The Rise and Fall of Thailand’s - Ricerca sull'intelligenza artificiale specializzata al MIT

The Rise and Fall of Thailand’s
Export-Oriented Industries*

Bhanupong Nidhiprabha
Faculty of Economics
Thammasat University
2 Prachan Road, Bangkok 10200
Thailand
bhanupong@econ.tu.ac.th

Astratto
In the past three decades, with the exception of the Asian financial crisis in 1997–98, the Thai economy
was propelled by the rapid growth of manufactured exports. There were 18 years of a double-digit
export growth, averaging 20.5 percent per year. In 2009, Thailand’s exports collapsed after the 2008–09
global financial crisis, but rebounded sharply in the following year. Thailand’s exports growth significantly
slowed down in 2011 E 2012. From 2013 A 2016, Thailand’s exports experienced negative growth.
The global recession and China’s slowdown contributed to the dismal export performance. There
was also a supply factor responsible for the negative growth, Tuttavia. The dwindling level of foreign
direct investment (FDI), caused by Thailand’s political turmoil and pessimistic business sentiment, ha
diminished export capability and competitiveness. The fall of Thailand’s export-oriented industries can
be attributed to the country’s inability to attract FDI inflows. Some industries that are able to secure
continuous flows of FDI remain competitive, whereas others that cannot will progressively retreat from
the world market.

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1. introduzione

Thailand is an example of an export-driven economy. The country enjoyed double-digit
growth of exports on the average of 23 percent per year from 1986 A 1995. The sharp re-
bound of the Thai economy after the 1997–98 Asian ﬁnancial crisis in 1997 can be attributed
to the strong export growth in 1999 E 2000. A short period after the U.S. recession re-
sulted in a decline of exports by 7.1 per cento. After the brief episode of the slowdown of
world trade in 2001, domestic supply responded quickly to rising export demand dur-
ing the upturn of the word trade, when world trade rebounded by 4.4 percent in 2002,
driving Thailand back to double-digit export growth from 2003 A 2008. During those six
years of export expansion, large foreign direct investment (FDI) continued ﬂowing into

I would like to thank Yingqi Wei, Yuanyuna Ma, Wing Thye Woo, and Maria Socorro Gochoco-
Bautista for their valuable comments.

Asian Economic Papers 16:3

Tecnologia

doi:10.1162/ASEP_a_00556

The Rise and Fall of Thailand’s Export-Oriented Industries

export-oriented industries to support the growth of export-oriented industries. Allo stesso modo,
when the global ﬁnancial crisis (GFC) hit Thai exports in 2009, Thailand again experienced
a drop in export growth, Di 14 per cento. Nevertheless, the export industry was able to re-
bound sharply to a double-digit growth rate of 27.1 percent in 2010 E 14.3 percent in
2011, thanks to the strong growth in the Chinese economy. As the Chinese economy en-
tered a new normal growth era in 2014, the adverse impact of China’s slowdown was
felt around the world. Thailand’s export took a direct hit through the impact on indus-
trial supply chains, which link China’s industrial growth to exports of parts and com-
ponents from Thailand. Thailand’s exports slowed to 3 percent in 2012 and entered a
new era of declining exports. From 2013 A 2016, exports declined by 1.6 percent per year
on average.

in questo documento, the rise and fall of Thailand’s export industries are examined in terms of
their vulnerability to external shocks. Some industries are able to cope well with chang-
ing world export demand, whereas others face challenges and struggle to survive. Four
export industries are selected to be analyzed in detail. Vehicles can be considered as a
rising export star, whereas the exports of apparels and textile are retreating as they are
losing market shares in the world economy. Electronic and electrical equipment is also cho-
sen because of its importance in total exports and its sharp contrast with the processed
food exports industry, which requires less imported raw materials. These industries’
successes and failures depend to a large extent on the inﬂows of FDI. This study argues
that without continuous ﬂows of FDI, the future of Thailand’s export-oriented industry
remains bleak.

An overview of Thailand’s export industries is provided in Section 2. The importance of
FDI in determining manufactured exports is discussed in Section 3. Sezione 4 examines the
processed food industry and its challenges. Sezione 5 explores the key factors contributing
to the success of automobile industry. Sezione 6 analyzes the vulnerability of electronic
and electrical equipment industry. Sezione 7 discusses the textile and garment industries’
struggle to survive. Conclusions are provided in Section 8.

2. An overview of Thailand’s export industries

As a small open economy, Thailand’s exports’ share in the world market was less than 3
per cento. Processed food is Thailand’s export with the highest world market share—2.9 per-
cent in 2015 (Tavolo 1). Thailand’s other top exports of manufactured goods are electrical
and electronic equipment (representing 1.7 percent in world market share), motor vehicles
and transport equipment (1.6 per cento), machinery and equipment (1.4 per cento), and rubber
and plastic products (2.5 per cento). The very low world market shares imply that Thailand
does not have the market power to set its own export prices. As a price taker in the world
markets for these goods, it is the supply factor that is the most important determinant of

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The Rise and Fall of Thailand’s Export-Oriented Industries

Tavolo 1. Thailand’s exports in 2015

Industry

Exports level
In 2015
(thousand US$)

Share in total
world trade
(%)

Electrical and electronic equipment
Motor vehicles transport equipment
Food and beverages
Chemicals and chemical products
Machinery and equipment
Metal and metal products
Rubber and plastic products
Agriculture
Textiles, clothing and leather

45,949.20
30,861.80
26,733.00
19,948.10
17,802.80
12,526.30
10,822.40
8,707.30
7,459.50

Fonte: UNCTAD/International Trade Center.

