In the past, with cheap labour and abundant resources at home enabling them to produce goods cheaper than many countries, Thai companies may not have had many reasons to move production overseas. As time passes, things change and this may no longer be the case. We may now have to rethink.
To compare Thailand with other Asian countries, in 2009, Malaysia and Korea had relatively high stock of direct investment to GDP of 41.74 and 13.89 per cent, respectively, while the percentage figure for Thailand is only 6.88. This number may be suggesting that Thai manufacturers still lag behind in terms of moving production bases abroad to capture the opportunities outside their home country.
There are a few good reasons why companies may consider making an investment overseas. First is to lower production costs by seeking access to cheaper resources, such as labour or raw materials, as well as to have access to a larger market to increase sales revenue, and help achieve economy of scale resulting in lower average production costs. The second reason is perhaps to enhance productivity by way of acquiring new technology. Other reasons could be to take advantage of the trade or investment incentives offered by the host country or, on the other hand, to avoid trade barriers put up by the host country as well as a third country. In addition to the above, it could serve as a way for businesses to diversify risks.
Japanese producers, in the past 20-25 years, has been relocating their production bases to the Asian emerging markets to take advantage of cheap labour in order to lower production costs, while also making direct investments, as well as forming strategic alliances, in advanced economies, in order to expand their markets. The fact that the yen had been appreciating in value helped make overseas investment cheaper and served as a catalyst for this strategic move.
Thai companies may be faced with a somewhat similar situation to Japanese companies in the past. The fact that the Thai baht has been on an appreciating trend makes it harder for companies exporting goods overseas to compete on price. We now need to think about how to create value to our products, how costs can be reduced, how efficiency can be improved, and how we can maintain competitiveness in the long-run
At present, the government as well as authorities see the importance of this adjustment and have a policy to support efforts of the business sector in improving its competitiveness. On the part of the Bank of Thailand, foreign exchange regulations relating to investing and lending abroad have been relaxed in order to provide more flexibility to the business sector in their business decisions. Thai companies now can invest in or lend to their associate and subsidiary companies abroad as deemed necessary, while Thai individuals are allowed to invest in or lend to overseas companies in an amount up to $100 million (Bt3 trillion)per year, without seeking prior permission from the Bank of Thailand. The Department of Export Promotion also has a facility to provide in-depth information for those who are interested in investing abroad.
Given the above reasons supporting overseas investment, coupled with the current strength of the Thai baht which makes investment abroad now cheaper than it used to be, companies with potential should no longer wait and seize this opportunity to expand their businesses abroad in order to increase their long-run competitiveness.
The opinions expressed in this article are the author’s own and do not necessarily reflect the official opinion of the Bank of Thailand.