"Thailand's Competitiveness: Meeting the Challenges of Globalization and Environmental Sustainability." (Pdf)

Thailand’s competitiveness: Meeting the challenges of globalization and environmental sustainability

Dr. Christian H. M. Ketels Institute for Strategy and Competitiveness Harvard Business School Asia Competitiveness Institute Lee Kuan Yew School of Public Policy The Role of Competitiveness

Quality of Life (Prosperity)

Economic Outcomes (Productivity)

Competitiveness

Competitiveness is not everything that matters, but without competitiveness everything that matters is much harder to achieve 2 Traditional Views on Achieving Competitiveness

• Conceptual research has increasingly focused on endogenous growth-models • Empirical literature has looked at “deep” drivers of prosperity differences; recent work at unsustainable “growth spurts”

• The general principles (Washington consensus, etc.) derived from this work provide often insufficient guidance to policy makers

• Emerging consensus for policy advice to become more context-, i.e. country-specific • But without a clear framework, the move from general recipes to country-specific approaches opens the door for old-style intervention • The competitiveness framework offers a systematic structure to make evidence-based policy choices in a concrete situation

3 © Christian Ketels, 2009 The Competitiveness Framework

Microeconomi c C ompetiti veness

Sophistication Quality of the of Company State of Cluster National Operations and Development Business Strategy Environment

Macroeconomic Competitiveness

Social Quality of Infrastructure Macroeconomic and Political Policy Institu tions

Endowments

Natural Geographic Size Resources Location

4 Macroeconomic Competitiveness

Social Quality of Infrastructure Macroeconomic and Political Policy Institutions

Political institutions Monetary policy • Set the context for policy • Ensure the effectiveness of price decisions on all dimensions of signals for economic choices competitiveness Fiscal policy Rule of law • Keep spending within government’s • Provide fundamental conditions intertemporal budget constraint for the functioning of markets • Reduce cyclical fluctuations of the economy Basic human capacity • Provide fundamental capacity Financial system management for economic activities beyond • Avoid the build-up of unsustainable the subsistence level internal and external imbalances

• Institutions critical in the long-term but hard to change in the short-term • Macroeconomic policies more amendable to reform but often unsustainable if not matched by policy changes in other areas 5 © Christian Ketels, 2009 Microeconomic Competitiveness

Sophistication Quality of the of Company State of Cluster National Operations and Development Business Strategy Environment

• Reach the highest level • Increase the level of • Create the conditions of productivity and productivity and that allow companies to innovation possible innovation companies reach a high level of given the overall can reach for a given productivity and environment business environment innovation

• Many individual factors and significant systemic interactions among them; ppgrioritizing and seqqguencing of actions is a crucial task • Many parts of the economy and society play an important role, including several parts of government, companies, universities, and platforms for collaboration; coordination and allocation of responsibilities ikis key

6 © Christian Ketels, 2009 Microeconomic Foundations of Development Typical Company Weaknesses in Emerging Economies

Corporate Direction Strategic Positioning Activities

• Opportunistic pursuit • Focus on the local • Labor intensive parts of new businesses, market of the value chain are seizing profitable • Wide product lines emphasized opportunities in serving all local industry • Low investment in whatever area they segments machinery, equipment, arise • Price is the primary brands, R&D, and • Strategy driven by basis of competition training government and other • Foreign partners relationships • Low input costs are primary competitive provide many inputs, • Conglomerate advantage know how, and financing business groups compete i n hi g hly • Emulate foreign best disparate businesses practices • Imitate products and services of foreign and other domestic competitors

7 Productivity and the Business Environment Context for Firm Strategy and Rivalry

z A local context and rules that encourage investment and sustained upgrading Factor –e.g., Intellectual property Demand (Input) protection Conditions Conditions z Meritocratic incentive systems across all major institutions z Open and vigorous competition z Presence of high quality, among locally based rivals z Sophisticated and demanding local specialized inputs available customer(s) to firms z Local customer needs that anticipate –Human resources those elsewhere Related and –Capital resources z Unusual local demand in specialized –Physical infrastructure Supporting segments that can be served –Administrative infrastructure Industries nationally and globally –Information infrastructure

–Scientific and technological z Access to capable, locally based suppliers infrastructure and firms in related fields –Natural resources z Presence of clusters instead of isolated industries

• Successful economic development is a process of successive economic upgrading, in which the business environment in a nation evolves to support and encourage increasingly sophisticated ways of competing Source: Michael Porter 8 National Export Portfolio Thailand, 1997 to 2007 3.5% Change In Thailand’s Overall Fishing & Fish Products World Export Share: +0.044% Information Technology (-2.2%, 6.5%)

3.0% Plastics 77 Motor Driven Products 2.5%

Construction Materials rket share, 200 aa 2.0% Jewelry, Precious Metals and Collectibles Entertainment and Reproduction Equipment