1.70
1.60
2.90
1.10
1.40
0.90
2.50
1.90
0.80

Change per year
since 2012
(%)
−0.40
1.50
−3.10
−4.60
2.10
−10.40
−4.40
−9.70
−1.60

Change in world
share since 2012
(%)
−1.80
0.40
−1.70
−2.70
4.20
−4.90
−3.50
−6.80
−4.30

the international competitiveness. Between the periods of double-digit export growth from
1986 A 1995, Thailand’s labor cost was still low. China had yet to enter the World Trade
Organization (WTO) In 2001 to compete with Thailand’s labor-intensive products and
to divert FDI away from the country. Thailand’s manufactured exports were driven by
the low production cost of labor-intensive products. But low cost of production is only a
temporary source of competitive advantage as this advantage can be eroded by increases
in wages.

Since 2012, export of motor vehicles and machinery and equipment increased their respec-
tive world market shares by 0.4 percent and 4.2 per cento, rispettivamente, while metal products,
textile and clothing, electrical and electronic equipment lost their shares in the respective
world markets by 4.9, 4.3, E 1.8 per cento, rispettivamente. The export-oriented industry suf-
fered from negative annual growth rates from 2013 A 2016, when the world economy was
adversely affected by the slowdown in Chinese economy. The demand for Thai export
products depends considerably on imports from China—China is Thailand’s major trading
partner. When China’s economy expands, it imports more intermediate imported products
from Thailand. Whether or not an industry copes well with the global slowdown is related
to its external dependency, the income elasticity of its export products, and the diversi-
ﬁcation of export markets and export products. Some industries have their own speciﬁc
industry challenges, such as market access restrictions and quality standards imposed by
importing countries.

From the long-term perspective of exports growth in the last twenty years, automotive ex-
ports experienced the highest growth rate between 1995 E 2015, whereas apparels and
textile grew only 1.9 percent on the average for the same period (Tavolo 2). The textile indus-
try exhibited the highest volatility, measured by the ratio of standard deviation to its mean
growth rate, followed by electronics and electrical appliances. Agro-manufactured exports
exhibited the least volatility, suggesting that the country can reduce export instability from
exporting agro-manufactured products rather than primary commodities, which are sub-
ject to quantity and price ﬂuctuations.

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The Rise and Fall of Thailand’s Export-Oriented Industries

Tavolo 2. Sectoral export growth rates (per cento): 1995–2015

Apparels
and textile

Electronics

Electrical
appliances Automotive manufactured

Agro-

Total
exports

Mean
Maximum
Minimum
SD
SD/mean
World business cycle sensitivity

1.87
20.78
−15.31
9.96
5.34
0.30

6.96
29.42
−11.03
11.82
1.70
0.75

7.56
31.03
−14.74
11.55
1.53
0.94

18.63
53.73
−26.29
18.17
0.97
3.35

8.38
20.91
−4.91
7.37
0.88
0.54

8.18
24.64
−11.91
9.40
1.15
1.58

Fonte: Author’s calculation.

Note: World trade volume data are from the World Bank and Thailand exports data from the Bank of Thailand. The two series are used to
calculate world trade volume elasticity of Thailand’ s exports to measure the sensitivity of each product to world business cycles. SD = standard

deviation.

The textile and garment industry used to generate more than a million jobs in the early
1990S, but it experienced the lowest average annual export growth rate of 1.9 per cento
between 1995 E 2015. The automotive industry’s average export growth rate was
18.6 per cento (Tavolo 2). Electronic and electrical equipment sectors registered an export
growth rate of 7.6 percent during the same period. These two sectors’ growth rates also
ﬂuctuated considerably; their standard deviation is around 1.5 E 1.7 higher than the
mean growth rates.

Generalmente, Thailand’s exports are very sensitive to world business cycles, as can be seen
from the world business cycle sensitivity index, approximated by the elasticity of world
trade volume for Thailand’s exports. For all exports, Thailand’s world business cycle sen-
sitivity is greater than unity (1.58). As such, Thailand’s exports rise and fall faster than rate
of changes in the global trade activities. Exports collapse spectacularly when world trade
growth decelerates and rebound vigorously during upturns in global trade.

Automotive export products, including parts and components, demonstrated the high-
est degree of sensitivity to global trade ﬂuctuations. Apparel and textile products were
the least sensitive to changing global volumes of trade, but it incurred the highest degree
of volatility. Its standard error of growth rate was about ﬁve times higher than its mean
growth. The industry’s products are normal goods, with positive but low values in the
income elasticity of demand. Unlike automobiles, which can be considered luxury prod-
ucts, processed food exports do not have a high value of income elasticity of demand. IL
agro-manufactured exports are not as sensitive as electronics and electrical appliances. Al-
though these industries do not suffer much during the global downturn, they usually miss
the opportunity to grow rapidly during the global recovery period.

Exports of meat, ﬁsh, and seafood exhibit a high degree of product concentration. On the
other hand, electronic and electrical equipment has the highest degree of product diver-
siﬁcation, thanks to the FDI that creates network trade through the international frag-
mentation of products. In other words, product differentiation is difﬁcult to achieve in

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The Rise and Fall of Thailand’s Export-Oriented Industries

Figura 1. Sectoral FDI stock and exports

agro-manufactured products. High-valued manufacturing products in general require
advanced technology, which is usually obtained from FDI in the case of Thailand.

3. FDI and Thailand’s export-oriented industries

The validity of export-led and FDI-led growth hypotheses has been well documented. FDI
raises productivity in the export sector of developing countries and boosts the overall pro-
ductivity level of host countries (Saadi 2014). Within three decades, the rank in China’s
global exports rose from 32nd in 1978 to ﬁrst in 2009 (Tang and Zang 2016). During this pe-
riod, China was one of the world’s top recipients of FDI. One of the key drivers of China’s
miracle growth is FDI. Large inﬂows of FDI may not automatically lead to an export boom,
Tuttavia, as the host country needs to possess absorptive capacity, which requires appro-
priate FDI policy, human capital, research and development (R&D) expenditures, E
infrastructure. China’s absorptive capacity reinforces the effect of FDI on growth by con-
tributing to export capacity (Zhang 2015). Besides the quantity of exports, FDI also raises
the quality of exports in developing countries (Harding and Javorcik 2012).

