thailand aims to use the new investments promotion strategy to overcome the middle income trap

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On the 1st of January 2015, the seven-year investment promotion strategy

(2015-2021) (7YIPS) came into effect in Thailand after being approved by the

Board of Investment (BOI). 7YIPS is intended to help overcome the middle

income trap by tapping foreign direct investments (FDI) and technological know-

how, promoting new value-added sectors, endorsing investments in R&D, and

decentralising investments into lower income regions.

In order to achieve this goal, modifications were made to the previous strategy

on three aspects of the investment incentives: the scope, the geography, and

the basis of incentives. In the 7YIPS, the government has chosen 10 target

industries for investment promotion and has clearly defined business activities

into categories A1-A4, B1 and B2, with business activities in category A1

receiving the most attractive incentives due to their knowledge-oriented

business activities. Secondly, the new strategy has abolished incentives under

the zoning scheme, which classified geographic incentives only into three zones

based on the distance from central Thailand. Under the business zoning scheme,

higher incentives were given to investments further away from the central area.

Nevertheless, in the 7YIPS, more structure was given to geographic incentives by

forming regional business clusters to specialise in specified industries. Lastly,

apart from activity-based incentives, merit-based incentives were introduced in

order to encourage R&D and to direct investments into designated geographic

locations.

Nontawan Kraitat

[email protected]

mailto:[email protected]


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7-Year Investment Promotion Strategy Structure

10 Target Industries

5 Existing Industries: Next-generation cars; smart electronics; affluent tourism; agriculture and biotechnology; and food processing 5 New Industries: Industrial robotics; logistics and aviation; biofuels and biochemical; digital economy; and the medical sector

Type of Incentives

Activity-Based Categories Merit-Based

Sub-Category of Incentives

A1-A4 B1 & B2 Competitiveness Enhancement

Decentralisation (20 Provinces

with Lowest Per Capita Income)

Industrial Area Development

(10 Border Provinces)

Thailand Caught in the Middle-Income Trap for

Decades

Thailand is believed to have fallen into the middle-income trap from around

1994-1995, after years of continuous drops in the poverty headcount ratio. Since

1986, poverty in the country has declined significantly from 67% to 11% in 2014

alongside the increase in income. However, Thailand is considered to be stuck in

the middle-income trap where a country is successful in improving its economy

from being a low-income to a middle-income country, but fails to progress into

becoming an advanced economy and has a low prospect of moving up the value

chain due to a lack of technological development.

For many decades, Thailand has built its economy on cheap labour, exploitation

of natural resources, borrowed technology, and reliance on export markets.

While this economic model has helped Thailand out of the low-end of the

income spectrum, it has also led to the degradation of the environment, caused

income disparity within the country, and has yet to push Thailand up into the

high-income segment.



2

Poverty Headcount Ratio (1986 - 2010)

Source: The Thailand Development Research Institute (TDRI)

Despite Being Recently Ranked as Upper-Middle Income Nation, Thailand’s R&D Expenditure Remained

Relatively Low (2011)

Source: World Bank Organisation

52.849.7

39.2

35.3

22.9

18.2

22

25.6 26.523.6

18.9

14.612 10.7 11.5 10.4 10.4

25.323.7

20.5

12.19.9

6.8 7.1 8.5 8.6 8.56.4

4.6 3.6 3.3 3 3 2.6

0

10

20

30

40

50

60

Per

cen

tage

Municipal Non-Municipal

3.74

3.38

2.15 2.06

1.79

1.201.06

0.39

24,156

46,204

53,121

10,369

5,574

4,159

10,428

5,539

-

10,000

20,000

30,000

40,000

50,000

60,000

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Korea, Rep. Japan Singapore World China MiddleIncome

Malaysia Thailand

Lin

e G

rap

h:

GD

P P

er C

apit

a (U

SD C

urr

ent)

Bar

Gra

ph

: R

&D

Exp

end

itu

re (

% o

f G

DP

)



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New Target Industries Expected to Foster New S-

Curve

The government estimated that, in the medium-term, the development of the

existing five targeted industries would create the first S-Curve and increase the

combined revenue of these industries by 70%, while the development of new

industries would increase it by a further 30%. However, in the long-term, the

government believes that investments and development of the new targeted

industries would enable Thailand to build a technological edge and diversify its

competitive advantages, leading to the new S-Curve, which could enhance

Thailand’s economy sustainably.

