What is economic zoning? History of economic zoning in Thailand and

relate it with domestic and Foreign Direct Investment (FDI).

by

Choen Krainara Doctoral Student

Regional and Rural Development Planning Field of Study School of Environment, Resources and Development

Asian Institute of Technology Bangkok, Thailand

March 2009

What is economic zoning? History of economic zoning in

Thailand and relate it with domestic and Foreign Direct

Investment (FDI).

1. Definition of Economic Zoning

According to European Environment Agency (2009), Economic Zoning is a land-use

planning design or control where specific types of businesses or private sector

investment are encouraged within designated boundaries.

2. The History of Economic Zoning in Thailand

2.1 Rationale of Spatial Division of Economic Zoning

Rapid industrialization has led Bangkok and its extended vicinities to become city

primacy. Bangkok metropolitan plays important roles as both commercial and

administrative centers of Thailand. The growth of Bangkok and its vicinities have

become densely concentrated causing highly imbalanced spatial development as well as

posing environmental degradation e.g. air and water pollution. In addressing this

challenge, Royal Thai Government has implemented policies on investment promotion

since 1993. Investment zones have then been used as a means to support government

policies in decentralizing industrial base from the Bangkok Metropolitan Area to the

peripheral provinces. In response, the Board of Investment subsequently announced

"Policies and Criteria for Investment Promotion" in April, 1993, creating three

Investment Promotion Zones throughout Thailand which were distinguished by

economic factors i.e., the level of income and the availability of infrastructure in each

province (BOI, 2009). The respective Investment Promotion Zones were as follows:

Zone 1 consists of 6 central provinces with high income and good

infrastructure: Bangkok, Samut Prakan, Samut Sakhon, Pathum Thani,

Nonthaburi and Nakhon Pathom provinces.

Zone 2 comprises of 12 provinces. They are Samut Songkhram, Ratchaburi,

Kanchaburi, Suphanburi, Ang Thong, Ayutthaya, Saraburi, Nakhon Nayok,

Chachoengsao, Chonburi, Rayong and Phuket

Zone 3 includes the backward regions covering the remaining 58 provinces

with low income and less developed infrastructure. All border provinces are

located in this zone; thus all areas in the Zone 3 provinces are designated as

Investment Promotion Zones.

Please see details of investment zones in Map 1 below.

Map 1 Displaying Investment Promotion Zones in Thailand

2

Source: Board of Investment of Thailand, retrieved from

http://www.boi.go.th/english/about/boi_privileges_by_location.asp, retrieved on 24

March 2009

3

The financial crisis in the middle of 1997 changed the Thai economy. As a result, tax

collection was below target and public debts increased drastically affecting the fiscal

position of the government. Moreover, the global economic outlook and investment

environment had undergone change. In 2000, the Board of Investment consequently

adjusted Thai investment promotion policies and criteria for granting tax privileges in

order to respond to the future economic and investment prospects.

2.2 Basic Investment Incentives

The BOI offers two kinds of incentives to promoted projects, regardless of location.

These are:

Tax-based incentives include exemption or reduction of import duties on

machinery and raw materials, and corporate income tax exemptions.

Non-tax incentives include permission to bring in foreign workers, own land

and take or remit foreign currency abroad.

2.3 Priority Investment Activities

The BOI places priority on promoting the following major types of projects:

Agriculture and agricultural products

Direct involvement in technological and human resource development

Public utilities and infrastructure

Environmental protection and conservation

Targeted industries

The BOI shall announce the list of priority activities or industries. Such projects will be

entitled to the following privileges:

Exemption of import duty on machinery regardless of location

Corporate income tax exemption for eight years, regardless of location

Other privileges entitled for each Investment Zone.

2.4 BOI Privileges by Location

Privileges Investment Promotion Zones are classified as follows:

1) Projects in Zone 1 are granted:

50 per cent reduction of import duty on machinery that is subject to import duty

of not less than 10 percent.

Corporate income tax exemption for 3 years for projects located within

industrial estates or promoted industrial zones, on the condition that such a

project with capital investment of 10 million baht or more (excluding cost of

land and working capital) obtains ISO 9000 or similar international standard

certification within 2 years from its start-up date, otherwise the corporate

income tax exemption will be reduced by 1 year.

Exemption of import duty on raw or essential materials used in the

manufacturing of export products for 1 year.

