2008 Foreign Investor Confidence Survey Report. Office of the Board of Investment. Summary Report. Submitted to

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1 2008 Foreign Investor Confidence Survey Report Summary Report Submitted to Office of the Board of Investment By Centre for International Research and Information 7 July 2008

2 Contents Executive Summary 1 Main Types of Industries Investment Plans 1 Factors Affecting Investment Decisions 2 Current Competitiveness of Thailand 2 Foreign Investors Confidence Level in Thailand 2 Thailand s Competitiveness Compared with Other Countries 3 Overall Satisfaction with the Services of Government Agencies 3 Current Problems 3 Recommendations 3 Chapter 1 General Information Objectives Data Collection Methods Status of Companies Nationality of Major Foreign Shareholders Type of Business classified by nationality Value of Firms Assets in Sources of Sales Revenue 10 Chapter 2 The 2008 Confidence Level of Foreign Investors in Thailand Foreign Investors Confidence about the Situation of Thailand at the Company and Industry levels and the Overall Business Environment Confidence Level about Thailand s Situation for at the Company level, Industry level and the Overall Business Environment Comparing the Business Sentiment Index with the Current Competitiveness of Thailand The Investment Plans and Main Reasons Affecting Planning Decisions 24 Office of the Board of Investment i

3 Chapter 3 Factors Influencing Investment Decisions in Thailand Factors Influencing Investment Decisions in Thailand Significance of Factors Influencing Investors Confidence 27 Chapter 4 Thailand s Competitiveness Compared to Other Countries 32 Chapter 5 Foreign Investors Satisfaction with Government Sector s Services 34 Chapter 6 Analysis of In-Depth Interviews with Foreign Investors Opinions about Thailand s Situation in Problems/Obstacles 36 Chapter 7 Recommendations Services that the BOI should improve or provide to investors Development of the Education System in Thailand The Government should Campaign to Build Work Discipline The Government should Provide Incentives for Foreign Investors to register in the Stock Market 39 Office of the Board of Investment ii

4 List of Tables Table 1.1 Classifications of Foreign Firms by Type of Business and Nationality 8 Table 2.1 Foreign Business Sentiment Index at the Company Level 17 Table 2.2 Index of Business Sentiment about Market Demand and Thailand s Factor Endowments 18 Table 2.3 Index of Business Sentiment about the Overall Business Environment 20 Table 3.1 Relationship between Factors Influencing the Investor s Confidence and Their Sub-Factors 28 Office of the Board of Investment iii

5 List of Figures Figure 1.1 The Percentages of BOI-promoted Businesses and non BOI-promoted Businesses 7 Figure 1.2 Percentages of Foreign Investor by the Nationalities of Major Foreign Shareholders 7 Figure 1.3 Percentages of Foreign Business by the Total Value of Firm s Assets 9 Figure 1.4 Sources of Sales Revenue by Type of Industry 10 Figure 2.1 Thailand s Situation at the Company Level in 2007 (Profit) 11 Figure 2.2 Levels of Foreign Investor Confidence about Thailand s Manufacturing Factors and Operating Business Status in Figure 2.3 Thailand s Overall Business Environment in Figure 2.4 Comparing the Business Sentiment Index in terms of Market Needs, Competition, Factors of Production, and Cost of Production with Thailand s Current Competitiveness 21 Figure 2.5 Comparing Overall Business Environment Confidence to Thailand s Current Competitiveness in Figure 2.6 Investment Plan for Figure 3.1 Factors Influencing Investment Decisions 27 Figure 3.2 Level of Significance of Factors Influencing Investor s Confidence 29 Figure 4.1 Thailand s Competitiveness, compared with Other Countries 33 Figure 5.1 Foreign Investor s Satisfaction of Government Sector s Services 34 Office of the Board of Investment iv

6 Executive Summary The 2008 Foreign Investor Confidence Survey was conducted from April to June The questionnaires were distributed to 4,500 foreign investors, which included 2,500 BOI-promoted and 2,000 non BOI-promoted companies. Officials from 482 firms responded, giving a response rate of 10.7 per cent. The respondents represented 359 BOI-promoted companies and 108 non BOI-promoted companies. Due to incomplete data, 15 responses were not included in this study. Aside from the quantitative study, in-depth interviews were also conducted with foreign investors from 7 types of industries: (1) Agriculture and Agricultural products; (2) Minerals, Basic metals, and Ceramics; (3) Light Industries (textiles, jewelry, leather); (4) Metal Products, Machinery and Transport Equipment; (5) Electronic Industry and Electrical Appliance; (6) Chemicals, Paper and Plastics; and (7) Services. The interviews involved 22 foreign investors from European countries, India and Taiwan. A summary of the quantitative and qualitative results is presented here. Main Types of Industries The industry distribution of foreign-owned businesses responding to this survey was: 38 firms in the Agriculture and Agricultural Products Industries (8.1%), 22 firms in the Minerals, Basic Metals, and Ceramics Industries (4.7%), 59 firms in the Light Industries (12.6%), 101 firms in the Metal Products, Machinery and Transport Equipment Industries (21.6%), 81 firms in the Electronic and Electrical Appliance Industries (17.3%), 80 firms in the Chemicals, Paper and Plastics Industries (17.1%) and 86 firms in the Services Industry (18.4%) Investment Plans With regard to their Investment Plans for , 54.8% of foreign investors would maintain their current investment levels, 39.2% would expand their investment levels, 5.6% would reduce their investment levels, and 0.4% would withdraw their investments from Thailand. The decision to withdraw was reported to be due to internal problems of the firm and change of business strategy by the shareholders. The two types of business expansion made by foreign investors would include minor expansions, accounting for 28.7%, and major expansions, accounting for 10.5%. A similar pattern was shown in the group of businesses planning investment reductions; 4.7% of foreign investors would make minor reductions while 0.9% would make major reductions in their business activities. It was found that 95.5% of companies planning minor expansion would expand investment in Thailand while the remaining 4.5% would expand in other countries, such as China, Vietnam and the Philippines. Among businesses planning major expansion, 94% would increase the level of investment in Thailand while 6% would expand elsewhere, such as China, Vietnam, and Eastern European countries. Thailand Board of Investment 1

