Transcript Investment Climate Constraints and Thailand Competitiveness

Seminar on Sustainable Growth, Regional Balance and Social
Development for poverty Reduction in Thailand
Bangkok, October 26, 2006
Investment Climate
Constraints and Thailand
Competitiveness
Albert G. Zeufack, PhD.
The World Bank
1
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
2
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
3
I. Growth and the
Investment Climate
4
TFP’s Contribution to Thailand LongRun Growth has been Negligible
Total Economy
6
Total
Index
5
Labor quality
4
Employment
3
Capital
2
TFP
1
1975
1980
1985
1990
1995
2000
2005
Year
5
Low TFP Contribution, Especially in
Manufacturing
Manufacturing
10
Total
9
8
Index
7
6
Labor quality
Employment
5
4
3
Capital
2
TFP
1
1975
1980
1985
1990
Year
1995
2000
2005
6
But, Investment has not Recovered from
the Crisis
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0.0%
Private Equipment Investment/GDP
Private Gross Fixed Capital Formation/GDP
Figure 1: Private Equipment and Total Investment to GDP Ratio in Thailand 1980-2003.
25.0%
7
6
20.0%
5
15.0%
4
3
10.0%
2
5.0%
1
20
02
20
00
19
98
19
94
19
96
19
92
19
90
19
86
19
88
19
84
19
82
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
86
19
84
19
82
19
80
19
88
FDI/GDP in Thailand
19
80
0.0%
0
Thailand's Share in FDI into East Asia and Pacific
Panel A
Panel B
Figure 2: Panel A. FDI to GDP Ratio in Thailand 1980-2003.
Panel B. Thailand’s Share in Total FDI into East Asia and Pacific 1980-2003.
7
II. Binding Investment
Climate Constraints
8
Major Business Climate Concerns for
Thai Firms
(Results from Open-Ended Question)
Regulatory Burden
Skilled Labor Shortage
Infrastructure and
Support Services
Dissatisfaction with
Economic Situation
0
10
20
30
40
50
60
70
Percent of Firms Identifying Issues as One of Three Top Obstacles
9
A. Bureaucratic Burden
1. Time (number of days) to clear customs for imports
Brazil
Philippine s
China
India
Rus s ia
Indone s ia
Thailand
Turke y
Slove nia
Malays ia
Es tonia
0
Source: World Bank PICS surveys.
5
10
15
10
Bureaucratic Burden
2. Labor regulations in Thailand are more restrictive than in key comparator countries
such as China, Malaysia
220
25th Percentile
Index of Labor Market
Regulations = 26.2
200
Days to Start a Business
180
160
Brazil
Indonesia
140
120
100
India
80
60
Philippines
25th Percentile
Start Business = 26 Days
China
40
Malaysia
Thailand
Chile
Korea
20
Singapore
U.S.
0
0
10
20
30
40
50
60
70
80
90
100
Index of Overall Restrictiveness of Labor Market Regulations
Source: World Bank Doing Business Indicators 2004.
11
Bureaucratic Burden
The issue is less with the time it takes to obtain authorizations, but
more with the unpredictability…(coefficient of variation)
Number of Days to Obtain Different Licenses/Permits/Approvals/ Certificates
Avg.
Ministry of Commerce
Department of Industrial Works
Immigration Department
Land Office
Local Government
Approval for Construction
Import Permit
Operating License
10
17
10
13
10
36
13
39
St. Dev. Coeff. Variat.
20
22
14
22
15
40
18
58
1.9
1.3
1.4
1.7
1.6
1.1
1.4
1.5
Median
N. Obs.
2
7
3
3
2
30
7
30
964
926
80
131
419
242
164
188
Number of Days to Process Application for Different Export Incentives
Avg.