Sport Lighting and Electrical Equipment Agriculture 1.5% Building Fixtures and Equipment Publishing world export m world export FtFootwear ( -1. 53%) Analytical Instruments and Printing Apparel Furniture Textiles Leather Automotive Power Generation Processed Foods 1.0% Thailand’s Average World Thailand’s Communications Aerospace Vehicles Export Share: 1.08% Equipment Chemical Transportation and Logistics ProductsConstruction Services Metal, Mining and Manufacturing Business Production Technology 0.5% Services Medical Devices Prefabricated Enclosures and Structures Oil & Forest Products TobaccoGas Biopharmaceuticals Heavy Machinery Communication Services Marine Equipment Financial Services 0.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% Change in Thailand’s world export market share, 1997 to 2007 Exports of Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics9 Database and the IMF BOP statistics. US$4.3 Billion = The Thai Automotive Cluster: The Geographic Dimension

Pathumthani • Thai Suzuki Motor Chachoengsao • and 39 suppliers • Toyota Motor Thailand • Isuzu Motors (Thailand) Ayyyudhaya • Honda Automobile (Thailand) Samutprakarn • Toyota Motor Thailand • Isuzu Motors (Thailand) Bangkok • Siam Nissan Automobile • Bangchan General Assembly • Siam V .M .C . Automobile • Y.M.C. Assembly • Thai Auto Work • Thai Honda Manufacturing • International Vehicles • and 232 suppliers • Thai Yamaha Motor • Thai Swedish Assembly • Hino Motors (Thailand) • Thonburi Automotive Chonburi Assembly Samutsakorn • 55 suppliers • Thai Rung Union Car Rayong • Auto Alliance (Thailand) • General Motors (Thailand) • BMW Manufacturing Samutprakarn (Thailand) • 158 suppliers • Kawasaki Motors Enterprise (Thailand) • MMC Sittipol • and 41 suppliers

Source: Vanichseni: Development of Automotive Industry Master Plan (2002) 10 © Christian Ketels, 2009 The Thai Automotive Cluster: The Activity Dimension

AblAssemblers Steel Distribution

Plastics Motor- Passenger Pickup cycles Cars Trucks Finance Rubber&Tires Testing Electronics

Components and Module Makers Specialized Glass (1st tier) Consultants Engines, Drivetrains, Steering, Suspension, Brake, Wheel, Tire, Leather & Bodyworks, Interiors, Electronics and Electrical Systems Fabric Services Parts (2nd & 3rd tiers) Machinery Stamping, Plastics, Rubber, Machining, Casting, Forging, Function, Electrical, Trimming Globally Competitive

Regionally Competitive Tools Nationally Significant

Nationally Insignificant Mold&Die Education and GtGovernment ThilTechnical AitiAssociations Jig&Fixture Institutions

Source: Sasin-team analysis, 2003 study 11 Clusters and Competitiveness

Static Dynamic (Leverage) (Upgrade)

ENHANCE

Other Dimensions of Clusters Competitiveness

ENABLE

• Co-location of companies • Economic fundamentals and other institutions that set the productivity affecting the potential for level companies can reach local value creation within a within a given geographic given economic field through location spillovers and linkages

12 © Christian Ketels, 2009 Clusters Enhancing Competitiveness: Leveraging Existing Assets

Productivity Local Externalities

• Common labor markets New • Specialized suppliers Business •Specialized infrastructure Formation • Knowledge Spillovers • Competitive pressure Innovation

13 © Christian Ketels, 2009 Enabling the Emergence of Clusters POLICY

Location Existing Clusters

Business Environment

Natural Resources Entrepreneurs

Con tex t for compe tition across regi ons

14 © Christian Ketels, 2009 Clusters Enhancing Competitiveness: Upgrading Capabilities

BETTER (Competitiveness)

FINISH

MORE (Agglomeration)

15 © Christian Ketels, 2009 Target Public Policy at Clusters

Business Attraction Education and Workforce Training

Science and Technology Infrastructure Export Promotion (e.g., centers, university departments, technology transfer) Clusters Market Information Setting standards and Disclosure

Specialized Physical Environmental Stewardship Infrastructure Natural Resource Protection

• Clusters provide a framework for organizing the implementation of public policy and public investments towards economic development

16 What are Cluster Initiatives?

Cluster initiatives are collaborative activities by a group of companies, public sector entities, and other related institutions with the objective to improve the competitiveness of a group of interlinked economic activities in a specific geographic region

• Upgrading of • Upgrading of cluster- company operations specific b usi ness and strategies across environment a group of conditions companies

• Strengthening of networks to enhance spill-overs andthd other economic benefits of clusters 17 © Christian Ketels, 2009 Clusters and Structural Change

• Cluster policy is most effective if it focuses on existing clusters

BUT

• For many economies the challenge is to broaden or change the portfolio of clusters they are in

Direction of structural change Management of structural change • Natur al str uctura l c ha n ge occur s •Depen din g on th eir maturi ty, through growth in fields related to clusters differ in their likelihood of activities already present success and policy needs • Encourage diversification into • Manage clusters as a portfolio related clusters o Existing clusters o Emerging clusters o New clusters 18 © Christian Ketels, 2009 What is Different about Cluster-Based Policy?