7 Factors Affecting Investment Decisions The economic situation was the most important factor for foreign investors when deciding to invest in Thailand. Elements included in this factor were market demand, competitors, policy environment, inflation and interest rates, and the currency exchange rates. Factors considered as less important were Thai law and regulations, including BOI investment incentives and other government support. The least important factor affecting foreign investors decisions were access to the sources of fund, whether access to equity financing or access to debt financing. Current Competitiveness of Thailand Foreign investors found Thailand s geographical location the most attractive factor in terms of doing business in this region. The competitive factor that ranked second was demand in the domestic and international markets. Foreign investors were confident about the positive trend for marketing their products and services. The overall business environment of Thailand was still considered as positive, particularly the privileges provided by the BOI, which was an important factor affecting their investment decisions. Foreign Investors Confidence Level in Thailand Foreign investors had more confidence in Thailand s current situation than during the previous year, especially in terms of increased profits for the current and upcoming years. Other factors that led to increased investor confidence were overall earnings, domestic sales, export value, and the liquidity level. The value of investment had increased insignificantly since the previous year. The trend for the upcoming year would be positive, reflecting fairly strong confidence in Thailand. Detailed evaluation revealed that in comparison to the previous year, investors level of confidence increased for some groups while it decreased for the other groups. The strong confidence of foreign investors was the result of several factors, such as a more stable foreign exchange rate and a weaker value of the Thai baht compared to the previous period. Another factor that played a crucial role in foreign investors confidence was the democratic system of Thailand. Whether the government was appointed or elected, it has been able to show more transparency in managing the country, especially when compared to other countries, such as China and Indonesia. The reported decrease in some investors confidence was due partly to the ongoing protests during the period when the study was conducted. Interviews with the foreign investors revealed that the protests against the government had little impact on their confidence level. Investors viewed the protests as a normal part of the country s democratic system. Factors having a negative impact on the level of confidence of foreign investors during the current period were uncertainty about fiscal and monetary policies in Thailand. This included inflation and interest rates, which were viewed as having negative effects on the purchasing power of consumers. In addition, Thailand Board of Investment 2

8 the increase in production costs due to the increased fuel prices has affected the country s competitiveness. Thailand s Competitiveness Compared with Other Countries Thailand was perceived as competitive in terms of production capabilities and capital market when compared to competitors, such as India, Indonesia, Malaysia, Vietnam, and China. In terms of economic conditions, Thailand had a greater advantage than Indonesia but less advantage compared to China. When compared with other competitors, differences were insignificant, but when evaluating infrastructure, law and regulations, Thailand had more competitive advantages than other countries, especially Indonesia. Overall Satisfaction with the Services of Government Agencies This year, the top three government agencies with which foreign investors were most satisfied were the Office of the Board of Investment (23.3 points), One Stop Service Center for Visas and Work Permits (15.1 points), and The Industrial Estate Authority of Thailand (10.9 points). These are the same three government agencies that were ranked most satisfactory in last year s study. Current Problems Factor Endowments The weaknesses of factor endowments in Thailand were identified as labors shortages in some areas, incompetent engineers, lack of patience and lack of disciplined labors, and the inconsistent quality of raw materials and intermediate goods. Foreign investors found that these factors reduced the investment attractiveness of Thailand. Business Environment Political uncertainty, currency instability, and the possible negative trend in the rate of inflation and interest caused investors to be concerned and this contributed to decreased confidence for some groups of investors. Recommendations Services offered by the BOI that foreign investors believe should be improved in order to increase investor satisfaction were: 1. Increase the efficiency in providing consistent and standardized solutions to questions and inquiries Thailand Board of Investment 3

