Thailand: Investment Climate, Firm Competitiveness, & Growth

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; --FTPI:Khun 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 • Thailand’s 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. It’s 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 Thailand’s growth • Growth in factors (capital & labor) main source of Thailand’s 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. Thailand’s Investment Climate:How is it? GOOD! On Average, Better Than in Most Neighboring Countries in East Asia, Except Malaysia; Better than in India, and Brazil.

11. MajorConcerns 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.

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 FirmsIdentifying 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 RegionsRegional Breakdown of Manufacturing GDP • The role of Bangkok and Vicinity as Thailand’s 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. Thailand’s 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” 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 government’s 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 Govt’s 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.