Broader Set of Industries

Public-Private Regional Collaboration Perspective Productivity Focus

Demand- Enhancing driven Own Strength Apppproach

19 © Christian Ketels, 2009 Policy Levels Influencing Competitiveness

World Economy WTO

Broad Economic Areas South-East Asia

• The business environment at a given location is the cumulative outcome of GfGroups of GtMkGreater Mekong policy at all levels of geography Neighboring Nations Region • Microeconomic competitiveness raises the importance of lower levels of geography Nations Thailand • The allocation of responsibilities across levels of geography is a crucial policy challenge

States, Provinces Thai provinces

Metropolitan and Rural Areas Bangkok

20 © Christian Ketels, 2009 The Process of Economic Development Shiftinggp Roles and Responsibilities

Old Model New Model

• GtGovernment didrives econom ic • EidltiEconomic development is a development through policy collaborative process involving decisions and incentives government at multiple levels, companies, teaching and research institutions, and private sector organizations

•Competitiveness is the result of both top-down and bottom-up processes in which many individuals, companies, and institutions take relevant decisions

21 © Christian Ketels, 2009 Observations so Far

• Many things matter for prosperity, but there are systematic differences between groups of factors – Macroeconomic strengths create opportunities – Microeconomic strengths translate opportunities into results

• The increasing importance of microeconomic factors requires a qualitatively different policy approach – From identifying right policy targets to sequencing the right policy areas – From narrow interventions to integgprated policies – From “horizontal” policies to a mix of general and cluster-specific policies – From national policies to leveraging all geographic levels of government – From public-sector driven policy to public-private dialogue

• Economies need to make progress on all dimensions, but trying to move on all fronts simultaneously often leads to failure – CfCrucial role of country analysis to arrive at a context-specific action strategy without compromising on standard economic logic

22 © Christian Ketels, 2009 From Analysis to Action

Analysis Prioritization Integration Roll-Out

Integrated set Internal of activities

National

Weaknesses Strengths Economic Strategy Targeted Economy- Campaigns: - + & wide roll- ege.g. Cluster, out FDI, or SEZ National Threats Opportunities Competitiveness Action Agenda

External Institution with cross-cutting authority

NtiNationa l Competitiveness Council

23 © Christian Ketels, 2009 Defining a National Economic Strategy

National Economic Strategy

• What can be the unique competitive position of the country/region given its location, legacy, endowments, and potential strengths? – What is its unique value as a business location? – What role can it play with neighbors? – IhtIn what range of fltd clusters does th thtie nation excel?

Achieving and Maintaining Parity Developing Unique Strengths with Peers

• What are the key potential strengths that • What weaknesses must be neutralized to the country/region must preserve or build? achieve parity with peer countries?

• A national economic strategy provides strategic orientation on the type of business environment that the country/region aims to provide; it is not a plan that sets production or investment targets • A national economic strategy is only effective, if it reflects a consensus view; it fails, if its implementation is based on government action and incentives/sanctions alone 24 Launching a Targeted Campaign Objectives, Institutions, and Mandates

Singapore Ireland Finland

• Attract foreign • Turn Ireland into the • Turn Finland into a investment to create EU base for US knowledge-driven jbjobs companies economy • EDB as statutory body • Combination of • Science and with wide-ranging specialized agencies Technology Policy mandate (finance, • IDA focused on Council chaired by skills, in fras truc ture, attracting investors the Prime Minister to rules and regulations • Enterprise Ireland coordinate activities focused on upgrading across the government domestic companies • Economy • FfForfas providing po licy support on enhancing • Education the business • Science environment • Regions •Finaacence

25 © Christian Ketels, 2009 Roll-Out of Competitiveness Upgrading Activities and Institutions

Costa Rica Latvia • Opportunity to attract investment • Significant foreign investment inflows from Intel after independence and EU • Presidential working group with wide accession ppyolicy mandate • Foreign investors concerned about weakness of local institutions driving competitiveness upgrading • No special deals for Intel; all improvements made available to other companies as well • Foreign Investors Council (FICIL) • Improvement of electricity supply driving general upgrading agenda quality in the Central Valley • Annual High-Level meeting with the • Open Sky -policy to increase air entire Latvian cabinet and one-on- transport connectivity one with key ministers • Radically increased efficiency of • Working groups on specific issues customs procedures (taxes, workforce skills, customs)

