Thai economy out of sync, out of sight?
The changing nature of globalisation, compounded by pandemic-induced disruptions require a rethink of Thailand's place and direction in the global economy. Already hampered by pre-Covid trends of global slowdown in trade and investment, the economy is facing tougher challenges as the pandemic has forced multinational companies to reconsider their supply chain configuration. The changing contours of the global economy on the one hand and ongoing political tensions at home that have delayed much-needed structural reforms on the other are becoming a perfect storm that could blow away Thailand's chances of maintaining its once central role in Southeast Asia's economic dynamism.
Short of revenue from tourism, policy makers have pinned their hopes on the return of exports and foreign direct investment (FDI) as the global economy recovers from the pandemic. Hopes for an export recovery rose after goods exports surged more than 30% in the first quarter of 2021, according to the National Economic and Social Development Board (NESDB). For FDI, the Board of Investment (BOI) continues to believe that despite the slowdown in 2020, Thailand remains resilient as an investment destination, thanks to the country's attractive investment incentives, strong supply chain, and availability of raw materials and parts.
Such optimism overlooks two crucial challenges Thailand is facing in the global economy -- the changing nature of international production in recent years and Thailand's relative decline in national competitiveness compared to regional neighbours. Although Thailand's diversified economy, ranked second largest in Southeast Asia, will likely keep the country in the race for foreign investment, continuing to pin hopes on a recovery in the export-driven sectors and tourism may be too passive given that the nature and growth of global trade and investment flows has changed over the past three decades. These trends, including the slowdown in global trade and investment, were already ongoing prior to 2020 and are likely to accelerate further as the pandemic induces changes and reconfiguration in global supply chains.
In the 1990s and 2000s, the rapid growth of international production that drove many multinational companies to look for alternative production locations in lower-cost countries led to sharp rises in global trade and investment flows. The fine-slicing of production processes in supply chains of export-intensive industries such as the electronics and automotive sectors was enabled by better communication technology and the supportive liberalisation policy of developed economies. Large multinational companies from the US, Europe and Japan expanded their global footprints to many developing economies, Thailand and Southeast Asia included, in search of cost efficiency in their production activities.
But this growth momentum stalled after the 2008-2009 global financial crisis and especially after 2010. The compound annual growth rate of global FDI flows drastically dropped from 20.8% in the 1990s to 4.9% during 2000-2007 and 0.4% in the post-crisis decade. The pandemic accelerated this decline further in 2020 when global FDI flows recorded a 42% contraction in value compared to 2019, according to the United Nations Conference on Trade and Development (UNCTAD).
On top of global protectionist sentiment, a key reason for the slowdown in global trade and investment flows was the increasing intangibility of overseas operations of multinational firms. The growth of service companies, particularly those in technology sectors, has reduced the need for direct investment in tangible assets, like local factories, that are needed in traditional manufacturing sectors. Tech giants from Amazon and Facebook to Alibaba and Lazada can reach markets worldwide through digital channels without much need for physical investment.
The ubiquitous spread of digital technologies has also enabled many manufacturing companies to turn to asset-light models of operations, focusing more on service than production. In other words, leading multinational companies have shifted to focus more on what they do, rather than what they produce and sell.
Take IBM, for example. The company got rid of personal computer manufacturing altogether in May 2005 to pursue data management services. When IBM expands abroad, the availability of computer parts will not be as relevant to their decision-making as the availability of skilled computer engineers.
Disruptions and vulnerabilities caused by the Covid-19 pandemic put a further strain on the value chain of many industries, from medical supplies to basic food items. The shortage of medical face masks and other medical supplies in the early months of the pandemic heightened concerns about over-reliance on long supply chains located in faraway countries. The Suez Canal accident in March 2021 further highlighted how fragile and vulnerable long and stretched-out global trade routes could be. These concerns have accelerated discussions in boardrooms of multinationals to reconsider how they manage their networks of overseas suppliers and subsidiaries.
Post-pandemic global production is unlikely to be the same. The changing nature of global production that had been ongoing prior to the pandemic, plus the increasing concerns over supply chain resilience are likely to lead multinational companies to demand more out of their foreign investment decisions. Policymakers of countries that need to attract foreign direct investment flows need to be aware of what these companies are looking for in their location decisions.
The same applies to Thailand. The rapid decline of the country as a foreign investment destination should be of urgent concern to policymakers. Based on UNCTAD data, Thailand has fallen from being the second-largest FDI destination in Southeast Asia in 2010, trailing only Singapore, to sixth in 2019, behind Singapore, Indonesia, Vietnam, Malaysia and the Philippines, respectively. With the pandemic wreaking havoc across the region, Thai FDI further contracted by 50% in 2020 compared to the previous year, a much sharper decline compared the region's average of 31% or Vietnam's 10% drop.
All these challenges should pose serious questions about how Thailand can navigate the changing nature of global trade and investment flows. The need to create value for investment in Thailand goes beyond the typical investment incentives based on taxes or investment privileges in special economic zones like the Eastern Economic Corridor.
Rather, knowing what Thailand can offer in the reconfigured value chain of global industries that is different than that of its regional peers is crucial for trade and investment policy directions. The sharp decline of foreign investment in Thailand may already indicate the country is falling out of sync with the changing nature of globalisation. Let's hope Thailand can get its house in order before it also falls out of sight for foreign and domestic investors looking to rearrange their value chain in the post-pandemic years.
Thammasat University Professor
Pavida Pananond, PhD, is Professor of International Business at Thammasat Business School, Thammasat University.