E-commerce Export Promotion
Promotion of Thailand Brands
Exports Promotion to new market (2003-2005)
Distribution Networking
Arrange sale promotion with Department store
Export one stop service
Prime Minister’s Export Award 2003 (PM Award)
Deduction on Cost of Developing Websites
Tax Incentives for Offshore Trading Via Websites
33
41
18
32
17
15
21
28
30
St. Dev. Coeff. Variat.
145
61
19
48
13
13
20
16
31
4.4
1.5
1.0
1.5
0.7
0.9
1.0
0.6
1.0
Median
N. Obs.
7
30
10
23
7
11
14
30
23
56
62
39
12
11
14
13
10
8
12
B. Thai Firms Identify Skills Shortages as a Severe Constraint to
their operations…
… Irrespective of Firm Size
Percent of Firms Identifying Skills and Education of Available
Workers as a "Severe" or "Very Severe" Obstacle
50.0
40.0
30.0
20.0
10.0
0.0
Small
Medium
Large
13
Skills Shortages as a Severe Constraint…
… More So in Garments, the East Region and
in Bangkok
Percent of Firms Identifying Skills and Education of Available
Workers as a "Severe" or "Very Severe" Obstacle
Percent of Firms Identifying Skills and Education of Available Workers as a
"Severe" or "Very Severe" Obstacle
60.0
50.0
50.0
40.0
40.0
30.0
30.0
20.0
20.0
10.0
10.0
i n./
Equ
i pm
.
re
Ma
ch
od/
F ur
nit u
Wo
st ic
s
Ru
bbe
r/ P
la
ian
ces
n./A
ppl
art
s
Ga
rm
ent
s
ti le
s
Tex
Au
t o-p
Ele
ct r
o
Foo
dP
r oc
essi
ng
0.0
0.0
North
Region
Central
Region
Bangkhok East
Region Region
Northeast
Region
South
14
Region
C. Infrastructure: A Severe Business Climate
Constraint for Thai Firms
Frequency of Power Outages (Number of Times Last
Year)
Number of Days to Obtain an Electricity Connection
India
Thailand
Thailand
Malaysia
Brazil
Philippines
China
Russia
Indonesia
China
Brazil
Malaysia
Indonesia
Philippines
Estonia
Russia
Turkey
Slovenia
Slovenia
Estonia
0
5
10
15
Note: India with 210 days is not shown due to space constraints.
Source: World Bank PICS surveys.
20
Turkey
0
20
40
60
80
15
Numbe r of Days to Obtain a Wate r Conne ction
Thailand
Brazil
Indone sia
Malaysia
0
5
10
15
20
25
16
Frequency of Transport Disruptions Last Year
Malaysia
Indonesia
Thailand
Philipines
Brazil
0
0.5
1
1.5
2
2.5
3
17
III. Impact of Investment
Climate Constraints on
Competitiveness
18
Performance and Firm Characteristics
Regressors
Total Factor
Productivity
Sales
Growth
Labor
Productivity
Firm Age
0.003**
(0.002)
0.087***
(0.015)
0.084***
(0.028)
0.133***
(0.032)
0.037
(0.047)
0.144***
(0.048)
0.010
(0.031)
-0.003***
(0.001)
-0.015
(0.009)
-0.013
(0.022)
-0.029
(0.026)
0.081**
(0.038)
-0.027
(0.035)
0.008
(0.022)
0.010***
(0.003)
-0.019
(0.025)
0.273***
(0.060)
0.438***
(0.064)
0.115
(0.094)
0.285***
(0.097)
0.049
(0.057)
1033
1033
1033
Current Employment
Exporter Dummy (more than 10%)
Foreign Ownership Dummy
Capital Vintage (% Mach.Under 5 Years)
% Computer-Controlled Machinery
R&D Spending Dummy
N. Observations
Notes: OLS estimation. *** and ** represent significance at 1 and 5 percent confidence levels
The regressions include industry fixed effects and region fixed effects.
