11

Investment Climate Investment Climate Constraints and Thailand Constraints and Thailand

CompetitivenessCompetitiveness

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

Seminar on Sustainable Growth, Regional Balance and Social Development for poverty Reduction in Thailand

Bangkok, October 26, 2006

22

Structure of the PresentationStructure 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 Thailand’s Competitiveness

• IV. The Way Forward

33

Key MessagesKey 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:1. Disproportionate impact of investment climate constraints on

more productive firms2. Poorer Investment Climate in expanding Regions 3. Skills Shortages4. Low Technological Capability of Firms and low ICT usage

44

I. Growth and the I. Growth and the Investment ClimateInvestment Climate

55

TFP’s Contribution to Thailand Long-Run Growth has been Negligible

Total Economy

1

2

3

4

5

6

1975 1980 1985 1990 1995 2000 2005

Year

Ind

ex

Total

Employment

Capital

TFP

Labor quality

66

Low TFP Contribution, Especially in Low TFP Contribution, Especially in ManufacturingManufacturing

Manufacturing

1

2

3

4

5

6

7

8

9

10

1975 1980 1985 1990 1995 2000 2005

Year

Ind

ex

Total

Employment

CapitalTFP

Labor quality

77

But, Investment has not Recovered from the Crisis

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Private Equipment Investment/GDP

Private Gross Fixed Capital Formation/GDP

Figure 1: Private Equipment and Total Investment to GDP Ratio in Thailand 1980-2003.

0

1

2

3

4

5

6

7

FDI/GDP in Thailand

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Thailand's Share in FDI into East Asia and Pacific

Panel A Panel B Figure 2: Panel A. FDI to GDP Ratio in Thailand 1980-2003.

Panel B. Thailand’s Share in Total FDI into East Asia and Pacific 1980-2003.

88

II. II. Binding Investment Binding Investment Climate ConstraintsClimate Constraints

99

Major Business Climate Concerns for Major Business Climate Concerns for Thai FirmsThai Firms

(Results from Open-Ended Question(Results from Open-Ended Question))

0 10 20 30 40 50 60 70

Dissatisfaction withEconomic Situation

Infrastructure andSupport Services

Skilled Labor Shortage

Regulatory Burden

Percent of Firms Identifying Issues as One of Three Top Obstacles

1010

A. Bureaucratic Burden 1. Time (number of days) to clear customs for imports

0 5 10 15

Estonia

Malaysia

Slovenia

Turkey

Thailand

Indonesia

Russia

India

China

Philippines

Brazil

Source: World Bank PICS surveys.

1111

Bureaucratic Burden

2. Labor regulations in Thailand are more restrictive than in key comparator countries such as China, Malaysia

Brazil

Chile

India

Indonesia

KoreaMalaysia

Philippines

SingaporeU.S.

China

Thailand

0

20

40

60

80

100

120

140

160

180

200

220

0 10 20 30 40 50 60 70 80 90 100

Index of Overall Restrictiveness of Labor Market Regulations

Day

s to

Sta

rt a

Bu

sin

ess

25th Percentile Start Business = 26 Days

25th Percentile Index of Labor Market

Regulations = 26.2

Source: World Bank Doing Business Indicators 2004.

1212

Bureaucratic BurdenBureaucratic Burden The issue is less with the time it takes to obtain authorizations, but The issue is less with the time it takes to obtain authorizations, but

more with the unpredictability…(coefficient of variation)more with the unpredictability…(coefficient of variation) Number of Days to Obtain Different Licenses/Permits/Approvals/ Certificates

Avg. St. Dev. Coeff. Variat. Median N. Obs.

Ministry of Commerce 10 20 1.9 2 964

Department of Industrial Works 17 22 1.3 7 926

Immigration Department 10 14 1.4 3 80

Land Office 13 22 1.7 3 131

Local Government 10 15 1.6 2 419

Approval for Construction 36 40 1.1 30 242

Import Permit 13 18 1.4 7 164Operating License 39 58 1.5 30 188

Number of Days to Process Application for Different Export Incentives

Avg. St. Dev. Coeff. Variat. Median N. Obs.