9 2. Provide standardized and transparent criteria for incentives and conditions by providing a manual or guidebook for investors about how to receive BOI promotion. This would help create more confidence and decrease foreign investors confusion. 3. Increase the efficiency of the application procedure for BOI promotion. An updated database would reduce redundancy and speed up the process for appraising applications. Services that foreign investors would like the BOI to give more attention to organize (ranked in descending order according to level of importance) were: o Increase coordination with other Thai government agencies, such as the Customs Department, the Revenue Department, etc. to solve problems for foreign companies (64.9%). o Provide improved services after project approval, such as advice on amending projects, BOI incentive procedures (62.1%). o Publicize BOI s new investment incentive packages (54.5%) Foreign investors suggested that the most efficient media for reaching them would be electronic mail and newsletters. Development of the Thai Education System Foreign investors believed that one issue in need of immediate action is the development of the Thai education system in order to improve the quality of Thai labor, especially for engineering, technical and managerial skills. This issue is especially important for regional education institutions in order to help reduce the problem of shortages of labor and engineering personnel in the rural areas. This problem was now being solved by hiring workers from other provinces or other countries, which increased production costs while reducing the competitiveness of BOI-promoted businesses in the various BOI promotion zones. This issue was one factor affecting decisions by potential foreign investors as well as changes in the business plans of current foreign investors in Thailand. Campaign to Build Discipline at Work Training workers to be tolerant, disciplined and responsible were issues that required collaboration and cooperation of government agencies and the educational sector, because Thai labor costs no longer had an advantage when compared to China and Vietnam. Although Thai labor is considered to be more competitive in term of skills, the strengths of labor in other countries (such as diligence and tolerance) could have an impact on future investment decisions. Thailand Board of Investment 4

10 The government should create incentives for foreign investors to register in the Stock Exchange of Thailand The majority of foreign investors received funds from their parent companies and hence few companies registered in the Stock Exchange of Thailand. The government should create supportive measures and relevant incentives to motivate foreign investors to register in the stock exchange. Thailand Board of Investment 5

11 Chapter 1 General Information 1.1 Objectives The Office of the Board of Investment (BOI) has conducted the foreign investor confidence surveys since The objective of this study was to examine the sentiments of foreign investors about the current situation in Thailand, the business environment, the competitiveness of Thailand, investment plans, opinions on services provided by Thai government agencies, problems, obstacles and suggestions. The findings from the survey would be useful for reviewing relevant investment promotion policies and measures to enhance the investment environment. 1.2 Data Collection Methods Questionnaires for the 2008 Foreign Investor Confidence Survey were distributed from April to June 2008 to 4,500 foreign investors, with at least 20% foreign ownership in companies that were both promoted and not promoted by the BOI. Officials from a total of 482 firms responded (accounting for a response rate of 10.7%): 359 of which were BOI-promoted and 108 were non BOI-promoted. Fifteen responses were excluded from the study due to incomplete data. In addition to the quantitative study, in-depth interviews were conducted with foreign investors in 7 industries, namely (1) Agriculture and Agricultural Products; (2) Mining, Basic Metals, and Ceramics; (3) Light Industry (textiles, jewelry, leather); (4) Metal Products, Machinery and Transport Equipment; (5) Electronic Industry and Electrical Appliances; (6) Chemicals, Paper and Plastics; and (7) Services. Twentytwo foreign investors from Europe, India and Taiwan participated in the in-depth interview. 1.3 Status of Companies Among the 467 respondents, 78% were BOI-promoted businesses and 22% were non-boipromoted businesses. The proportion varies according to the types of industries as shown in Figure 1.1. Office of the Board of Investment 6

12 Figure 1.1 The Percentages of BOI-promoted Businesses and non BOI-promoted Businesses Agriculture and Agricultural Products Mining, Basic Metals and Ceramics Light Industry (Textiles, Jewellery, Leather, etc) Metal Products, Machinery and Transport Electronic Industry and Electrical Appliance Chemicals, Paper and Plastics Services % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% BOI promoted Non BOI promoted 1.4 Nationality of Major Foreign Shareholders As presented in Figure 1.2, the overall results show that the nationalities of major foreign shareholders responding were Japanese (47.1%), Taiwanese (10.1%), Singaporean (7.3%), and other nationalities (17.1%). Figure 1.2 Percentages of Foreign Investor by the Nationalities of Major Foreign Shareholders Germany 4.3% Hong Kong 2.1% India 1.1% Others 17.1% Japan 47.1% China 1.7% Korea 1.9% USA 4.7% Taiwan 10.1% Singapore 7.3% Malaysia 2.6% Office of the Board of Investment 7

13 1.5 Type of Business classified by nationality The types of industries that Japanese and Taiwanese invest in Thailand were in the Metal Products and Machinery and Transport Equipment industries, while the businesses owned by most Singaporeans were the Service Industry. Table 1.1 Classifications of Foreign Firms by Type of Business and Nationality Type of Business Nationality Amount Total Group 1 Group 2 Group 3 Group 4 Group 5 Group 6 Group 7 Japan No of Firms Proportion (%) China No of Firms Proportion (%) Germany No of Firms Proportion (%) Hong Kong No of Firms Proportion (%) India No of Firms Proportion (%) Malaysia No of Firms Proportion (%) Singapore No of Firms Proportion (%) Taiwan No of Firms Proportion (%) USA No of Firms Proportion (%) Korea No of Firms Proportion (%) Others No of Firms Proportion (%) Total No of Firms Proportion (%) Group 1 = Agriculture and Agricultural Products Group 3 = Light Industry (Textiles, Jewelry, Leather, etc) Group 5 = Electronic Industry and Electrical Appliances Group 7 = Services Group 2 = Mining, Basic Metals and Ceramics Group 4 = Metal products, Machinery and Transport equipment Group 6 = Chemicals, Paper and Plastics Office of the Board of Investment 8