26 © Christian Ketels, 2009 From Insight to Action

What to do How to get it done

• Consensus • Institutional structure • Leadership • External environment

27 © Christian Ketels, 2009 Where to Start: The Crucial Role of Analysis

Equality Productivity Purchasing Quality of Life Power

Environmental OtOutcomes Labor utilization conditions

Entrepppreneurship IiInnovation Intermediate Indicators Investment FDI flows Exports/Imports

Knowledge Competitiveness Corruption Economy Governance Global Doing Business Competitiveness Logistical Performance Report Index

28 © Christian Ketels, 2009 Prosperity Performance Selected Lower and Middle Income Countries PPP-adjusted GDP per Capita, 2008 ($USD) $30,000 Japan ($34,590) Taiwan ($36,400) Slovenia UAE Greece ($30,650) Israel New Zealand South Korea Czech Asian countries $25, 000 Cyprus RbliRepublic Other countries Bahrain Saudi Arabia Oman Portugal Slovakia Estonia $20,000 Hungary Trinidad & Tobago Lit huan ia Poland Latvia Croatia Libya Russia $15,000 Panama Chile Argentina Mexico Malaysia VlVenezuela Turkey Bulgaria Uruguay Belarus Iran Romania Costa Rica Kazakhstan Lebanon South Africa $10,000 Brazil Dominican Republic Thailand Colombia Peru Belize Algeria Bosnia Ecuador Tunisia Ukraine Albania Guatemala Guyana Egypt China Jordan $5,000 Paraguay Sri Lanka Georgia El Salvador Bolivia Honduras Indonesia Nicaragua Philippines Papua New Pakistan India Vietnam Laos Cambodia GiGuinea (-3. 15%) Bangladesh $0 0% 2% 4% 6% 8% 10% 12% 14% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2004 to 2008 Source: EIU (2009), authors calculations 29 Comparative Economic Performance Real GDP Growth Rates Over Time

Compounded annual growth rate (CAGR) of real GDP 12%

10% Vietnam 8% China Thailand 6% India Malaysia 4% Indonesia Brazil 2% Philippines

0% 1980-1989 1990-1999 2000-2004 2005-08

Source: EIU (2009), authors calculations 30 Income Inequality

Gini Index Selected Countries 60

Note: Most recent Gini index data available for each country (1997 – 2007) Source: World Bank, World Development Indicators, 2009 31 Environmental Quality

EPI Score, 100 = best value

100 Objectives Policy Categories

40 Thailand Asia Pacific 20 4th Income Group

Source: Yale Environmental Performance Index 2008 32 Decomposing Prosperity

Prosperity

Domestic Purchasing Per Capita Income Power

• Consumption taxes • Efficiency of local industries • Level of local market competition Labor Labor Productivity Utilization

• Skills • Working hours • Capital stock •Unemployment • Total factor productivity • Participation rate – Efficiency – Population age profile – Technology

33 © Christian Ketels, 2009 Comparative Labor Productivity Real GDP per employee (PPP adjusted US$), 2008 Selected Countries $90,000 USA

Ireland $80,000 Hong Kong Asian countries France Other countries $70,000 UK Kuwait Australia Taiwan Greece Saudi Arabia Italy Germany Spain Singapore Japan Oman $60,000 Israel Slovenia $50,000 New Zealand United Arab Emirates Korea Slovakia Cyprus Hungary Czech Republic

Croatia $40,000 Poland Lithuania TkTurkey Mexico Chile Malaysia Latvia Russia $30,000 Argentina Romania Iran South Africa Kazakhstan $$,20,000 Peru Brazil Algeria TiiTunisia Egypt Jordan Thailand Ukraine Sri Lanka (8.1%) $10,000 Syria Morocco Philippines Indonesia China (10.1%) Yemen Pakistan India Cote d’Ivoire Cameroon Nigeria Bangladesh Vietnam Cambodia Kenya Senegal Ghana Mozambique $0 -2%0%2%4%6%8% Growth of real GDP per employee (PPP-adjusted), 2004 to 2008

Source: authors calculation Groningen Growth and Development Centre (2009),34 EIU (2009) Understanding Productivity Growth

Economy Sector

Skill Upgrading, Structural Capital Deepening, Change and TFP

Firm

Entry, Exit, and Internal Restructuring

35 © Christian Ketels, 2009 Total Factor Productivity Growth Selected Countries

Last 15 years Last 6 years Last 3 years

China China China

High India Hong Kong Hong Kong Singapore Turkey India Thailand India Philippines Vietnam Philippines Turkey South Korea Thailand Malaysia Malaysia Malaysia Indonesia Turkey Indonesia Vietnam Philippines Singapore Thailand Hong Kong Vietnam South Korea Indonesia South Korea Brazil Low Brazil South Africa Singapore Mexico Brazil Mexico

Source: EIU (2009) 36 © Christian Ketels, 2009 Labor Force Utilization Participation Rates, Selected Countries Labor Force Participation Rate, 2008 65%

