1. 1 Thailand: Investment Climate, Firm Competitiveness, and Growth World Bank’s Presentation of Preliminary Findings Workshop Intercontinental Hotel, Bangkok, June 10, 2005

2. 2 The Report Team Albert Zeufack, EASPR (Task Team Leader), Barry Bosworth (The Brookings Institutions, Consultant), Amadou Dem (EASPR), Ana Margarida Fernandes (DECRG), Tenzin Norbhu (CITPO), Magdi Amin (EASFP), Kaspar Richter (EASPR), Charles Udomsaph (EASPR), Khuankaew Varakornkarn (EASHD), Paul Welsh (Consultant for the NEED project). The report team receives overall guidance from Kazi Matin, Lead Economist for Thailand. Peer Reviewers are: Aart Kraay (DECRG), William Maloney (LACVP), and Shahid Yusuf (DECRG). The report is based on data from the Productivity and Investment Climate Survey (PICS), a large survey of 1500 establishments in Manufacturing and 100 in ICT, and around 14,000 workers, conducted under the supervision of the Foundation for Thailand Productivity Institute (FTPI) with the help of the World Bank. Additional sources of information were used to complement the PICS.

3. 3 Objectives of the Study The productivity and Investment Climate Study (PICS) is a mechanism for: –Assisting business-government dialogue by providing hard data as basis for discussions; –Receiving feedback from firms on obstacles they face in doing business; –Measuring the impact of reforms, and refocusing the agenda on most relevant and pressing concerns. The PICS supplies the government with: –A tool to monitor industry performance, facts and figures instead of complaints, –Benchmark indicators for comparisons with competitor countries, –Feedback on existing industry support schemes, providing clear priorities for action. The PICS supplies firms with a checklist of competitive practices.

4. 4 Structure of the Report Chapter 1: Growth, Productivity and Investment Climate Chapter 2: Regional Investment Climate and Firm Performance Chapter 3: Supplying Skills for Competitiveness Chapter 4: Strenghtening Firms’ Technological Capabilities Chapter 5: Improving ICT Use and Performance

5. 5 Structure of the Presentation I. Growth and the Investment Climate II. How is Thailand’s Investment Climate? III. Do Investment Climate Constraints Affect Thailand’s Competitiveness? IV. Some Policy Implications

6. 6 Key Messages The Thai Investment Climate is good by international standards. It’s definitely better than most neighboring countries (except Malaysia) and better than India and Brazil. However, Thai firms have identified Regulatory burden, Skills Shortages and Infrastructure as the three most binding constraints to their activity. These constraints appear to have a significant negative impact on Thailand Competitiveness. –Most Productive Firms (Large, Exporting, Foreign Invested, High-Tech) are the most affected by regulatory burden, the most important investment climate constraint. –Regions witnessing the most important rate of firms creation (Eastern Seaboard and Center) have a poorer investment climate than Bangkok. A better investment climate in these regions would boost Thailand competitiveness. –Skills shortages are costing in average 15% of sales to Thai firms. There is a high premium to tertiary education graduates and less so for Secondary education graduates. Firms seems to be coping for poor quality secondary education by providing significant levels of training to workers. English and ICT skills lack the most. –Technological capabilities of firms in Thailand are relatively weak, except [fortunately] for the three industries that have been contributing the highest percentage of exports since the crisis (Auto-Parts, Electronics, and Machinery and Equipment). –ICT use and performance remains weak, constrained by ICT skills shortages.

7. 7 I. Growth and the Investment Climate

8. 8 Growth in factors (capital and labor) was the main source of Thailand’s economic growth in past decades. TFP’s contribution was negligible. But, sustaining growth in the future may require shifting to a productivity-driven growth strategy. Improving the business climate is key to reducing risks and costs, and to increasing productivity, hence the competitiveness of the Thai economy. A Low contribution of TFP to Thailand Long-Run Growth

9. 9 Total Employment Capital TFP Labor Quality

10. 10 Total Employment Capital TFP Labor quality

11. 11 The need to shift to a productivity- driven growth

12. 12 II. How is Thailand Investment Climate? GOOD! In Average, Better Than in Most Neighboring Countries in East Asia, Except Malaysia; Better than in India, and Brazil.

13. 13 Major Business Climate Concerns for Thai Firms (Results from Open-Ended Question)

14. 14 A. Bureaucratic Burden 1. Time (number of days) to clear customs for imports Source: World Bank PICS surveys.

15. 15 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.

16. 16 Bureaucratic Burden The issue is less with the time it takes to obtain authorizations, but more with the unpredictability…(coefficient of variation)

17. 17 Time (number of days) to clear customs for exports Source: World Bank PICS surveys. Thailand performs well on some aspects of regulation

18. 18 B. Thai Firms Identify Skills Shortages as a Severe Constraint to their operations… … Irrespective of Firm Size

19. 19 Skills Shortages as a Severe Constraint… … More So in Garments

20. 20 Skills Shortages as a Severe Constraint in all Regions… … More So in the East Region and in Bangkok

21. 21 C. Infrastructure: A Severe Business Climate Constraint for Thai Firms Source: World Bank PICS surveys.