14 1.6 Value of Firms Assets in 2007 Foreign companies participating in the study have their asset size varied from less than 50 million baht to more than 500 million baht. In 2007, 31.1% of the foreign firms responding to the questionnaire had assets valued at less than 50 million baht. They invested mostly in the service industry. There were 28.2% of foreign firms each with assets of more than 500 million baht, mostly invested in Metal Products, Machinery and Transport Equipment. The overall results for other categories are shown in Figure 1.3. Figure 1.3 Percentages of Foreign Business by the Total Value of Firm s Assets Percentages of Foreign Investors in each group 0-50 million baht % million baht % million baht % million baht % >500 million baht % 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Agriculture and Agricultural Products Light Industry (Textiles, Jewellery, Leather, etc) Electronic Industry and Electrical Appliances Mining, Basic Metals and Ceramics Metal products, Machinery and Transport Equipment Chemicals, Paper and Plastics Services Office of the Board of Investment 9

15 1.7 Sources of Sales Revenue In 2007, 55.8% of the foreign firms obtained their sales revenue from both the domestic and export markets, which were mostly in Metal Products, Machinery and Transport Equipment sector. There were 25.4% of foreign firms obtaining their sales revenues only from the domestic market, especially in the Service sector and 18.8% of firms, mostly in Light Industry sector, obtaining their sales revenue only from the export market. (Figure 1.4) Figure 1.4 Sources of Sales Revenue by Type of Industry Only From Domestic Sales Only From Export Sales Both From Domestic and Export Sales % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Agriculture and Agricultural Products Light Industry (Textiles, Jewellery, Leather, etc) Electronic Industry and Electrical Appliances Mining, Basic Metals and Ceramics Metal products, Machinery and Transport Equipment Chemicals, Paper and Plastics Services In conclusion, the majority of foreign investors participating in this survey were Small and Medium Enterprises (SMEs) that employed less than 200 workers and had less than 200 million baht in total assets. Office of the Board of Investment 10

16 Chapter 2 The 2008 Confidence Level of Foreign Investors in Thailand 2.1 Foreign Investors Confidence about the Situation of Thailand at the Company and Industry levels and the Overall Business Environment Thailand s Situation at the Company Level in 2007 Figure 2.1 shows the position of foreign businesses in Thailand during 2007 compared to Foreign businesses were classified into two groups: the first group comprised of businesses that were operating in a positive direction or making profits (small and large increase in profits). The second group was businesses operating in a negative direction or having decreased profits (small and large decrease in profits). According to the study, among the 45% of businesses operating in a positive direction, 35.5% made a small amount of increase in profits while 9.5% made large increases in profits. A total of 41.7% businesses operated in a negative direction, of which 19.3% were businesses whose profits declined by a small amount while 22.4% had a significant reduction in profits. Among 40 firms (9.5%) that made a large increase in profits, most of them operated in the Metal Products, Machinery and Transport Equipment industries and the Service Industry. For 149 firms (35.5%) that made small profits, most operated in the Metal Products, Machinery and Transport Equipment industries and the Chemicals, Paper and Plastics industries. Figure 2.1 Thailand s Situation at the Company Level in 2007 (Profit) % % 22.4% Group7 Group 6 Group 5 Group % 9.5% Group 3 Group 2 Group 1 Much lower Somewhat lower About the same Somewhat higher Much higher Group 1 = Agriculture and Agricultural products Group 3 = Light Industry (Textiles, Jewelry, Leather, etc) Group 2 = Mining, Basic Metals and Ceramics Group 4 = Metal products, Machinery and Transport equipment Group Office 5 of = the Electronic Board of Industry Investment and Electrical Appliance Group 6 = Chemicals, Paper and Plastics Group 7 = Services 11

17 2.1.2 Thailand s Situation at the Industry Level in 2008 Figure 2.2 shows the levels of foreign investors confidence in Thailand s situation at the industry level. In this study, the evaluation covered 17 factors: (1) Competition in the domestic market (2) Competition in the international market (3) Demand in the domestic market (4) Demand in the international market (5) Sufficiency of qualified suppliers (6) Sufficiency of high-quality raw materials (7) Sufficiency of skilled labors (8) Sufficiency of qualified engineers and technicians (9) Sufficiency of qualified managers (10) Suitability of Thailand s geographical location for business operations (11) Reasonable level of land price/ land lease (12) Ease of access to equity finance (13) Ease of access to debt finance (14) Attractiveness of wages for skilled labors (15) Attractiveness of engineer/ technician s wages (16) Attractiveness of manager s wages and (17) Attractiveness of investment costs in Thailand. Data shown in Figure 2.2 are summarized as follows: Foreign investors found that competition in the domestic and international markets has been intensive in recent years. However, investors were confident that there would still be increasing demand for their products/ services in both the domestic and international markets. With respect to the quantity and quality of suppliers and raw materials in Thailand, the study revealed that the number of qualified suppliers were insufficient. However, foreign investors believed that the situation was moving in a positive direction. Respondents considered that the quality of raw materials was moving in a negative direction. Among other opinions, foreign investors had a positive view about the geographical location of Thailand and considered it suitable for their business activities. Business costs, excluding wages, were seen as an attractive factor for investment. For land price/ land lease in Thailand, investors considered it to be at a reasonable level currently. On the other hand, the wages for engineers/ technicians and managers have become less attractive for investment. Wages for skilled labor were considered to be at a reasonable level, but this was not a strong motivation for investment decisions compared to other costs of production. Since the quantity and quality of the workforce is an important component for running a business, a sufficient quantity and quality of skilled labors in Thailand was still perceived as an attractive investment factor for foreign investors. There were good prospects for the group of qualified managers, but this factor was not significant. This meant that the availability of qualified managers in Thailand is sufficient; although it is not a strong factor for attracting foreign investment. On the other hand, prospects for the quantity and quality of engineers/ technicians were moving in a negative direction. Office of the Board of Investment 12

