Download Foreign Direct Investment in Thailand:

Foreign Direct Investment in Thailand:
With Special Reference on European Foreign Direct Investment in the
Manufacturing Sector
Thesis Paper for Worldwide Economic Colloquium
on Wednesday, 16 July 2003
Referat: Ratchanee Wattanawisitporn
Korreferat: Arne Meyer-Ramien
Table of Contents
I.
II.
III.
IV.
Introduction
Objectives of the study
Hypotheses
Research methodologies
I. Introduction
The importance of foreign direct investment (FDI) as a factor in economic growth has long been
recognised, particularly in developing countries, as it can bring to the host economy a number of
benefits such as employment generation, business culture, technology transfer, and capital
formation.
FDI has been an important part of the economic transition, business liberalisation, and macroeconomic growth story in Thailand for over two decades up to the onset of the Asian financial
crisis in mid-1997. At least three major trends were clearly evident in investment patterns. First,
Thailand was one of the world’s fastest growing economies and, since the 1960s, it has been one
of the most successful developing countries (OECD, 1999). Second, impressively high real
growth rates of 8-9 per cent were maintained almost 30 years. Third, first formulating the
Promotion of Investment Act in 1972 focusing on labor-intensive industry has dived Thailand
more successful in attracting FDI inflows into manufacturing sectors, especially export-oriented
industries such as clothing, textiles, footwear and toys, including labour intensive assembly
activities in electronics and electrical goods industries (Baldwin and Maxwell, 1974).
Thailand has started industrialisation under the conditions of shortages in capital, technology, and
skill manpower since 1960s. However, during the same period, the agricultural sector expanded
much more slowly. This changed the structure of the Thai economy from dependence on
agriculture to dependence on industries and services. A dramatic change occurred in the
economic relations between Thailand and foreign countries. International trade expanded, and
foreign investment rapidly increased, especially investment from the United States and Japan,
which between them accounted for 60-65 percent of foreign investment. Beginning of 1980,
Thailand barely showed economic growth compared with other ASEAN regions. But Thailand
demonstrated a comeback from 1987, recording economic growth of 8% per year until 1995. It is
important to know that this rate of growth did not happen in short period of time, but had started
in the late 50’s, building up the economic progress for over 30 years. Thus, Thailand used direct
investment as a driving force to economic growth, obtaining linkages with global and regional
production networks, shifting the economy away from agriculture towards manufacturing and
within manufacturing, away from textiles into electronic goods. Thailand’s industrial structure
then has been crucial changed through FDI. In particular, foreign affiliates have dominated
production and sales in many manufacturing industries in Thailand and have contributed
significantly to the growth of exporting industries. It is undoubtedly that FDI has been a dynamic
force in the development of Thai industries, then gave Thailand the necessary technology and
capital, which lead to direct inward investment, thus came close to the level that are referred as
NIEs countries (Amnuay, 1970; Harada, Yutaka and Yasuhisa, 1998).
Given the growing role of foreign direct investment and multinational corporations (MNCs) in
developing countries in the age of globalisation resulting from its positively economic impacts,
its contribution is expected to continue playing an important element of Thai economic
development process. The question is still not only that FDI is needed, but how foreign capital
and technology should be put to work in the Thai economy and such transfers can be accelerated
and enhanced through FDI promotion policies and can keep Thailand as an attractively investing
location in an increasingly integrated world.
This study examines the overall impacts of FDI and related policies at the macro-level as well as
the promotion activities at the micro-level during the past twenty years in order to synthesize and
provide key lessons from the Thai experience on utilizing FDI as a tool of economic
development. Especially, in view of the increasing inflows of foreign capital to Thailand since
the early 1980’s, a detail examination of the macroeconomic mechanisms linking openness to
foreign capital and growth in Thailand may prove instructive for understanding the progress of
development. A special reference is made to conduct a survey on the factors affecting FDI from
European Enterprises in Thai manufacturing sector dealing with the technology transfer and
exports relationship with FDI in Thailand.
II. Objectives of the study
The growing role of foreign direct investment and multinational corporations (MNCs) in
developing countries in the age of globalisation, especially the nature of its impact on the growth
and development has made government and policymakers in host countries more active, even
more competitive in capturing the benefit, however, be avoid the danger in order to maximise the
contribution of FDI. The objectives of this study which will further lead to better understanding
for improving the investment promotion planning process and regulate the policy on how to
induce more FDI, especially from EU and maintain country as an attractive location are identified
as the following conceptual frameworks.