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2) Projects in Zone 2 (excluding Laem Chabung Industrial Estate and industrial

estates and promoted industrial zones in Rayong Province) are granted:

Exemption of import duties on machinery for projects located in industrial

estates or promoted industrial zones, and 50 per cent reduction of import duty on

machinery that is subject to import duty of not less than 10 per cent for projects

located outside industrial estates or promoted industrial zones.

Corporate income tax exemption for 3 years, increased to 7 years for projects

located within industrial estates or promoted industrial zones, provided that such

a project with capital investment of 10 million baht or more (excluding cost of

land and working capital) obtains ISO 9000 or similar international standard

certification within 2 years from its start-up date, otherwise the corporate

income tax exemption will be reduced by 1 year.

Exemption of import duty on raw or essential materials used in the

manufacturing of export products for 1 year.

3) Projects in Zone 3 (including Laem Chabung Industrial Estate and industrial

estates and promoted industrial zones in Rayong Province) are granted:

Exemption of import duty on machinery.

Corporate income tax exemption for 8 years provided that a project with capital

investment of 10 million baht or more (excluding cost of land and working

capital) obtains ISO 9000 or similar international standard certification within 2

years from its start-up-date, otherwise the corporate income tax exemption will

be reduced by 1 year.

Exemption of import duty on raw or essential materials used in the

manufacturing of export products for 5 years.

Deduction from net profit of 25 percent of the project's infrastructure installation

or construction costs in addition to normal depreciation, and such deductions can

be made from the net profit of one or several years within 10 years form the date

of first revenue derived from the promoted activity.

4) Projects located in industrial estates or promoted industrial zones in 36

provinces : (Chai Nat, Chanthaburi, Chiang Mai, Chiang Rai, Chumphon,

Kamphaeng Phet, Khon Kaen, Krabi, Lamphang, Lamphun, Loei, Lop Buri, Mae

Hong Son, Mukdahan, Nakhon Ratchasima, Nakhon Sawan, Nakhon Si

Thammarat, Phangnga, Phattalung, Phetchabun, Phetchaburi, Phitsanulok, Pichit,

Prachin Buri, Prachuab Khiri Khan, Ranong, Sa Kaew, Sing Buri, Songkhla,

Sukhothai, Surat Thani, Tak, Trang, Trat, Uthai Thani, and Uttaradit) as well as

Laem Chabung Industrial Estate and industrial estates or promoted industrial

zones in Rayong province are granted the tax and duty privileges extended under

BOI Policies and the following:

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50 per cent reduction of corporate income tax for 5 years after the exemption

Double deduction from taxable income of transportation, electricity and water

costs for 10 years from the date of first revenue derived from promoted activity.

75 percent import duty reduction on raw or essential materials used in

manufacturing for domestic sales for 5 years, based on annual approval (This

incentive is not available to projects in Laem Chabung Industrial Estate and

industrial estates or promoted industrial zones in Rayong province.)

5) Projects located in 22 provinces: Amnat Charoen, Buri Ram,Chaiyaphum,

Kalasin, Maha Sarakham, Nakhon Phanom, Nan, Narathiwat, Nong Bualamphu,

Nong Khai, Pattani, Phayao, Phrae, Roi Et, Sakhon Nakhon, Sathun, Si Sa Ket,

Surin, Udon Thani, Ubon Ratchathani, Yasothon, and Yala are granted the tax

and duty privileges extended under BOI Policies and the following:

50 per cent reduction of corporate income tax for 5 years after the exemption

period;

Double deduction from taxable income of transportation, electricity and water

costs for 10 years from the date of first revenue derived from promoted

activities;

75 percent import duty reduction on raw or essential materials used in

manufacturing for domestic sales for 5 years, based on annual approval, for

projects located in industrial estates or promoted industrial zones.

It should be noted that in each zone the maximum value of a project's corporate income

tax exemption is 100 percent of its investment capital, unless otherwise specified.

Please find a summary of BOI Privileges by Investment Promotion Zone in Table 1.

