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

12.5

21.7

35.8

40.6

0 5 10 15 20 25 30 35 40 45

Inadequate &unreliable

infrastructure services

Regulatory burden

Skilled labor shortage

Macroeconomicuncertainty and access

to finance

Percent

5

Structure of Thailand ICA Update

Thailand’s investment climate todayThailand’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)

0

20

40

60

80

100

120

140

% sales withoverduepayment

% firms withoverdraft facility

% of newinvesments

finance by localcommercial

banks

Value ofcollateral

required as % ofloan value

% of newinvestmentfinanced by

internal funds orretained earnings

Per

cent

2007 2004

Objective Measures of Access to Finance

Access to commercial bank loans have become slightly more difficult, especially for small and medium firms

7

0

1

2

3

4

5

6

7

8

No. of Weeks to fill vacancy forprofessional position

No. of Weeks to fill vacancy forskilled production worker position

No. of Weeks to fill vacancy forunskilled production worker

position

2007 2004

Objective indicators shows a slight worsening in investment climate (II)

Objective Measures of Skills Availability

Professional staff are slightly more difficult to find

8

0

5

10

15

20

25

30

35

40

45

Average days toobtain permits

issued by centralgovernment to

start production

Number of daysto obtain mostrecent license,

permit, approvaland certificate

Number of daysto deal with

agencies

% of manager timedealing withregulations

Days to clearimport custom

Days to clearexport custom

2007 2004

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

0

2

4

6

8

10

12

14

16

18

20

Yea

rly

nu

mb

er

of

po

wer

ou

tages

Pro

du

ctio

n

loss

due

to

po

wer

ou

tag

es

(%)

Yea

rly

nu

mb

er

of

wat

er

inte

rru

pti

on

s

Av

erag

e ho

urs

of

each

wat

er

inte

rru

pti

on

Yea

rly

nu

mb

er

of

ph

on

e

inte

rru

pti

on

s

Av

erag

e ho

urs

of

each

tele

ph

on

e

inte

rru

pti

on

2007 2004

10

Thailand’s investment climate is middling compared to other countries (I)

1.6

2.3

2.9

3.2

3.4

3.7

5.2

8.8

0 2 4 6 8 10

Indonesia

Turkey

Russia

India

Korea

Germany

Thailand

Brazil

Weeks

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

0

2

4

6

8

10

12

14

16

18

Days to obtainoperating license

Days to clear exportscustoms

Days to clear importcustoms

Thailand(2007) China(2003) Indonesia(2003)

S. Korea(2005) Malaysia(2002) Vietnam(2005)

India(2006)

12

Thailand’s investment climate is middling compared to other countries (III)

Objective Measures of Infrastructure Services

0

5

10

15

20

25

30

Value lost dueto electrical

outages (% ofsales)

Days to obtainelectrical

connection

Days to obtainwater

connection

Daysto obtainfixed-line phone

Thailand(2007) China(2003) Indonesia(2003) S. Korea(2005)

Malaysia(2002) Vietnam(2005) India(2006)

Source: Thailand PICS 2007 and Global PICS

13

Subjective perceptions worsened significantly

0%

10%

20%

30%

40%

50%

60%

70%

Macro

eco

no

mic

insta

bil

ity

Eco

no

mic

po

licy

un

cert

ain

tyS

kil

ls a

nd

ed

ucati

on

of

av

ail

ab

le w

ork

ers

An

ti-c

om

peti

tiv

e

pra

cti

ces

Co

st

of

Fin

an

cin

g

Tax

ad

min

istr

ati

on

Ele

ctr

icit

y

Cu

sto

ms a

nd

tra

de

reg

ula

tio

ns

Access t

o d

om

esti

c

cre

dit

Tra

nsp

ort

ati

on

Lab

or

reg

ula

tio

ns

Tele

co

mm

un

icati

on

s

Bu

sin

ess p

erm

its

2007 2004

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

36

38

40

42

44

46

48

50

20

05

Jan

Ap

r

Jul

Oct

20

06

Jan

Ap

r

Jul

Oct

20

07

Jan

Ap

r

Jul

Oct

Source: Bank of Thailand Source: BOT and NESDB

Private Investment growth and

Capacity Utilization

70

71

72

73

74

75

2004 2005 2006 2007

Perc

ent

0

2

4

6

8

10

12

14

16

18

Perc

ent

Real private investment growth (Right)

Capacity utlization rate (Left)

15

Structure of Thailand ICA Update

Thailand’s investment climate today Investment climate and enterprise Investment climate and enterprise

productivityproductivity 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)

0

2

4

6

8

10

1978-93 1993-04 1978-93 1993-04 1978-93 1993-04

Employment Capital investment

Total factor productivity Others

IndiaChina Thailand

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 Macroeconomic environment and

access to financeaccess to finance Skills and innovation Regulatory framework Public infrastructure

20

Unstable macroeconomic and policy environment affected firms’ investment decision

Percentage of firms that considered these to have adversely affected their investment decisions substantially or very substantially in 2006-2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

Oil

pric

es

Raw

mat

eria

lpr

ices

Exc

hang

era

te

Inte

rest

rate

Com

mod

itypr

ices

Infl

atio

nra

te

Polic

ies

onin

vest

men

t

Polic

ies

onfo

reig

nca

pita

l

21

Rising oil prices and appreciated baht was unfavorable to business and investment

Exchange Rates

70

75

80

85

90

95

2004 2005 2006 2007

Rea

l Eff

ecti

ve E

xcha

nge

Rat

e In

dex

(199

4=10

0)31

32

33

34

35

36

37

38

39

40

41

Bah

t/U

S$

REER (Left) Baht/US$ (Right)

