Download - Thailand aims to use the new investments promotion strategy to overcome the middle income trap
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On the 1st of January 2015, the seven-year investment promotion strategy
(2015-2021) (7YIPS) came into effect in Thailand after being approved by the
Board of Investment (BOI). 7YIPS is intended to help overcome the middle
income trap by tapping foreign direct investments (FDI) and technological know-
how, promoting new value-added sectors, endorsing investments in R&D, and
decentralising investments into lower income regions.
In order to achieve this goal, modifications were made to the previous strategy
on three aspects of the investment incentives: the scope, the geography, and
the basis of incentives. In the 7YIPS, the government has chosen 10 target
industries for investment promotion and has clearly defined business activities
into categories A1-A4, B1 and B2, with business activities in category A1
receiving the most attractive incentives due to their knowledge-oriented
business activities. Secondly, the new strategy has abolished incentives under
the zoning scheme, which classified geographic incentives only into three zones
based on the distance from central Thailand. Under the business zoning scheme,
higher incentives were given to investments further away from the central area.
Nevertheless, in the 7YIPS, more structure was given to geographic incentives by
forming regional business clusters to specialise in specified industries. Lastly,
apart from activity-based incentives, merit-based incentives were introduced in
order to encourage R&D and to direct investments into designated geographic
locations.
Nontawan Kraitat
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7-Year Investment Promotion Strategy Structure
10 Target Industries
5 Existing Industries: Next-generation cars; smart electronics; affluent tourism; agriculture and biotechnology; and food processing 5 New Industries: Industrial robotics; logistics and aviation; biofuels and biochemical; digital economy; and the medical sector
Type of Incentives
Activity-Based Categories Merit-Based
Sub-Category of Incentives
A1-A4 B1 & B2 Competitiveness Enhancement
Decentralisation (20 Provinces
with Lowest Per Capita Income)
Industrial Area Development
(10 Border Provinces)
Thailand Caught in the Middle-Income Trap for
Decades
Thailand is believed to have fallen into the middle-income trap from around
1994-1995, after years of continuous drops in the poverty headcount ratio. Since
1986, poverty in the country has declined significantly from 67% to 11% in 2014
alongside the increase in income. However, Thailand is considered to be stuck in
the middle-income trap where a country is successful in improving its economy
from being a low-income to a middle-income country, but fails to progress into
becoming an advanced economy and has a low prospect of moving up the value
chain due to a lack of technological development.
For many decades, Thailand has built its economy on cheap labour, exploitation
of natural resources, borrowed technology, and reliance on export markets.
While this economic model has helped Thailand out of the low-end of the
income spectrum, it has also led to the degradation of the environment, caused
income disparity within the country, and has yet to push Thailand up into the
high-income segment.
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Poverty Headcount Ratio (1986 - 2010)
Source: The Thailand Development Research Institute (TDRI)
Despite Being Recently Ranked as Upper-Middle Income Nation, Thailand’s R&D Expenditure Remained
Relatively Low (2011)
Source: World Bank Organisation
52.849.7
39.2
35.3
22.9
18.2
22
25.6 26.523.6
18.9
14.612 10.7 11.5 10.4 10.4
25.323.7
20.5
12.19.9
6.8 7.1 8.5 8.6 8.56.4
4.6 3.6 3.3 3 3 2.6
0
10
20
30
40
50
60
Per
cen
tage
Municipal Non-Municipal
3.74
3.38
2.15 2.06
1.79
1.201.06
0.39
24,156
46,204
53,121
10,369
5,574
4,159
10,428
5,539
-
10,000
20,000
30,000
40,000
50,000
60,000
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Korea, Rep. Japan Singapore World China MiddleIncome
Malaysia Thailand
Lin
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rap
h:
GD
P P
er C
apit
a (U
SD C
urr
ent)
Bar
Gra
ph
: R
&D
Exp
end
itu
re (
% o
f G
DP
)
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New Target Industries Expected to Foster New S-
Curve
The government estimated that, in the medium-term, the development of the
existing five targeted industries would create the first S-Curve and increase the
combined revenue of these industries by 70%, while the development of new
industries would increase it by a further 30%. However, in the long-term, the
government believes that investments and development of the new targeted
industries would enable Thailand to build a technological edge and diversify its
competitive advantages, leading to the new S-Curve, which could enhance
Thailand’s economy sustainably.