Forecasted First and New S-Curves Created by Target Industries

Source: Ministry of Industry Thailand

To support the 7YIPS and encourage investments in the 10 target industries,

eight business clusters were formed, six of which were categorised as super

clusters, while the other two are normal clusters. Business clusters also promote

the concentration of interconnected businesses, in order to enhance the level of

vertical and horizontal cooperation among enterprises and strengthen the

industrial value chain.



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Apart from agriculture and biotechnology, all of the super clusters are associated

with at least one of the target industries. There are a total of 29 provinces

involved in the business clusters. The clusters with the highest number of

associated provinces are agro-processing products, textiles and garments,

automotive and parts, and E&E and telecommunication equipment. Agro-

processing products and textiles and garments cover the most provinces as they

are two of the most traditional industries fundamental to Thailand’s economy.

Provinces with the most overlaps between clusters are Chonburi and Rayong,

which are present in four different clusters. Chonburi is home to Thailand’s

largest and primary seaport and has the widest motorway connection to

Bangkok among other provinces outside of the Bangkok Metropolitan Area,

making it a logistically strategic province to be located in. Chonburi is also a

tourist destination, famous for its beaches; Pattaya City attracts not only tourists

but also expats and migrants. Meanwhile, Rayong is Chonburi’s neighbouring

province, allowing it to easily access Chonburi’s logistics facilities.



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Relationship Between Target Industries and Business Clusters

Super Clusters Clusters

Automotive and Parts

E&E, and Telecom Equipment

Eco- friendly Petrochemicals and Chemicals

Digital-based

Food Innopolis

Medical Hub

Agro-processing Products

Textiles and Garment

Next- Generation Cars

Smart Electronics

Affluent Tourism

Agriculture And Bio-technology

Food Processing

Industrial Robotics

Logistics And Aviation

Biofuels And Biochemical

Digital Economy

Medical Sector

Regions

Ayutthaya, Pathum Thani, Chonburi, Rayong, Chachoengsao, Prachinburi, Nakhon Ratchasima

Chonburi and Rayong

Chiang Mai and Phuket

To be announced

Chonburi, Rayong and 17 other Provinces

9 Provinces



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Activity-Based Incentives Prioritise Knowledge-

Based Activities

Activity- and merit-based incentives make up the foundation of incentives for

investing in business clusters. Activity-based incentives serve to promote

investments in businesses that enhance the country’s knowledge, technology,

and infrastructure, in a prioritised manner depending mainly on the level of

technology utilised. As such, investments in A1 business activities, which require

the highest knowledge and technology, receive the most incentives.

Regarding tax-incentives, depending on the initial investment value, the cap for

CIT exemption is determined for investments in all business activities categories

apart from A1. The specified value of the CIT exemption could be utilised and

deducted from the company’s annual CIT expenses over the number of years

acquired for CIT exemption, until either the cap is reached or the CIT exemption

duration is up. However, investments in the A1 business category would receive

an unlimited amount of CIT exemption for eight years, making it the most

attractive business activities category for investment.

Investors are eligible for activity-based incentives regardless of investment

location and industries, as long as they fall into one of the business activity

categories, which cover over 200 activities. Investments in business clusters may

be granted up to a maximum of 8 years of CIT exemption as shown in table 3.



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Activity-Based Incentives Categories

Incentives

Examples in Light Industry

Corporate Income Tax (CIT) Exemption

Exemption of Import Duty on Raw Materials

Exemption of Import Duty on Machinery

A1 8 years (without cap)

Yes Yes

Creative product design and development center - Projects must consist of 2 components, as

follows: - Information system for design

- Conceptual design and creation system. - Projects must consist of one of the following

components: - Engineering design system - Prototype design creation and performance testing system

- Prototype standard testing anduser acceptance testing system.