E-commerce Export Promotion 33 145 4.4 7 56Promotion of Thailand Brands 41 61 1.5 30 62Exports Promotion to new market (2003-2005) 18 19 1.0 10 39Distribution Networking 32 48 1.5 23 12Arrange sale promotion with Department store 17 13 0.7 7 11Export one stop service 15 13 0.9 11 14Prime Minister’s Export Award 2003 (PM Award) 21 20 1.0 14 13Deduction on Cost of Developing Websites 28 16 0.6 30 10Tax Incentives for Offshore Trading Via Websites 30 31 1.0 23 8

1313

B. Thai Firms Identify Skills Shortages as a Severe Constraint to their operations…… Irrespective of Firm Size

Percent of Firms Identifying Skills and Education of Available Workers as a "Severe" or "Very Severe" Obstacle

0.0

10.0

20.0

30.0

40.0

50.0

Small Medium Large

1414

Percent of Firms Identifying Skills and Education of Available Workers as a "Severe" or "Very Severe" Obstacle

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Skills Shortages as a Severe Constraint…Skills Shortages as a Severe Constraint…… More So in Garments, the East Region and … More So in Garments, the East Region and

in Bangkokin BangkokPercent of Firms Identifying Skills and Education of Available

Workers as a "Severe" or "Very Severe" Obstacle

0.0

10.0

20.0

30.0

40.0

50.0

NorthRegion

CentralRegion

BangkhokRegion

East Region

NortheastRegion

SouthRegion

1515

C. Infrastructure: C. Infrastructure: A Severe Business Climate A Severe Business Climate Constraint for Thai FirmsConstraint for Thai Firms

Source: World Bank PICS surveys.

Frequency of Power Outages (Number of Times Last Year)

0 5 10 15 20

Slovenia

Turkey

Estonia

Indonesia

Brazil

China

Russia

Philippines

Malaysia

Thailand

Note: India with 210 days is not shown due to space constraints.

Number of Days to Obtain an Electricity Connection

0 20 40 60 80

Turkey

Estonia

Slovenia

Russia

Philippines

Malaysia

Indonesia

China

Brazil

Thailand

India

1616

Number of Days to Obtain a Water Connection

0 5 10 15 20 25

Malaysia

Indonesia

Brazil

Thailand

1717

Frequency of Transport Disruptions Last Year

0 0.5 1 1.5 2 2.5 3

Brazil

Philipines

Thailand

Indonesia

Malaysia

1818

III. Impact of Investment III. Impact of Investment Climate Constraints on Climate Constraints on

CompetitivenessCompetitiveness

1919

Performance and Firm CharacteristicsPerformance 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.

Regressors Total Factor Productivity

Sales Growth

Labor Productivity

Firm Age 0.003** -0.003*** 0.010***(0.002) (0.001) (0.003)

Current Employment 0.087*** -0.015 -0.019(0.015) (0.009) (0.025)

Exporter Dummy (more than 10%) 0.084*** -0.013 0.273***(0.028) (0.022) (0.060)

Foreign Ownership Dummy 0.133*** -0.029 0.438***(0.032) (0.026) (0.064)

Capital Vintage (% Mach.Under 5 Years) 0.037 0.081** 0.115(0.047) (0.038) (0.094)

% Computer-Controlled Machinery 0.144*** -0.027 0.285***(0.048) (0.035) (0.097)

R&D Spending Dummy 0.010 0.008 0.049(0.031) (0.022) (0.057)

N. Observations 1033 1033 1033

2020

0

10

20

30

40

50

60

70

Small Medium Large

Percen

t F

irm

s Id

en

tify

ing

Iss

ues

as

Ma

jor T

hree C

on

cern

s

Skilled Labor Shortage Dissatisfaction Economic SituationRegulatory burden Infrastructure and support services

1. Disproportionate impact of investment climate constraints on more productive firmsMedium 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 ConstraintsPercent of Firms Identifying Issues as one of Top 3 Constraints

2121

0

10

20

30

40

50

60

70

Noncomputerized Machinery Computerized Machinery

Per

cen

t F

irm

s Id

enti

fyin

g I

ssu

es a

s M

ajo

r T

hre

e C

on

cern

s

Skilled Labor Shortage Dissatisfaction Economic SituationRegulatory burden Infrastructure and support services

