World economic integration. The rise of China and India. Rising global competition. How can We Prepare Thai firms for the Challenge of Globalization?

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1 How can We Prepare Thai firms for the Challenge of Globalization? World economic integration Strengthening The Competiveness of Thai Firms: What Needs to be Done? Monetary Policy Group Bank of Thailand 9 August 006 ก ก Let a Hundred Flowers Bloom, Let a Thousand Schools of Thoughts Contend. ~Mao Tse-Tung All is transient; nothing is permanent. ~Buddha Shakyamuni The rise of China and India Rising global competion Policy Objective: Refrain from picking winners and losers. Create an environment in which all firms can raise their competiveness. Allow winners to emerge. Build a foundation for successful integration into the global marketplace. Theory and Empirics: Competion Causes Growth 3 Key Questions 4 Competion Productivy Efficiency Innovation Anti-competive Policy Excessive Regulations Industrial Policy Stagnant Growth Does product market competion foster firm Total Firm Productivy (TFP)? Does product market competion foster firm TFP growth? Does product market competion foster firm innovation? Outline 6 Database: Productivy Investment Climate Survey 7 I. Motivation & Background II. Measuring Firm Total Factor Productivy (TFP) III. What are the Characteristics of High TFP firms? IV. Does Market Competion Foster TFP? V. Regression Analysis: TFP and Competion VI. Policy Implications VII. Conclusion Productivy Investment Climate Survey (NESDB, World Bank, Productivy Instute) Panel Data of Manufacturing Firms: 1,75 small, medium, and large firms, mostly outside the stock exchange, in 6 regions from wh an employee module in 004 The PICS survey responses are gleaned from interviews wh CEOs, human resource managers, and a sample of workers. ยางแปรร ป เคร องใช ใน คร วเร อน เฟอร น เจอร เคร องจ กรกล อาหารกระป อง อาหารแช แข ง น าตาลทราย เส นด าย ผ าผ น พลาสต ก เคร องน งห ม เคร องใช ไฟฟ า ช นส วน อ เล กทรอน คส อ เล กทรอน คส ช นส วนยานยนต Source: Productivy Investment Climate Survey 1

2 A Competive Firm is a Highly Productive Firm 9 TFP reflects technical know-how and abily in using inputs TFP growth is the main source of long-run growth Calculating firm TFP: we use the TFP calculation method of Levinsohn-Petrin (003) which estimates a Cobb-Douglas production function using intermediate inputs as a proxy to distinguish between observed and unobserved productivy shocks II. Measuring Firm Total Factor Productivy Real Value Added TFP Labor Real Y = Α L β K γ y = βl + γk + u Physical Capal y = βl + γk + ϖ + e Estimated TFP Productivy shock Diversy in Firm TFP Levels 10 Heterogeney in firm TFP levels across firms and industries Frequency ln Firm Total Factor Productivy Source: Productivy and Investment Climate Survey Histogram: Firm TFP Levels III. Characteristics of Highly Productive Firms What determines firm TFP? How can policymakers encourage firm TFP to rise? Creative Destruction 1 Foreign Ownership Correlates wh High TFP 13 TFP e e e+09.00e+09.50e+09 Young Firms are More Productive Firm Age Source: Productivy and Investment Climate Survey Firm Total Factor Productivy e e e+09.00e+09.50e+09 Equy Share of Foreign Ownership Correlates wh High TFP Creative destruction refers to an ongoing process of technological revolution in which new technology replaces the old. Technological progress is what is important, not the firm per se which is a temporary construct Foreign Ownership Source: Productivy and Investment Climate Survey