- At least 70% of total employees in the project must be Thai.

- Projects must have expenses for salaries for creative product design and development personnel of at least 1,500,000 baht per year.

A2 8 years Yes Yes

Manufacture of technical fiber or functional fiber - Projects must be approved by related agencies, e.g. Thailand Textile Institute, National Innovation Agency.

A3 5 years Yes Yes

Manufacture of functional yarn or functional fabric - Projects must be approved by related agencies,

e.g. Thailand Textile Institute, National Innovation Agency.

A4 3 years Yes Yes

Manufacture of other yarn or fabric - Projects with investments or expenditures on

research, design or product development of not less than 0.5% of the project’s total revenue of

the first 3 years combined.

B1 - Yes Yes Manufacture of musical instruments

B2 - Yes No Manufacture of gypsum board or gypsum products*

Source: Thailand Board of Investment (BOI) *For Mineral, Ceramics and Basic Metals Industry



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Merit-Based Incentives are Used to Encourage

R&D and to Channel Investments to Designated

Regions

There are three types of merit-based incentives: competitive enhancement,

decentralisation, and industrial area development. Merits on competitive

enhancement serve to encourage knowledge-based investments and

investments in R&D, which are fundamental for breaking out of the middle

income trap. Depending on the percentage of such investments of the total

expenditure, investors may be granted up to three additional years of CIT

exemption on top of what is granted from activity-based incentives.

Investments in business clusters are comparable to that of investments under

the decentralisation and industrial area development scheme, as they are all

geographic merit-based. However, the incentives for investing in business

clusters surpass that of the other two schemes, as they directly support the 10

target industries for sustainable economic growth. Merits for decentralisation

and industrial area development aim to facilitate cross-border trade, the

dispersing of income, and boost the local economy of lower income provinces.

To encourage investments in these regions, investments in the 20 provinces with

the lowest per capita income could increase CIT exemption up to three

additional years, and up to one year for investments in 10 chosen border

provinces. There are three overlapping provinces between these two incentive

schemes, which are Nakhon Phanom, Mukdahan, and Sa Kaeo. On the other

hand, there are four overlapping provinces between the business cluster scheme

and the other two geographical schemes (Kanchanaburi, Chiang Rai, Trad, and

Songkhla), all of which are border provinces, strategic for trade and cheaper

labour from neighbouring countries.



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Provinces Under Decentralisation and Industrial Area Development Scheme

Provinces

Decentralisation: 20

Provinces with Lowest

Per Capita Income

Kalasin, Chaiyaphum, Nakhon Phanom, Nan, Bueng Kan, Buri Ram, Phrae,

Maha Sarakham, Mukdahan, Mae Hong Son, Yasothon, Roi Et, Si Sa Ket,

Sakhon Nakhon, Sa Kaew, Sukhothai, Surin, Nong Bua Lamphu,

Ubon Ratchatani and Amnatcharoen

Industrial Area

Development: 10 Border

Provinces

Tak, Mukdahan, Sa Kaeo, Trat, Songkhla, Chiang Rai, Nong Khai, Nakkhon,

Kanchanaburi, Narathiwat

To advocate investments in super clusters (refer to table 2), investors are eligible

for incentives from both the BOI and the Ministry of Finance (MoF). Depending

on the business activity, investors may be granted up to eight years of CIT

exemption with an additional 5 years of 50% CIT exemption from the BOI. Under

normal circumstances, investors are only eligible to a maximum combined CIT

exemption of eight years under the 7YIPS, irrespective of business activity, value

of R&D, and investment location. However, as a means of encouraging

investments in super clusters, the MoF may also grant additional years of CIT

exemption, of up to 15 years, and personal income tax exemption for

international specialists to work in the clusters. In terms of non-tax incentives,

the BOI would consider granting permanent residence to leading specialists and

permission for foreigners to own land to implement the promoted activities.