18 Figure 2.2 Levels of Foreign Investor Confidence about Thailand s Manufacturing Factors and Operating Business Status in 2008 Competitors Demand for the Products/ Services in the Domestic Market Market Demand Demand for the Products/ Services in the International Market Suppliers Others Negative Direction Competition in the Domestic Market Competition in the International Market Sufficiency of Qualified Suppliers Sufficiency of Qualified Raw Materials Sufficiency of Qualified Skilled Labors Sufficiency of Qualified Engineers / Technicians Sufficiency of Qualified Managers Suitability of Thailand s Geographical Location for Business Reasonable Level of Land Price/ Land Lease Ease of Accessing to Equity Finance Ease of Accessing to Debt Finance Attractiveness of Skilled Labour s Wages Attractiveness of Engineer/ Technician s Wages Attractiveness of Manager s Wages Attractiveness of Cost of Investment in Thailand Positive Direction + No difference Office of the Board of Investment 13

19 2.1.3 Thailand s Overall Business Environment in 2008 Figure 2.3 shows the overall business environment in Thailand. In this study, the evaluation covered 7 factors, namely the policy environment, law and regulations, foreign direct investment policies, monetary and fiscal policies, oil prices, infrastructures, and living environment. Results from the survey are summarized as follows: Policy Environment The policy environment factor was measured in terms of the stability of government policies and the transparency of Thai government procedures. Thailand s policy environment currently is unfavorable, especially in terms of the transparency of government procedures. Law and Regulations In this study, law and regulations refer to legislation (such as the Foreign Business Act, taxation system, including customs procedures, etc.) applying to foreign investors doing business in Thailand. Study results showed that existing business law and regulations are not their factors concerned, while the Thai taxation system is considered negative factors. Foreign Direct Investment Policies Foreign investors noted that Thailand s BOI investment incentives are a positive factor for attracting foreign investment. However, governments in other countries also offer interesting incentives to foreign investors. It is important to understand that the privileges offered by the BOI must be considered in conjunction with the aforementioned contributing factors as overall attractive investment factors for foreign investors. Monetary and Fiscal Policies The monetary and fiscal policies assessed in this study comprised of foreign exchange rates, domestic inflation rates, and domestic interest rates. Foreign investors perceived the monetary and fiscal policies of the previous year as negative due to unstable exchange rates and unfavorable inflation and interest rates. Oil Prices The recent continuous increases in world oil prices have had the greatest impact on businesses when compared to other factors. The impact of increased oil prices varied from one business to another. Office of the Board of Investment 14

20 Infrastructure Investors considered Thailand s infrastructure, including transportation, utilities, and telecommunication systems, to be sufficient. As shown in figure 2.3, among the three types of infrastructure, the availability of utilities in recent years is able to meet foreign investors needs. In addition, in-depth interviews revealed that foreign investors were satisfied with the current management of industrial zones, whether by government agencies or private firms. Development of transportation infrastructure helps make traveling faster and easier. The only infrastructure element that needs improvement is logistics management. According to the in-depth interviews, foreign investors believed that current surcharges for telecommunication services in Thailand are at an appropriate level. However, Thai communications networks had weaknesses in some areas, where the supply does not meet demand or there were inconsistencies in quality. This problem was considered to have a strong impact on operation costs. This was the case particularly for multinational companies, which needed to invest in leased lines in order to improve the quality of business communications. Living Environment Foreign investors found that the living environment in Thailand was suitable for expatriates. This component was considered as the most important factor for foreign investors when compared to other business environment factors. Office of the Board of Investment 15

21 Figure 2.3 Thailand s Overall Business Environment in 2008 Negative Direction No difference Positive Direction + Policy Environment Certainty of Thai Government Policy Transparency of Thai Government Procedures Business Laws & Regulations Conduciveness of Thailand s Foreign Business Act Effectiveness in Thailand s Tax System Foreign Investment Policy Attractiveness of BOI Investment Incentives Attractiveness of Other Thai Government Policies Reasonable Level of Domestic Inflation Rate Monetary/ Finance Policy Attractiveness of Domestic Interest Rate Stability of Foreign Exchange Rate Effect from Oil Prices Oil Price Infrastructure Sufficiency of Transportation Infrastructure Sufficiency of Public Utility Sufficiency of Communications Services Attractiveness of Living Environment Overall Investment Factors Confidence Level about Thailand s Situation for at the Company level, Industry level and the Overall Business Environment Foreign Investors Confidence about at the Company Level Overall, foreign investors had more confidence in Thailand s current situation than in the previous year, especially in terms of profits for the current year and next year. There was also an increased level of confidence about other factors, including total revenues, domestic sales, value of exports, and liquidity when compared to the previous year. Although the level of confidence about total investment was higher in Office of the Board of Investment 16