Firms using more computer-controlled machinery are more likely to consider regulatory burden a major

obstacle to doing businessPercent of Firms Identifying Issues as one of Top 3 ConstraintsPercent of Firms Identifying Issues as one of Top 3 Constraints

2222

2. Poorer Investment Climate in expanding Regions 2. Poorer Investment Climate in expanding Regions Regional Breakdown of Manufacturing GDP Regional Breakdown of Manufacturing GDP

• The role of Bangkok and Vicinity as Thailand’s factory hub has declined over the last 25 years

• East and Central have expanded• Little change in North, Northeast, and South

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Bangkok Vicinity Central East West North Northeast South

2323

3. 3. Skills ShortagesSkills Shortages Impose a Significant Cost to Impose a Significant Cost to Thailand CompetitivenessThailand Competitiveness

Estimates of Estimates of BenefitsBenefits from Relaxing Skills Shortages from Relaxing Skills Shortages

IndustryBenefit from reducing skill

shortages as % sales Food Processing 8.2Textiles 14.1Clothing 10.7Auto-parts 4.6Electronics and Electrical Appliances 3.6Rubber and Plastics 27.7Wood Products and Furniture 44.8Machinery and Equipment 7.8

• 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)

2424

4. Technological capabilities of firms in 4. Technological capabilities of firms in Thailand are relatively weak:Thailand are relatively weak:

TCI by Industry TCI by Industry

0

0.5

1

1.5

2

2.5

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Technological Capabilities Index

Den

sity

Food Processing Textiles ClothingAuto Parts Electronics & Electrical Appliances Rubber & PlasticsWood & Wood Furniture Machinery & Equipment

Clothing

Textiles

Food Processing

Auto Parts

Electronics & Electrical Appliances

Wood & Wood Furniture

Rubber & Plastics

Machinery & Equipment

2525

Linkages TCI by IndustryLinkages TCI by Industry

0

0.5

1

1.5

2

2.5

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Technological Capabilities Index

Den

sity

Food Processing Textiles ClothingAuto Parts Electronics & Electrical Appliances Rubber & PlasticsWood & Wood Furniture Machinery & Equipment

2626

…“…“High Tech Exports” is Not Necessarily High Tech Exports” is Not Necessarily Equal to Competitiveness!Equal to Competitiveness!

Vietnam

Thailand

Sri Lanka

Philippines

Pakistan

Mexico

Malaysia

Indonesia

IndiaColombia

China

Chile

Brazil

BangladeshArgentina0

15

30

45

60

75

0.00 20.00 40.00 60.00 80.00 100.00

Manufactures exports (% of merchandise exports)

Hig

h-te

chno

logy

exp

orts

(%

of

man

ufac

ture

d ex

port

s)

2727

And ICT Use and Performance is LimitedAnd ICT Use and Performance is LimitedEmail/Website Use by Firm Size, Ownership, Export Orientation

Small Foreigner exporter

Small Domestic Exporter

Small Foreign Non-Exporter

Small Domestic Non-Exporter

Medium Foreigner Exporter

Medium Domestic Exporter

Medium Foreign Non-Exporter

Medium Domestic Non-Exporter

Large Foreigner Exporter

Large Foreign Non-Exporter

Large Domestic Non-Exporter

0

10

20

30

40

50

60

0 20 40 60 80 100

Email Use

Web

site

Use

Large Domestic Exporter

Source: Investment Climate Survey (2004), World Bank

2828

ICT use among manufacturing firmsICT use among manufacturing firmsConstraints 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

2929

IV. The Way ForwardIV. The Way Forward

3030

• 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.

Creating the conditions for a Creating the conditions for a Productivity-Driven Growth by Improving Productivity-Driven Growth by Improving

the Investment Climatethe Investment Climate

3131

Some Concrete Next StepsSome 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 government’s 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.

3232

Some Concrete Next StepsSome Concrete Next Steps

• Strengthen all dimensions of technological capabilities of firms to spark productivity-enhancing 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.