Diesel Price

14.59

25.6625.59

20.03

10

12

14

16

18

20

22

24

26

28

2004 2005 2006 2007

Bah

t/L

iter

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

0%

1%

2%

3%

4%

5%

6%

7%

Average interest rate forshort term domestic liability

Average interest rate for longterm domestic liability

2007 2004

Source: PICS 2007 & PICS 2004

Minimum Lending Rate of Commercial Banks

Source: Bank of Thailand (BOT)

2.8

7.27.55.9

0

1

2

3

4

5

6

7

8

2004 2005 2006 2007

Per

cent

23

Higher interest rates plus higher collateral requirement…led to greater use of retained earnings & small increase in bank loans

Percentage-point Difference between 2007 and 2004

-10%

0%

10%

20%

30%

40%

50%

% of firms withoverdraft facility

% of firms withbank loan

% of firmsfinanced working

capital & newinvestment by

local commercialbanks

% of firmsfinanced working

capital & newinvestment by

internal funds orretained earnings

Value of collateralrequired as % of

loan value

All Small Medium Large

Objective Indicators of Firms’ Access to Finance

24

Firms need to increase protection against macroeconomic volatility

Percentage of Firms Used These Methods to Deal with Macroeconomic Uncertainties

0%

10%

20%

30%

40%

50%

60%

Pro

du

ctivity

imp

rove

me

nt

Fin

din

g n

ew

su

pp

lie

rs

Lo

ng

te

rm

co

ntr

act

Fin

an

cia

l

he

dg

ing

instr

um

en

t

Pri

cin

g in

diffe

ren

t

cu

rre

ncy

Inve

stin

g

ab

roa

d

No

me

asu

re

take

n

All Small Medium Large

25

Lack of knowledge is a bottleneck and small firms are particularly vulnerable

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

No measure taken

Lack o

f know

ledge

Electrical Appliance

Small

Medium

Large

Food Processing Textile

Garment

Auto parts

Electronic Component

Domestic

Machinery & Equipment

Foreign

Rubber & Plastics

Furniture & Wood Product

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 innovationSkills and innovation Regulatory framework Public infrastructure

27

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

% of Firms Identifying Labor Skill Level as a Major or Severe Constraint

0 10 20 30 40 50

Cambodia(2003)

Korea(2005)

Turkey(2005)

Philippines(2003)

India(2006)

Indonesia(2003)

Vietnam(2005)

Malaysia(2002)

China(2003)

Thailand (2004)

Thailand(2007)

Brazil(2003)

28

Skilled production workers are in short supply relative to other countries

1.6

2.3

2.9

3.2

3.4

3.7

5.2

8.8

0 2 4 6 8 10

Indonesia

Turkey

Russia

India

Korea

Germany

Thailand

Brazil

Weeks

1.0

1.4

1.5

2.1

2.2

2.3

2.5

2.5

0 1 2 3

Indonesia

Turkey

Russia

Korea

Thailand

Germany

India

Brazil

Weeks

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

3.9

8.6

13.1

19.4

23.4

31.6

0 5 10 15 20 25 30 35

Universities not producingenough graduates

Applicants demand veryhigh wage

No applicants for unskilledworkers position

Applicants lack requiredtechnical skills

Applicants lack requiredbasic skills

High turnover of newrecruits

Percent

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

0 20 40 60 80 100

Technica/professional

Team-working

Adaptability

Social

Problem-solving

Time management

Communication

Leadership

Creativity/innovation

Numerical

IT

English language

Percent

PICS 2004 PICS 2007

% of Firms Rating Certain Skills as Poor or Very Poor

31

Lack of qualified personnel limits firms innovation efforts

43.6 42.7

9.4

4.2

0

10

20

30

40

50

High cost offinancinginnovativeactivities

Lack ofknowledgeable

and trainedpersonnel

Insufficientknowledge about

possibleinnovativeactivities

Low returns toinnovative activity

Per

cent

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 frameworkRegulatory framework Public infrastructure

33

Regulatory constraints are more binding for larger firms

0

5

10

15

20

25

30

35

40

Taxadministration

Customs andtrade

regulations

Laborregulations

Businesslicensing andregistration

Percent

All firms Small Medium Large

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

Percentage of firms reporting at least one of the four reguatory issues as a major obstacle to business

0%

10%

20%

30%

40%

50%

60%

70%

Textile

s

Ele

ctr

ical

Appliance

Ele

ctr

onic

com

ponents

Auto

part

s

Food

pro

cessin

g

Garm

ents

Machin

ery

&

Equip

ment

Furn

iture

&

Wood

Pro

ducts

Rubber

&

pla

stics

2007 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

0 10 20 30 40 50 60 70

Electronic components

Garments

Rubber & plastics

Furniture & Wood Products

Food processing

Machinery & Equipment

Auto parts

Textiles

Electrical Appliance

All Industries

Days

(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 infrastructurePublic infrastructure

38

The share of logistical costs in total product costs increased from 2004-07, and is the highest in the

North, Northeast, and South

0%

1%

2%

3%

4%

5%

6%

7%

8%

Thailand Bangkokand

vicinity

Central East North Northeast South

2007 2004

39

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

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Food

pro

cessin

g

Furn

iture

and

wood

pro

ducts

Rubber

and

pla

stics

Ele

ctr

ical

applia

nces

Garm

ents

Machin

ery

and

equip

ment

Textile

s

Auto

com

ponents

Ele

ctr

onic

com

ponents

2007 2004

40

Thank youThank youContact persons:

Dr. Kirida Bhaopichitr (Bangkok)kbhaopichitr@worldbank.org

Dr. Xubei Luo (Washington)xluo@worldbank.org