22 the current year, there was small variation when compared to the previous year. This factor was seen as moving in a positive direction for the next year. Table 2.1 Foreign Business Sentiment Index at the Company Level Business Situation Overall Foreign Investor s Business Sentiment Index Year 2007 Year 2008 Year 2009 Total revenues Domestic sales Value of exports Profit Liquidity Total investment BSI = 50 means business sentiment remains stable BSI > 50 means business sentiment has improved BSI < 50 means business sentiment has worsened Foreign Investors Confidence about at the Industry Level Table 2.2 shows that foreign investors in Thailand had increased confidence about demand for their products and services. Demand in the international market had a more positive trend than domestic market demand (the scores of BSI are 64.9 and 61.1, respectively). Foreign investors also found that competition in both markets had become more intensive, especially in the international market (the scores of BSI were 42.4 for the domestic market and 36.3 for the international market). In terms of factor endowments, foreign investors still favored Thailand s geographical location and believed that land prices/ land leases were currently at a reasonable level. While confidence in the availability of raw materials has decreased, the confidence level in the supply of skilled labors, engineers/ technicians, and managers, including labor costs, has increased slightly. The issue in which investor confidence has decreased was the method of access to long-term financing. This included access to equity finance or debt finance. Foreign investors found that current approaches did not create any convenience or flexibility for them. The overall evaluation reflects an overall positive confidence level of foreign investors and a slightly better position when compared to the previous year. Office of the Board of Investment 17

23 Table 2.2 Index of Business Sentiment about Market Demand and Thailand s Factor Endowments Foreign Investor s Business Sentiment Index Issues Year (1) Year (2) Competition in the Domestic Market Competition in the International Market Demand for the Products/ Services in the Domestic Market Demand for the Products/ Services in the International Market Sufficiency of Qualified Suppliers Sufficiency of Qualified Raw Materials Sufficiency of Qualified Skilled Labors Sufficiency of Qualified Engineers/ Technicians Sufficiency of Qualified Managers Suitability of Thailand s Geographical Location for Business n/a (3) 67.9 Reasonable Level of Land Price/ Land Lease n/a (4) 56.4 Ease of Access to Equity Finance n/a (5) 48.4 Ease of Access to Debt Finance n/a (5) 48.7 Attractiveness of Wages for Skilled Labors n/a (5) 52.3 Attractiveness of Wages for Engineers/ Technicians n/a (5) 51.3 Attractiveness of Wages for Managers n/a (5) 52.2 Attractiveness of Investment Costs in Thailand n/a (6) 54.6 Overall Business Sentiment Index Sources: (1) Foreign Investor Confidence Survey. (2) Survey results for this year. Remarks: n/a (3) (4) (6) There was no survey question on this issue last year. n/a (5) This issue was surveyed in the overall picture last year. Office of the Board of Investment 18

24 Foreign Investor Confidence in the Overall Business Environment for The overall results show that investment factors in Thailand remained satisfactory (the BSI score was 61.1). Other factors affecting investment in Thailand is shown in Table 2.3 and can be summarized as follows: Policy Environment Foreign investors confidence in the overall policy environment, specifically government policies and transparency (BSI scores were 39.7 and 35.7, respectively), has declined when compared to the previous year. Law and Regulations Thai regulation and taxation system and procedures has been considered a negative factor in foreign business sentiment. Foreign Direct Investment Policies The attractiveness of BOI investment incentives to foreign investors has shown a rising confidence level (the BSI score was 67.3). On the other hand, foreign investors confidence in other government support policies turned slightly negative. Monetary and Fiscal Policies The level of foreign investors confidence in the current monetary and fiscal policies of the Thai government has declined, especially foreign exchange rates stability (the BSI score was 39.5). In addition, they considered the current inflation and interest rates in Thailand to be unfavorable to their business. Level of Oil Prices Rising oil prices have caused a decline in foreign investors confidence level, especially when compared to other business environment factors. Infrastructure The infrastructure in Thailand was considered as satisfactory since foreign investors confidence level has increased, especially a sufficient utility system (the BSI score was 60.5). Other available infrastructure, specifically the transportation and telecommunication system, also caused a significant increase in the confidence level. Living Environment Foreign investors were satisfied with the living environment in Thailand. Office of the Board of Investment 19