Forecasted First and New S-Curves Created by Target Industries
Source: Ministry of Industry Thailand
To support the 7YIPS and encourage investments in the 10 target industries,
eight business clusters were formed, six of which were categorised as super
clusters, while the other two are normal clusters. Business clusters also promote
the concentration of interconnected businesses, in order to enhance the level of
vertical and horizontal cooperation among enterprises and strengthen the
industrial value chain.
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Apart from agriculture and biotechnology, all of the super clusters are associated
with at least one of the target industries. There are a total of 29 provinces
involved in the business clusters. The clusters with the highest number of
associated provinces are agro-processing products, textiles and garments,
automotive and parts, and E&E and telecommunication equipment. Agro-
processing products and textiles and garments cover the most provinces as they
are two of the most traditional industries fundamental to Thailand’s economy.
Provinces with the most overlaps between clusters are Chonburi and Rayong,
which are present in four different clusters. Chonburi is home to Thailand’s
largest and primary seaport and has the widest motorway connection to
Bangkok among other provinces outside of the Bangkok Metropolitan Area,
making it a logistically strategic province to be located in. Chonburi is also a
tourist destination, famous for its beaches; Pattaya City attracts not only tourists
but also expats and migrants. Meanwhile, Rayong is Chonburi’s neighbouring
province, allowing it to easily access Chonburi’s logistics facilities.
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Relationship Between Target Industries and Business Clusters
Super Clusters Clusters
Automotive and Parts
E&E, and Telecom Equipment
Eco- friendly Petrochemicals and Chemicals
Digital-based
Food Innopolis
Medical Hub
Agro-processing Products
Textiles and Garment
Next- Generation Cars
Smart Electronics
Affluent Tourism
Agriculture And Bio-technology
Food Processing
Industrial Robotics
Logistics And Aviation
Biofuels And Biochemical
Digital Economy
Medical Sector
Regions
Ayutthaya, Pathum Thani, Chonburi, Rayong, Chachoengsao, Prachinburi, Nakhon Ratchasima
Chonburi and Rayong
Chiang Mai and Phuket
To be announced
Chonburi, Rayong and 17 other Provinces
9 Provinces
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Activity-Based Incentives Prioritise Knowledge-
Based Activities
Activity- and merit-based incentives make up the foundation of incentives for
investing in business clusters. Activity-based incentives serve to promote
investments in businesses that enhance the country’s knowledge, technology,
and infrastructure, in a prioritised manner depending mainly on the level of
technology utilised. As such, investments in A1 business activities, which require
the highest knowledge and technology, receive the most incentives.
Regarding tax-incentives, depending on the initial investment value, the cap for
CIT exemption is determined for investments in all business activities categories
apart from A1. The specified value of the CIT exemption could be utilised and
deducted from the company’s annual CIT expenses over the number of years
acquired for CIT exemption, until either the cap is reached or the CIT exemption
duration is up. However, investments in the A1 business category would receive
an unlimited amount of CIT exemption for eight years, making it the most
attractive business activities category for investment.
Investors are eligible for activity-based incentives regardless of investment
location and industries, as long as they fall into one of the business activity
categories, which cover over 200 activities. Investments in business clusters may
be granted up to a maximum of 8 years of CIT exemption as shown in table 3.
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Activity-Based Incentives Categories
Incentives
Examples in Light Industry
Corporate Income Tax (CIT) Exemption
Exemption of Import Duty on Raw Materials
Exemption of Import Duty on Machinery
A1 8 years (without cap)
Yes Yes
Creative product design and development center - Projects must consist of 2 components, as
follows: - Information system for design
- Conceptual design and creation system. - Projects must consist of one of the following
components: - Engineering design system - Prototype design creation and performance testing system
- Prototype standard testing anduser acceptance testing system.
