1. 1 Investment Climate Constraints and Thailand Competitiveness Albert G. Zeufack, PhD. The World Bank Seminar on Sustainable Growth, Regional Balance and Social Development for poverty Reduction in Thailand Bangkok, October 26, 2006

2. 2 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 Thailand’s Competitiveness IV. The Way Forward

3. 3 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: 1.Disproportionate impact of investment climate constraints on more productive firms 2.Poorer Investment Climate in expanding Regions 3.Skills Shortages 4.Low Technological Capability of Firms and low ICT usage

4. 4 I. Growth and the Investment Climate

5. 5 TFP’s Contribution to Thailand Long- Run Growth has been Negligible

6. 6 Low TFP Contribution, Especially in Manufacturing

7. 7 But, Investment has not Recovered from the Crisis

8. 8 II. Binding Investment Climate Constraints

9. 9 Major Business Climate Concerns for Thai Firms (Results from Open-Ended Question)

10. 10 A. Bureaucratic Burden 1. Time (number of days) to clear customs for imports Source: World Bank PICS surveys.

11. 11 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.

12. 12 Bureaucratic Burden The issue is less with the time it takes to obtain authorizations, but more with the unpredictability…(coefficient of variation)

13. 13 B. Thai Firms Identify Skills Shortages as a Severe Constraint to their operations… … Irrespective of Firm Size

14. 14 Skills Shortages as a Severe Constraint… … More So in Garments, the East Region and in Bangkok

15. 15 C. Infrastructure: A Severe Business Climate Constraint for Thai Firms Source: World Bank PICS surveys.

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18. 18 III. Impact of Investment Climate Constraints on Competitiveness

19. 19 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.

20. 20 1.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

21. 21 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

22. 22 2. Poorer Investment Climate in expanding Regions 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

23. 23 3. Skills Shortages Impose a Significant Cost to Thailand Competitiveness Estimates 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)

24. 24 4. Technological capabilities of firms in Thailand are relatively weak: TCI by Industry

25. 25 Linkages TCI by Industry

26. 26 …“High Tech Exports” is Not Necessarily Equal to Competitiveness!

27. 27 And ICT Use and Performance is Limited Email/Website Use by Firm Size, Ownership, Export Orientation Source: Investment Climate Survey (2004), World Bank

28. 28 ICT use among manufacturing firms Constraints to introducing or expanding IT use considered “important” or “very important” ConstraintsSmallMediumLarge High cost of IT equipment and maintenance20%18% Lack of knowledge and trained IT personnel42%35%33% Low returns to investments in IT15%12%11% Lack of experienced consultants to provide or design IT-based solution systems39%37%32% IT-based systems do not improve productivity20%13% Source: Investment Climate Survey (2004), World Bank

29. 29 IV. The Way Forward

30. 30 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 Productivity-Driven Growth by Improving the Investment Climate

31. 31 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 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.

32. 32 Some 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.