1. Thailand’s Minimum Wage Increase of 2013:
Impacts on Foreign Direct Investment
Aikaparb Michael Fuangfoo
The Street Economist
May 28, 2016

2. Introduction
January 1st, 2013 – Thailand implements nationwide minimum wage increase of 39.5% [Minimum Wage > 300 THB (Thai Baht) per Day]
The economy relies heavily on Foreign Direct Investment (FDI)
Thailand is a major producer in agriculture & manufacturing goods
Including services, financial, and technology industries
In 2015, Japan ranked the highest FDI country investor with projects worth over 1 Billion USD (US Dollar)

3. Purchasing Power
1 US Dollar (USD) = Thai Baht (THB), May 20, 2016
Most street food stall items, such as a bowl of noodles, cost approximately THB
Eating 3 meals a day would leave the Thai worker with about 200 THB (6 USD) after a day’s labor, before taxes.
The Big Mac Index
the metric shows how much a McDonald’s Big Mac hamburger would cost in a particular country and illustrates how the burger is undervalued or overvalued compared to a McDonald’s Big Mac in the United States of America (USA). According to the Big Mac Index’s latest data (January 2016), 300 THB per day would purchase approximately 2.67 Big Mac hamburgers.

4. FDI in Thailand
FDI is broadly defined as mergers and acquisitions, constructing new facilities, reinvesting profits earned from overseas operations and intra company loans.
Gauge for presence of multinational corporations (MNCs)
FDI is an example of international factor movements that have shown to create technology transfers (e.g. skills, knowledge, facilities, methods)
Board of Investment (BOI) of Thailand is the sole agency responsible for promoting investment
There is no agency that monitors, evaluates, or endorses FDI
Only securing the necessary operating permits need to be secured for FDI

5. Motivations of This Paper
Many politicians, economists, and reporters have stated that increasing the minimum wage will have negative impacts on attracting investors due to higher overheard and production costs.
This study is significant because the worker lies at the foundation of the economy and labor is an essential component in Thailand’s main industries, such as manufacturing, services, agriculture.

6. Questions
What is the affect on Foreign Direct Investment (FDI) since the 39.5% minimum wage increase on January 1, 2013?
What affects can be observed among other determinants of FDI when incorporating the minimum wage increase?
What would be added to this analysis for further research?

7. FDI in Thailand Types of FDI:
Vertical and Horizontal
“Horizontal” incentives for FDI represents firms wishing to reproduce their operations in other countries to be closer to consumers and “vertical” incentives for FDI represents firms wanting relatively low cost economies for labor intensive production.

8. Figure 1: Registered Foreign Capital (BOI Approved Projects)
Data Source: Board of Investment, Thailand
Currency: US Dollar (USD)

9. Figure 2: Foreign Direct Investment Inflows by Business Sector
Data Source: Bank of Thailand
Currency: US Dollar (USD)

10. Figure 3: Foreign Direct Investment Inflows by Manufacturing Sector

11. Literature Review (Botrić, Valerija, and Skuflić, 2005)
(Blonigen and Piger, 2011)
(Ramstetter, 2009)
(Adam and Filippaios, 2007)

12. Figure 4: Foreign Direct Investment Model Variables (1980 – 2015)
Variable Names
Used In Regression
Description
gdp
Aggregate demand and is the Gross Domestic Product of a particular country.
minimum_wage
The indicator Minimum Wage contains average daily wage data up to After 2012, 300 THB is used as the daily wage rate.
total_population
Total Population is the total number of people that live in Thailand.
exports_imports
Trade Openness (Exports/Imports ratio) is an indicator that measures the ratio of exports to imports. If the ratio is greater than one, then exports surpasses imports. If the ratio is less than one, then imports surpasses exports.
external_debt_stocks
External Debt Stocks represents how much foreign debt Thailand holds.
inflation
Inflation gauges prices over time.
governance
Governance is an indicator that is an overall average of the following categories: Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law, Control of Corruption.
internet_users
Internet Users is measured in per 100 people.

13. Empirical Model
Equation 1
𝐹𝐷𝐼 𝐼𝑁𝐹𝐿𝑂𝑊𝑆= 𝛽 𝛽 1 𝐺𝐷𝑃 + 𝛽 2 𝑀𝐼𝑁𝐼𝑀𝑈𝑀 𝑊𝐴𝐺𝐸+ 𝛽 3 𝑃𝑂𝑃𝑈𝐿𝐴𝑇𝐼𝑂𝑁+ 𝛽 4 𝐸𝑋𝑃𝑂𝑅𝑇𝑆 𝐼𝑀𝑃𝑂𝑅𝑇𝑆+ 𝛽 5 𝐸𝑋𝑇𝐸𝑅𝑁𝐴𝐿 𝐷𝐸𝐵𝑇 𝑆𝑇𝑂𝐶𝐾𝑆+ 𝛽 6 𝐼𝑁𝐹𝐿𝐴𝑇𝐼𝑂𝑁+ 𝛽 7 𝐺𝑂𝑉𝐸𝑅𝑁𝐴𝑁𝐶𝐸+ 𝛽 8 𝐼𝑁𝑇𝐸𝑅𝑁𝐸𝑇 𝑈𝑆𝐸𝑅𝑆+ℇ
Equation 2
∆𝑦= 𝛽 1 ∆ 𝑥 1