Export competitiveness depends on the level of foreign technology and knowledge assets
that can lead to deepening the level of product sophistication and market diversiﬁcation.
The level of FDI inward stock in each sector is related to the export capacity of each sector.
Figura 1 is a scatter diagram of sectoral FDI stocks in 2012 and the corresponding level of
exports in 2015. Rather than using contemporaneous stock of capital, three-year lagged
inward FDI stock is used to avoid the endogeneity problem. Data permitting, there are
ten industries included: electrical and electronic equipment, motor vehicles and trans-
port equipment, food and beverages, chemicals and chemical products, machinery and

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The Rise and Fall of Thailand’s Export-Oriented Industries

Tavolo 3. Percentage change of sectoral FDI inﬂows and exports (in parentheses)

Chemicals

2007–10
2011–15
2007–15

17.9 (8.3)
−2.3 (3.2)
6.7 (5.5)

Fonte: Bank of Thailand.

Electrical
−24.5 (−0.2)
18.7 (4.0)
−0.5 (2.1)

Electronics
19.8 (−0.8)
0.5 (0.4)
9.1 (−0.2)

Food

Machinery

Vehicles

12.9 (8.6)
6.7 (4.2)
9.5 (6.2)

28.9 (12.0)
11.8 (6.3)
19.4 (8.9)

13.9 (11.5)
5.7 (8.7)
9.3 (9.9)

equipment, metal and metal products, rubber and plastic products, textiles and clothing,
petroleum products, and wood products. The highest level of inward FDI stocks is in the
machinery sector, followed by electronic and electrical equipment sector. The wood prod-
ucts and textiles and clothing sectors attracted the least amount of FDI, representing only
6 percent and 9 per cento, rispettivamente, of the FDI stock in the machinery and equipment
sector. Consequently, the export levels of wood products and textile and clothing sectors
were low. In conclusion, higher the level of FDI stock, the higher the export capacity of
the industry.1

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Despite the highest level of FDI stock, the machinery and equipment industry’s export per-
formance was below the average trend line (Figura 1). Electronics and automotive exports
achieved the highest level of exports. The two points representing the two industries lie
above the trend line. The processed food sector’s exports performance was higher than the
trend line, despite receiving a lower level of FDI. Because Figure 1 is a two-dimensional
diagram representing the relationship between FDI stock and export level, there are other
factors determining the level of exports.

During 2007–10, FDI increased rapidly in the following sectors: chemicals, food, machin-
ery, and vehicles—and their exports also expanded signiﬁcantly. For electrical equipment
exports, the resurgence of FDI during 2011–15 led to a turnaround of exports from a neg-
ative to positive growth rate (Tavolo 3). For other sectors, when FDI slowed down during
2011–15 we observe a substantial decline in export growth of chemical, electronics, machin-
ery, and vehicles.

We can conclude that there was a signiﬁcant slowdown in FDI inﬂows to the manufactur-
ing sector after 2011, which is not a good sign for the future of Thailand’s export-oriented
industries. If the declining trend continues from 2016 A 2020, Thailand would badly need a
new engine of growth. The country can no longer rely on a manufactured export engine of
growth and the era of double-digit export growth will end permanently.

The declining competitiveness might be caused by baht appreciation, rising wages, and the
decline in FDI to sustain productivity of labor in the industry. As can be seen from Figure 2,

1 If the export level in 2013 and FDI stocks in 2010 are used, a positive relationship between FDI

stock and export level can still be observed, albeit with a lower explanatory power at 48 per cento.

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The Rise and Fall of Thailand’s Export-Oriented Industries

Figura 2. Wage and labor productivity

Fonte: Ofﬁce of Industrial Economics.

Thailand’s wage rates increased faster than labor productivity. The gap between wage and
productivity has widened considerably since 2014. When private investment declined (be-
cause of increased risk perception from investors), labor productivity indicated signs of
stagnation. The divergence between productivity and wage growth has long been a con-
cern in the United States and Europe. In advanced countries, Tuttavia, capital investment
leads to a rapid rising productivity while the wage growth lags behind, causing problems
of income inequality and exclusive growth. But in the sluggish recovery of the Thai econ-
omy with labor shortages, wage rate grew faster than labor productivity. The adverse con-
sequences are a loss in international competitiveness and declining attractiveness of FDI.

The share of FDI in Thailand’s GDP has plummeted since 2006, when the military coup
took place, causing an increase in uncertainty and a decrease in investor conﬁdence. IL
2011 ﬂoods and the latest coup in 2014 further depressed FDI inﬂows. Thailand’s neigh-
bors, Cambodia, Laos, Myanmar, and Vietnam (CLMV)—countries with a more stable po-
litical environment—can be more attractive to FDI, despite the global economic slowdown.
The ASEAN Economic Community, which promotes regional free trade, further encour-
aged FDI inﬂows to these neighboring countries, replacing Thailand as an export platform,
with their lower wage rates besides providing a growing domestic market as well.

After China entered WTO in December 2001, some ASEAN countries experienced a slow-
down in their inﬂows of FDI as China attracted huge FDI and FDI diversion from other de-
veloping countries. During the period 1992–2006, Thailand’s FDI inﬂows averaged about
9.3 percent of China’s inﬂows (Figura 3). During the period 2007–15, Tuttavia, it declined

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The Rise and Fall of Thailand’s Export-Oriented Industries

Figura 3. ASEAN FDI inﬂows (% China FDI inﬂow)

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Fonte: Asian Development Bank.