- At least 70% of total employees in the project must be Thai.
- Projects must have expenses for salaries for creative product design and development personnel of at least 1,500,000 baht per year.
A2 8 years Yes Yes
Manufacture of technical fiber or functional fiber - Projects must be approved by related agencies, e.g. Thailand Textile Institute, National Innovation Agency.
A3 5 years Yes Yes
Manufacture of functional yarn or functional fabric - Projects must be approved by related agencies,
e.g. Thailand Textile Institute, National Innovation Agency.
A4 3 years Yes Yes
Manufacture of other yarn or fabric - Projects with investments or expenditures on
research, design or product development of not less than 0.5% of the project’s total revenue of
the first 3 years combined.
B1 - Yes Yes Manufacture of musical instruments
B2 - Yes No Manufacture of gypsum board or gypsum products*
Source: Thailand Board of Investment (BOI) *For Mineral, Ceramics and Basic Metals Industry
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Merit-Based Incentives are Used to Encourage
R&D and to Channel Investments to Designated
Regions
There are three types of merit-based incentives: competitive enhancement,
decentralisation, and industrial area development. Merits on competitive
enhancement serve to encourage knowledge-based investments and
investments in R&D, which are fundamental for breaking out of the middle
income trap. Depending on the percentage of such investments of the total
expenditure, investors may be granted up to three additional years of CIT
exemption on top of what is granted from activity-based incentives.
Investments in business clusters are comparable to that of investments under
the decentralisation and industrial area development scheme, as they are all
geographic merit-based. However, the incentives for investing in business
clusters surpass that of the other two schemes, as they directly support the 10
target industries for sustainable economic growth. Merits for decentralisation
and industrial area development aim to facilitate cross-border trade, the
dispersing of income, and boost the local economy of lower income provinces.
To encourage investments in these regions, investments in the 20 provinces with
the lowest per capita income could increase CIT exemption up to three
additional years, and up to one year for investments in 10 chosen border
provinces. There are three overlapping provinces between these two incentive
schemes, which are Nakhon Phanom, Mukdahan, and Sa Kaeo. On the other
hand, there are four overlapping provinces between the business cluster scheme
and the other two geographical schemes (Kanchanaburi, Chiang Rai, Trad, and
Songkhla), all of which are border provinces, strategic for trade and cheaper
labour from neighbouring countries.
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Provinces Under Decentralisation and Industrial Area Development Scheme
Provinces
Decentralisation: 20
Provinces with Lowest
Per Capita Income
Kalasin, Chaiyaphum, Nakhon Phanom, Nan, Bueng Kan, Buri Ram, Phrae,
Maha Sarakham, Mukdahan, Mae Hong Son, Yasothon, Roi Et, Si Sa Ket,
Sakhon Nakhon, Sa Kaew, Sukhothai, Surin, Nong Bua Lamphu,
Ubon Ratchatani and Amnatcharoen
Industrial Area
Development: 10 Border
Provinces
Tak, Mukdahan, Sa Kaeo, Trat, Songkhla, Chiang Rai, Nong Khai, Nakkhon,
Kanchanaburi, Narathiwat
To advocate investments in super clusters (refer to table 2), investors are eligible
for incentives from both the BOI and the Ministry of Finance (MoF). Depending
on the business activity, investors may be granted up to eight years of CIT
exemption with an additional 5 years of 50% CIT exemption from the BOI. Under
normal circumstances, investors are only eligible to a maximum combined CIT
exemption of eight years under the 7YIPS, irrespective of business activity, value
of R&D, and investment location. However, as a means of encouraging
investments in super clusters, the MoF may also grant additional years of CIT
exemption, of up to 15 years, and personal income tax exemption for
international specialists to work in the clusters. In terms of non-tax incentives,
the BOI would consider granting permanent residence to leading specialists and
permission for foreigners to own land to implement the promoted activities.
