In the aftermath of last year's Brexit and Donald Trump's surprising election victory, the global economy this year will face risks and uncertainties. Stagnant world trade growth will be further dampened by increasing protectionism and populism in the US, the EU and Asia.
Meanwhile, international finance will remain unstable a decade after the global financial crisis. These will keep government policies everywhere in flux. As a response, the Thai government requires policies and adaptation beyond its lofty rhetoric of "Thailand 4.0" if the country wants to survive and evolve.
Export-dependent emerging economies, including Thailand and its Southeast Asian neighbours, are most at risk from the global economic fluctuations. While the slowdown in trade and direct investment flows in recent years is often attributed to cyclical factors, especially the lethargic recovery of developed economies, structural changes in the global economy and economic policy uncertainties exacerbate the woes of Southeast Asia's export-led economies. How this changing global economic and business landscape shapes the strategies of countries and firms is crucial to Thailand 4.0's future.
Pavida Pananond is Associate Professor of International Business at Thammasat Business School, Thammasat University.
More specifically, the structural forces at work against growth in trade and investment include the maturation and limitations of global value chain integration across countries. The disaggregation of global value chains has been a principal mechanism that enables export-oriented economies such as Thailand's to benefit in three main ways.
First, multinational companies, which relocated their production to developing countries, have become sources of foreign direct investment (FDI). They have brought along not only capital inflows but also other intangible assets such as technological and managerial expertise. These FDIs are instrumental in developing local subsidiaries into regional or global manufacturing and export bases. This FDI-led growth pattern has benefited Thailand in many industries, particularly automotives and electronics.
Second, when multinational firms use their Thai subsidiaries as an export base, Thailand has also gained from increased trade flows. Exports have been made easier for local subsidiaries or subcontractors, which only need to concentrate on production, as their products can be distributed to consumers in advanced economies through those multinational lead firms' networks.
Third, the geographical disaggregation of activities across many countries also translates into a rise in trade flows. Hard disk drives that are manufactured in Thailand, for example, can be exported for the assembly of notebook computers in Mexico for final distribution to consumers in the US. Companies such as Dell have deployed this strategy.
This pattern has been a win-win strategy for all. Home economies in developed countries benefit from the global growth of their firms. Multinational lead firms gain from relocating their standardised and non-specialised activities to countries where production costs are low. At the same time, host countries are happy with increased investment, a rise in exports, more local employment, and economic upgrading possibilities. Similarly, emerging-market firms enjoyed export market expansion coming with relative ease.
But these trends have been changing. Rising costs in developing economies and technological advances enable some multinationals to bring back overseas production activities to be nearer to end consumers in their own countries. This has slowed down the disaggregation of value chain activities, hence, decelerating global trade and investment flows.
In addition, the increased likelihood of US protectionist policies, especially to raise tariff barriers and penalise firms that invest overseas, will become institutional factors that dampen global flows of trade and investment even further.
It is unlikely that multinational firms will uproot all the disaggregated global value chain activities, as firms will continue to serve markets worldwide. But the saturation of global value chain integration, compounded by prospective policy changes in the US, is alarming for the Thai economy.
To make the most of our deeply integrated position in many value chains, the Thai government and Thai firms need to strengthen their competitiveness.
Relying on the same worn-out model of attracting foreign investment through a host of incentives and tax exemptions will no longer suffice. Thailand needs to create and offer more value to firms, and make itself an attractive regional destination for foreign investment in many industries. Strengthening business institutions and local resource capabilities are among the most crucial first steps.
The current government's push to improve physical infrastructure deserves applause. But having physical hardware without more sophisticated human resources and institutional software would be comparable to driving a Ferrari on Bangkok's jammed streets. The changing context of global trade and investment requires countries to offer the most valuable geographical advantages that cannot be found elsewhere.
Take Thailand 4.0, for example. While the attempt to attract higher value-added and technology-intensive industries like robotics or biotech is heading in the right direction, being a hub for these industries means much more than providing tax incentives. Skilled human resources in science and technology are crucial for any firm in these industries. But the recent Programme for International Student Assessment (PISA) rank Thailand's performance at the bottom of Asia. The result is anything but comforting.
As for firms, the integration into global value chains is not an end in itself, particularly when value is created and captured more by other firms in the chain. The more important question is what Thai firms can do to leverage their position to generate and capture more value that goes beyond low-skilled tasks like production or assembly. The changing competitiveness calls for value creation from more skilled and sophisticated activities.
Moving into upstream functions, such as research and development, or into downstream activities like marketing and distribution, as well as international expansion will become more critical for future growth and survival in the age of structural changes in global value chain dynamics. Firms that would thrive and survive in this changing context should derive value more from what they do, and not just from what they sell.
Thailand 4.0 is an ambitious growth strategy that lacks a bottom-up vision to cope with the fluctuating global economy. Thailand needs to move away from cosmetic and superficial policy announcements in favour of a blanket acknowledgement of our structural shortcomings and a broad-based drive to enact institutional and policy reforms that can underpin innovation and value creation. Time and tide wait for no man, and nor does globalisation, even with its recent hiccups.