25 Table 2.3 Index of Business Sentiment about the Overall Business Environment Foreign Investor s Business Sentiment Issues Index Year Year (1) (2) Certainty of Thai Government Policy Transparency in Thai Government Procedures Conduciveness of Thailand s Foreign Business Act n/a 50.4 Effectiveness of Thailand s Tax System Attractiveness of BOI Investment Incentives Attractiveness of Other Thai Government Policies Reasonable Level of Domestic Inflation Rates Attractiveness of Domestic Interest Rates Stability of Foreign Exchange Rates Effect of Oil Prices Sufficiency of Transportation Infrastructure Sufficiency of Public Utilities Sufficiency of Communications Services Attractiveness of Living Environment n/a 67.0 Overall Investment Factors Sources: (1) Foreign Investor Confidence Survey. (2) Survey results for this year. Remarks: n/a (3) There was no survey question about this issue last year. 2.3 Comparing the Business Sentiment Index with the Current Competitiveness of Thailand Comparing the BSI with Thailand s current competitiveness in terms of market needs, competition, factors endowments, and cost of production in Thailand. Figure 2.4 shows a comparative analysis of results from the BSI involving Thailand s current competitiveness with respect to market needs, competition, factors of production, and costs of production. Key points are summarized as follows: Office of the Board of Investment 20

26 Figure 2.4 Comparing the Business Sentiment Index in terms of Market Needs, Competition, Factors of Production, and Cost of Production with Thailand s Current Competitiveness J D Competitiveness B 40 A N P O I M H E L F 50 Q K C G Confidence Index A = Competition in the Domestic Market C = Demand in the Domestic Market E = Sufficiency of Qualified Suppliers G = Sufficiency of Qualified Skilled Labors I = Sufficiency of Qualified Managers K = Reasonable Level of Land Price/ Land Lease M = Ease of Access to Debt Finance O = Attractiveness of Engineer/ Technician Wages Q = Attractiveness of Investment Costs in Thailand B = Competition in the International Market D = Demand in the International Market F = Sufficiency of Qualified Raw Materials H = Sufficiency of Qualified Engineers/ Technicians J = Suitability of Thailand s Geographical Location for Business L = Ease of Access to Equity Finance N = Attractiveness of Skilled Labor Wages P = Attractiveness of Manager Wages Factors that are highly competitive and have the potential for future improvements From the viewpoints of foreign investors, factors that are highly competitive at present and could potentially increase competitiveness in the future include demand in domestic and international markets, sufficiency of qualified skilled labors, suitability of Thailand s geographical location, reasonable level of land prices/ land leases, and wages of skilled labors. They considered that these factors were capable of attracting investments. Office of the Board of Investment 21

27 Factors with a moderate level of competitiveness and future potential for improvement The factors that foreign investors identified as moderately competitive and with a potential to increase Thailand s competitiveness in the future include the availability of qualified suppliers, the availability of qualified engineers/ technicians, and managers as well as their wage levels. Factors that were moderately competitive but expected to have declining competitiveness in the future Foreign investors identified several factors with a moderate level of competitiveness at present, but competitiveness was expected to decline in the future. These factors were the amount of highquality raw materials and the acquisition of funds through equity instruments and debt securities. Factors with a low level of competitiveness that were expected to have declining competitiveness in the future Foreign investors considered that competition in domestic and international markets was intensive and they expected increased intensity in the future. Office of the Board of Investment 22

28 2.3.2 Comparing Thailand s overall business environment to Thailand s current competitiveness. Figure 2.5 shows the BSI as a comparison of Thailand s overall business environment with Thailand s current competitiveness. Figure 2.5 Comparing Overall Business Environment Confidence to Thailand s Current Competitiveness in O N E L 10 K M 0 H F D C -10 B A G I Competitiveness J Confidence Index A = Certainty of Thai Government Policy C = Conduciveness of Thailand s Foreign Business Act E = Attractiveness of BOI Investment Incentives G = Reasonable Level of Domestic Inflation Rates I = Stability of Foreign Exchange Rates K = Sufficient Transportation Infrastructure M = Sufficient Communications Services O = Overall Investment Factors B = Transparency in Thai Government Procedures D = Effectiveness in Thailand s Tax System F = Attractiveness of Other Thai Government Policies H = Attractiveness of Domestic Interest Rates J = Affecting from Oil Prices L = Sufficient Public Utilities N = Attractiveness of Living Environment Office of the Board of Investment 23

29 Highly competitive factors and their potential for future improvements The factors that foreign investors identified as competitive for Thailand with potential to improve in the future include BOI investment incentives, sufficiency of infrastructure (transportation, utilities, and telecommunication services), and good living environment for expatriates. Overall, foreign investors were confident that Thailand s investment factors were still highly competitive. Moderately competitive factors and their potential for future improvements Foreign investors considered that current law and regulations relevant to their investment in Thailand was a factor that were moderately competitive at present and could be improved in the future. Moderately competitive factors that were expected to have declining competitiveness in the future Foreign investors identified the effectiveness of Thailand s taxation system and other government s support policies as factors that were moderately competitive at present but expected to decline in competitiveness in the future. Factors with a low level of competitiveness that were expected to have declining competitiveness in the future Thailand s policy environment, including unstable government policies, transparent government procedures, and unfavorable monetary and fiscal policies (inflation rates, interest rates, and foreign exchange rates), were currently be less considered to be competitive and expected to be even worse in the future. 2.4 The Investment Plans and Main Reasons Affecting Planning Decisions Investment Plans for Figure 2.6 shows that 54.8% of foreign investors in Thailand reported that their investment plans for would maintain current investment levels in Thailand, 39.2% planned to expand their businesses while 5.6% would reduce their investment levels. The balance of 0.4% said that their foreign investments would be withdrawn from Thailand due to internal business problems and shareholders changing their business strategy. The group of firms that plan to expand their businesses divided into two main categories: firms that would expand slightly or on a small scale (28.7%) and firms planning to expand significantly or on a larger scale (10.5%). Firms planning to reduce their investments followed a similar pattern with 4.7% of firms planning to reduce their investments slightly and 0.9% planning to reduce investments significantly. Office of the Board of Investment 24

