For business, any kind of instability that reduces predictability is not well tolerated. Thailand may have appeared like a case study of economic resilience, given what the country has gone through in the past decade of varying colour-coded protests and turmoil. In the current round of crisis and confrontation, however, doubts are surfacing as to how many more self-inflicted shocks this country can absorb.
On top of the erosion of confidence among foreign trade and investment partners over our prolonged political unrest, the opportunity loss from upgrading Thailand's competitiveness amid increasing global challenges may prove costly.
There is no denying how impressively Thailand has bounced back economically time and again. Despite the coup in 2006, Thailand managed a growth rate of 5% in 2007. Days of violent unrest in Bangkok in 2009-2010 that left dozens dead and many more injured did not stop the economy from clocking a 7.8% expansion in 2010, the highest for a decade. Following the disastrous floods of 2011, the economy surged back to an impressive 6.5% growth rate in 2012.
Such resilience was attributed to strong growth in exports, continuing inward foreign direct investment (FDI), and robust domestic consumption. Despite its ups and downs, Thailand managed to retain the benefit of the doubt from its global business partners.
But can we expect Thailand to bounce back just like that time and again in an increasingly competitive global economy? Maybe not for long. Signs are emerging that large and long-term investors like Toyota and Honda have had second thoughts about their future investment plans in the country should the crisis drag on indefinitely. For example, Toyota recently put on hold a 20-billion-baht capacity expansion that would have increased production by 20% to one million vehicles annually.
While Thailand remains an important destination for FDI, it is no longer the regional darling of foreign investors. According to the United Nations Conference on Trade and Development, Indonesia has surpassed Thailand to become one of the world's top 20 destinations for FDI since 2009. Vietnam and the Philippines are equally attractive and politically more stable than Thailand in courting FDI inflows. At this rate, even Myanmar may seem less politically turbulent as an investment location than Thailand.
Thailand cannot be complacent and look at these countries simply as low-cost alternatives that are not in its league. Global investment flows are driven less and less by labour cost arbitrage. Location decisions become central to the international investment strategy of multinational firms. Proximity to markets, resources and knowledge, as well as flexibility to accommodate different consumer demands dominate the minds of today's CEOs much more than low labour costs.
The changing nature of global production compels investors to seek more value from their foreign locations. Policy-makers have to continuously ask what Thailand can offer in this increasingly challenging investment environment. Over the past few decades, Thailand has successfully established itself as a key production and export hub for many global industries.
Automobile, electronics and agribusiness are among our success stories, where Thailand plays an instrumental part as regional supplier and exporter. Favourable investment incentives, reasonable costs of production, clusters of supporting industries, and a sufficient pool of semi-skilled labour contributed to Thailand's success in placing itself on the production map of many multinational firms.
But manufacturing activities remain at the lowest end of the value chain of global industries. Capturing more value therefore means moving to higher value-added activities in the value chain of global industries. Serving as a manufacturing and export base is simply not enough for our future direction.
Meeting those goals require upgrading of infrastructural facilities and development of more skilled human resources. Improved infrastructure can lead to more value-added activities and services such as distribution centres, logistics hubs, or regional sales and marketing headquarters being concentrated in Thailand.
This can further enhance multinational firms' strategies to expand their operations to meet growing demands in an emerging Southeast Asia. To sustain its attractiveness for foreign investment, Thailand needs to become more strategic to multinational firms' investment plans. In short, manufacturing and export is important, but it is not enough.
To get there, much more needs to be done. Physical infrastructure plays a central role in maximising Thailand's geographical location to benefit from the increase in regional connectivity. Developing more tech-savvy suppliers and supporting industries to be ready for higher value-added manufacturing activities will also be significant in keeping leading global investors in the country.
These upgrading requirements boil down to developing human resources and talents that can handle more advanced manufacturing technologies and managers who understand differences in consumer demands within and across regions. While it is a clich? to say education is the root cause of Thailand's development problems, it cannot be denied that our education system needs a major revamp and reform for longer-term economic development.
The rising opportunity costs of putting off what needs to be done to remain economically viable and globally competitive should remind political leaders that there is more to it than their existential battle for Thailand's future. They must bear in mind that Thailand's shock absorbers are reaching their limits.
Pavida Pananond is associate professor of International Business at Thammasat Business School, Thammasat University.