19
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
Percent Firms Identifying Issues as Major Three Concerns
70
60
50
40
30
20
10
0
Small
Skilled Labor Shortage
Regulatory burden
Medium
Large
Dissatisfaction Economic Situation
Infrastructure and support services 20
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
Percent Firms Identifying Issues as Major Three Concerns
70
60
50
40
30
20
10
0
Noncomputerized Machinery
Skilled Labor Shortage
Regulatory burden
Computerized Machinery
Dissatisfaction Economic Situation
Infrastructure and support services 21
2. Poorer Investment Climate in expanding Regions
Regional Breakdown of Manufacturing GDP
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1981
1982
Bangkok
1983
1984
1985
1986
Vicinity
1987
1988
1989
Central
1990
1991
East
1992
1993
1994
West
1995
1996
North
1997
1998
1999
2000
Northeast
2001
2002
2003
South
• 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
22
2004
3. Skills Shortages Impose a Significant Cost to
Thailand Competitiveness
Estimates of Benefits from Relaxing Skills Shortages
Industry
Food Processing
Textiles
Clothing
Auto-parts
Electronics and Electrical Appliances
Rubber and Plastics
Wood Products and Furniture
Machinery and Equipment
Benefit from reducing skill
shortages as % sales
8.2
14.1
10.7
4.6
3.6
27.7
44.8
7.8
• 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)
23
4. Technological capabilities of firms in
Thailand are relatively weak:
TCI by Industry
2.5
Wood & Wood Furniture
Food Processing
Rubber &
Clothing
Plastics
Electronics &
Electrical Appliances
2
Auto Parts
Machinery &
Equipment
Textiles
Density
1.5
1
0.5
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Technological Capabilities Index
Food Processing
Auto Parts
Wood & Wood Furniture
Textiles
Electronics & Electrical Appliances
Machinery & Equipment
Clothing
Rubber & Plastics
24
Linkages TCI by Industry
2.5
2
Density
1.5
1
0.5
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Technological Capabilities Index
Food Processing
Auto Parts
Wood & Wood Furniture
Textiles
Electronics & Electrical Appliances
Machinery & Equipment
Clothing
Rubber & Plastics
25
High-technology exports (% of manufactured exports)
…“High Tech Exports” is Not Necessarily
Equal to Competitiveness!
75
Philippines
60
Malaysia
45
Thailand
30
Indonesia
Brazil
15
Chile
0
0.00
China
Mexico
20.00
Colombia
Argentina
Vietnam
40.00
India
Sri Lanka Pakistan Bangladesh
60.00
80.00
100.00
Manufactures exports (% of merchandise exports)
26
And ICT Use and Performance is Limited
Email/Website Use by Firm Size, Ownership, Export Orientation
60
50
Website Use
Large Foreigner
Exporter
Large Domestic
Exporter
Large Foreign NonLarge
Domestic
NonMedium Domestic
Exporter
Exporter
Small
Foreigner
Exporter
exporter
Medium Domestic
Medium Foreign NonNon-Exporter Medium Foreigner Exporter
Small Domestic
Exporter
Exporter
Small Foreign NonSmall Domestic NonExporter
Exporter
40
30
20
10
0
0
20
Source: Investment Climate Survey (2004), World Bank
40
60
Email Use
80
100
27
ICT use among manufacturing firms
Constraints to introducing or expanding IT use considered
“important” or “very important”
Constraints
Small
Medium
Large
High cost of IT equipment and maintenance
20%
18%
18%
Lack of knowledge and trained IT personnel
42%
35%
33%
Low returns to investments in IT
15%
12%
11%
Lack of experienced consultants to provide or design IT-based solution systems
39%
37%
32%
20%
13%
13%
Source: Investment Climate Survey (2004), World Bank
IT-based systems do not improve productivity
28
IV. The Way Forward
29
Creating the conditions for a
Productivity-Driven Growth by Improving
the Investment Climate
• 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
30
achieving Productivity-Driven Growth.
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.
31
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.
32