GMS Projects

1. Khon Kaen University International CollegeBusiness in the Greater Mekong Sub-regionCourse number 050 451 - Second semester 2013Wednesdays at 9:00 in room 823Lecturer: Michael Cookeoffice room 817E-mail: Michco@kku.ac.thWeb: KKU.AC.TH/Michco

2. GMS Projects • Find a successful industry in GMS, or one which shows potential to be successful (13 Nov) • Explore reasons the industry located in GMS • What is the nature of the business (capital or labor intensive, etc) • Any spillover effects? • What was the mode of entry for the businesses? • Study a GMS country in which the industry is successful (4 Dec) • What are the strengths of that country from a business perspective? • What are the weaknesses? • Look for barriers to further business success in the country • How do you see the business evolving (5 Feb) • Effect of ASEAN or other alliances (trade, labor mobility, etc) • Relevant demographic, economic, trade projections • Infrastructure, education, and other changes as a result of government or business initiatives • Advice you would give to government units to encourage industry growth

4. What are the CLMV Countries? • Enormous differences in economic development and history between Thailand and Cambodia, Laos, Myanmar and Vietnam • Analysts group Thailand with more advanced economies • Vietnam is the most developed of the CLMV countries • Within Thailand, the Northeast now has the most rapid economic growth, but still lags Central Thailand • Some Bangkok based Thai firms, such as Central Group, owner of Robinsons, Centara Hotels, and Central Malls, see growth opportunity in Isaan • In the Northeast, rising incomes, property prices and consumer spending have generated economic growth of 8% annually, or double the rate of Bangkok, according to Siam Commercial Bank Plc * • The wealthiest area is Rayong, where Ford exports ¾ of the production of two factories * http://www.bangkokpost.com/business/news/376967/thailand-s-rural-boom-yields-mercedes-and-us-6000-jacuzzis

5. Ford Leaves Australia • After nine decades, Ford leaves in 2013 Australia, citing high costs related to the strong Australian dollar • The two remaining car producers (GM and Toyota) could face a domino effect” as the industry becomes too small to support its own supply chain • Some of Ford’s Rayong production now goes to Australia • Thailand is now the 9th or 10th largest auto producer in the world http://www.bloomberg.com/news/2013-05-22/ford-to-close-australia-car-manufacturing-plants-afr-reports.html

6. Mekong Watershed36% of the River’s Volume is from Laos

7. Mekong River Commission Secretariat

8. Resources • JETRO (Japan External Trade Organization) established 1958 helps small to medium size Japanese firms maximize their global export potential • JETRO-Institute of Developing Economies (IDE) Bangkok Research Center links • http://www.ide.go.jp/English/Links/southeast_asia.html • Good for links to government and university sites for the GMS countries • Institute of Developing Economies (IDE) Bangkok Research Center publications • http://www.ide.go.jp/English/Publish/Download/Brc/ • Relevant and relatively recent research reports • Examples: • "Five Triangle Areas in the Greater Mekong Subregion" Edited by ISHIDA Masami / Published in 2013 • "Economic Reforms in Myanmar: Pathways and Prospects" Edited by HANK LIM and YASUHIRO YAMADA / Published 2013 • "Cause and Consequence of FIRMS' FTA Utilization in Asia" Edited by HAYAKAWA Kazunobu / Published in 2012 • "Emerging Economic Corridors in the Mekong Region" Edited by ISHIDA Masami / Published in 2012 • "Industrial Readjustment in the Mekong River Basin Countries: Toward the AEC" Edited by Yasushi UEKI AND TEERANA BHONGMAKAPAT / Published in 2012 • "Investment Climate of Major Cities in CLMV Countries" Edited by ISHIDA Masami / Published in 2010 • "Economic Relations of China, Japan and Korea with the Mekong River Basin Countries (MRBCs)" Edited by KAGAMI Mitsuhiro / Published in 2010 • "Major Industries and Business Chance in CLMV Countries" Edited by UCHIKAWA Shuji / Published in 2009 • "A China-Japan Comparison of Economic Relationships with the Mekong River Basin Countries" Edited by KAGAMI MItsuhiro / Published in 2009 • Mekong Institute (on the KKU Campus) http://www.mekonginstitute.org/

9. Mekong Institute Focus on Labor • http://www.mekonginstitute.org/images/abook_file/policy_brief_labour_supply.pdf • From a study of a Laos SEZ: “The breakdown in occupational skills indicate mismatches in supply and demand for specific skills areas such as IT/computer operators, maintenance mechanics, welders, sewers/dressmakers, gem lapicides, and others. On the other hand, majority of students at TVET schools enroll in accountancy and Business management courses.” • From a study of a Cambodian SEZ: “The new SEZs that have been set up in the border areas with Thailand and Vietnam have reduced the pull factor to migrate to Phnom Penh for work. The preference of students for enrolling in academic courses such as management and accounting due to the perception that vocational training will lead to a career of hard labor and low wages in factories. In Laos, many prefer to migrate to Thailand where they can earn more even without the necessary educational credentials.”