China Kuwait Asian countries 60% Singapore Other countries United Arab Emirates IldIceland Papua New Guinea Thailand 55% Norway Vietnam Canada Australia Germany Sweden Russia Denmark New Zealand Latvia Japan Hong Kong Ireland Finland Estonia 50% USA UK Cyprus Spain Slovakia South Korea Brazil Taiwan Lithuania Netherlands Indonesia Ukraine Slovenia France India 45% Greece Macedonia Poland Chile Bangladesh Austria Mexico Hungary Ital y Colombia Argentina Malaysia Israel 40% Philippines Sri Lanka (-3.59%) Croatia Moldova South Africa Cote d’Ivoire Bulgaria 35% Nigeria Tunisia Turkey Albania Iran Egypt 30% Pakistan Libya Yemen

Jordan Saudi Arabia Syria 25% -3%-2%-1%0%1%2%3%4%5% Change in Labor Force Participation Rate, 2004 to 2008

Source: Economist Intelligence Unit (2009) 37 Indicators and Enablers of Competitiveness

Productivity

Domestic Domestic Entrepre- Trade FDI investment innovation neurship

Competitive Environment

38 © Christian Ketels, 2009 Trade Openness Selected Countries Exports/Imports (% of GDP), 2008 +44% +83% -7% 100%

+41% +34% Change in trade as % of +21% 80% GDP since 2003

60% 0% +36% Exports Imports

-23% +17% +17% 40% -8% -1% +8% +19% +1% +11% 20% -1% -9%

Source: EIU (2008), authors’ analysis 39 Thailand’s Export Share Trends

World Export Market Share (current USD) 2.0% Processed Goods Semi-processed Goods 1.8% Unprocessed Goods Services 1.6% TOTAL

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

00%0.0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: UNComTrade, WTO (2009) 40 Inbound Foreign Investment Performance Stocks and Flows, Selected Countries Inward FDI Stocks as % of GDP, Average 2003 - 2007 80% Netherlands Estonia Singapore (160.1%, 64.7%) 70% Asian countries Other countries Hungary Chile Cyprus 60% Vietnam Switzerland New Zealand Sweden Slovakia 50% ChRbliCzech Republic Denmark

Portugal Cambodia 40% UK Australia Spain Thailand Philippines Canada Latvia South Africa Poland Egypt Iceland (46.7%) Finland Lithuania France Israel 30% Syria Colombia Romania Laos Mexico Norway Austria Slovenia Brazil Russia 20% Germany UAE Turkey Greece US Ital Malaysia South Korea A Saudi Arabia Chinay Oman 10% Indonesia Sri Lanka Pakistan India Japan Iran 0% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007

Source: UNCTAD, World Investment Report (2009) 41 Domestic Fixed Investment Rates Gross Fixed Investment Selected Countries as % of GDP, 2008 36% China (40.8%) India Vietnam (44.6%) Nicaragua Romania (11.1%) Asian countries Qatar Bulgaria (12.6%) Other countries Ghana 32% Croatia Belarus Jordan

Latvia Estonia Spain Australia Singapore 28% Korea Kazakhstan Iran Slovenia Indonesia Bahrain Yemen (8.7%) Oman Thailand Slovakia Lithuania Algeria Ukraine Chile Sri Lanka Colombia Czech Rep. Tunisia 24% Iceland UAE Albania New Zealand Japan Mexico Argentina Canada Cambodia Lebanon Austria France Russia Ireland Syria Portugal Nigeria Denmark Poland Greece Cyprus Kenya Taiwan Italy Netherlands Norway South Africa Hungary Finland 20% Malaysia Turkey Egypt Pakistan Hong Kong Germany Saudi Arabia Malta Brazil Kuwait Israel Papua New Guinea UK 16% Philippines USA

12% -4% -2% 0% 2% 4% 6% 8% Change in Gross Fixed Investment (as % of GDP), 2004 to 2008

Note: Includes inbound FDI Source: EIU, 2009 42 Innovative Capacity Innovation Output of Selected Countries Average U.S. patents per 1 million popul ati on, 2003 -2007 9 Slovenia

Hungary 5

4 Malaysia Czech Republic 3 Croatia Estonia South Africa Greece Romania Brazil Belarus 2 Chile Mexico Russia Poland India Argentina Portugal Egypt China 1 Indonesia Saudi Thailand Arabia Philipp ines 0 Colombia -30% -20% -10% 0% 10% 20% 30% 40% CAGR of US-registered patents, 2003 – 2007 50 patents = Source: USPTO (2008), EIU (2008) 43 Thailand’s Competitiveness Profile 2009

GCI (55) Micro (44) Macro (61)

Business Company Social Infra- Macroeconomic Environment Quality Sophistication structure and Pol. Policy (52) (48) (45) Institutions (68)

Demand Conditions (55) Political Institutions (68)