A 4.3 percent of China’s inﬂows. Malaysia and the Philippines experienced a similar de-
cline in their respective share of FDI. All countries reported in Figure 3 experienced ris-
ing wages, but not all of them lost their FDI shares. Singapore, Indonesia, and Vietnam
increased their respective shares of FDI. Singapore has a political infrastructure and im-
proving rule of law to maintain political stability that is highly valued by foreign investors.
In 2015, according to the worldwide governance indicator, Thailand’s rank of political sta-
bility and absence of violence/terrorism was lower than that of Indonesia and Vietnam.

With political unrest, airport shutdowns, Bangkok shutdowns, and military coups, In-
vestor sentiment and consumer conﬁdence deteriorated sharply. Unless Thailand restores
political stability through establishing a democratic government, Thailand will not be able
to establish government effectiveness, political participation, and the rule of law. Quality of
institutions matters for economic growth. Because level of FDI is highly correlated with the
level of exports, the longer the military government is in power, the less can Thailand rely
on an export-led growth strategy.

4. The rise of the processed food industry and its challenges

The emergence of Thailand’s processed food industry provides the country a smooth tran-
sition from agriculture to industry. There are several beneﬁts from having a developed

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The Rise and Fall of Thailand’s Export-Oriented Industries

processed food industry. The labor-intensive nature of the product generates more em-
ployment than other industries that are capital-intensive, such as the automobile indus-
try. The processed food industry absorbs and speeds up the transfer of rural labor to the
manufacturing sector. The industry, which is closely linked to the agricultural sector, cre-
ates higher value-added for the primary commodities produced in the country. Unlike the
electronics industry, it does not require large amounts of imported raw materials; thereby
providing net gains in foreign exchange ﬂows in this sector. Inoltre, the processed
food industry has a higher scope of product diversiﬁcation than traditional primary com-
modities. As such, exports in this industry can enhance international competitiveness via
product differentiation, in addition to improvements in cost advantage through economies
of scale. Processed food exports also beneﬁt domestic consumers, who can enjoy the same
quality and hygienic standards of export products.

As Ruan and Gopinath (2008) have shown, the average productivity of the processed food
industry increases with trade liberalization. Countries with faster productivity growth
than the global average can also acquire a larger share of the global market. Per esempio,
Thailand’s exports of processed meat, ﬁsh, and seafood accounted for 14.6 percent of world
exports in 2013. These products gained market share rapidly in high income countries. IL
gain in world market shares was not permanent, Tuttavia. The industry is always sub-
ject to various shocks. The industry was hit in the early 2000s by the withdrawal of pref-
erential tariffs under the Generalised System of Preferences from the EU countries. IL
industry also experienced an EU import ban on chicken and shrimpbecause of the pres-
ence of veterinary drug (nitrofuran) residues in chicken and shrimp exports. The outbreak
of avian inﬂuenza further prompted the EU to ban exports of Thailand’s frozen chicken.
Between 2014 E 2016, shrimp output and exports further declined because of early
mortality syndrome.

Among processed food exports, cereals ﬂour and other food products experienced a dou-
ble digit growth rate during the period 1995–2015 (Tavolo 4). These are the products that
have high income elasticity of demand. Exports of these items grow more rapidly than
the world trade volume. D'altra parte, exports of poultry, crustaceans, and canned
pineapple were not able to sustain double-digit export growth as these export products are
not sensitive to ﬂuctuations of the world business cycle (Tavolo 4).

To gain world market share, the processed food industry must stay focused on products
that are growing more rapidly than world trade volume. These fast-growing products
include sugar, canned ﬁsh, and cereals ﬂour. Nevertheless, if exports of these products
penetrate foreign markets so much that they seriously affects local producers, non-tariff
barriers can be imposed to protect domestic producers. Sanitary and Phytosanitary Stan-
dards (SPS), environmental standards, animal welfare, and labor standards might be raised

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The Rise and Fall of Thailand’s Export-Oriented Industries

Tavolo 4. Thailand’s processed food exports: Growth and sensitivity to world
business cycle, 1995–2015

Export growth World trade
rate

volume elasticity

Sugar
Fish, canned, prepared, or preserved
Crustaceans, canned, prepared, or preserved
Meat of poultry, canned, prepared, or preserved
Pineapple, canned, prepared, or preserved
Other fruits & vegetables, canned, prepared, or preserved
Preparation of cereals ﬂour or starch
Other food products
Beverages

7.60
8.40
2.30
3.10
5.70
5.60
11.30
10.60
12.10

1.40
1.54
−0.26
0.57
1.06
1.01
2.18
2.20
2.06

Fonte: Author’s estimated regression coefﬁcients, using Bank of Thailand data from 1995 A 2015.

Note: Growth rates are exponential growth rate from time trend.

to maintain welfare of consumers and producers in import countries.2 Since the bird ﬂu
outbreak in 2004, Singapore permitted only cooked chicken products from Thailand and
South Korea had imposed a ban on imports of Thai chicken. In November 2016, South
Korea lifted a 12-year ban after approvals were given by their ofﬁcials who inspected Thai
chicken processing plants.

With the availability of international data on sectoral FDI inward stocks in 2012 and ex-
port levels in 2013 (Figura 4), we can observe a positive relationship between exports and
the size of FDI stock in 12 countries: Turkey, Argentina, Ireland, Mexico, Chile, Kaza-
khstan, Uruguay, Thailand, Finland, Austria, Japan, and Iceland. The size of the bub-
ble indicates shares of each exporting country in total world trade of processed food
and beverage.

It is clearly seen in Figure 4 that the stock of FDI is related to the level of exports. The cross-
section data point of Thailand is above the linear trend, which implies that, given the same
level of FDI, Thailand has a relatively higher than average capability to export processed
food. Argentina and Austria also indicate competitive advantage in this industry. Ireland
and Turkey do not have such an advantage, given the size of FDI stock. It is important to
note that other factors, such as the distance to markets, size of domestic markets, trade
policy, and membership of regional groupings, may also affect the level of exports.

