Download OFDIPolicy_BPost20May2013

BUSINESS
Government must watch Thai transnationals
Published: 20 May 2013 at 00.00
Newspaper section: News
The Thai economy is not what it used to be. Once starved and desperate for
inward foreign direct investment and ambivalent about outward investment flows,
Thailand now confronts different investment dilemmas and challenges that have
posed mounting adjustment difficulties for state agencies.
Using Thailand as a key export base,Toyota pickup trucks are ready to be exported
through Laem Chabang port. Thai companies need more systematic support from the
government to increase their outbound investment. THITI WANNAMONTHA
For example, the Board of Investment (BOI) as the frontline regulatory agency on
investment has incorporated outward foreign direct investment (OFDI) into its
2013-17 strategy aimed at bolstering the country's economic competitiveness.
Yet the BOI is new to the outward-investing game, its "recipient" and "inward"
culture deeply embedded. To promote Thailand's competitiveness effectively, the
Thai government should ensure that its OFDI approach is inclusive, integrative,
forward-looking and fair.
Thai government policy towards OFDI in recent decades has transformed from
restriction in the 1970s and tentative liberalisation in the 1990s to outright
promotion in the 2010s. Whereas most countries generally welcome inbound
investment for the inflows of capital, technology and employment opportunities,
OFDI is often questioned for its cost-benefit impacts on the home country's
economy.
If Thailand promotes OFDI as a home country, would it not lose capital and jobs
to others that would be host countries? At the same time, whatever benefit
Thailand receives may accrue to only a few large firms capable of investing
beyond domestic borders. This dilemma besets other emerging economies as
well but perceptions have changed. Developing economies have discovered that
outbound investment contributes to economic competitiveness as much as
inbound investment flows do.
The most important direct gain from OFDI is the improved competitiveness of the
firms and the industries involved. Such gains can be translated to industrial
upgrading, whereby lower value-added activities can be shifted to countries with
lower costs and the investing home country can focus on higher value activities
within the global value chain. After all, improved competitiveness of local firms
should contribute to the competitive advantage of the investing home country.
In addition, outward investment has become an essential competitive strategy for
Thai firms. As Thailand is increasingly integrated in global competition, Thai firms
are forced to compete with multinationals from other countries both at home and
in foreign markets. International expansion is no longer a choice for large Thai
corporate titans but a necessity even for smaller and medium-sized players.
While a few of the stronger Thai pioneers have already ventured abroad, many
more rank-and-file Thai firms are looking to the Thai government to provide
direction and guidance to reduce their transaction costs. Some of our
neighbouring countries have assisted their local firms to expand abroad. Nearby
examples include Singapore's "Regionalisation 2000" that was adopted since
1993, and China's "Go Global" policy implemented in 2000. Such state-assisted
policy enables these neighbouring economies to surge ahead with more of their
firms investing internationally. Unsurprisingly, Singapore's OFDI stock in 2011 is
more than 10 times that of Thailand. Similarly impressive, China's OFDI stock
multiplied 13 times in the last decade.
For home-country governments to come up with appropriate OFDI-supporting
measures, a clear understanding of what their domestic firms are doing abroad is
necessary. Firms' motives of international expansion vary and a proper policy
framework should encapsulate all that need to be done to support the variety of
activities that local firms undertake.
Based on their motive, four types of foreign direct investment can be noted.
Market seekers expand abroad to broaden their reach in new or existing markets
that were previously served through exports. The CP Group's expansions of their
"Five Star Chicken" in India and Vietnam are examples of this type of investment.
Firms can also invest to seek resources that cost more in home countries or
simply do not exist. As Thailand's state-owned oil and gas multinational, PTT's
exploration and development of crude oil sites in far-flung countries like Algeria
exemplifies resource-seeking foreign investment.
In addition, firms go abroad to seek increased efficiency for the operations of the
entire group through economies of scale and scope. Toyota's decision to
concentrate their production of one-tonne pick-up trucks in Thailand and use the
country as a key export base to other economies highlights how the scale of
operation in the country can increase Toyota's overall efficiency in truck
manufacturing.
Differing from the previous three types, whereby firms use their existing
advantages to set up affiliates abroad, the fourth type is the asset-seeking
investment undertaken to improve the investing firm's competitive position
through acquisitions of strategic assets like technology, brands, distribution
networks, or R&D expertise. Thai Union Frozen's 1997 acquisition of the USbased Chicken of the Sea and its 2010 purchase of MW Brands, a leading
European canned tuna company, stamped its authority as a world leader with
key brands in all major markets.
Although market- and resource-seeking investments are the two most common
for multinationals from developing countries, they are not the only types of
investment that would contribute to Thailand's competitiveness. The Thai
government's exclusive focus on these two types of investment, as announced in
the BOI's latest plan, could regrettably shield Thai firms from seeing opportunities
that come with more complex types of outward investment.
For Thailand to fully benefit from outbound investment, its OFDI policy framework
should reflect the following four characteristics.
First, it should be all-inclusive, not favouring only the major types of investment in
which the majority of Thai firms are already engaged. A thorough understanding
of what all Thai firms are doing outside Thailand is needed in order to come up
with appropriate directions to support the wide range of Thai outward
investments.
Second, OFDI-promotion policy should be undertaken as an integrative part of
the overall strategy to improve Thailand's competitiveness. As painful as it would
be, industries and activities that are no longer cost competitive may have to be
shifted to lower cost locations so that Thailand can prepare for more challenging
activities in the global value chain. Outbound investment is equally significant to
the industrial upgrading of the Thai economy as much as inward flows have
been.
Although Thai firms may not yet be fully engaged in all four types of investment,
the government policy should be forward-looking in anticipation of more complex
types of outward investment in the future. Designing policy that is based only on
the current profile and portfolio of Thai OFDI, without envisaging how the full
spectrum of outbound investment could be, would be regrettable for the missed
opportunities.
Lastly, any support policy from the government should be based on a free, fair
and transparent basis that favours no particular firm or industry. There is no clear
one-size-fits-all recipe for the home-country government. The best overall
preparation could be for the home-country government to provide the appropriate
legal and institutional environment for competitive conditions that would induce
and entice local firms to invest overseas in ways that could produce value
multipliers for the home country. Competing in the world's premier leagues of
international business requires strenuous training and effective and committed
coaching.
Pavida Pananond is associate professor of International Business at
Thammasat Business School, Thammasat University. Her research focuses
on the internationalisation of firms, with a particular interest in emerging
market multinationals.