Thailand Investment Climate Assessment Update Xubei Luo The World Bank Bangkok August 21st, 2008

2 Background and Sample of Firms  Thailand Investment Climate Assessment Update is based on round 2 of survey; round 1 of survey was done in 2004  Survey Covers 9 industries: Auto components, electrical appliances, electronic components, food processing, furniture/wood products, garments, machinery & equipment, rubber & plastics, and textiles (1,043 firms in 2007 survey)) 6 regions: Bangkok & vicinity, Central, East, North, Northeast, and South Firm size: Small, Medium, and Large Foreing-owned and Thai-owned Exporting and non-exporting

3 Main messages  Big picture of Thailand’s investment climate  Changes between PICS 2004/07:  Objective indicators – worsened slightly  Subjective perceptions – worsend significantly  International perspective: middling among other countries  Key obstacles of investment climate  Uncertain macroeconomic environment and inadequate access to finance  Shortage of skilled labor  Cumbersome regulatory procedures  Unreliability of infrastructure

4 Key obstacles of investment climate Top Constraints to Business and Investments (PICS 2007) (Percent of 1,043 firms in 9 manufacturing industries surveyed) Source: Thailand Productivity and Investment Climate Study 2007 (PICS 2007), World Bank, NESDB and Foundation of Thailand Productivity Institute

5 Structure of Thailand ICA Update  Thailand’s investment climate today  Investment climate and enterprise productivity  Macroeconomic environment and access to finance  Skills and innovation  Regulatory framework  Public infrastructure

6 Objective indicators shows a slight worsening in investment climate (I) Objective Measures of Access to Finance Access to commercial bank loans have become slightly more difficult, especially for small and medium firms

7 Objective indicators shows a slight worsening in investment climate (II) Objective Measures of Skills Availability Professional staff are slightly more difficult to find

8 Objective Measures of Regulatory Framework Objective indicators shows a slight worsening in investment climate (III) Some administrative procedures takes slightly longer time

9 Objective indicators shows a slight worsening in investment climate (IV) Objective Measures of Infrastructure Services Duration of infrastructure service interruptions are slightly longer

10 Thailand’s investment climate is middling compared to other countries (I) Time required to fill the most recent vacancy for SKILLED production workers (weeks) Source: Thailand PICS 2007 and Global PICS

11 Thailand’s investment climate is middling compared to other countries (II) Objective Measures of Bureaucratic Process Source: Thailand PICS 2007 and Global PICS

12 Thailand’s investment climate is middling compared to other countries (III) Objective Measures of Infrastructure Services Source: Thailand PICS 2007 and Global PICS

13 Subjective perceptions worsened significantly Perception of Investment Climate Indicators as Major or Severe Obstacles to Doing Business (Percent of Firms)

14 Perceptions becomes reality as they affect investment decisions Business Sentiment Index Source: Bank of Thailand Source: BOT and NESDB Private Investment growth and Capacity Utilization

15 Structure of Thailand ICA Update  Thailand’s investment climate today  Investment climate and enterprise productivity  Macroeconomic environment and access to finance  Skills and innovation  Regulatory framework  Public infrastructure

16 Thailand’s productivity growth is smaller than China & India Sources of GDP growth - China, India, & Thailand (Annual average % increase) IndiaChinaThailand Source : Barry Bosworth and Susan Collins (Thailand ’ s data is from WB study with NESDB, 2005)

17 From PICS 2007, which types of firms have higher productivity  Older firms  Larger firms  Foreign-owned firms  Exporting firms  Firms better equipped with new / computer-controlled machinery  Firms engaging in R&D

18 What investment climate is conducive for productivity  Stable policy and macroeconomic environment  Well functioning financial system  Abundant skilled labor  Efficient regulatory framework  Adequate and reliable infrastructure services

19 Structure of Thailand ICA Update  Thailand’s investment climate today  Investment climate and enterprise productivity  Macroeconomic environment and access to finance  Skills and innovation  Regulatory framework  Public infrastructure

20 Unstable macroeconomic and policy environment affected firms’ investment decision

21 Rising oil prices and appreciated baht was unfavorable to business and investment Exchange RatesDiesel Price Source: Energy Policy and Planning Office (EPPO) Source: Bank of Thailand (BOT)

22 Rise in interest rates had raised the cost of financing new investments Average Interest Rates Faced by Firms Source: PICS 2007 & PICS 2004 Minimum Lending Rate of Commercial Banks Source: Bank of Thailand (BOT)

23 Higher interest rates plus higher collateral requirement…led to greater use of retained earnings & small increase in bank loans Objective Indicators of Firms’ Access to Finance

24 Firms need to increase protection against macroeconomic volatility

25 Lack of knowledge is a bottleneck and small firms are particularly vulnerable Firms Reporting Not Undertaking any Measure vs. the Lack of Knowledge on Coping Measures (Percent of firms)

26 Structure of Thailand ICA Update  Thailand’s investment climate today  Investment climate and enterprise productivity  Macroeconomic environment and access to finance  Skills and innovation  Regulatory framework  Public infrastructure

27 Shortage of skills remained a key obstacle for Thailand to move towards a knowledge economy

28 Skilled production workers are in short supply relative to other countries Time required to fill the most recent vacancy for skilled production workers (weeks) Time required to fill the most recent vacancy for unskilled production workers (weeks)

29 Filling vacancies take time because applicants lack skills that firms look for Percent of firms identifying these issues as the most important reason for job vacancies At the professional level, quantity is not a problem

30 English proficiency and IT skills remain weak for skilled local production workers % of Firms Rating Certain Skills as Poor or Very Poor

31 Lack of qualified personnel limits firms innovation efforts Percent of firms reporting these as a reason for not engaging more in innovative activities Innovative Activities includes 1.Technological innovation e.g. upgrading of machinery 2.Process innovation e.g. new process of producing the same product 3.Product innovation e.g. developing new products 4.Commercial innovation e.g. joint ventures 5.Marketing innovation e.g. branding

32 Structure of Thailand ICA Update  Thailand’s investment climate today  Investment climate and enterprise productivity  Macroeconomic environment and access to finance  Skills and innovation  Regulatory framework  Public infrastructure

33 Regulatory constraints are more binding for larger firms Percent of Firms that Cited Each Regulatory Issue as a Major or Severe Obstacle

34 More firms in all industries reported a higher regulatory burden in 2007 relative to 2004 Firms Reporting At Least One of the Four Regulatory Issues as a Major Obstacle to Business

35 Some industries face a longer time to obtain permits to start production and hihger uncertainties (22) (147) (115) (82) (25) (23) (19) (21) (22) (23) Average Days to Obtain Permits to Start Production Figures in () are standard deviations from mean

36 Some regulatory issues negatively affected firms’ investment decisions – from in-depth interviews  Delayed and partial VAT refunds  Delayed import tax refund and unclear codes for goods categorization  Bureaucratic procedures and unnecessarily high frequency of inspections  Multiple agency contacts for standard certifications  Price administration and uncertainties in foreign business participation & specific industrial policies

37 Structure of Thailand ICA Update  Thailand’s investment climate today  Investment climate and enterprise productivity  Macroeconomic environment and access to finance  Skills and innovation  Regulatory framework  Public infrastructure

38 The share of logistical costs in total product costs increased from , and is the highest in the North, Northeast, and South

39 The share of logistics costs in total product cost is the highest for food processing firms

40 Thank you Contact persons: Dr. Kirida Bhaopichitr (Bangkok) Dr. Xubei Luo (Washington)