Thailand as an FDI Oasis

THE Thai economy registered a robust growth of around 6.7 per cent last year. However, growth slowed down fairly in the first quarter of this year. Analysts, however, opine that there is no reason to raise alarm as the economic deceleration is in the main attributed to cyclical growth risks.

Moreover, it is the agriculture sector due to outbreak of the avian flu, as opposed to the industrial sector, that is affected. Indeed, the Thai economy has enjoyed growth for eight straight quarters, essentially driven by strong exports and consumer spending.

Singapore is one of the main sources of foreign direct investment (FDI) in Thailand, concentrated in the finance, petroleum and real estate sectors.

Why is Thailand looking good in terms of FDI, though like other Asean member countries, it faces a formidable competitor in China? The answer lies in various policy instruments that have been put in place to foster FDI since the Asian crisis and Prime Minister Thaksin Shinawatra's pro-growth posture, including the dual track policy he introduced in 2001, wherein innate domestic growth and FDI are accorded equal importance.

Typically, investor grievances about Thailand have included inconsistency and erratic FDI policies, undue delays and cumbersome application procedures, corruption, flagrant disregard for intellectual property rights and lack of a credible dispute resolution mechanism.

Today, by all indications, these obstacles have been reduced. More importantly, the political will to show the investment climate as being transparent and accountable is more evident than ever before.

Rule of law

The notion of rule of law is creating a buzz throughout the country. The Foreign Business Act 1999, replacing the Alien Business Law 1972, as well as the recently amended Investment Promotion Act 1977, brings fresh impetus to the investment scene. Both these laws enshrine the fundamental investment policies in a comprehensive and clear manner. Indeed, in tandem with Thailand's commitment to liberalise its service sectors in accordance with the General Agreement on Trade in Services under the World Trade Organization (WTO), several professional sectors, amongst others, accounting, legal and architecture have been liberalised.

Also, to some extent, the finance and telecommunication sectors have been deregulated. Foreign participation in these sectors, however, still has to be through joint ventures with domestic partners. Arguably, total liberalisation may not serve the short-term development interests of Thailand. Hence the country is adopting an incremental approach.

In a bid to promote an economic level playing field, the Trade Competitiveness Act 1999 has been promulgated. In recent years several corporations have been targeted by the authorities for alleged anti-competitive practices. Some critics argue that the law is limited in its scope and does not go far enough.

However, time is needed for Thai businesses and people to understand the implication of this law.

In general, the Thai government has not shrunk from its responsibilities. For instance, the draft Retail Bill meant to curb foreign dominance in the retail sector was withdrawn in November 2002. However, the privatisation programme remains lacklustre; employee unions of state-owned enterprises oppose privatisation. Thus the attempt to privatise the Electricity Generating Authority of Thailand met with failure.

In sum, political and socio economic conditions at the moment make it difficult for privatisations to take off.

A major bureaucracy reform exercise is underway in Thailand. It is hoped that the reforms would induce professionalism and integrity to the administrative system. The Board of Investment and the main ministries have been revamped. Investment procedures have been streamlined and strict time period prescribed at all stages, essentially to prevent dilatory tactics and to facilitate transparency and accountability.

On a broader context, to enhance general governance, a slew of institutions such as the Election Commission, the Constitution Court, the Administrative Court and the National Counter Corruption Commission have been established, invariably with their fair share of sympathisers and critics.

If these institutions act as effective and diligent watchdogs to safeguard the rule of law and serve as checks vis-a-vis bureaucratic practices, investor confidence in Thailand will be bolstered. Conversely, if they falter, Thailand's competitiveness will erode.

The improvement of corporate governance has also been given a fresh impetus, which will translate into better shareholder, corporate finance and related party rights. However, cumbersome corporate rules stifle risk-taking and creativity as well as increase transaction costs.

Land ownership by foreign entities is still restricted though greater flexibility is now exercised over land leases. Furthermore, labour regulations still tend to be relatively onerous, though labour disputes do not pose as a pronounced problem in Thailand.

With the strong assertiveness of civil society in Thailand, environmental concerns are gaining currency. Accordingly, environmental laws and institutions have been beefed up to adopt best practices in environmental management. Increasingly, apart from regulations, a key component to successful environment management is engagement of meaningful dialogue with all parties - essentially a bottom-up approach. It remains to be seen if Thailand is able to adhere to this strategy. Although Thailand still remains on the US Trade Representatives Special 301 watch list, significant changes and introductions have been made to the Thai intellectual property rights laws in recent years in order to comply with the Agreement on Trade Related Intellectual Property Rights, on matters related to patents, trademarks, copyrights, plant-variety protection, integrated-circuit layout, geographical indications and trade secrets.

Judiciary system

Here the work of the Central Intellectual Property and International Trade Court dubbed as a bright spot in the country's efforts to safeguard intellectual property rights by the US Trade Representative is noteworthy. Still there is an urgent need to improve the institutional capacity for registration and administration of intellectual property rights.

The existing judiciary system is plagued by undue delays, cumbersome procedures and relatively high costs. But there have been genuine efforts to develop an alternative dispute resolution machinery, particularly arbitration with international linkages. This is certainly a step in the right direction as it presents investors with a wider choice in the management of commercial disputes. Ultimately, the challenge is to provide a legal recourse that is independent, professional and cost-effective.

In general, Thailand's FDI governance today suggests seriousness about the country's role in the regional and international economy. Much effort is going into utilisation of laws and institutions that are pragmatic and responsive to economic development.

Notwithstanding this, there are some immediate problems looming, which could possibly dampen the encouraging inflow of foreign direct investments. These include: terrorists attacks; wide outbreak of Sars and bird flu; and, the sectarian tension in southern Thailand.

It is not just incentives that attract FDI. Indeed, some incentives are viewed under the WTO as creating trade distortions.

The all-encompassing FDI determinants are cost competitiveness, credible infrastructures, and rule-based norms that underpin accountability and transparency. The ultimate challenge for Thailand is to build on them, decisively.