Investment Climate Constraints and Thailand Competitiveness

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Investment Climate Constraints and Thailand
Competitiveness
Seminar on Sustainable Growth, Regional Balance
and Social Development for poverty Reduction in
Thailand Bangkok, October 26, 2006

• Albert G. Zeufack, PhD.
• The World Bank

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Structure of the Presentation

• I. Growth and the Investment Climate
• II. Binding Investment Climate Constraints
• Regulatory Burden
• Skills
• Infrastructure
• III. Impact of Investment Climate Constraints on
  Thailands Competitiveness
• IV. The Way Forward

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Key Messages

• While Thailand growth has mainly been
  factor-driven, sustaining it in the future may
  require shifting to a productivity-driven growth
  strategy.
• Using data from the Productivity and Investment
  Climate Survey conducted between March 2004 and
  February 2005, we find that The Thai Investment
  Climate is good by international standards,
  better than most neighboring countries (except
  Malaysia).
• However, Regulatory burden, Skills Shortages and
  Infrastructure are identified as the three most
  binding constraints to firms activity and have a
  negative and significant impact on Thailand
  productivity and Competitiveness.
• The Impact on Competitiveness goes through four
  channels
• Disproportionate impact of investment climate
  constraints on more productive firms
• Poorer Investment Climate in expanding Regions
• Skills Shortages
• Low Technological Capability of Firms and low ICT
  usage

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I. Growth and the Investment Climate
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TFPs Contribution to Thailand Long-Run Growth
has been Negligible
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Low TFP Contribution, Especially in Manufacturing
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But, Investment has not Recovered from the Crisis
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II. Binding Investment Climate Constraints
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Major Business Climate Concerns for Thai Firms
(Results from Open-Ended Question)
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• A. Bureaucratic Burden
• 1. Time (number of days) to clear customs for
  imports

Source World Bank PICS surveys.
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• Bureaucratic Burden
• 2. Labor regulations in Thailand are more
  restrictive than in key comparator countries such
  as China, Malaysia

Source World Bank Doing Business Indicators
2004.
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Bureaucratic Burden The issue is less with the
time it takes to obtain authorizations, but more
with the unpredictability(coefficient of
variation)
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B. Thai Firms Identify Skills Shortages as a
Severe Constraint to their operations
Irrespective of Firm Size
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Skills Shortages as a Severe Constraint More
So in Garments, the East Region and in Bangkok
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C. Infrastructure A Severe Business Climate
Constraint for Thai Firms
Source World Bank PICS surveys.
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III. Impact of Investment Climate Constraints on
Competitiveness
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Performance and Firm Characteristics
Notes OLS estimation. and represent
significance at 1 and 5 percent confidence
levels. The regressions include industry fixed
effects and region fixed effects.
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• Disproportionate impact of investment climate
  constraints on more productive firms
• Medium and large firms are more likely to
  consider regulatory burden a
• severe constraint to operations

Percent of Firms Identifying Issues as one of
Top 3 Constraints
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Firms using more computer-controlled machinery
are more likely to consider regulatory burden a
major obstacle to doing business
Percent of Firms Identifying Issues as one of Top
3 Constraints
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2. Poorer Investment Climate in expanding Regions
Regional Breakdown of Manufacturing GDP

• The role of Bangkok and Vicinity as Thailands
  factory hub has declined over the last 25 years
• East and Central have expanded
• Little change in North, Northeast, and South

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3. Skills Shortages Impose a Significant Cost to
Thailand CompetitivenessEstimates of Benefits
from Relaxing Skills Shortages

• If firms increased their skill intensity to
  optimal skill mix in industry
• benefits would be large, on average 15 of
  sales
• Larger benefits from relaxing skills shortages
  occur in industries
• where vacancies for professionals take longer
  to fill (i.e., where skill
• shortages are more binding)

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4. Technological capabilities of firms in
Thailand are relatively weak TCI by Industry
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Linkages TCI by Industry
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High Tech Exports is Not Necessarily Equal to
Competitiveness!
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And ICT Use and Performance is Limited
Email/Website Use by Firm Size, Ownership, Export
Orientation
Source Investment Climate Survey (2004), World
Bank
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ICT use among manufacturing firms
Constraints to introducing or expanding IT use
considered important or very important
Constraints Small Medium Large
High cost of IT equipment and maintenance 20 18 18
Lack of knowledge and trained IT personnel 42 35 33
Low returns to investments in IT 15 12 11
Lack of experienced consultants to provide or design IT-based solution systems 39 37 32
IT-based systems do not improve productivity 20 13 13
Source Investment Climate Survey (2004), World
Bank
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IV. The Way Forward
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Creating the conditions for a Productivity-Driven
Growth by Improving the Investment Climate

• Attracting new investment (FDI and domestic), and
  improving the productivity of existing firms will
  require
• reducing risk, through a streamlined and
  attractive regulatory framework, political
  uncertainties, and
• reducing costs through a better infrastructure,
  and a better quality skills
• Resource reallocations out of agriculture have
  limits. As the country climbs the value added
  ladder, the quality of the workforce will matter
  more.
• To reach the future growth potential of 6-7
  percent, Services, which tend to be more skill
  intensive, will have to contribute more to
  growth.
• Therefore, improving the business climate will be
  key to achieving Productivity-Driven Growth.

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Some Concrete Next Steps

• Investigate further how to streamline the
  regulatory framework. Firms point to labor
  regulations, import regulations, and the
  unpredictability of entry regulations as areas
  needing governments close attention. What
  exactly is the problem and how to address it?
• Deepen the understanding of Services Sectors
  performance and potential.
• Improving infrastructure and institutional
  deficits in the regions outside of BKK/VIC to
  sustain export growth.
• Improving Skills of the Workforce. English and
  ICT skills are key to innovation and
  competitiveness. Reinforce their provision at all
  levels of education.

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Some Concrete Next Steps

• Strengthen all dimensions of technological
  capabilities of firms to spark productivity-enhanc
  ing technological progress, especially increasing
  linkages.
• Monitor progress in improving the investment
  climate on a regular basis. For example by
  conducting a PICS every 2 to 3 years.
• Create the appropriate databases (panels) to
  boost analysis of firms behavior, especially of
  SMEs.
• Rationalzing survey work and adopting a unique
  identifier per firm across different surveys.