10. Taxes and Corruption • The Mexican government expects to get $1BB from a new tax on sugary beverages in part of a war against obesity. Mexican water is famously unsafe to drink, so Mexicans drink a lot of sodas. • “So here’s an idea: now that we’ve taxed soda, let’s tax corruption. According to the Mexican employers’ association, the cost of corruption is 9 percent of our economic output ($1.2 trillion). If you apply the standard value-added tax of 16 percent, you’ll collect $17 billion. If you think a tax on soft drinks will make us healthier, just imagine what a tax on corruption could do. “ New York Times By DAVID TOSCANA Published: November 3, 2013

11. Who Owns the Land? • A little known legacy of the Khmer Rouge (Cambodian Marxists) was the systematic destruction of nearly all land records in Cambodia. Land ownership is ambiguous • The Khmer Rouge have been out of power since 1998 • Cambodian law authorizes a land title of sorts for people who have been certified by local authorities as having occupied the land for at least five years. • However, land occupiers say that obtaining the necessary certification from local authorities is nearly impossible when political forces seek control of land • Very often land title is unclear. What effect does this have on the investment climate? http://www.nytimes.com/2013/10/01/business/international/in-cambodias-cane-fields.html

12. Gabon seeks to reclaim Chinese oil assets* • Gabon is planning to take assets back from three international oil companies including a subsidiary of China’s Sinopec • The move will increase tensions over a lack of clarity in the terms and conditions of investment as Gabon prepares to launch a licensing round for the deep waters off its coast. • African countries attempt to get better terms from foreign multinationals and control transfer pricing (slide 26) and tax evasion. • Gabon plans to reclaim assets due to alleged breaches of contract by China’s Addax Petroleum, when their contract renews in 2015. • Assets reclaimed last year assets are now managed by the recently-created national Gabon Oil Company. • There are also suspicions that Gabon’s tougher approach is motivated by a desire to reallocate producing assets to GOC, which wants to take stakes in existing and new fields. • According to the New York Times**: • Niger’s oil minister said “This is all we’ve got. If our natural resources are given away, we’ll never get out of this.” He was commenting on a deal in which the previous ruling party got a $300MM bonus for signing a contract with China National Petroleum. • Ricardo Soares de Oliveira, a politics professor at Oxford and an expert on African oil said “Even a weak state in Africa can have serious leverage. African-Chinese relations are not as unbalanced as is sometimes argued.” *Financial Times June 5, 2013 **NYT September 17, 2013

13. Rent Seeking • Rent seeking generates increasing returns – with strength in numbers among the reasons • In a farm economy with three activities, cash crop for market, subsistence farming, rent seeking: • Rent seekers will expropriate cash crops until the returns fall to the level of subsistence • In a system of very poorly protected property rights, returns to farming tend to fall to the level of subsistence, where nothing is left to expropriate • Rent seeking drives farmers out of cash crop production and into subsistence farming • Overall productivity and standards of living decline, as happens in Africa • Countries with a good rent seeking equilibrium as a result of property rights protection can slide into bad equilibrium due to war or social unrest • These reduce both productivity and property protection • Getting out of bad equilibrium may require major government or civil service reform • Private rent seeking is forms of transfer between private parties • Lawsuits, theft, attack the productive sector of an economy • Private rent seekers go after existing wealth, such as land and capital • Public rent seeking is redistribution from the private sector to the state or to government bureaucrats • Lobbying and corruption are two forms of redistribution to bureaucrats • Public rent seeking attacks (reduces) innovation • Innovators demand for government goods such as permits is high and inelastic • Innovators have no established lobbies and usually lack the cash to pay bribes • In developing countries with weak property rights protection capital is usually not committed to long term investment, to avoid expropriation • If an innovation fails the innovator bears the cost. If it succeeds, returns are expropriated • Some harmful effects of public rent seeking can be reduced if rulers or bureaucrats have an equity stake in innovative activities and long time horizons Adapted from Murphy, Shleifer, Vishnay AEA Papers and Proceedings May,1993

14. Apple’s iPhone • Why does Apple choose to assemble iPhones in China? • Scale of operations • Supply chains • Skilled technical workforce, including engineers • Clusters of excellence • Response times • Think of how 2011 floods in Thailand affected other manufacturers • Labor is not a big component of the total cost • Apple employs 43,000 in the USA (and about 33,000 of those are low-wage retail or call-center) • Apple’s contractors employ 700,000 outside of the USA • Apple’s profits accrue to shareholders across the world • Apple is a true global company • Sales span the globe • Software created in USA • Marketing created and managed in USA • Supply chains span the globe • iPhones assembled in China by a subsidiary of a Taiwanese company • Some components made in USA by S. Korean company (Samsung) • Glass made in Japanese factories by an American company (Corning)