Mid-Year Economic Review 2002

INVESTMENT

New-look BoI woos investors

Chatrudee Theparat

INVESTMENT

'Small is beautiful' approach shifts focus away from large projects toward SMEs and community-based businesses in line with the government's populist policies

Over the last five years, the Board of Investment, which plays a crucial role in economic development, has been a prime target of critics who argue it has not been active enough in drawing investors into the country to stimulate the economy.

When the current government led by Thaksin Shinawatra took office early in 2001, the BoI, under political pressure, shifted its focus away from large industrial projects, which had been the cornerstone of development policy for two decades. Instead, it attempted to provide promotional privileges to small and medium-sized enterprises and community-based businesses, in line with the government's policies.

Prime Minister Thaksin has also stressed repeatedly that investment privileges would be granted in the future based on local content use, technological development and the creation of value-added content.

The new criteria were in line with the government's efforts to reduce imports and restructure investment policy in the face of the changing world economy.

Currently, the BoI screens investment applications using a geographic zone system. Projects located in Zone 3, covering the 60 poorer and less-developed provinces of the country, enjoy maximum privileges.

The main elements of the current BoI system are corporate tax exemptions _ typically for five to eight years _ and waivers of import duties on raw materials and machinery.

The economic crisis of 1997 was only one of the factors that have hastened the BoI's attempts to change its role. Another critical factor has been the country's amendments to the investment promotion law in order to comply with World Trade Organisation rules limiting subsidies, which are said to distort trade.

Under WTO agreements, most industries will lose their tax perks over the next 10 years. Tax breaks will continue only for projects that the state deems essential for economic development or which are based in poor areas. The gradual phasing out of tax incentives will begin in August this year.

The BoI itself has also undergone a big overhaul from an investment-promotion body to an "investment intelligence agency" as the role of tax incentives has diminished.

After the reorganisation, the BoI will focus more on providing investment databases, stepping up marketing, developing industrial links and creating a better environment for investment.

The expanded marketing effort will include the establishment of two new branches abroad, in San Francisco and Hong Kong, in addition to its existing four overseas offices. The agency plans to open 14 overseas offices over the next four years.

Greater importance will be attached to developing industrial links to promote supporting industries. Instead of staging "vendors meet customers" programmes with the BoI acting as a matchmaker, the agency will play a supporting role for assemblers and parts makers. It will help them to locate production in Thailand.

"It's time to change the investment laws that have been in use for 25 years. The changes would be gradually implemented in order to make less of an impact on investors," said Sompong Wanapa, who took up the post of BoI secretary-general office early this year.

Mr Sompong succeeded Chakramon Phasukvanich, who had been groomed for the job by longtime BoI chief Staporn Kavitanon, the man most closely associated with spearheading the country's earlier heavy-industry boom. Mr Chakramon's tenure lasted only a few months before he was named head of the National Economic and Social development Board.

Under Mr Sompong's stewardship, the BoI has a five-pronged strategy. The first element is to create a more promising climate for investment with the BoI co-operating with other agencies to encourage deregulation.
The second is to seek investment partners. The BoI has already signed an agreement to attract investors with Japanese banks, and plans to extend partnerships to cover other foreign banks in Europe and the United States.

The third strategy involves more aggressive marketing in the US, the European Union, Japan, China, Korea, Taiwan, Singapore and Australia.

The fourth is to strengthen small businesses. The BoI aims to offer extensive information to SMEs to develop linkages between international companies and Thai companies.

The fifth strategy involves promoting community businesses. The BoI will act as the co-ordinator of various agencies that play a key role at the grass-roots level.

Mr Sompong said the agency would develop more efficient ways to support market access, especially in international markets.

The combination of new approaches, the BoI says, is intended to make Thailand the biggest recipient of foreign investment among Asean countries within two years.

But how to compete with emerging countries is one of the biggest challenges the BoI now faces. Mr Sompong believes, for example, that Thailand has less room to compete with China in labour-intensive industries.

However, investors would not invest in only one country, he says, taking issue with many commentators who believe China will continue to gain at the expense of Asean. They would invest in many countries in order to diversify their risk, he said.

Even before the Thaksin government took office, the trend toward smaller ventures was emerging. Some 50% to 60% of the applications to the BoI from 1997 to 2001 were for projects with an investment less than 100 million baht each. Projects worth between 100 million and 500 million baht made up 30-40% of total applications, while those worth 500 million baht or more made up the rest. Large investments with an investment scale of more than one billion baht accounted for only 30 to 50 projects each year.

Investments in the agriculture sector rose significantly during the past five years, from 133 approved projects in 1997 to 217 in 2001, with a peak of 262 in 1999. Light industry accounted for 164 projects approved last year, against 153 in 1997, with a low point of 75 approvals in 1999.

Many manufacturers have moved out of Thailand to labour-intensive and emerging countries such as China and Vietnam. with smaller-scale projects incurring lower investment costs.

The value of projects seeking BoI privileges declined to 190.7 billion baht in 2001 from 353.3 billion in 2000. By comparison, the value of investment applications in 1997 was 380 billion.

Applications in the first four months of this year totalled 238 projects, worth 66.5 billion baht, compared with 226 projects, worth 35.7 billion baht, in the same period last year.

Mr Sompong projected that the investment value of applications should reach 200 billion baht this year, slightly higher than in the previous year.

In the immediate aftermath of the crisis of 1997, the BoI took other measures to help domestic industries and draw foreign investment. Among them were duty exemptions for agro-industries in export markets, and for 61 other key industries.

As well, rules were relaxed for new manufacturing sectors. Projects in Zones 1 and 2, representing the Bangkok area and more developed provinces, formerly qualified for privileges only if they exported all of their output. The changes allowed majority Thai-owned companies in these zones to distribute goods in the domestic market. Duties on raw materials for export-oriented industries were also cut.

Under the eased rules, 36 projects in footwear, textiles and food manufacturing were permitted to import machinery free of tax, and 120 key industries were promoted.

The BoI reported that the measures cost about 710 million baht, while foreigners who formed joint ventures with Thais invested 16 billion baht in new enterprises.

Other developments included relaxing conditions on locations for activities eligible for promotion. Promoted projects primarily geared toward exports could be located in any zone and still enjoy existing privileges. The liberalised terms expired at the end of 1999.

Other significant measures followed, including the government's decision to allow foreigners to own majority stakes in joint-venture projects in Zones 1 and 2 in a bid to ease the liquidity problems confronting locally owned businesses. In addition, the board set up trade and investment support offices and a one-stop visa and work permit service centre.