Don't let Asean rules pigeonhole firms
published : 11 Mar 2015 at 06:00
newspaper section: News
writer: Pavida Pananond
For a country that has long courted foreign direct investment (FDI) from other countries, Thailand has added a growing new twist to its role. No longer just a recipient of FDI from abroad, the country has become a home economy for its own set of multinationals. Indeed, Thai firms have never ventured so far abroad so vigorously.
That Thailand's outward foreign direct investment (OFDI) is on the up and up bears implications for government policy, especially during the coup administration and ongoing reforms bent on boosting Thai economic competitiveness. A better understanding of outward investment dynamics is warranted for Thailand's appropriate OFDI policy platform.
In addition to inward foreign direct investment (IFDI) that could bring in capital, knowledge and technology, OFDI can strengthen a country's competitiveness by making its firms leaner and meaner. Better and more competitive domestic firms generate higher domestic competition through linkages and spillovers to competitors, suppliers and other related parties. Put simply, both inward and outward FDI are necessary for a home country to upgrade its overall industrial capabilities.
How home-country governments should support its overseas firms to expand merits attention. While policy directions benefitting all firms are welcome, interventions with advantages for specific types of investment require more careful justification.
For example, the removal of capital controls or negotiations for double taxation treaties benefit all firms looking to expand internationally. However, direct government incentives to support OFDI in particular geographical areas, industrial sectors, or for certain types of firms may distort market mechanisms as managers react to government incentives and make decisions that may not be in the firms' best interest.
One major OFDI policy direction is the geographical preference for the Asean region. This explicit government inclination has translated into tangible promotional policy measures that directly support investment in this pre-selected geographical region.
Given the recent public fanfare on regional opportunities, it is unsurprising that the Asean Economic Community (AEC), set to launch at the end of 2015, features prominently in Thailand's OFDI policy framework. In the five-year investment promotion strategy plan for 2013-2017, the Board of Investment (BOI) identifies Asean members as the primary target countries for Thai overseas investors.
At first glance this strategy makes economic sense as many Thai firms who first embark on international expansion in the Asean neighbourhood benefit from lower production costs and/or growing regional market opportunities. But, not all Thai firms are following the same strategy in their international expansion. While some stay close to the region, others may go farther afield to seek different types of strategic assets, such as established brands and sophisticated R&D facilities, in faraway countries.
A closer analysis of Thai OFDI stock statistics from the United Nations Conferences on Trade and Development (UNCTAD) confirms that there is a large variety and a shifting concentration of destinations for Thai multinationals. Thai OFDI stock in Southeast Asia declined from 45% to 31% of the country's total OFDI stock during 2001-2012.
In the same period, Thai OFDI stock grew significantly in more advanced economies beyond the Asean region. Thai OFDI stock in advanced economies rose from 6% to 23% — the majority of which is concentrated in the EU, the US, Australia and Japan.
The relative growth of Thai OFDI to advanced economies and the corresponding decline in developing economies should be further noted. In 2001, Thai investment flows to advanced economies represented one-sixth of total OFDI flows. In little over a decade, the figure increased to more than one-third. During the same period, Thai OFDI flows to emerging economies decreased from two-thirds in 2001 to 57% in 2012. If we discount flows to offshore financial centres like Mauritius, the Cayman Islands and the British Virgin Islands, emerging economies represent only 40% of OFDI flows.
In other words, Thai OFDI has increased dramatically in absolute terms. In relative geographical distribution, Thai OFDI destinations are increasingly located in more advanced economies, less so in emerging economies in general and the Asean neighbourhood in particular.
Even within Asean, Thai OFDI is most concentrated in more advanced Singapore but not so much in less-developed Cambodia, Laos, Myanmar and Vietnam (CLMV) as we might anticipate from general impressions. For example, Thai OFDI stock in Singapore is measured at 13% of total OFDI stock in 2012, whereas investment in CLMV altogether accounted for 9% of Thailand's total OFDI stock.
These statistics show the reality of Thai OFDI is diverse, complex and evolutionary. Policymakers should have a comprehensive understanding of the variety of international investments Thai firms pursue in order to provide valuable support. Some firms may establish additional production facilities in neighbouring countries to benefit from cheaper production costs. Examples include the relocation of Thai textile firms to Cambodia, Laos, Myanmar or Vietnam in reaction to rising labour costs at home.
Others may opt to invest in capital and technology-intensive R&D facilities or distribution networks. They may choose to expand abroad by acquiring firms in more advanced economies. For example, Thai Union Frozen group's purchases of leading canned tuna brands in Europe and the US depict this latter type of investment.
Thai firms are investing far and wide in the global marketplace for a variety of reasons. Appropriate policy measures should not be formulated in favour of one region or certain types of firms over others. A policy framework that does not consider the broad range of Thai OFDI risks channeling Thai firms into certain types of activities or selected geographical destinations that may not be in their best interests. Such a policy framework may result in firms investing abroad in search of government subsidies and assistance rather than advancing their corporate competitiveness.
Government agencies do not know better than managers about what firms need. The role of the government in promoting OFDI should be to encourage more participation from those who feel they are ready for the challenge. This means reducing constraints both at home and in international markets to promote more competition, but not telling firms what to do and where to go.
The best way to make Thai firms more competitive is simply to make them compete more at home and abroad.
Pavida Pananond is Associate Professor of International Business at Thammasat Business School, Thammasat University. This article is partially based on 'Multinationals and Performance: Policy Implications', a research project co-authored with Alvaro Cuervo-Cazurra, D'Amore-McKim School of Business, Northeastern University and supported by the Thailand Research Fund.