Bank
• NESDB-WB Workshop for Private Sector
• Four Seasons Hotel, Bangkok,
• 27 October, 2005

2
The Study Teams

• World Bank Team Albert Zeufack, EASPR (Task Team
  Leader), Barry Bosworth (Brookings Institutions,
  Consultant), Amadou Dem (EASPR), Ana Margarida
  Fernandes (DECRG), Tenzin Norbhu (CITPO), Magdi
  Amin (EASFP), Kaspar Richter (EASPR), Charles
  Udomsaph (EASPR), Khuankaew Varakornkarn (EASHD),
  Paul Welsh (Consultant), Kirida Bhaopichr Overall
  guidance Kazi Matin.
• Peer Reviewers Aart Kraay, William Maloney,
  Shahid Yusuf .
• Thailand Government Team
• --NESDB Khun Arkhom Termpittayapaisith,
  Wilaiporn Liwgasemsarn, Panithan Yamvinij, Thanin
  Paem, Pojanee Artarotpinyo, Piyanuch Wuttisorn
• --FTPIKhun Phanit, Natapat team
• Survey Executed by Infosearch CSN under FTPI
  supervision

3
Survey of Firms in ThailandCovering

• 1385 manufacturing firms 100 ICT firms
• 13,847 workers
• 6 regions Northeast, North, South, East, Center,
  Bangkok
• 8 sectors/industries plus ICT Electronics, Auto
  parts, machinery parts, clothing, food
  processing, textiles, rubber plastics, wood

4
Objectives of the Study

• The Investment Climate Study is a mechanism for
• Assisting business-government dialogue by
  providing hard data as basis for discussions
• Receiving feedback from firms on obstacles they
  face in doing business
• Measuring the impact of reforms, and refocusing
  the agenda on most relevant and pressing
  concerns.
• It supplies the government with
• A tool to monitor industry performance, facts and
  figures instead of complaints,
• Benchmark indicators for comparisons with
  competitor countries,
• Feedback on existing industry support schemes,
  providing clear priorities for action.
• It supplies firms with a checklist of competitive
  practices.

5
Structure of the Report

• Chapter 1 Growth, Productivity and Investment
  Climate
• Chapter 2 Regional Investment Climate and Firm
  Performance
• Chapter 3 Supplying Skills for Competitiveness
• Chapter 4 Strenghtening Firms Technological
  Capabilities
• Chapter 5 Improving ICT Use and Performance

6
Structure of the Presentation

• Growth linked to Investment Climate
• Thailands Investment Climate
• Investment Climate Constraints Affect
  productivity of firms?
• Government Firms Need to Act

7
Key Messages

• The Thai Investment Climate is good by
  international standards. Its definitely better
  than most neighboring countries (except Malaysia)
  and better than India and Brazil.
• However, Thai firms have identified Regulatory
  burden, Skills Shortages and Infrastructure as
  the three most binding constraints to their
  activity.
• These constraints appear to have a significant
  negative impact on Thailand Competitiveness.
• Most Productive Firms (Large, Exporting, Foreign
  Invested, High-Tech) are the most affected by
  regulatory burden, the most important investment
  climate constraint.
• Regions witnessing the most important rate of
  firms creation (Eastern Seaboard and Center) have
  a poorer investment climate than Bangkok. A
  better investment climate in these regions would
  boost Thailand competitiveness.
• Skills shortages are costing in average 15 of
  sales to Thai firms. There is a high premium to
  tertiary education graduates and less so for
  Secondary education graduates. Firms seems to be
  coping for poor quality secondary education by
  providing significant levels of training to
  workers. English and ICT skills lack the most.
• Technological capabilities of firms in Thailand
  are relatively weak, except fortunately for the
  three industries that have been contributing the
  highest percentage of exports since the crisis
  (Auto-Parts, Electronics, and Machinery and
  Equipment).
• ICT use and performance remains weak, constrained
  by ICT skills shortages.

8
I. Growth and the Investment Climate
9
Productivity growth contributed little to
Thailands growth

• Growth in factors (capital labor) main source
  of Thailands rapid growth so far
• TFP/productivity growth contributed little
  mostly labor moving from agriculture to others.
• Scope for additional cheap labor limited for
  excess agriculture labor limited
• Sustaining rapid growth in future require more
  from TFP growth more from innovation
  productivity-growth within sectors
• Improving investment climate is key to increasing
  productivity innovation- growth

10
Thailands Investment ClimateHow is it?

• GOOD!
• On Average, Better Than in Most Neighboring
  Countries in East Asia, Except Malaysia
• Better than in India, and Brazil.