30 Among the firms that would expand their businesses slightly, 95.5% would expand their businesses in Thailand while 4.5% would expand to other countries, such as China, Vietnam, and the Philippines. Among the firms that planned to expand their businesses significantly, 94% planned to expand in Thailand while 6% would expand in other countries, such as Vietnam and countries of Eastern Europe. Figure 2.6 Investment Plan for Reducing slightly 4.7% Reducing significantly 0.9% Withdrawing 0.4% Expanding significantly 10.5% Expanding slightly 28.7% Retaining 54.8% Main Reasons Affecting Investment Plan Decisions Foreign investors pointed out that the top three reasons for deciding to expand their business in Thailand were BOI investment incentives and other government support (37.5%), sufficient infrastructure in Thailand (28.5%), sufficiency of qualified skilled labor (24.8%) and attractive wages of Thai labors (24.8%). Foreign investors pointed out that the top three reasons for deciding to invest in other countries or to reduce their investments or to withdraw their investments from Thailand include the unstable Thai political situation (12%), the uncertainty of Thai government policies (10.5%), and the unstable Thai economy (8.8%). Office of the Board of Investment 25

31 Chapter 3 Factors Influencing Investment Decisions in Thailand 3.1 Factors Influencing Investment Decisions in Thailand Five factors considered to influence investment decisions are factor endowments, capital market, Thai economic situation, infrastructure in Thailand, and Thai law/regulations. This study defined each of these factors as follows: The term Factor Endowments refers to land (the suitability of the geographical location and the cost of land), labor (human resources), competitive wages, suppliers, and raw materials. The term Capital Market refers to access to equity financing and access to debt financing. The term Economic Situation refers to market demand, competition, policy environment, domestic inflation rates, domestic interest rates, and international trade. The term Infrastructure in Thailand refers to the overall structure of transportation, utilities, and telecommunication services. The term Law and Regulations refers to foreign direct investment policies, the Foreign Business Act, and taxation law. Figure 3.1 shows the results by adopting the AHP technique. Findings indicated that the most important factor affecting foreign investors decisions to invest was the economic situation in Thailand (27.4%) followed by law and regulations (22.8%). The factor that played the least important role in investors decision was access to long-term financing (11.2%). Office of the Board of Investment 26

32 Figure 3.1 Factors Influencing Investment Decisions Factor Endowments 18.9% Capital Market 11.2% Economic Situation 27.4% Infrastructure 19.8% Law & Regulations 22.8% 0% 5% 10% 15% 20% 25% 30% 3.2 Significance of Factors Influencing Investors Confidence In the second part of this report shows the significance of factors that influence investor confidence, the relationship between investors confidence and the importance of each factor was studied by using a Multivariate Regression equation. In evaluating the relationship between investors confidence and the significance of each factor, 17 sub-factors from the industry level and 14 business environment sub-factors were taken into account. The 31 sub-factors were grouped into 15 items or key factors, as shown in Table 4.1. Results from each part are summarized as follows: Office of the Board of Investment 27

33 Table 3.1 Relationship between Factors Influencing the Investor s Confidence and Their Sub-Factors Key Investment Factors Key Factors Sub-Factors 1. Factor Endowments 1. Land (Suitability of geographical location and land price/ land lease) Suitability of Thailand s Geographical Location for the Business Reasonable Level of Land Price/ Land Lease 2. Human Resources Sufficiency of Qualified Skilled Labors Sufficiency of Qualified Engineers/ Technicians Sufficiency of Qualified Managers 3. Competitive wages and cost of investment Attractiveness of Skilled Labor Wages Attractiveness of Engineer/ Technician s Wages Attractiveness of Manager s Wages Attractiveness of Other Cost of Investment in Thailand (excluding wages) 4. Suppliers and Raw Materials Sufficiency of Qualified Suppliers Sufficiency of Qualified Raw Materials 5. Stability of Domestic Oil Prices Level of Domestic Oil Price 2. Capital Market 6. Capital Access Access to Equity Finance Access to Debt Finance 3. Economic Situation 4. Infrastructure 5. Law & Regulations 7. Market Demand Domestic Demand International Demand 8. Competition Competition in the Domestic Market Competition in the International Market 9. Policy Environment Stability of Thai Government Policy Transparency of Thai Government Procedures 10. Inflation and Interest Rates Reasonable Level of Domestic Inflation Rates Reasonable Level of Domestic Interest Rates 11. International Trade Stability of Foreign Exchange Rates Effectiveness of Thai Tax System 12. Transportation and Logistic Infrastructure Sufficiency of Transportation Infrastructure Sufficiency of Public Utilities Sufficiency of Communications Services 13. Living Environment for Expatriates Attractiveness of Living Environment in Thailand 14. Investment Support BOI Investment Incentives Other Thai Government Support 15. Business Law and Regulations Thailand s Foreign Business Act Office of the Board of Investment 28