Locational Determinants of Foreign Direct Investment: A Case of Thailand Dr. Viyada Valyasevi UniSA, 14 Apr. 2009

The Research Factors encourage / discourage direct investment of foreigner in Thailand. Factors encourage / discourage direct investment of foreigner in Thailand. Foreign Direct Investment (FDI) Foreign Direct Investment (FDI) – Direct investment of foreign (not portfolio, not lending) – With more than 10% shareholding – In a firm in another country

The Importance of FDI Transfer technology, innovation, and wealth from developed countries (home) to developing ones (host). Transfer technology, innovation, and wealth from developed countries (home) to developing ones (host). Significantly contribute to development and economic growth in host countries. Significantly contribute to development and economic growth in host countries. Allow host countries to invest in activities beyond their domestic saving capabilities. Allow host countries to invest in activities beyond their domestic saving capabilities.

FDI vs. Thailand Intense competition from China, India, and Vietnam. Intense competition from China, India, and Vietnam. Limited number of research done based on Thai characteristics, and all were aged. Limited number of research done based on Thai characteristics, and all were aged. Understanding what determines investment location choices: Understanding what determines investment location choices: – Provide tools for FDI agency (BOI) to formulate their strategies to attract desired FDI.

Research Question What are the factors most encourage and discourage FDI in Thailand? What are the factors most encourage and discourage FDI in Thailand? Are there different requirements between each type of FDI? Are there different requirements between each type of FDI?  Moderators applied - Nationality: Asian vs. Western - Industry type: Manufacturing vs. Service - Market orientation: Domestic oriented vs. Export oriented - Sourcing orientation: Local sourcing vs. Import oriented - Inter-group dependency: Non-group vs. Group dependency - Size of investment: SME vs. Large corporate - Major shareholder: Foreign vs. Thai - Years of establishment: Newly start-up vs. Long establishment

Research Model Foreign Decision to Invest in Thailand Moderators  Nationality  Industry type  Market orientation  Sourcing orientation  Inter-group dependency  Size of investment  Major shareholder  Years of establishment Moderators  Nationality  Industry type  Market orientation  Sourcing orientation  Inter-group dependency  Size of investment  Major shareholder  Years of establishment Locational Determinants

Methodology: Design Descriptive statistic & empirical research Descriptive statistic & empirical research Seven Likert scale self-administered questionnaire survey (in English, Chinese, and Japanese languages) Seven Likert scale self-administered questionnaire survey (in English, Chinese, and Japanese languages) Expert interviews & pilot test done Expert interviews & pilot test done Random sampling from the official list of Board of Investment of Thailand Random sampling from the official list of Board of Investment of Thailand Mailed to 1,188 FDI, with posted return package mail included Mailed to 1,188 FDI, with posted return package mail included Non-response bias test done (comparing demographic characteristics, Armstrong & Overton (1997)). Non-response bias test done (comparing demographic characteristics, Armstrong & Overton (1997)).

Methodology: Data Analysis Response rate: 8.7% (103 / 1,188) Response rate: 8.7% (103 / 1,188)  Low, but acceptable - Kanuk & Berenson (1975): Questionnaires mailed w/o specific naming usually earn low response rate. - Brennan (1990) & Comegys (2000): Status of the researcher has an effect on the response rate; i.e. student researchers normally get a lower response rates than corporate or professional researchers. Factor analysis, resulting in 13 determinant factors Factor analysis, resulting in 13 determinant factors MANOVA (Multivariate Analysis of Variance) to test hypothesis MANOVA (Multivariate Analysis of Variance) to test hypothesis

Methodology: Data Analysis The 13 determinant factors: 1.Economic condition (GDP, economic growth) 2.Government policy (political stability, FX policy, etc.) 3.Barriers & red tape (restriction on land ownership, govt. bureaucracy) 4.Tax concession (on imports, corporate tax, income expatriation 5.Supply of raw material) 6.Domestic infrastructure (cost of land & construction, cost & quality of energy, utilities, transportation, communication) 7.Skilled labor (availability & cost) 8.Unskilled labor (availability & cost) 9.R&D (support from home country & Thailand) 10.Market condition (trend, size & competition in Thailand & neighboring countries) 11.Financial accessibility (access to local source of fund, cost of fund) 12.Transparency & legal practices (accounting & audit standard, corporate governance) 13.Environment condition (living condition of expatriates)

Findings: Overall Top most encouraging factors – Tax concession – Economic condition – Government policy – Business environment condition – Market condition Top least encouraging factors – Barrier & red tape – Transparency & legal practice – Skilled labor – Unskilled labor – Financial accessibility

Findings: Nationality NationalityAsianWesterner Most Encouraging Factor 1.Tax concession 2.Economic condition 3.Business environment condition* 1.Tax concession 2.Economic condition 3.Supply of raw material** Least Encouraging Factor 1.Barriers & red tape 2.Skilled labor** 3.Supply of raw material 1.Barriers & red tape 2.Transparency & legal practice* 3.Market condition *Significantly different at p <.10 **Significantly different at p <.05