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Table 1: Summary of BOI Privileges by Investment Promotion Zone

(Effective for applications submitted during 1 January 2005 - 31 December 2009)

Granting Tax and

Duty Privileges

Zone 1 Zone 2 Zone 3

36 Provinces and Laem

Chabang Industrial Estate

and Industrial Estate

/Promoted Industrial Zone in

Rayong Province

Zone 3

22 Provinces

Industrial

Estate/

Promoted

Industrial

Zone

Outside

Industrial

Estate

Industrial Estate /

Promoted

Industrial Zone

(Excluding Laem

Chabang

Industrial Estate

and Industrial

Estate/Promoted

Industrial Zone in

Rayong Province)

Outside

Industrial

Estate

Industrial

Estate/

Promoted

Industrial

Zone

Outside

Industrial

Estate

Industrial

Estate/

Promoted

Industrial

Zone

Outside

Industrial

Estate

Import duty on

machinery

50 %

reduction

50 %

reduction

Exemption

50 %

reduction

Exemption

Exemption

Exemption

Exemption

Corporate income tax

Exemption

3 years - 7 years* 3 years 8 years

(Including Laem

Chabang Industrial

Estate/Promoted

Industrial Zone in

Rayong Province

8 years 8 years 8 years

Remarks: √ = Shall be granted privileges.

- = Shall not be granted privileges.

* = (For all applications submitted during January 1, 2005 to December 31, 2009)

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Granting Tax and

Duty Privileges

Zone 1 Zone 2 Zone 3

36 Provinces and Laem

Chabang Industrial Estate

and Industrial Estate

/Promoted Industrial Zone in

Rayong Province

Zone 3

22 Provinces

Industrial

Estate/

Promoted

Industrial

Zone

Outside

Industrial

Estate

Industrial Estate /

Promoted

Industrial Zone

(Excluding Laem

Chabang

Industrial Estate

and Industrial

Estate/Promoted

Industrial Zone in

Rayong Province)

Outside

Industrial

Estate

Industrial

Estate/

Promoted

Industrial

Zone

Outside

Industrial

Estate

Industrial

Estate/

Promoted

Industrial

Zone

Outside

Industrial

Estate

Import duty on raw or

essential materials used

in manufacturing of

export products

Exemption

for 1 year

Exemption

for 1 year

Exemption

for 1 year

Exemption

for 1 year

Exemption

for 5 years

Exemption

for 5 years

Exemption

for 5 years

Exemption

for 5 years

Double deduction from

transportation

,electricity and water

costs

- - - - √ - √ √

50 percent reduction of

corporate income tax

for 5 years

- - - - √ - √ √

Remarks: √ = Shall be granted privileges.

- = Shall not be granted privileges.

* = (For all applications submitted during January 1, 2005 to December 31 2009)

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Granting Tax and

Duty Privileges

Zone 1 Zone 2 Zone 3

36 Provinces and Laem

Chabang Industrial Estate

and Industrial Estate

/Promoted Industrial Zone in Rayong

Province

Zone 3

22 Provinces

Industrial

Estate/

Promoted

Industrial

Zone

Outside

Industrial

Estate

Industrial Estate /

Promoted

Industrial Zone

(Excluding Laem

Chabang

Industrial Estate

and Industrial

Estate/Promoted

Industrial Zone in

Rayong Province)

Outside

Industrial

Estate

Industrial

Estate/

Promoted

Industrial

Zone

Outside

Industrial

Estate

Industrial

Estate/

Promoted

Industrial

Zone

Outside

Industrial

Estate

Deduct the project’s

infrastructure

installation or

construction cost

- - - - √ √ √ √

Duty on raw or

essential materials

used in the

manufacturing of

domestic sales

- - - - 75% reduction for 5

years*, with year-by year

approval (Excluding Laem

Chabang Industrial

Estate and Industrial

Estate/ Promoted Industrial

Zone in Rayong Province)

- 75%

reduction

for 5

years*,with

year-by

year

approval

-

Remarks: √ = Shall be granted privileges. - = Shall not be granted privileges.

* = (For all applications submitted during January 1, 2005 to December 31, 2009)

Source: http://www.boi.go.th/english/about/boi_privileges_by_location.asp, retrieved on 25 March 2009

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2. 5 State of Investment in Thailand

1) Overall Investment

Investment approvals are performed by related government agencies. Domestic

investment is mainly granted approval by Ministry of Industry and Ministry of

Commerce, while FDI approval is mostly carried out by the Office of the Board of

Investment. Investments consisted of capital for both start-up and expansion phase.

Both domestic investment and Foreign Direct Investment (FDI) play important role in

the Thai economy as it greatly help generate jobs and income for the Thai people.

During the 9-years period from 2001-2009 (January-February), accumulative domestic

investment amounted at 5.08 trillion Baht, while FDI in-flows to Thailand which mostly

induced by the above outlined tax and nontax incentives accounted for at 2.74 trillion

Baht. The aggregate domestic investment and FDI in-flows amounted as much at 7.83

trillion Baht. In terms of annual average of investment, domestic investment

represented at 635,778 million Baht, whereas FDI in-flows totaled at 343,056 million

Baht.