Processed food products do not command a high income elasticity of demand. Unlike au-
tomobile exports, processed food exports do not rebound sharply after world economic
recovery. The industry experiences a constant shock syndrome from both supply and de-
mand. Rapid gains in export market shares can be considered as a threat to local producers.
The industry must continue investing in upgrading SPS standards to meet increasingly

2 Australia has banned imports of Thai shrimp for the ﬁrst six months of 2017 because of the spread

of white spot syndrome virus in these shrimps.

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The Rise and Fall of Thailand’s Export-Oriented Industries

Figura 4. Exports and inward FDI stock: Food and beverages

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Fonte: UNCTAS/Inter Trade Center.

stringent demands, especially in advanced countries. By establishing foreign partnerships,
exporters can obtain information on changing tastes and new regulations in importing
countries. FDI from developed home countries is the key success of the processed food
industry to penetrate these particular export markets.

5. The success of Thailand’s automobile industry

The entry of multinationals can affect a host country’s composition of exports by produc-
ing more sophisticated goods than previous exports from host countries. Swenson (2013),
using data from 1997 A 2009, ﬁnds evidence that Chinese private ﬁrm export capability
was increased by product quality that was fostered by proximity to multinational ﬁrms.
Harding and Javoricik (2012) argue that the knowledge spillovers from the presence of
multinationals to local ﬁrms can boost the country’s ability to export higher unit-value
goods. Così, policies aimed at attracting FDI inﬂows enable export ﬁrms climb up the ex-
port value chain, provided that domestic ﬁrms have sufﬁcient absorptive capacity.

The auto industry was among the ﬁrst industry to receive promotion from Thailand’s
Board of Investment. Import substitution was created through high tariff and limitation
of new assembly plants, which was later lifted in 1993. From 1973 A 1999, the Thai gov-
ernment had implemented various promotion policies: Local Content Requirement (LCR),

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The Rise and Fall of Thailand’s Export-Oriented Industries

mandatory and selective items for localization, high import tariffs, a ban on imported Com-
pletely Built Unit and localization of diesel engine.

The minimum LCR was set at 54 percent for passenger cars and 70 percent for one-ton
pickup trucks. Assemblers of pickup trucks were required to use local manufactured en-
gines, and imports of their engines were banned. The protective tariff system on automo-
biles and parts were restructured. The LCR was abandoned by the end of 1999 and the
car industry has been liberalized. Dopo 40 years of development, the Thai automobile in-
dustry has become externally oriented and the previously protected industry has become
more competitive.3

Thailand’s Board of Investment promoted three Japanese joint ventures (Toyota, Nissan,
and Isuzu) that began producing diesel and gasoline engines in Thailand. Before 1997,
most production went to the domestic market as domestic purchasing power was rising
rapidly. After the Asian ﬁnancial crisis, domestic demand collapsed, with domestic sale
declining sharply by 38 percent in 1997 e da 60 percent in 1998. Capacity utilization was
the lowest, at 17 per cento, In 1998. Producers therefore were forced to focus more on ex-
ports to improve capacity utilization and thus the ﬁnancial crisis turned out to be a blessing
in disguise.

The Thai domestic market has potential—political stability permitting. Car ownership
in Thailand is 9 people per unit, much less than the rates of 1.3 in the United States and
1.7 in Japan. Thailand is facing competition from many Asian countries, especially China
and India, to attract FDI from carmakers and auto parts suppliers to their homelands. IL
automotive industry share of exports in total production is about 60 per cento, while ca-
pacity utilization in 2016 was between 60 percent and 70 per cento. Because of the current
economic slump, there would be no new investment unless the capacity utilization rate
exceeds 80 per cento.

The auto industry, which is the highest paid sub-sector in manufacturing, is facing a short-
age of skilled labor. Salary increases are about 5.6 percent per year on average and labor
unions in this sector are relatively more inﬂuential compared with those in other sectors.
The domestic sales of vehicles ﬂuctuated in line with GDP growth, rising during booms
and falling during recessions. The GFC and recent global slowdown dictate domestic sales
of the vehicle industry.

3 Soejachmoen (2016) provides evidence that FDI openness is the most important determinant of a
country’s participation in the global production network of the automotive industry. Indonesia
is left behind because of restrictive FDI policies, high domestic protections, and low absorptive
capacity in technology.

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The Rise and Fall of Thailand’s Export-Oriented Industries

Figura 5. Automobile exports

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Fonte: Bank of Thailand.

Exports of automobiles, parts, and components increased steadily from 2001 A 2012
Figura 5) thanks to increased output capacity, which was enhanced by FDI. A regional
automative production network has emerged, as can be seen from the market shares of
the Philippines, Indonesia, and Malaysia (Figura 6). Toyota has its unique production net-
lavoro, choosing Thailand as its producer for diesel engine, steering column, body parts,
and pressed and resin parts. Toyota plants in Malaysia specialize in engine computers,
steering linkages, and wiper arms and blades, whereas Indonesia’s plants produce gasoline
engines, multipurpose vehicles, door locks, and door frames. In the Philippines, trans-
missions, drive shafts (front wheel) and switches are produced. The product fragmen-
tation process is also evident in Honda plants. Thailand plants produce pressed parts,
meter parts, and cylinder blocks, whereas Honda Malaysia supplies bumpers, dashboards,
and constant velocity joints. Indonesia plants produce cylinder blocks and heads, engine
valves, automatic transmissions, and Honda Philippines produces manual transmissions,
exhaust parts, and pedals.

Network trade of parts and components has become larger than ﬁnal products (Figura 5),
as product fragmentation facilitates the exploitation of economies of scale and scope in
the automotive networks trade. The GFC caused a plunge in export levels in 2009. Never-
theless, the industry was resilient enough to rebound sharply in 2010. In 2011, the ﬂoods

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The Rise and Fall of Thailand’s Export-Oriented Industries

Figura 6. Market diversiﬁcation of Thai exports of vehicles and parts in 2015

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disrupted the automobile production—resulting in another drop in the export level. If
ﬂoods are considered a once-and-for-all shock by international investors, there should
not be discernible impact on FDI. If, Tuttavia, shocks are permanent and come in various
forms such as political unrest or regime uncertainties, the decision of multinational cor-
porations to invest in Thailand will take into account the risks from these random shocks
when establishing production networks in the region.