Investments in Renewable Energy Take the Lead

in 2015

The announcement of the 7YIPS in 2014 has led to an influx of investment

project applications around the end of 2014, which impacted the number of

applications in 2015. By the end of 2015, 684 applications were submitted for

incentives under the 7YIPS programme, which represented 65.9% of the total

number of applications, and 54.6% of the total investment value. Out of the

applications submitted, over 100% (816 applications) were approved for

incentives, as some projects were granted incentives even without filing

applications. This demonstrates the keenness of the Thai government in

endorsing projects in target industries. Moreover, the total value of approved

projects under the 7YIPS constituted 32.9% of the total approved projects.



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Investment Applications Submitted and Approved 2014 - 2015 Applications Submitted Applications Approved

2014 2015 2014 2015

No. Value (THB

billion)

No. Value (THB

billion)

No. Value (THB

billion)

No. Value (THB

billion)

Investment Projects 3,197 1,956.5 1,038 218.1 1,662 724.7 2,237 809.4

FDI Projects 1,573 1,023.0 559 106.5 912 483.5 1,151 493.7

Applications Submitted for 7-Year Investment Promotion Strategy

- - 684 119.0 - - 816 266.0

Source: Thailand Board of Investment (BOI)

Among the approved applicants for incentives from the 7YIPS programme,

investment projects in renewable energy received the highest number of

approvals and had the highest investment value. From 816 projects approved for

incentives, up to 30% were projects in renewable energy, which accounted for

62.6% of the total investment value. This investment category falls under the

biofuels and biochemical target industry and corresponds to the eco-friendly

petrochemicals and chemicals business cluster, designated at the Chonburi and

Rayong provinces. Following renewable energy, investments in science,

technology and innovation had the second highest investment value, which

contributed 11.4% to the total investment value under the 7YIPS scheme.

Investments in this category cover all 10 of the target industries, and thus could

be located in multiple clusters.

Approved Projects Under the 7YIPS

Number of Projects Approved

Investment Value (THB billion)

Digital economy 183 18.9

Trading nation 127 3.03

Logistic development 59 6.97

Science, technology, and innovation 126 30.24

Human resource development 4 0.35

Renewable energy 248 166.59

Agricultural products and related services 36 17.96

Tourism promotion 16 9.53

Eco-friendly products and related services 7 9.26

Other targeted industries 10 3.14

Total 816 266.0 Source: Thailand Board of Investment (BOI)



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Will Thailand Succeed in Escaping the Trap?

Through the 7YIPS, Thailand is trying to push itself up the value chain and out of

the middle income trap, but it is not the only country aiming to do so. With the

recent implementation of the ASEAN Economic Community (AEC) in 2015,

competition to become more advanced is extremely high in Southeast Asia.

Malaysia is one of the nations that has also been stuck in the middle-income

trap for over a decade. Moreover, for as long as Thailand has, Malaysia too has

been trying to fight its way out. In 2014, Malaysia announced that it plans to

achieve the high-income status as defined by World Bank by 2020.

Even though some would consider exiting the middle-income range to be an

“economic miracle,” a few Asian nations have been successful in escaping the

trap, such as Taiwan, Hong Kong, Japan, South Korea, and Singapore. In the

1950s, Thailand’s economic development was comparable to that of South

Korea. However, South Korea had chosen to focus more on establishing its own

internationally competitive industries to reduce reliance on exports. By the

1990s, South Korea became a high income nation with some of its brands, such

as Samsung, LG, and Hyundai being large players in the global arena in their

respective industries. Therefore, there may be some hope left for Thailand in the

coming years.

While the 7YIPS may be one of the keys for Thailand to become an advanced

economy, there are other crucial aspects that should not be overlooked. One

factor that contributed to South Korea’s success in escaping the middle-income

trap was said to be its human capital, which was a result of its high-quality

education system. Meanwhile, Malaysia’s failure to progress could be partially

attributed to the country’s political instability.

Remodeling economic policies is a positive step forward for Thailand. However,

it is far from being the only measure that the country must undertake. In

addition to economic policy, the country must look toward reform in other areas

in order to build a solid foundation for sustainable economic growth and thus

break out of its longstanding predicament as a middle-income nation.


thailand aims to use the new investments promotion strategy to overcome the middle income trap

Economy & Finance