Regarding the patterns of investment, both domestic investment and FDI had shown a

similar movement. Domestic investment kept increasing from 2001 to 2005 and then

significantly decreased since 2007. The major industries invested were food, textile and

garment, steel, automobile and parts, cement, electrical appliances and electronics, etc.

(Office of Industrial Economics, 2009). While FDI increased at smaller pace of that

domestic investment with highest investment in 2005, and then varied and started

declining in 2008. The major industries invested were automobile and parts, services

e.g. hotel and utilities for industries, electronics, steel, chemicals, agro-industries,

machinery, and transportation parts, etc. The major investors were from Japan,

Singapore, China, Malaysia, Indonesia, United States of America, the Netherlands,

Germany, England, and India, etc. (BOI, 20009). The trend of both domestic investment

and FDI is notably moving downward resulting from global and domestic economic

recession. As a result, the total investment in the whole Kingdom considerably began

falling since 2008. This reflected the overall national economic performance which

should cautiously be taken care through responsive policies/strategies and measures in

order to maintain economic growth, full employment and prosperity. Please see details

of Domestic and Foreign Direct Investment Values in Thailand in Figure 1 below.

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Figure 1: Domestic and Foreign Direct Investment Values in Thailand

During 2001-2009 (January to February)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 ( Jan-

Feb)

Year

Millio

n B

ah

t

Zone 1 (FDI) Zone 2 (FDI)Zone 3 (FDI) Total Foreign Direct InvestmentTotal Domestic Investment Total Investment in the Whole Kingdom

Source:

Data on Total Domestic Capital Investment for the year 2001 to 2008 was from Office

of Industrial Economics, Ministry of Industry of Thailand, retrieved from

http://www.oie.go.th/industrystatus1/r_OctDec51/r_OctDec51_1.html, retrieved on 25

March 2009.

Data on Foreign Direct Investment for the year 2001 to 2006 was from Office

of Industrial Economics, Ministry of Industry of Thailand, retrieved from

http://www.oie.go.th/industrystatus1/r_OctDec51/r_OctDec51_1.html, retrieved on 25

March 2009.

Data on Foreign Direct Investment for the year 2007-2009 (January-February) obtained from

Office of the Board of Investment, Thailand.

Remark: Data on both Domestic Investment and Foreign Direct Investment for the year 2004 were

represented with 11 months.

It is evident contribution of investments towards national economic growth and

development. During 2001-2007, approximate annual average at 14.55 % of domestic

investment contributed to the national Growth Domestic Product (GDP), whereas

around annual average at 5 % of FDI shared to GDP. Hence the magnitude of domestic

investment was larger than FDI for 2.91 times. Thailand should therefore strive to

diversify national economy based on two-pronged approach through fostering domestic

investment and expanding FDI. Rural industrialization could meaningfully be further

intensified in order to promote domestic investment and employment in rural area in

order to support sustainable rural development.

2) Share of Foreign Direct Investment by Investment Zones

Following to the Government policy on designating investment zones, it was proved

successful in terms of decentralizing industries out of Bangkok and vicinities. Yet, the

investments were shifted to largely concentrate in zone 2, which dominated by the

Eastern Seaboard Development region-Chachoengsao, Chonburi and Rayong provinces-

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. This is apparent that during 2007-2009 (January-February) the annual average share of

FDI in zone 2 accounted for as high at 69 % of total FDI, followed by zone 3 at 19 %

and zone 1 at 14 %, respectively. As a result, investment in zone 2 left behind the

investment gaps as higher than zone 1 for 4.99 times and zone 3 for 4.1 times.

Furthermore, combining of investments in zone 1 and zone 2, the magnitude of

concentration of investments highly reached at for 83 %. It is notable that the

dominance of zone 2 is also widening interregional disparities in Thailand. Therefore, it

is crucial to rationally more divert of both FDI and domestic investment toward zone 3

in order to promote equitable benefits of investment for development. Please find details

of share of foreign direct investment during 2007-2009 (January-February) in Figure 2.

0

10

20

30

40

50

60

70

80

90

100

2007 2008 2009 ( Jan-Feb)Year

Perc

en

tag

e

Zone 1 Zone 2 Zone 3

Source: Office of the Board of Investment of Thailand

Figure 2: Share of Foreign Direct Investment Divided by Investment Zones

During 2007 To 2009 (January-February)

3) Share of Domestic Investment to Share of Foreign Direct Investment

In 2001, the share of total domestic investment increased to 72.75 % and much declined

to 61.74 % in 2003, and then from 2004-2008 its annual average fluctuated at around 67

%. The tendency may continue varying. While the share of FDI slightly increased at

27.25 % in 2001, then from 2003-2008 its annual average varied at around 36.63 %.