Context for Strategy and RlRule o fLf Law (68) Rivalry (43)

Related and Supporting Human Development (70) Industries (40)

Worse than 65 Factor Input Conditions 60 - 65 (40) 50 - 60

Admin (53) Comm. (51) 45 - 50

Innov. (49) Capital (35) Logistic. (33) Better than 45 44 Governance Indicators Selected Countries Best country ithin the wor ld Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule of Law Control of Corruption

Index of Governance Quality, 2008

Worst country in the world

Note: Sorted left to right by decreasing average value across all indicators. The horizontal line corresponds to the median country’s average value across all indicators. Source: World Bank (2009) 45 Factor (Input) Factor (Input) Conditions Conditions Thailand’s Relative Position 2009

Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita

Financial Market Infrastructure Advanced Communications Infrastructure Soundness of banks 18 Personal computers per 100 population 56 Financing through local equity market 19 Internet users per 100 population 52 Ease of access to loans 22 Regulation of securities exchanges 27 Innovation and Skills Financial market sophistication 28 Utility patents per million population 55 Domestic credit to private sector 29 Quality of scientific research institutions 50 Venture capital availability 32 Quality of math and science education 45

Physical Infrastructure Administrative Infrastructure Quality of air transport infrastructure 20 Reliability of the Police 56 Qualit y o f road s 24 Decen tra liza tion of economi c poli cymaki ng 52 Quality of port infrastructure 29 (Low) Time required to start a business 52 Quality of electricity supply 30 (Low) Burden of customs procedures 45

Change up/down of more than 5/10 ranks since 2002

Note: Rank versus 74 countries; overall, Thailand ranks 54th in 2008 PPP adjusted GDP per capita and 40th in Global Competitiveness Source:Institute for Strategy and Competitiveness, Harvard University (2009) 46 Ease of Doing Business Thailand, 2009 Ranking, 2009 (of 183 countries) Favorable Unfavorable 120

100

Source: World Bank Report, Doing Business (2009/10) 47 Workforce Skills and Labor Market Needs

Educational Attainment, Time Required to Fill Job Math, 8th Grade Vacancy in Production

Taiwan Korea Brazil Singapore Hong Kong Thailand Japan Hungary Russia Korea US Slovenia India Unskilled Australia Skilled Sweden Malaysia Russia Israel Thailand TkTurkey Turkey Indonesia Egypt Indonesia Colombia

250 350 450 550 650 0 2 4 6 8 10 Average Score Number of Weeks

Source: TIMSS (2007), World Bank (2007) 48 Context for Firm Strategy Context for Strategy and Rivalry and Rivalry Thailand's Relative Position 2009

Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Openness Openness Strength of investor protection 11 (Low) Tariff rate 63 Business impact of rules on FDI 23 Restrictions on capital flows 56 Prevalence of foreign ownership 43 Incentives and flexibility (Low) Rigidity of employment 16 Competition Cooperation in labor-employer relations 21 Efficacy of corporate boards 56 (Low) Impact of taxation on incentives to 24 Intellectual property protection 53 work and invest Regulatory quality 50 Extent of market dominance by business 42 Competition groups Intensity of local competition 27 Distortive effect of taxes and subsidies on 40 Quality of competition in the ISP sector 32 competition Effectiveness of antitrust policy 36 Prevalence of trade barriers 38 Change up/down of more than 5/10 ranks since 2002 Low market disruption from state-owned 39 enterprises

Note: Rank versus 74 countries; overall, Thailand ranks 54th in 2008 PPP adjusted GDP per capita and 40th in Global Competitiveness Source:Institute for Strategy and Competitiveness, Harvard University (2009) 49 Openness to Trade Rank (157 countries) Selected Countries, 2008 160

140

120

100

Source: Index of Economic Freedom (2008), Heritage Foundation 50 Related and Supporting Related and Supporting Industries Industries Thailand’s Relative Position 2009

Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita

Extent of cluster policy 21 Local availability of specialized research 52 and training services Local supplier quantity 22 Availability of latest technologies 43 Extent of collaboration in clusters 27 State of cluster development 30 Local availability of process machinery 36 Local supplier qualit y 37

Change up/down of more than 5/10 ranks since 2008

Note: Rank versus 74 countries; overall, Thailand ranks 54th in 2008 PPP adjusted GDP per capita and 40th in Global Competitiveness Source:Institute for Strategy and Competitiveness, Harvard University (2009) 51 Share of World Exports by Cluster World Market Share Thailand, 2007 1.0% -1.5%