3 Vibrant Markets Create both Winners and Losers 14 How are Exporters Created? 15 High performance firms tend to be in vibrant markets. Winners and losers tend to occur together. For winners to emerge, we must accept that losers will also emerge as markets reallocate away from unproductive firms to productive firms. Sales Growth Exporting firms tend to be more productive. Exporters begin exporting quick after entry reflecting the importance of self-selection, rather than productivy learning. Ln Firm Total Factor Productivy e e e+09.00e+09.50e+09 Young Exporters are More Productive Firm Age Source: Productivy and Investment Climate Survey Percent Most Exporters Begin Exporting Whin 4 years Product Launching Time Source: Productivy and Investment Climate Survey Market Entry (Weeks) How to Measure Market Competion? Market Concentration. Contestabily IV. Product Market Competion & Firm Total Factor Productivy 3. Market Segmentation 4. Economic Rent 1. Market Concentration 18 Market Competion is Associated wh High TFP 0 Herfindahl Index: a measure of market concentration. Calculated as Herfindahl index HI jt = n S i j t i= 1 Market share Range: [0-10,000] Moderately concentrated: [ ] Highly concentrated: [ ,000] Firm Total Factor Productivy Total Factor Productivy and Herfindahl Index Herfindahl Index Data Source: Productivy and Investment Climate Survey 3

4 . Contestabily 3 Contestable Markets Promote TFP 4 Are Market Contestable? Theory: threat of entry makes firms behave Barriers to Entry Number of licenses Number of weeks Firm Total Factor Productivy Market Entry (Number of Certificate) Data Source: Productivy and Investment Climate Survey Contestable Markets Promote TFP 5 Poor Countries Regulate Business the Most 6 Firm Total Factor Productivy Market Entry (Number of Week) Data Source: Productivy and Investment Climate Survey Entry Procedures lowincome lowermiddleincome uppermiddleincome highincome Source: Doing Business in 004, World Bank 3. Market Segmentation 7 Market Segmentation Decreases Firm TFP 8 Price Dispersion Productivy / Competion The spread between domestic and export prices for a firm s good reflects market segmentation, price controls, and tariff and non-tariff barriers. Domestic P < 1 P Export Price Control 1 Domestic P > 1 Export P Tariff, Non-Tariff Barriers & Market Power Price spread Firm Total Factor Productivy Total Factor Productivy and Price Dispersion Price Dispersion Data Source: Productivy and Investment Climate Survey 4

5 4. Economic Rent 9 Less Capal Rent, More TFP 30 Rent is the difference between what is realized in the current use and opportuny cost, the income offered in the next, best alternative use of the factor. Calculation of Capal Rent (normalized on value added): Capal Rent = profs before tax + depreciation + interest payment cost of capal x capal stock ln Total Factor Productivy Growth and ln Rent Low rent High rent ln Capal Rent ln Firm Total Factor Productivy Fted values Data Source: Productivy and Investment Climate Survey Competion Fosters Research and Development 31 Electronics Processed Foods R&D Expenses : Total Expendure R&D Expenses : Total Expendure V. Regression Analysis: Product Market Competion, TFP and TFP growth Capal Rent Capal Rent Source: Productivy and Investment Climate Survey Source: Productivy and Investment Climate Survey Panel Regression Models 33 Regression Results 34 Does product market competion foster efficiency and TFP growth? Firm TFP (Panel, Random Effects) y = f ( competion, characteristics ) Independent Variables Capal Rent Price Control Firm TFP Firm TFP Growth n/a Herfindahl -- Firm TFP growth (Cross-section) y i = f ( competioni, characteristicsi ) Exporter Foreign Ownership Age

6 Competion Policy: The Firm s Perspective 36 Rising Competion VI. Policy Implications Lobby Regulatory Capture Anti-competive Policy Self-Improve Innovation Productivy Growth Policy: Markets and Instutions 37 Policy: Competion Law 38 Trade Competion Commission Fair representation of interest groups: consumers, small firms Independent from business interest Transparent Accountable Competion Law Equal treatment of all firms Define explic collusion agreements Use quantative measures of concentration as aids Patent Law Foster innovation in sectors near the world technology frontier Let Markets Work Market Entry and Ex Streamline and facilate Ease foreign ownership restrictions in industries Abolish Price Controls, gradually Maintain Flexible Factor Input Markets Maintain wage flexibily Frequency Would Firms Invest More in R&D if Copyright Laws are Strengthened? Electrical Appliances Machinery and Equipment Yes No Frequency Yes No Source: PICs Source: PICs Conclusion 40 VII. Conclusion Does product market competion foster firm TFP? Yes Does product market competion foster firm TFP growth? Yes Does product market competion foster firm innovation? Yes, in certain sectors. Market competion can help Thailand meet the challenges of globalization and long-run growth. 6