One of the important features of the automobile industry in Thailand is its market diver-
siﬁcation. The top three market share amounted to about 30 percent of total Thailand’s
automobile exports (Figura 6). Thanks to the network trade and product fragmentation
processi, Thailand has ample product and market diversiﬁcation, which can help the indus-
try reduce its exposure to the volatile world business cycle.

Despite the strong cyclical demand impact of the world business cycle, market diversiﬁca-
tion provides a cushion for abrupt changes in the demand for vehicles. Tavolo 5 provides a
stark contrast between Thailand’s automobile industry and other export-oriented indus-
tries. All export categories from passenger cars, pickup trucks, motocycles, and vehicle
parts and component experieced a double-digit exponential growth rate, with a high value
of world trade volume elasticity.

Thailand obtained automotive technology from FDI, mainly from Japanese ﬁrms. Accord-
ing to the empirical evidence provide by Sadoi (2010), there has been a signiﬁcant rise in

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The Rise and Fall of Thailand’s Export-Oriented Industries

Tavolo 5. Thailand’s automobile export growth and world business
cycle sensitivity

Export growth rate

World business cycle
sensitivity index

Passenger cars
Pickups and trucks
Motorcycles
Other vehicles
Vehicle parts & accessories

11.4
10.5
14.2
16.7
14.5

2.24
2.46
2.61
3.18
3.16

Fonte: Author’s estimated regression coefﬁcients, using Bank of Thailand data from 1995 A 2015.

Note: Growth rates are exponential growth rate from time trend.

the demand for automotive engineering and technology in Thailand. The lack of engineers
and technological capabilities among Thai supplier ﬁrms, Tuttavia, has restricted techno-
logical development in the industry. The lack of process engineering capability remains
because Thai suppliers need not perform designing, tooling, or planning in production
process themselves. Busser (2008) provides evidence that industrial upgrading has taken
place largely in Japanese enterprises but that technology transfer from these ﬁrms has
hardly taken place. Hence, Thai suppliers have remained as second-tier suppliers, with no
improvements in the indigenous technology capacity as seen in Korea, Taiwan, and China.

The future of Thailand’s automotive industry depends on whether Thailand can success-
fully attract more higher value-added FDI into this sector. In 2007, at the beginning of the
ﬁrst phase of the eco-car projects, there were ﬁve Japanese car makers interested in the
government’s incentive schemes. When the government launched the second phase of the
eco-car scheme in 2015, only Mazda started the operation and General Motors withdrew.
The Thai government also has an ambitious policy to establish electric vehicle production
plants. The investment incentives cover vehicle production, electric battery, engine, E
charging infrastructure. By the end of 2016, there had been no electric vehicle application to
the Board of Investment due, perhaps, to the unstable political environment and sluggish
domestic and foreign demand.

6. The rise and fall of the electronic and electrical equipment sector

The largest sector in Thailand to receive FDI inﬂows is the electronic and electrical equip-
ment. Production and export capacity had increased rapidly during the last two decades.
The electronic industry has been dominated by multinational corporations such as Hitachi,
Fujisu, Seagate Technology, and Western Digital Corp., which are producing hard disc
drives (HDDs) and making Thailand the largest exporter of HDD in the world. Recentemente,
exports of HDDs have been on the decline because of the slowing down of demand for per-
sonal computers and tough competition from solid-state drives. In the long-term, HDD
makers have to lower the price of their products because of intensifying competition with
this sector and from competing sectors.

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The Rise and Fall of Thailand’s Export-Oriented Industries

Figura 7. Exports of electronic equipment

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Exports of electronics are less sensitive to the world business cycle when compared with
electrical equipment. The income elasticity of demand for electronics products was 0.75,
which is still higher than exports of agro-manufactured exports (Tavolo 2). The year 2009
was the peak for the electronics industry, which suffered from lackluster growth of ex-
ports. The industry has become a falling star.4

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Exports of integrated circuits, telecommunication equipment, computers, and other electri-
cal apparatus (such as computer keyboards, printers, and monitors) do not have a promis-
ing trend (Figura 7). Thailand cannot compete with cheap exports from low-cost countries
such as Vietnam, where the exports of electronic machines rose 36 percent annually, from
2011 A 2015, when the world demand increased by only 2 per cento.

FDI in the electronic industry brought along imported machinery, as the multinational cor-
porations in this sector required imported intermediate inputs from their production net-
works. Di conseguenza, the electronics sector does not generate net gains in foreign exchange.
The industry generally produces according to speciﬁcation of the multinational corpora-
tions operating assembly plants in Thailand.

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4 The growth of FDI into the sector declined sharply to just 0.5 percent between 2011 E 2015.

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Thailand’s electronic and electrical equipment (E&E) industry does not design its own
prodotti; there are no Thai brand names. The ability to create original products is lim-
ited by the availability of quality of human resources and telecommunication infras-
tructure. The challenge of the industry is inadequate human capital—the labor force
in this sector has relatively low skills. The percentage of high-skilled computer profes-
sionals used is small. The average years of schooling for the Thai labor force older than
15 years old is only eight years, and the enrollment for tertiary education is extremely
low (35 per cento) compared with countries with successful electronic sectors. Despite
the fact that the Thai government spends 5.5 percent of GDP annually on education,
the low level of human capital has remained a perennial problem for Thailand. As a re-
sult, the absorptive capacity to FDI is low, making it difﬁcult to attract advanced FDI
that requires skilled labor. To make matters worse, Thailand has very low investment
in research and development (R&D). Between 2001 E 2009, R&D expenditures aver-
aged only 0.24 percent of GDP. Private R&D amounted to 64 percent of public expen-
ditures, indicating that the private sector has yet to learn the importance of investing in
product innovation.