1.5% - 2.5% Fishing & Enter- Textiles Fishing tainment Prefabricated Hospitality > 2.5 Products Enclosures & Tourism Agricultural Products Transportation Furniture Processed & Logistics Building Food Aerospace Fixtures, Construction Vehicles & Equipment & Materials Jewelry & Distribution Information Defense Services Services Precious Tech. Lightning & Heavy Metals Electrical Construction Business Analytical Services Education & Equipment Services Instruments Knowledge Power Forest Medical Creation Generation Products Devices Communi- Publishing cations & Printing Biopharma- Equipment Financial Heavy ceuticals Services Motor Machinery Production Driven Chemical Technology Products Products Tobacco Oil & Automotive Gas Aerospace Mining & Metal Engines Manufacturing Apparel Plastics

Leather & Related Sporting Marine Products & Recreation Equipment Footwear Goods

Note: Clusters with overlapping borders have at least 20% overlap (by number of52 industries) in both directions. Clusters and Cluster Efforts in Thailand

• Clear evidence of significant cluster presence in the Thai economy • Areas of strengths are largely in unrelated areas • Focus on five clusters based on 2003 government decision – Analysis at the time focused on situation in these clusters, not on the selection • Limited progress on mobilizing an effective institutional architecture to move from diagnosis to action – Creation of structures like the Thailand Automotive Institute positive steps, but limited to selected clusters – Organization of government policies around clusters very limited • Limited if any progress of creating mechanisms for translating cluster- specific competitiveness upgrading into economy-wide benefits

• Cluster efforts remain a significant opportunity for Thailand, but a step- change in the policy approach is needed to achieve real impact

Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Strategy and operations Organizational Practices Degree of customer orientation 18 Willingness to delegate authority 56 Value chain breadth 35 Reliance on professional management 46 Company spending on R&D 37 Extent of staff training 42 EtExtent of mark ktieting 38 EtExtent of fi incenti ve compensati on 41

Internationalization Strategy and operations Breadth of international markets 23 Production ppprocess sophistication 51 Prevalence of foreign technology 35 Nature of competitive advantage 46 licensing Capacity for innovation 46 Control of international distribution 37 Firm-level technology absorption 41 EtExtent of regi onal sal es 37 Extent of incentive compensation 41

Change up/down of more than 5/10 ranks since 2008

North • Significant differences in 73% of average prosperity, structure, and income Northeast competitiveness 70% of average income

• Duality of locally elected and centrally appointed officials at the local and regional level Central 102% of average income

• Does the current structure Greater Bangkok provide for an efficient 187% of average interplay across the different income levels of government? – Allocation of responsibilities – Allocati on of capabiliti es South 106% of average income Source: 2007 Household Socio-economic Survey, National 55 Statistical Office of Thailand (accessed Nov. 2009) Thailand’s National Economic and Social Development Plan

• Sets out objectives and principles The 10th National Economic and • Provides the foundation for Social Development Plan (2007-2011) government investments and legislative action The 9th National Economic and Social Development Plan

The 8th National Economic and Social • Does the Plan define Development Plan competitive strengths to be achieved? The 7th National Economic and Social • Is the private sector Development Plan sufficiently involved in the design and execution?

56 © Christian Ketels, 2009 Competitiveness Rankings Over Time Rank New GCI Methodology (Stab(Stabesale sam people of countries) 15

Mal aysi a 25 China

35 Thailand

45 IdIndones ia India 55

Vietnam 65 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Unpublished data from the Institute for Strategy and Competitiveness, 57Harvard University (2009) Thailand’s Competitiveness Agenda Priority Action Areas

• Strengthen the robustness and efficiency of public institutions • Address the mismatch between existing and required workforce skills • Tackle remaining weaknesses in business rules and regulations • Remove remaining barriers to foreiggpn competition and strengthen the legal framework to enable more effective domestic rivalry • Activate clusters as an effective mechanism to deliver government policies • Clarify the roles and responsibilities across different levels of government • Mobilize public-private collaboration at the level of clusters, regions, and the national economy • Launch a discussion on the dimensions of national value proposition for Thailand

Creating competitive Prosperity advantages

Thailand Argentina S Korea

Exploiting comparative advantages

Time

• The concept of competitiveness

• Thailand’s Competitiveness: From Assessment to Action

• Competitiveness and the New Global Economy

• CiidEilSibiliCompetitiveness and Environmental Sustainability

60 Impact of the Global Economic Crisis

China Sweden Financial Sector- Singapore Export- Oriented Driven Mexico Vietnam Thailand Brazil US UK Venezuela Ireland Russia Iceland

Hungary Ukraine

Estonia External RlEttReal Estate- Hungary Spain Finance- Argentina Driven Ukraine Dependent Latvia TkTurkey

Economic Sustainability of Current Prosperity High

THAILAND Philippines

Indonesia Malaysia Vietnam

Low

Economic Sustainability of Current Prosperity

High Moderate Low

• High short term • Short term • Short term impact given impact depends impact depends high openness on openness on openness

• Quick recovery • Recovery likely • Recovery only possible to be prolonged with reforms

• RiRemain on • BlBalance cr iiisis • UthiiUse the crisis course management as a promoter with upgrading of change

