INVESTMENT

Quality over quantity

The competition for foreign direct investment, with China a favourite at the moment, has led to a rethink of Thailand's strategy, with officials now expecting investors to deliver higher levels of technology transfer and research

By NAREERAT WIRIYAPONG

Privileges have been given to electronic component projects with an aim to improve the country's competitiveness.

Over the last four years, various policies have been introduced to serve the national agenda _ boosting economic growth, improving the country's competitiveness, and reducing poverty.

New investment promotion strategies have been adopted to strengthen the attractiveness of Thailand at a time when China, with its low production costs and gigantic market, has emerged as the world's most popular investment destination, and threats arising from countries with low wages.

After enjoying foreign direct investment (FDI) inflows in the past decade, mainly from Japanese vehicles and electrical appliances makers, Thailand has come to realise it can no longer rely on cheap labour and natural resources alone to attract more FDI. Only projects that generate high added value and a major push for technology development could transform the country into a knowledge-based economy for sustainable development.

To serve this goal, investment promotion policies that encourage technology transfer and human resource development play a key role, along with the availability of telecommunication and information technology infrastructure and efficient logistics structure.

To start, the Board of Investment has singled out five sectors in which Thailand has competitive advantages or which have potential to generate high added value to the country's manufacturing sectors. The automotive and agro industries are considered the standard-bearers, followed by fashion, information and communication technology (ICT) and services.

To encourage more investment in the targeted sectors, special incentive packages for certain sectors such as the automobile and hard-disk drive industries were introduced. As well, the BoI has tried to facilitate investors to complement its focus on only offering tax incentives as in the past.

Next, the science, technology and innovation (STI) criteria were introduced to boost Thailand's competitiveness, with priority given to projects that help improve productivity, skill development, technology and innovation. Launched late last year, the STI programme provides additional tax incentives for projects that meet the requirements in terms of R&D inputs, human resource upgrading and assistance given to small and medium-sized suppliers.

Over the first three months of this year, 11 STI projects were approved, with total investment of more than two billion baht for the manufacturing of electronic components, pharmaceutical, and medical equipment, as well as R&D centres.

To support the government's policy to support SMEs, a promotional package was launched, with the priority given to the design and creative industries, as well as agricultural products. The package, which offers incentives to projects with minimum investment of only 500,000 baht each, also promotes new businesses such as logistics, R&D, packaging and ICT.

As well, the BoI has customised an incentive package to encourage the development of provincial clusters. With the co-ordination with CEOs governors, the package aims to improve investment environment and promote Thai overseas investment to link provincial clusters with neighbouring countries. A network linking Thailand with the surrounding countries is believed to enable Thai manufacturers to source lower-cost raw materials and labour to make their products more competitive with Chinese-made goods.

Meanwhile, a domestic direct investment (DDI) initiative, which also aims to encourage Thai manufacturers to invest overseas, has been promoted as a dual-track policy alongside the FDI. Out of the "conservative" 270 billion baht targeted for this year, 60% or 162 billion baht would be drawn from foreign investors while the remainder would be DDI.

Peter van Haren, chairman of Joint Foreign Chambers of Commerce, commended the Thaksin administration for portraying Thailand as a desirable investment destination and invoking inward direct investment, resulting in an increase in FDI from very low levels in 2002 and 2003.

"Both DDI and FDI are still somewhat low. However, the investment trend is upward," he said.

Global FDI inflow has declined steadily for three consecutive years since 2000 due mainly to the global economic slowdown and a drop in cross-border mergers and acquisitions. The FDI inflow to Thailand in 2001 dropped to 185 billion baht from 355 billion baht in 2000. But in 2002, the inflow picked up to 264.5 billion baht and climbed to 319 billion baht last year. Earlier this year, the BoI came up with a target of 270 billion baht for the year, with average 8% annual growth projected over the next five years.

Kasikorn Research Center shares the same view, saying that it targeted a 65% surge in total FDI inflow from $1.8 billion last year to at least $3 billion this year although high oil prices had put pressure on the global recovery the second half of the year. Given the country's growth and integration with regional economies, the centre forecast the FDI inflow would remain on the uptrend over the next couple of years.

Recent proof of such optimism is Thailand's improvement in the competitiveness rankings conducted by the International Institute for Management and Development (IMD). After sliding from seventh place in Asia in 2001 to 11th in 2002 due to increased competition from China, Thailand moved to 10th in last year's ranking among the 30 countries surveyed, ahead of Japan, China and South Korea. The agency cited strong economic performances and the government's efficiency as main reasons.

Buoyed by the achievement, the BoI set a target to push Thailand into the top five in Asia within 2006, clashing head-on with China, Australia, Hong Kong, Japan and Singapore.

But Thailand's efforts to fine-tune its investment promotion strategy have faced an acid test in recent months. At home, southern unrest has intensified while externally global oil prices have skyrocketing with little sign of abating.

Mr van Haren said the government needed to find a quick solution to the unrest, as the problems had begun to affect the overall economy, mostly in the southern region. Particularly affected were tourism-related businesses and in some instances those related to international trade out of the South.

"Several embassies have issued travel advisories urging tourists to avoid the southern provinces affected by the unrest. This is a clear indication that foreign governments and businesses are keeping a steady eye on the situation," he said.

Meanwhile, the surging global oil price and China's move to cool down its overheating economy are major external threats. Those factors will probably cause the global economy to shrink. China's slowdown, in particular, threatens to dampen Asia's overall growth and eventually drag down worldwide FDI inflow, still in a fledgling stage after a three-year slump.

With intensified competition from other countries to attract FDI, Mr van Haren said the government should step up efforts to promote its Regional Operating Headquarters (ROH) programme spearheaded by the Finance Ministry. The scheme aims to use corporate and personal income tax reductions to draw foreign companies to move their headquarters to Thailand.

"The programme is drawing some interest from multinational companies. However, the government has not been as aggressive as such countries as Singapore in promoting its ROH incentives," he said.