Local innovation vital to sustain growth

Local innovation vital to sustain growth

Thailand's economic development derives mainly from cheap labour. The manufacturing sector relies upon foreign technology rather than creating its own industry. With comparatively low labour costs and government support for infrastructure and investment incentives, the Thai manufacturing sector has thrived as a main driver of economic growth in the past few decades.

But this development model may not be able to continue to sustain growth in the long term. Rising wages over the years hinder Thailand's competitiveness in the region. In addition, as the demographic is shifting towards a larger, ageing population than its developing-country peers, it is also likely that it will face a severe labour shortage in the near future.

Economic development without a technology industry also leaves Thailand with limited trade gains because a large chunk of the added value goes to the tech developers. Moreover, to maintain a competitive edge, the minimum wage has been suppressed, aggravating inequality. It follows that domestic purchasing power has never been adequate to spur the economy. Instead, Thailand has to put faith in exports as a main engine of growth, greatly exposing it to global economic volatility.

Lessons from more successful countries such as South Korea, Taiwan, Chile and Malaysia indicate that to move forward sustainably, development must aim to generate domestic value through a knowledge-based economy and innovation. To achieve this, the government needs to play a vital role in transforming the economic structure.

For Thailand, public policies related to the knowledge-based economy are numerous. For example, there are tax incentives for research and development (R&D) expenditure, and the Thailand Science Park was established by the National Science and Technology Development Agency (NSTDA) to serve as a centralised innovation hub.

However, the effectiveness of these policies is limited. Based on three major R&D indicators - namely, scientists and engineers per million population, R&D expenditure to GDP and a ratio of private R&D to public R&D - we are all well below other countries in a comparable development stage. It is clear the current policies will not lead the economy to the desired goal.

Although the quality chasm in present policies needs to be addressed, we believe that bridging the gap alone will not be enough to make the knowledge-economy happen. Based on our analysis of the reasons behind the decision to invest in R&D by Thailand's SET-listed companies that we, along with three other TDRI researchers have studied, there are some other fundamental factors that have undermined Thai companies' ability to engage in R&D activities.

SET-listed companies are Thailand's top-notch businesses who should have the strongest capability to invest in R&D and absorb the risk of loss from possible failures. As it turns out, they invest very little in R&D. We found there are at least two government-related factors leading to this problem: the high share of sales to the public sector and special licences to operate in certain industries.

Many businesses gain from the public sector either directly, indirectly or both. Direct benefits derive from government procurement. The value of the government's electronic auctions (e-auction) amounted to over 300 billion baht last year. The auctions are not perfectly competitive.

Close relationships between companies and officials play a key role in the likelihood of winning a deal. The public sector provides companies with a secure revenue stream.

On the other hand, issuing special licences brings indirect benefits to businesses. Stringent process and specific qualifications of applicants - believed to be in favour of certain companies - hamper effective competition in industries where special licences are required to operate legally.

Hence, businesses that operate in these industries face less pressure to improve themselves than those in other industries; therefore, they have much less willingness to invest in R&D.

Due to the reasons above, the government must do more than just implementing a bunch of policies to promote Thailand's move towards a knowledge-based economy.

It has to reconsider the appropriateness of the special business licence in sectors including energy, telecommunication and finance. Those licences should be given based on well-grounded reasons independent of political motives.

Besides, the government needs to improve its transparency and fairness throughout the procurement process. It should also change procurement qualifications to support the economic development strategy. For instance, it should help businesses who choose to invest in R&D instead of merely those firms that only acquire foreign innovations.


Nonarit Bisonyabut is a research fellow at the Thailand Development Research Institute (TDRI). Chatra Kamsaeng is a researcher at TDRI. Policy analyses from the TDRI appear in the Bangkok Post on alternate Wednesdays.

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