Investments in Renewable Energy Take the Lead
in 2015
The announcement of the 7YIPS in 2014 has led to an influx of investment
project applications around the end of 2014, which impacted the number of
applications in 2015. By the end of 2015, 684 applications were submitted for
incentives under the 7YIPS programme, which represented 65.9% of the total
number of applications, and 54.6% of the total investment value. Out of the
applications submitted, over 100% (816 applications) were approved for
incentives, as some projects were granted incentives even without filing
applications. This demonstrates the keenness of the Thai government in
endorsing projects in target industries. Moreover, the total value of approved
projects under the 7YIPS constituted 32.9% of the total approved projects.
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Investment Applications Submitted and Approved 2014 - 2015 Applications Submitted Applications Approved
2014 2015 2014 2015
No. Value (THB
billion)
No. Value (THB
billion)
No. Value (THB
billion)
No. Value (THB
billion)
Investment Projects 3,197 1,956.5 1,038 218.1 1,662 724.7 2,237 809.4
FDI Projects 1,573 1,023.0 559 106.5 912 483.5 1,151 493.7
Applications Submitted for 7-Year Investment Promotion Strategy
- - 684 119.0 - - 816 266.0
Source: Thailand Board of Investment (BOI)
Among the approved applicants for incentives from the 7YIPS programme,
investment projects in renewable energy received the highest number of
approvals and had the highest investment value. From 816 projects approved for
incentives, up to 30% were projects in renewable energy, which accounted for
62.6% of the total investment value. This investment category falls under the
biofuels and biochemical target industry and corresponds to the eco-friendly
petrochemicals and chemicals business cluster, designated at the Chonburi and
Rayong provinces. Following renewable energy, investments in science,
technology and innovation had the second highest investment value, which
contributed 11.4% to the total investment value under the 7YIPS scheme.
Investments in this category cover all 10 of the target industries, and thus could
be located in multiple clusters.
Approved Projects Under the 7YIPS
Number of Projects Approved
Investment Value (THB billion)
Digital economy 183 18.9
Trading nation 127 3.03
Logistic development 59 6.97
Science, technology, and innovation 126 30.24
Human resource development 4 0.35
Renewable energy 248 166.59
Agricultural products and related services 36 17.96
Tourism promotion 16 9.53
Eco-friendly products and related services 7 9.26
Other targeted industries 10 3.14
Total 816 266.0 Source: Thailand Board of Investment (BOI)
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Will Thailand Succeed in Escaping the Trap?
Through the 7YIPS, Thailand is trying to push itself up the value chain and out of
the middle income trap, but it is not the only country aiming to do so. With the
recent implementation of the ASEAN Economic Community (AEC) in 2015,
competition to become more advanced is extremely high in Southeast Asia.
Malaysia is one of the nations that has also been stuck in the middle-income
trap for over a decade. Moreover, for as long as Thailand has, Malaysia too has
been trying to fight its way out. In 2014, Malaysia announced that it plans to
achieve the high-income status as defined by World Bank by 2020.
Even though some would consider exiting the middle-income range to be an
“economic miracle,” a few Asian nations have been successful in escaping the
trap, such as Taiwan, Hong Kong, Japan, South Korea, and Singapore. In the
1950s, Thailand’s economic development was comparable to that of South
Korea. However, South Korea had chosen to focus more on establishing its own
internationally competitive industries to reduce reliance on exports. By the
1990s, South Korea became a high income nation with some of its brands, such
as Samsung, LG, and Hyundai being large players in the global arena in their
respective industries. Therefore, there may be some hope left for Thailand in the
coming years.
While the 7YIPS may be one of the keys for Thailand to become an advanced
economy, there are other crucial aspects that should not be overlooked. One
factor that contributed to South Korea’s success in escaping the middle-income
trap was said to be its human capital, which was a result of its high-quality
education system. Meanwhile, Malaysia’s failure to progress could be partially
attributed to the country’s political instability.
Remodeling economic policies is a positive step forward for Thailand. However,
it is far from being the only measure that the country must undertake. In
addition to economic policy, the country must look toward reform in other areas
in order to build a solid foundation for sustainable economic growth and thus
break out of its longstanding predicament as a middle-income nation.