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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? 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