Exports of electrical appliances exhibit a more promising trend than electronics equip-
ment. Although experiencing the same fallout during the GFC in 2009, it has resumed an
upward trend despite the global slowdown between 2012 E 2016. Note the wild ﬂuctua-
tions in exports of parts and components of electrical appliances, which reﬂect the volatil-
ity of network trades in this sector. The world income elasticity of Thailand’s exports of
electrical appliances was close to unity (Tavolo 2). The champion products within these
categories are air conditioners, refrigerators, and other household electrical appliances
(Figura 8). An important factor contributing to an increase in exports is the turnaround
of FDI. The resurgence of FDI growth from the decline by 24.5 percent during the pe-
riod 2007–10 to a jump to 18.7 percent underlines the importance of the ability to attract
FDI inﬂows.

The data provided by UNCTAD/International Trade Center reveal that there is a positive
relationship between exports and inward FDI stocks (Figura 9). The sample points in the
ﬁgure include the following countries: the United States, Svizzera, Japan, Thailand,
Mexico, Netherlands, Denmark, Turkey, and France. It should be noted that for Japan,
Netherlands, and France, exports of E&E products are higher than average, given the same
level of stock of inward FDI inﬂows. Domestic stocks of investment also contribute to E&E
exports, in addition to FDI inﬂows. FDI are also attracted to countries with large domestic
markets such as the United States—as the motivation for FDI is domestic sales, unlike a
small domestic market such as Thailand, where hosting export platforms is the main moti-
vation of FDI. Mexico, which is closer to the U.S. market, also beneﬁts from being a mem-
ber of NAFTA, as it attracted export-oriented FDI that aims to export to the United States
and Canada.

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The Rise and Fall of Thailand’s Export-Oriented Industries

Figura 8. Exports of electrical appliances

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Fonte: Bank of Thailand.

Figura 9. Exports of electronic and electrical equipment

Note: Bubble size corresponds to world market share.

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Thailand’s exports of electronic and electrical equipment depend heavily on inﬂows of FDI.
When compared with exports of processed food and textiles, using cross-country data, FDI
stock has the highest explanatory power to the E&E export performance. To sum up, it is
a hard road ahead for Thailand to maintain the high export growth in this sector that was
achieved during the years with large FDI inﬂows.

7. The decline of the textile and garment industry

Thailand’s textile and garment industry became integrated into international production
networks by the 1980s. The industry was among the main drivers of Thailand’s manufac-
turing sector at that time. The rise of the industry was mainly due to FDI, thanks to cheap
wages and the strength of the Japanese yen in the 1980s. At its peak, the industry employed
more than one million workers.

The comparative advantage of the industry has been declining since the slowdown of FDI,
which reduces labor productivity, and the wage rate was rising because of an overall short-
age of labor (Figura 3). Textile exports in Thailand’s total exports have been declining over
the last two decades. In 1995, the industry contributed around 12 percent of Thailand’s to-
tal manufactured exports; this was reduced to 4 percent by 2015. Allo stesso modo, the share of FDI
inﬂows into this sector has declined from 6 percent to less than 2 percent during the same
period. Other labor-intensive products, such as footwear and parts, are facing the same fate
(Figura 10). Exports of footwear in Cambodia and Vietnam grew annually by 52 per cento
E 17 per cento, rispettivamente, between 2011 E 2015, resulting in gains in their shares in the
world market, which grew at 3 percent annually.

By nature, the textile industry is labor-intensive and trade-dependent. Labor shortages
brought about rising wage rates, making the industry less competitive when compared
with other developing countries. Labor-intensive products such as manmade staple ﬁbers,
and apparel [knit and crochet] cannot compete with labor-abundant countries such as
Vietnam, Indonesia, and Bangladesh. Thailand’s wage rate is currently almost three times
higher than Vietnam’s.

According to the Thailand Garment Manufacturers Association, the industry is experienc-
ing a labor crisis: There is a shortage of 50,000 workers in the industry, and by the end of
2017 the shortage will reach 60,000 workers. Thailand has 400,000 people working in the
garment industry. One of the main contributors to the labor shortage was the high price of
agricultural products during the global food crisis in 2008. There was a shift of labor supply
from the garment sector back to farming. The problem was mitigated after China’s slow-
down, which dampened commodity prices. The labor shortage can be eased somewhat by
migrant workers, although there are also shortages of labor in Laos and Cambodia, Quale
also increased their daily minimum wage rate in early 2016. It is expected that Myanmar’s

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The Rise and Fall of Thailand’s Export-Oriented Industries

Figura 10. Exports of labor-intensive products

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Fonte: Bank of Thailand.

textile and garment industry will generate more than one million jobs in the next ﬁve years.
Thus Thailand’s problem of cost disadvantage will remain.

A high wage rate would not harm the industry as long as labor productivity rises in line
with increasing wage rates. The growth of labor productivity of textiles and the apparel
industry has remained subdued, which can be attributed to insufﬁcient FDI and also low
domestic investment to create new products. The production of fabric and apparel had
actually declined since 2008. In 2013, the production of fabric declined by 40 percent from
the level in 2000. Infatti, the industry’s future depends largely on the growth of external
demand. Thailand’s export market shares were shrinking because of a cost disadvantage
and the baht appreciation from 2008 A 2014.

Thailand’s clothing industry was badly hit by the GFC, as the United States has been the
biggest importer of Thailand’s garment products. By the end of 2016, the industry had yet
to recover from the impact of global economic slowdown.5 Despite the growing power of
China as a global growth-driver, ASEAN-5 countries’ dependence on the U.S. economy
still remains stronger than their dependence on the Chinese economy (Tan, Abeysinghe,

5 In 2016, fabric and home textile suffered the decline by 13.7 E 36.5 per cento, rispettivamente, and the

total industry exports declined by 3 per cento.