14. Empirical Model
Equation 3
log (𝐹𝐷𝐼 𝐼𝑁𝐹𝐿𝑂𝑊𝑆) = 𝛽 𝛽 1 log (𝐺𝐷𝑃) + 𝛽 2 log (𝑀𝐼𝑁𝐼𝑀𝑈𝑀 𝑊𝐴𝐺𝐸) + 𝛽 3 log (𝑃𝑂𝑃𝑈𝐿𝐴𝑇𝐼𝑂𝑁) + 𝛽 4 log (𝐸𝑋𝑃𝑂𝑅𝑇𝑆 𝐼𝑀𝑃𝑂𝑅𝑇𝑆) + 𝛽 5 log (𝐸𝑋𝑇𝐸𝑅𝑁𝐴𝐿 𝐷𝐸𝐵𝑇 𝑆𝑇𝑂𝐶𝐾𝑆) + 𝛽 6 log (𝐼𝑁𝐹𝐿𝐴𝑇𝐼𝑂𝑁) + 𝛽 7 log (𝐺𝑂𝑉𝐸𝑅𝑁𝐴𝑁𝐶𝐸) + 𝛽 8 log (𝐼𝑁𝑇𝐸𝑅𝑁𝐸𝑇 𝑈𝑆𝐸𝑅𝑆) +ℇ
Equation 4
%∆𝑦= 𝛽 1 %∆ 𝑥 1

15. Empirical Model
The selected determinants in this analysis are from Botrić, Valerija, and Skuflić (2005)
Governance was added to the list of variables in order to incorporate regional and cultural factors. (Blonigen and Piger, 2011).

16. Empirical Results Examples:
𝐼𝑓 𝑇𝑜𝑡𝑎𝑙 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒𝑠 𝑏𝑦 1%, 𝑐𝑒𝑡𝑒𝑟𝑖𝑠 𝑝𝑎𝑟𝑖𝑏𝑢𝑠,
𝑤𝑒 𝑠ℎ𝑜𝑢𝑙𝑑 𝑒𝑥𝑝𝑒𝑐𝑡 𝐹𝐷𝐼 𝐼𝑛𝑓𝑙𝑜𝑤𝑠 𝑡𝑜 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒𝑙𝑦 𝑏𝑦 %
𝐼𝑓 𝐸𝑥𝑡𝑒𝑟𝑛𝑎𝑙 𝐷𝑒𝑏𝑡 𝑆𝑡𝑜𝑐𝑘𝑠 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐷𝑒𝑏𝑡 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒𝑠 𝑏𝑦 1%, 𝑐𝑒𝑡𝑒𝑟𝑖𝑠 𝑝𝑎𝑟𝑖𝑏𝑢𝑠,
𝑤𝑒 𝑠ℎ𝑜𝑢𝑙𝑑 𝑒𝑥𝑝𝑒𝑐𝑡 𝐹𝐷𝐼 𝐼𝑛𝑓𝑙𝑜𝑤𝑠 𝑡𝑜 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒𝑙𝑦 𝑏𝑦 %
𝐼𝑓 𝐺𝑜𝑣𝑒𝑟𝑎𝑛𝑐𝑒 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒𝑠 𝑏𝑦 1%, 𝑐𝑒𝑡𝑒𝑟𝑖𝑠 𝑝𝑎𝑟𝑖𝑏𝑢𝑠,
𝑤𝑒 𝑠ℎ𝑜𝑢𝑙𝑑 𝑒𝑥𝑝𝑒𝑐𝑡 𝐹𝐷𝐼 𝐼𝑛𝑓𝑙𝑜𝑤𝑠 𝑡𝑜 𝑑𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒𝑙𝑦 𝑏𝑦 %

17. Conclusions
This study found that a minimum wage increase does not negatively affect FDI inflows
The variables Governance, External Debt Stocks (foreign debt), and Total Population are statistically significant in affecting FDI Inflows
Total Population has a positive affect and External Debt Stocks and Governance have a negative relationship to foreign capital inflows.
The Governance indicator used in this analysis has a profound negative relationship to FDI Inflow growth.
The more Thailand’s government exhibits voice and accountability, political stability, absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption, the greater FDI inflow growth will be negatively affected.
However, increase in Governance may indicate greater red tape to investors, therefore greater barriers to entry and less incentives for a profit seeking entity

18. Future Research
Include regional competitors, such as Malaysia, Indonesia, Vietnam, and Philippines by comparing their economic activity post minimum wage increase
Using country specific data with the same model
Differentiate between the source(s) of FDI inflows, so to better understand the investing country.
Include a variable that measures the participation or lack of participation in the Trans-Pacific Partnership.
Incorporate

19. Aikaparb Michael Fuangfoo
Thank you for your time
Aikaparb Michael Fuangfoo
The Street Economist
May 28, 2016