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27. 27 However, Power Outages have lower incidence than in benchmark countries

28. 28 III. Do Investment Climate Constraints Affect Thailand Competitiveness? Yes, Significantly! Through 4 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

29. 29 Determinants of Firm Performance Main Messages Larger firms are significantly more productive than small firms Exporters & foreign-owned firms are significantly more productive Firms using more computer-controlled machinery are more productive Firm performance (labor productivity and TFP) is lower in Northeast and South regions than in Bangkok

30. 30 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.

31. 31 International comparisons

32. 32 International comparisons

33. 33 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

34. 34 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

35. 35 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

36. 36 Spatial distribution of manufacturing employment, 1997 - 2002 Size of circles presents number of workers in manufacturing sector Increasing clustering of manufacturing employment in BKK, VIC, EAST, CENTRAL

37. 37 Bangkok Companies report less problems with: –Telecommunications, electricity, infrastructure, and business support supply –Credit access and insurance Bangkok Companies report more problems with: –Corruption –Skilled labour shortages –Competition from imports –Utility prices In addition, “low-tech” Bangkok Companies report more problems with: –Marco-stability –Anti-competitive practices –Regulations for start-up. Location Choice Bangkok/Vicinity versus Rest of the County Investment Climate

38. 38 Total Factor Productivity – Regional Comparison II For Automotive, Electronic Appliances, Rubber and Plastics and Machinery and Equipment: Bangkok and Vicinity have higher productivity than other regions Plus: These industries have higher productivity than the low-tech industries

39. 39 Simulated TFP Outside of Bangkok/Vicinity Using Returns of Bangkok and Vicinity If companies outside of Bangkok/Vicinity had the same returns on company and product characteristics as in BKK/VIC, their productivity would be higher than in BKK/VIC in high-tech industries

40. 40 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)

41. 41 Benefits from relaxing skills shortages are larger in industries where time needed to fill vacancy for professional is longer

42. 42 Shortages Translate into very High Returns to Schooling, especially to Tertiary Education

43. 43 …And the gap between wage premiums for Tertiary and secondary Education Graduates has been high for the past 15 Years Real Monthly Wages by Education of Monthly Wage Earners 1991 – 2004 (LFS)

44. 44 An issue with quality… Thai Secondary Education Students score lower than average in International Tests

45. 45 English Language and ICT Skills are the skills the worker lack the most in Thailand, with significant impact on wages

46. 46 3. Thailand’s Past Technological Performance has been Modest Source: Global Competitiveness Report, 2004-2005

47. 47 And “High Tech Exports” is Not Necessarily Equal to Competitiveness!!

48. 48 Technological Capabilities Index

49. 49 TCI by Size

50. 50 TCI by Region

51. 51 TCI by Industry

52. 52 Production TCI by Industry

53. 53 Linkages TCI by Industry

54. 54 4. ICT Use and Performance: PICS Results Email/Website Use by Firm Size, Ownership, Export Orientation Source: Investment Climate Survey (2004), World Bank

55. 55 ICT use among manufacturing firms – PICS results Regional variations exist in ICT use Over 50% of firms in Bangkok, Eastern, North and Central regions use email while less than 30% of firms in Northeast and South use email 61% of firms in Bangkok has made sales online, while this is true only for 14% of the firms in the other regions Access to the Internet, email and website use is only the first step, other steps are necessary for firms to conduct significant portions of their business online

56. 56 ICT use among manufacturing firms – PICS results Inadequate IT skills impact firm performance 45% of manufacturing firms rated the IT skills of their skilled production workers as “very poor.” Thai firms perceive, lack of knowledge, availability of trained IT personnel and experienced consultants to be major constraints in adopting ICTs Small firms especially perceive these to be severe constraints

57. 57 ICT use among manufacturing firms – PICS results 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

58. 58 ICT use among manufacturing firms – PICS results Thai firms When comparing firm perception of IT affordaility with the average perception of 50 other developing countries, Thai firms are much more concerned or hindered by costly IT services. Firm Perception that IT Services are NOT affordable Source: Investment Climate Survey (2004), World Bank

59. 59 IV. Some Policy Implications

60. 60 Some Policy Implications Firms point to labor regulations, import regulations, and the unpredictability of entry regulations as areas needing government’s close attention. Small firms are less productive than large, train less workers... What are the implications for SME policies? Improving infrastructure and institutional deficits in the regions outside of BKK/VIC is essential for the sustaining expansion and entry of exported- oriented companies and Thailand competitiveness and growth.

61. 61 Some Policy Implications English and ICT skills are key to innovation and competitiveness. There is a need to reinforce these skills at the secondary education level. There is a need to look beyond high-tech export’s ratio and strengthen all dimensions of technological capabilities of firms to spark productivity-enhancing technological progress, especially increasing linkages. Lack of knowledge and trained IT personnel is the most important constraint to introducing and expanding IT use. Skills, not Machines may be the culprit.