Findings: Industry IndustryManufacturingService Most Encouraging Factor 1.Tax concession 2.Economic condition 3.Business environment condition 1.Economic condition 2.Tax concession 3.Government policy Least Encouraging Factor 1.Barriers & red tape 2.Transparency & legal practice 3.Skilled labor 1.Barriers & red tape 2.Unskilled labor** 3.Supply of raw material *Significantly different at p <.10 **Significantly different at p <.05

Findings: Market Orientation Market Domestic Oriented Export Oriented Most Encouraging Factor 1.Tax concession 2.Economic condition 3.Government policy 1.Tax concession 2.Economic condition 3.Business environment condition Least Encouraging Factor 1.Barriers & red tape 2.Transparency & legal practice 3.Supply of raw material 1.Barriers & red tape 2.Transparency & legal practice 3.Skilled labor *Significantly different at p <.10 **Significantly different at p <.05

Findings: Sourcing Orientation Sourcing Local Sourcing Import Oriented Most Encouraging Factor 1.Tax concession 2.Economic condition** 3.Government policy* 1.Tax concession 2.Market condition 3.Business environment condition Least Encouraging Factor 1.Barriers & red tape 2.Unskilled labor 3.Transparency & legal practice 1.Barriers & red tape 2.Transparency & legal practice 3.Supply of raw material** *Significantly different at p <.10 **Significantly different at p <.05

Findings: Inter-group Dependency Inter-groupNon-groupGroup Most Encouraging Factor 1.Tax concession 2.Economic condition** 3.Government policy 1.Tax concession 2.Market condition 3.Unskilled labor Least Encouraging Factor 1.Barriers & red tape 2.Transparency & legal practice 3.Unskilled labor 1.Supply of raw material** 2.Barriers & red tape 3.Skilled labor* *Significantly different at p <.10 **Significantly different at p <.05

Findings: Firm Size SizeSME Large Corporate Most Encouraging Factor 1.Tax concession 2.Economic condition 3.Business environment condition** 1.Tax concession 2.Economic condition 3.Government policy** Least Encouraging Factor 1.Barriers & red tape 2.Transparency & legal practice** 3.Financial accessibility** 1.Barriers & red tape 2.Skilled labor 3.Unskilled labor *Significantly different at p <.10 **Significantly different at p <.05

Findings: Major Shareholder ShareholderForeignThai Most Encouraging Factor 1.Tax concession 2.Economic condition 3.Government policy** 1.Economic condition 2.Tax concession 3.Business environment condition* Least Encouraging Factor 1.Barriers & red tape 2.Transparency & legal practice 3.Skilled labor 1.Barriers & red tape 2.Unskilled labor* 3.Transparency & legal practice *Significantly different at p <.10 **Significantly different at p <.05

Findings: Years of Establishment Years Newly Start-up Long Established Most Encouraging Factor 1.Economic condition 2.Tax concession 3.Government policy 1.Tax concession 2.Economic condition 3.Government policy Least Encouraging Factor 1.Barriers & red tape 2.Skilled labor* 3.Transparency & legal practice 1.Barriers & red tape 2.Transparency & legal practice 3.Domestic infrastructure *Significantly different at p <.10 **Significantly different at p <.05

Conclusions & Implications Each type of FDI has different investment determinants. Each type of FDI has different investment determinants. Thai government should tailor their incentives provided to attract desired FDI. Thai government should tailor their incentives provided to attract desired FDI. Though financial incentives (tax concession) is the most encouraging factor for every type of FDI, enhancing non- financial incentives (economic & market conditions, barriers & red tape, and legal transparency) could easily attract FDI, without additional cost to the country. Though financial incentives (tax concession) is the most encouraging factor for every type of FDI, enhancing non- financial incentives (economic & market conditions, barriers & red tape, and legal transparency) could easily attract FDI, without additional cost to the country. More attention should be paid on top least encouraging factors (Barriers & red tape, Legal transparency, Skilled labor, Unskilled labor, and Financial accessibility). More attention should be paid on top least encouraging factors (Barriers & red tape, Legal transparency, Skilled labor, Unskilled labor, and Financial accessibility).

Limitation & Future Research Limitation: Low response rate Low response rate Changing environments (financial/economic crisis, political stability, Free Trade Agreements, climate changes, sustainability issues) Changing environments (financial/economic crisis, political stability, Free Trade Agreements, climate changes, sustainability issues) Future Research: Replicate the research (confirm Generalization) Replicate the research (confirm Generalization) Add more factors, e.g. sustainability requirements Add more factors, e.g. sustainability requirements Ask for support from government agency, to enhance response rate Ask for support from government agency, to enhance response rate

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