1. To provide the empirical work on FDI determinants and impacts on Thai economy.
2. To investigate the impact of FDI on Thai economic development defined as a growthenhancing factor.
3. To conduct a survey on foreign direct investment in Thailand focusing on the key
determinants and impacts on Thai Economy in conjunction with the Office of the Board
of Investment (BOI), including personal interview with some European enterprises,
particularly German enterprises.
4. To find out and examine the key determinants for driving European FDI into the Thai
manufacturing sector as it is a major target investing group for Thai investment promotion
plan based on the result of Survey.
5. To examine policy options, investment-activities and -strategies provided by Office of the
Board of Investment, Ministry of Industry, as is responsible for dealing with
multinationals and attracting inward FDI into country.
6. Policy suggestion should be geared not only to enhance the contribution of FDI to
country’s growth, but also to improve the capacity of Thailand to participate in a
proactive manner in a regional and international negotiation on a possible multilateral
framework for investment. Therefore, “best practice” experiences of selected countries as
useful case studies will be considered because some regions and countries might do better
than others in this process.
III. Hypothesises
1. The economic development in most developing countries is restrained by the shortage of
capital both financial and physical, technology, skilled labour and management expertise
and foreign exchange. FDI is positively related with growth based on the theories of
economic growth, which highlight the importance of improvement in technology,
2.
3.
4.
5.
6.
efficiency and productivity in stimulating economic growth. FDI is therefore proposed
that may positively affect the economic growth of Thailand through its role as a conduit
for transferring advanced technology.
The factor affecting FDI can be changed as the economic environment evolves over time.
It is important to know that FDI is treated as a dependent variable of the system. This
means that FDI is determined by various independent variables. These determinants
depend on the type of FDI classified by motives of MNCs: market-seeking,
resource/asset-seeking and efficiency-seeking. Such independent variables are, for
example, size of a market and per capita income, wage rates, exchange rate risks, etc.
Therefore, in order to estimate any determinants of FDI from EU to Thailand, these
independent variables need to be taken into account.
The locational patterns of international production differ by country and industry, and
they change over time, partly in response to the shifting industrial composition of FDI. In
many manufacturing industries, the predominant reason for investing aboard is to access
to the domestic market. Therefore, the more advanced the level of technology in an
industry, the higher the level of concentration tends to be.
In line with national development objectives, government and policymakers should
become less a regulator and more a facilitator of investment and focus on attracting
foreign investment that draws on promoting R&D, skill development as well as
technological development and transfer as productivity-driven wealth creation is more
desirable than capital-driven wealth creation. Therefore, it is necessary to understand how
MNCs choose investment locations which help explain differences in FDI inflow among
countries, evaluate, formulate and implement policies to capture inbound investment.
Thai manufacturing has been the longest recipient of FDI. With the growing importance
of industrial competitiveness in an increasingly competitive global marketplace and the
potential of the relationship between FDI and technological upgrading, government can
also act as facilitators and catalysts to encourage and support foreign affiliates and
domestic firms to strike up and deepen linkages through FDI promotion policies. In fact,
the more linkage promotion policies go hand-in-hand with targeted FDI promotion policy,
the more they are like to be successful.
Experience has shown that the rule of law, stable and sound economic policies, supporting
legislation and a facilitating attitude on the part of the government are all prerequisites in
any attempt to attract FDI. Policy suggestion should be geared not only to enhance the
contribution of FDI to growth, but also to improve the capacity of Thailand to participate
in a proactive manner in a regional and international negotiation on a possible multilateral
framework for investment. Best practice policy from different countries in terms of which
policies deserve special emphasis in what type of countries under what circumstances will
be useful case studies because some regions and countries might do better than others in
this process.
IV. Methodologies
This research study uses three sources of method.
1. Empirical analysis
2. Survey
The survey aims to explore the following issues:
 Motivations for investment in Thailand? – Why did the parent choose to invest?
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Principle market supplied – does the enterprise supply the local market, regional market,
market in the rest in the world or some combination?
Mode of Entry – what the initial investment Greenfield or an acquisition of and existing
assets in Thailand?
Ownership structure – is the enterprise wholly owned by the parent firm part owned? Are
partners are local or foreign?
Level of employment – local and expatiate
Has the enterprise expanded or contracted in the past five years?
Have there been changed in employment in the past five years?
What are plan for the next five years, expansion, extraction?
How do economic policy issues affect the enterprises: trade barriers, foreign exchange
arrangements (including exchange controls); tax and investment incentives?
How do the enterprises affect domestic enterprises through transferring technology?
What are the main sources of country risk in Thailand?
3. Interview