The trend may keep on changing. During 2001-2008, the annual average share of

domestic investment accounted for 66.18%, while the annual average share of FDI

represented at one-thirds of total investment in the Kingdom. It is understandable that

both domestic and FDI will be moving in the similar trend. It is important to note that

Thailand still needs FDI in-flow in order to help generate employment and income as

well as cultivating technology transfer and spillover effects, human capital and skill

formation and integration of national trade with the global economy. It is also vital for

Thailand to attract FDI by providing quality infrastructure and human capital. Strong

backward linkages with Multinational Enterprises should be enhanced so that win-win

12

benefits of FDI can be ultimately realized. Please find details of share of domestic

investment to share of foreign direct investment in Thailand during 2001 to 2008 in

Figure 3 below.

0

10

20

30

40

50

60

70

80

90

100

2001 2002 2003 2004 2005 2006 2007 2008

Year

Per

cen

tag

e

Total Foreign Direct Investment Total Domestic Investment

Source: Investment statistics of various years from Office of Industrial Economics and

Office of the Board of Investment of Thailand

Figure 3: Share of Domestic Investment to Share of Foreign Direct Investment in

Thailand During 2001 To 2008

4) Industrial development along Thai border area

As a result of promoting investment particularly in Zone 3, there is a prominent

investment platform along Thailand-Myanmar border area. It is located in Maesod

district, Tak province, which plays a significant role as major industrial development

location in Northern part of Thailand. Maesod district is home to labor-intensive

industry particularly for garment productions. In 2003, Tak province had 464 factories.

Maesod alone hosted 235 factories, which accounted for 51% of the whole province

with total investment capital at 1,500 millions Baht, and it generated export values at

3,100 millions Baht per year, (NESDB). The key labor-intensive industries were textile

and garment, canned food, wood furnitures, jewelry and accessories. In addition, there

was increasing emergence of service industries e.g. garage and car maintenance shops,

etc. The principal reason for investors in locating these industrial plants in Maesod was

to take advantage of cheap labor from Myanmar and investment incentives in Zone 3. In

2003, approximate 10,000 Myanmarnese workers were employed in Maesod district.

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Conclusion

Domestic investment plays major role while Foreign Direct Investment acts as

complementing role in joint contribution to national economic growth, income

generation, employment and development. Adopted Investment zones have been quite

successful in dispersing industries out of Bangkok. However, good infrastructure has

led to such concentration of industries be densely located in zone 2 and parts of zone 1

which is negative to zone 3. It is thus challenging for Thailand on how to further

distribute investment activities to regional provinces in zone 3. Border industrialization

in the form of border economic zone can be one of the means to spread out investment

activities to border regions. This is believed to not only help minimize interregional and

intra-regional disparities in Thailand but also bring about opportunities to share benefits

with border cities in neighbouring countries especially Myanmar, Lao PDR and

Cambodia timely in response to increasing regionalization. Likewise, Thailand should

also continue diversifying investments in order to promote equitable competiveness of

both rural and urban economies.

References

Board of Investment. (2009). Statistics on Foreign Direct Investment for the Year 2007,

retrieved from http://www.boi.go.th, on 24 March 2009.

Board of Investment. (2009). Statistics on Foreign Direct Investment for the Year 2008,

retrieved from http://www.boi.go.th, on 24 March 2009.

Board of Investment. (2009). Statistics on Foreign Direct Investment for the Months of

January to February, 2009, retrieved from http://www.boi.go.th, on 24 March 2009.

http://www.boi.go.th/english/about/boi_privileges_by_location.asp, retrieved on 24

March 2009.

http://www.boi.go.th/english/about/statistics_investment.asp, retrieved on 25 March

2009.

http://glossary.eea.europa.eu/terminology/concept_html?term=economic%20zoning,

retrieved on 24 March 2009.

http://www.nesdb.go.th/Default.aspx?tabid=94, retrieved on 27 March 2009.

http://www.oie.go.th/industrystatus1/r_OctDec51/r_OctDec51_1.html, retrieved on 25

March 2009.

http://www.oie.go.th/industrystatus1_th.asp, retrieved on 25 March 2009.