• When the global financial crisis translated into a dramatic slowdown of global trade, Thailand was hard hit due to its export-orientation – Thailand’s financial system was relatively resilient after the fundamental changes in the wake of the Asian Financial crisis

• Recovery is now relatively swift because of the balance between Thailand’s competitiveness and prosperity

• The challenge is to remain focused on upgrading Thailand’s competitiveness while the improving economic situation reduces the pressure to act

• Unsustainable trade imbalances in the global economy will adjust over time – There is some risk of increasing protectionism in key export markets – Adjustment in response to changes in exchange rates and capital flows seems more likely

• While Thailand’s trade has become more ASEAN/Asia-focused over time, the ultimate market for many exports so far remains in the US or Western Europe

• The relative share of Asia in the ggygglobal economy is growing, a process that has been accelerated by the global economic crisis

• Competitiveness will only increase in importance • A robust economic strategy needs to take a balanced view of different segments of the economy – Export-oriented activities will remain important: support the market-driven reorientation towards Asian markets – Domestic consumption will gradually gain in importance, especially for jobs: ensure the upgrading of activities serving the domestic market • Regional collaboration will gain in importance – Strengthening the potential of markets in neighboring countries – Leverage the potential for cluster collaboration in regional cluster networks • The abili ty to dea l w it h externalhl shock s ibis becom ing more cruc ilial; avoiding shocks through less openness and specialization is not viable – Skill level of the workforce – Flexibility of the economy – Social security mechanisms

• The concept of competitiveness

• Thailand’s Competitiveness: From Assessment to Action

• Competitiveness and the New Global Economy

• Compet iti veness and E nvi ronmental S ustai nabili ty

67 Competitiveness and Ecological Sustainability

• Ecological sustainability is conceptually fully consistent with the overall objective of competitiveness, i.e. creating an environment where ppyppgroductivity supports a high standard of livin g • The Porter hypothesis identified the synergistic relationship of the two – Tough environmental regulations can lead companies to become more productive – Tough environmental regulations can trigger innovations that provide companies with competitive advantages

BUT

• Short-term trade-offs can exist through the costs of ecological activities, especially for activities exposed to global competition • Competitiveness and ecological sustainability have many overlaps but are two separate objectives 68 © Christian Ketels, 2009 Economic Policy towards Environmental Sustainability

Context for Firm Strategy and Rivalry

z Upggggrading programs for FtFactor companies, especially SMEs Demand (Input) z Environmental taxes, Conditions Conditions subsidies, and process standards z Research grants with an z Demanding domestic product environmental focus Related and standards, including early Supporting adoption of demanding z Targeted workforce skill upgrading Industries international standards z EiEnvironmen tlttal taxes or z Financing facilities for z Creation of specialized relevant public and subsidies research institutions private investments z Cluster working groups on environmental sustainability

• Achieving higher levels of environmental sustainability requires innovation • Innovation will only occur, if complementary changes are made across different dimensions the business environment • The policy challenge is to set the pace and mix of these policies in ways that balances environmental and economic goals in the short-term 69 Ecological Sustainability of Clusters

• Themarktket envi ronmen t will crea te increas ing oppor tun ities for environmental products and services o Relative prices for energy, natural resources, and pollution o Government policies ()(taxes, subsidies, regulations) o Consumer preferences

• The market for the products • The demand for products, of specific clusters is likely services, and processes that to grew significantly, e.g. are environmentally sound is renewable energy going to increase across all technologies clusters • Competition in these • Environmental issues will markets is going to be affect competition on all intense;;y only the most markets; no cluster will be productive clusters will successful unless it actively succeed addresses them

• Competitiveness and sustainability have to be pursued in tandem • Thailand’ s environmental track -record is relatively solid, but more a reflection of its overall profile than of explicit policies in the past – Issues in areas like air quality and the pollution in industrialized zones have been gggrowing over time • The national strategy for environmental sustainability needs to integrate policies across different business environment dimensions – A narrow focus on branding Thailand will not be sufficient; the global competition in this space is becoming relentless • Cluster policy needs to be an important tool for achieving environmental sustainability – Pursue environmental issues within existing clusters – Encourage the development of new clusters that target emerging environmental markets and relate to areas of current Thai strengths

Internal External

• Competitive advantage • Competitive advantage (or resides so le ly iidinside a disa dvan tage ) res ides company or in its partly in the locations at industry which a company’s business units are based • Competitive success • Cluster participation is an depends primarily on important contributor to company chihoices competitiveness

Source: Michael Porter 72 Thailand: Looking Ahead

ISSUES

Thailand has all Domestic opportunities to meet the • The Middle Income Trap challenges of the future…

• Policy Implementation … if Thais across all • Political Volatility segments of society and economy collaborate.

Global Competitiveness ishas a • NlblNew global economy tbtonational be a na goal,ti tilona lnot goa al , not a political one • Climate Change political one