Riding the global upward trend

A mid the upward trend of global foreign direct investment (FDI) next year, Thailand will continue to attract more investment but the country has to maintain a friendly investment environment in order to attract capital.
The United Nations Conference on Trade and Development (Unctad) reported a rebound of FDI inflows in 2004, with a greater contribution from the services sector as well as the so-called South-to-South investment trend among developing economies. The upward trend is likely to continue next year due to positive factors of world investment.

Citing the World Investment Report 2004, Kee Hwee Wee, Unctad's economic affairs officer said that the downward trend of FDI in the last three years was about to turn upward again due to faster economic growth and improved corporate profitability worldwide.

Despite the decline in global investment flows in recent years, international production continued to expand. Transnational companies (TNCs) from developing countries were also increasingly expanding abroad, up from 1% of the global outward FDI two decades ago to 10%.

The US$560 billion in global FDI in 2003 would record an upswing in 2004 in key countries where mergers and acquisitions and services transactions were flourishing.
Reinvested earnings, an important component in FDI flows, already resumed growth last year while the services sector now accounted for 70% of the FDI flows and the composition within the sector was also changing.

While trading and financial services used to account for about half of the inward stock of FDI in services, such services as electricity, telecommunications and business services were gaining stronger prominence.
Manapas Xuto, executive director of the International Institute for Trade and Development, said Thailand remained a popular investment destination ranking the 10th, with US$1.8 billion in FDI, while China ranked the first with $53 billion.

Figures at the Board of Investment also showed an upward trend of investment in 2004. The number of applications for investment promotion in the first 10 months was 1,049 projects, worth 482.5 billion baht, up from 768 projects for 256.8 billion baht in the same period of 2003. The total applications in 2003 were for 961 projects with a combined investment value of 304 billion baht.

The rising number of applications to the BoI was partly the result of the agency's policy to attract more investment by offering special incentive packages for targeted sector such as automobile and hard-disk drive industries. The agency also sought to strengthen the competitiveness of Thai industries by introducing new criteria to encourage industries to conduct more research and development.

The BoI also has a plan to amend the Investment Promotion Act to attract more investors in 2005, with a programme to offer the highest privilege packages in 10 years for certain projects. The agency forecasts a stable or higher flow of investment next year in line with the upward trend of global FDI.
Dr Teerana Bhongmakapat, an economist at Chulalongkorn University, forecast a stable amount of FDI in 2005 as a result of the upward trend of FDI and the easing world deflation.

But Dr Teerana remains cautious, pointing out the fact that investment over the last three years has been concentrated on only two sectors _ construction and automotive. Since growth in these sectors has to date been the result of the government's policy to boost domestic demand by facilitating access to financial sources and allowing civil servants to use advanced revenues, the expansion is unlikely to go on forever.

Besides, he noted that although the overall capacity utilisation was quite high, at 75% to 80% in 2004, it occurred only in a handful of strategic sectors which portrayed the illusion of robust overall development.
These sectors are automotive and parts and construction such as steel. A breakdown by sector shows that the capacity utilisation is only 40% in the food industry, and 60% in the electronic industry.

One negative factor that is likely to dampen the flow of investment in 2005 is high oil prices which add to most businesses' investment costs.

Chakramon Phasukvanich, the permanent secretary of the Industry Ministry, agreed that the high oil prices would be a negative factor for the economy. The manufacturing sector will continue to grow in 2005 but at a slower pace than in 2004 because the cycles of many industries had already peaked in recent years and are now on the downward trends such as the automotive industry.

But Saengchai Ekpatanapanich, the vice-chairman of the Federation of Thai Industries, maintained a more optimistic view, saying foreign investors still ranked Thailand among the most attractive investment destinations in the region because of attractive investment privileges, relatively adequate infrastructure and political stability.

He believed that FDI in 2005 was likely to be at the same level as in 2004 thanks to various free trade agreements which would help attract more foreign investors to set up factories in Thailand in order to enjoy low tariffs under the agreements.

Mr Saengchai said high energy prices were not a big issue since other countries also faced the same problem.