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The Rise and Fall of Thailand’s Export-Oriented Industries

and Tan 2015). The rising dependence on China is worrisome, Tuttavia, considering that
China’s GDP growth slowed down to 6.9 percent in 2015 E 6.7 percent in 2016. The free
trade agreement between Thailand and advanced economies might have helped, but deals
did not materialize, as the EU and the United States do not want to strike a trade deal with
Thailand’s military regime. This was a missed opportunity to upgrade textile technology
via trade and investment creation effects from establishing free trade agreements.

Goto and Endo (2014) argue that rising wages and labor shortages require ﬁrms to upgrade
and shift from labor-intensive assembly to higher value-added products. Wu, Chen, E
Chen (2012) provide evidence that China’s openness to trade and bilateral trade agree-
ments determine the growth of its textile industry. There is also a home market effect in
downstream exports and China’s FDI outﬂows stimulate growth in mid-steam textile pro-
duction exports. Così, Thailand’s investment outﬂow to CLMV countries might help stim-
ulate up-steam and mid-stream exports.6

Thailand can no longer compete with Turkey, Bangladesh, Cambodia, Pakistan, and Viet-
nam. These countries are competitive in the traditional garment and textile sector. Between
2011 E 2015, annual export growth rates of apparel and clothing accessories in Cambo-
dia and Vietnam were 11 percent and 36 per cento, rispettivamente, while the world imports of
the products grew by 3 per cento. The low-wage countries gained in the world market share
because of Thailand’s rising wages. The industry must differentiate and upgrade to high-
valued textile production. Challenges are the ability to upgrade product quality and to cre-
ate technical textile products that require R&D to differentiate Thailand’s textile products
from other developing countries. To survive the ﬁerce competition from countries with
lower wage rates, the industry must attract FDI to produce technical textiles and textiles for
medical uses.

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8. Conclusione

The rise and fall of Thailand’s manufactured export industries depend on whether the
country can attract inﬂows of the right type of FDI. The main strength of Thailand’s export-
oriented industries lies behind export upgrading and labor productivity enhancement
by continued inﬂows of FDI. With imported technology and spillover effect to local in-
dustries, FDI can lead to sophisticated industrial production. If inﬂows of FDI declines or
ceases to be attracted to Thailand, Tuttavia, it would be difﬁcult for the country to main-
tain competitiveness, as the country is squeezed between countries with the lower wage
rate and countries with high wages but more advanced technology. It is not surprising that

6 The production of ﬁber amounted to 31.6 percent of total output of the industry. Yarns and fabric
amounted to 10.1 E 7.1 per cento, rispettivamente, and home textiles and technical textiles amounted
A 7.1 E 9.6 per cento, rispettivamente, of production in 2016.

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Thailand does not have its own national brands of manufactured export products.7 Thai-
land will get stuck in the middle-income trap until investment in human capital bears the
fruit of innovation through creating indigenous higher–value added products.

We have seen the rise and fall of Thailand’s industries. Some industries can sustain growth
and maintain competiveness, thanks to their ability to attract FDI. This is the case in the
automobile industry, whose exports have grown faster than world trade volume. The pro-
cessed food industry, having a comparative advantage through abundant agricultural food
resources, faces constant challenges that always disrupt the steady growth path either from
supply or demand sides. Electronic and electrical equipment exports are sensitive to world
trade ﬂuctuations. Rapid changes in technology and demand patterns may prevent the
industry from maintaining a steady growth path.

The level of income elasticity of the demand for industrial products also matters during
periods of strong world trade ﬂuctuations. In other words, the export product of a country
matters. If the export products can be differentiated from competitors in terms of superior
quality and safety standards, if they can be produced with cost advantages, and if they can
create sufﬁcient product and market diversiﬁcation, they will have a better chance to sur-
vive a global recession and will rebound immediately when the global economy recovers.

Riferimenti

Busser, Rogier. 2008. “Detroit of the East”? Industrial Upgrading, Japanese Car Producers and the
Development of the Automotive Industry in Thailand. Asia Paciﬁc Business Review 4(1):29–45.

Goto, Kenta, and Tamaki Endo. 2014. Labor-Intensive Industries in Middle-Income Countries: Traps,
Challenges, and the Local Garment Market in Thailand. Journal of the Asia Paciﬁc Economy 19(2):369–
386.

Harding, Torﬁnn, and Beata S. Javorcik. 2012. Foreign Direct Investment and Export Upgrading.
Review of Economics and Statistics 94(4):964–980.

Ruan, Jun, and Munisamy Gopinath. 2008. Global Productivity Distribution and Trade Liberalisation:
Evidence from Processed Food Industries. European Review of Agricultural Economics 35(4):439–460.

Saadi, Mohamed. 2014. Does Foreign Direct Investment Increase Exports’ Productivity? Evidence
from Developing and Emerging Countries. International Review of Applied Economics 28(4):482–506.

Sadoi, Yuri. 2010. Technological Capability of Automobile Parts Suppliers in Thailand. Journal of the
Asia Paciﬁc Economy 15(3):320–334.

Soejachmoen, Moekti P. 2016. Globalization of the Automotive Industry: Is Indonesia Missing Out?
Asian Economic Papers 15(1):1–19.

7 This is why the Thai government has come up with a new strategy of industrial development: IL
Thailand 4.0 modello, which targets ten industries focusing on innovative technology development,
namely, robotics, biofuels, biochemical, digital industry, and medical services.

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Tan, Kong Yam, Tilak Abeysinghe, and Khee Giap Tan. 2015. Shifting Drivers of Growth: Policy Im-
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Tang, Yingkai, and Kevin H. Zhang. 2016. Absorptive Capacity and Beneﬁts from FDI: Evidence from
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