11
Major Concerns for Firms in Thailand
12

• A. Regulatory Burden
• 1. Time (number of days) to clear customs for
  imports

Source World Bank PICS surveys.
13
Regulatory Burden Issue is less with average
time to obtain authorizations, but more with
unpredictability(i.e. variation 4th column)
14
Thailand performs well on some aspects of
regulation

• Time (number of days) to clear customs for
  exports

Source World Bank PICS surveys.
15
B. Thai Firms Identify Skills Shortages as a
Severe Constraint to their operations
Irrespective of Firm Size
16
Skills Shortages as a Severe Constraint in all
Regions More So in the East Region and in
Bangkok
17
C. Infrastructure A Severe Business Climate
Constraint for Thai Firms
Source World Bank PICS surveys.
18
(No Transcript)
19
(No Transcript)
20
(No Transcript)
21
(No Transcript)
22
(No Transcript)
23
However, Power Outages have lower incidence than
in benchmark countries
24
Do Investment Climate Constraints Affect
Competitiveness ProductivityYes, Significantly

• Through 4 channels
• Disproportionate impact of investment climate
  constraints on more productive firms
• Poorer Investment Climate in expanding Regions
• Skills Shortages across all regions
• Low Technological Capability of Firms and low ICT
  usage

25
Determinants of Firm Performance Main Messages

• Larger firms are significantly more productive
  than small firms
• Exporters foreign-owned firms are significantly
  more productive
• Firms using more computer-controlled machinery
  are more productive
• Firm performance (labor productivity and TFP) is
  lower in Northeast and South regions than in
  Bangkok

26
International comparisons
27
International comparisons
28

• Disproportionate impact of investment climate
  constraints on more productive firms
• Medium and large firms are more likely
  to consider regulatory burden a
• severe constraint to operations

Percent of Firms Identifying Issues as one of
Top 3 Constraints
29
Firms using more computer-controlled machinery
are more likely to consider regulatory burden a
major obstacle to doing business
Percent of Firms Identifying Issues as one of Top
3 Constraints
30
2. Poorer Investment Climate in expanding Regions
Regional Breakdown of Manufacturing GDP

• The role of Bangkok and Vicinity as Thailands
  factory hub has declined
• over the last 25 years
• East and Central have expanded
• Little change in North, Northeast, and South

31
Location Choice Bangkok/Vicinity versus Rest of
the County Investment Climate

• Bangkok Companies report less problems with
• Telecommunications, electricity, infrastructure,
  and business support supply
• Credit access and insurance
• Bangkok Companies report more problems with
• Corruption
• Skilled labour shortages
• Competition from imports
• Utility prices
• In addition, low-tech Bangkok Companies report
  more problems with
• Marco-stability
• Anti-competitive practices
• Regulations for start-up.

32
3. Skills Shortages Impose a Significant Cost to
Thailand CompetitivenessEstimates of Benefits
from Relaxing Skills Shortages

• If firms increased their skill intensity to
  optimal skill mix in industry
• benefits would be large, on average 15 of
  sales
• Larger benefits from relaxing skills shortages
  in industries
• where vacancies for professionals take longer
  to fill

33
Benefits from relaxing skills shortages are
larger in industries where time needed to fill
vacancy for professional is longer
34
Quality Thai Secondary Education Students score
lower than average in International Tests
35
3. Thailands Past Technological Performance has
been Modest

• Source Global Competitiveness Report, 2004-2005

36
4. ICT Use and Performance PICS Results
Email/Website Use by Firm Size, Ownership, Export
Orientation
Source Investment Climate Survey (2004), World
Bank
37
ICT use among manufacturing firms

• Regional variations exist in ICT use
• Over 50 of firms in Bangkok, Eastern, North and
  Central regions use email while less than 30 of
  firms in Northeast and South use email
• 61 of firms in Bangkok has made sales online,
  while this is true only for 14 of the firms in
  the other regions
• Access to the Internet, email and website use is
  only the first step, other steps are necessary
  for firms to conduct significant portions of
  their business online

38
ICT use among manufacturing firms

• Inadequate IT skills impact firm performance
• 45 of manufacturing firms rated the IT skills of
  their skilled production workers as very poor.
• Thai firms perceive, lack of knowledge,
  availability of trained IT personnel and
  experienced consultants to be major constraints
  in adopting ICTs
• Small firms especially perceive these to be
  severe constraints

39
ICT use among manufacturing firms
Constraints to introducing or expanding IT use
considered important or very important
Constraints Small Medium Large
High cost of IT equipment and maintenance 20 18 18
Lack of knowledge and trained IT personnel 42 35 33
Low returns to investments in IT 15 12 11
Lack of experienced consultants to provide or design IT-based solution systems 39 37 32
IT-based systems do not improve productivity 20 13 13
Source Investment Climate Survey (2004),
World Bank
40
ICT use among manufacturing firms

• Thai firms When comparing firm perception of IT
  affordability with the average perception of 50
  other developing countries, Thai firms are much
  more concerned or hindered by costly IT services.

Firm Perception that IT Services are NOT
affordable
Source Investment Climate Survey (2004), World
Bank
41
IV. Some Policy Implications
42
Some Policy Implications

• Firms point to labor regulations, import
  regulations, and the unpredictability of entry
  regulations as areas needing governments close
  attention.
• Small firms are less productive than large, train
  less workers... What are the implications for SME
  policies?
• Improving infrastructure and institutional
  deficits in the regions outside of BKK is
  essential need private sector input into Govts
  new program

43
Some Policy Implications

• Strengthen secondary education
• English and ICT skills are key to innovation and
  competitiveness -- need to reinforce these skills
  .
• More knowledge training of IT in secondary
  education more vocational education
  opportunities in IT
• Firms must strengthen various dimensions of
  technological capabilities to spark productivity,
  innovation especially increasing linkages.