Mismanaging Innovation Systems

Thailand and the Middle-income Trap

Patarapong Intarakumnerd

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351366557
• Edition: 1
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

Once recognised as a high-performing newly industrialising Asian economy with the potential for economic and developmental success similar to South Korea, Taiwan, Hong Kong and Singapore, Thailand's growth rate and competitive edge have declined substantially. With slower adoption and movement towards the knowledge-intensive industries, the loss of the competitive edge is a cause of growing concern among Thai policymakers, with Thailand succumbing to the middle-income trap. This book analyses Thailand's declining competitiveness in the past 50 years, considering both the national and sectoral roles and capabilities of key players, including the government, universities and research institutes, as well as the electronics, food, and automotive industries.

Including comparative analyses with other Asian nations, this book is a must-read for both students and practitioners with interests in development economics, industrial economics and public policy.

1
Introduction

During the mid-1980s and mid-1990s, Thailand was recognised as a high-performing newly industrialising economy (NIE) which could catch-up to industry in the West, similar to what Korea, Taiwan, Hong Kong and Singapore had done before. The country experienced double-digit growth of gross domestic product (GDP) and was able to diversify its economy with various agriculture and manufacturing products and thriving services, especially tourism. Nonetheless, the country faced a major economic crisis in 1997. Although the economic situation improved within a few years afterwards, the country’s long-term growth rate and competitiveness in once-rising-star and labour-intensive products like textiles, shoes and clothing declined substantially. At the same time, the country failed to climb the technological ladder to produce more knowledge-intensive products and services. These circumstances caused growing concerns among Thai policymakers and more recently, the general public, that Thailand is about to be in the middle-income trap,¹ because the country has had upper middle-income levels for 14 years in 2017.

What went wrong with Thailand? We analyse Thailand’s declining competitiveness through the evolution of innovation systems in the past 50 years. At a national level, we investigate the roles, capabilities and interactions of key actors, namely, government, firms (transnational corporations, large Thai firms, SMEs, and start-ups), universities, public research institutes, industrial and professional associations and financial intermediaries (banks, venture capitals and capital market). This book also sheds light on the role of institutional factors (such as entrepreneurship, policymaker mindsets, intellectual property rights, and trust) in shaping the technological learning and innovation of firms in Thailand. In addition to analysis at the national level, we examine innovation systems in the key sectors of electronics, food and automotive industries.

The primary objective of this book is to analyse why a promising Asian power like Thailand is now losing its competitive advantages and stuck in the middle-income trap. This is an interesting question to scholars, policymakers and those with an interest in economic development and industrialisation.

The book offers an innovative way to analyse technological and economic pursuit of a late-industrialising country with four points:

1. By adopting the concept of innovation system, the book provides a holistic, longitudinal and historically friendly analysis and synthesis of Thailand’s industrialisation and technological development in the past 50 years. This differs from previous studies that focused on a specific and a snapshot aspect of industrial development. We examine key actors in innovation systems, how they interact and learn together, and the roles of shaping institutions, like law, regulations, norms, entrepreneurship, intellectual property rights and others.
2. The book analyses innovation systems at the national level. It also evaluates development at the sectoral level and attempts to link these two levels together. Technological development of a sector depends on circumstances at both the national and the sectoral levels. The sectors evaluated here are a high-tech industry (electronics), a mid-tech industry (automotive), and a resource-based industry (food).
3. Though the book concentrates on Thailand, it also compares the national level policies of Thailand with more successful industrialised Asian countries, like Japan, Korea, Taiwan and Singapore. At the sector level, we also consider relevant experiences of other countries.
4. The book focuses on policy and action, rather than offering a theoretical breakthrough. By examining the behaviours and underlying capabilities of various actors, how they work collectively and institutions supporting and obstructing the learning processes, it presents a straightforward understanding of the current situation in Thailand.

1.1 Overview of Thailand’s economic development since 1950s

In the past 50 years, Thailand has achieved consistently high GDP growth rates, approximately 7 per cent per annum, and significantly diversified its economy. Industrialisation in Thailand can be divided into three periods: import substitution (late 1950s–1970s), export promotion (1980s–mid-1990s) and liberalisation (late 1990s onwards). The contribution of the agriculture sector to GDP was significantly reduced from 44 per cent in 1951 to 8.7 per cent in 2015, while the share of manufacturing markedly increased from 13 per cent to 27.5 per cent in the same period. Nonetheless, in terms of export, while the role of primary products has declined relative to that of manufacturing, agriculture has been diversified significantly, as Thailand has become one of the world’s top exporters of a wide range of primary or primary-based products, including rice, rubber, sugar, cassava and also prawns and canned pineapple. At the same time, the growth and diversification of manufactured exports, in sectors from textiles, automobiles and parts and electronic and electrical components, has also been impressive. For example, the shares of exports of electronic and automotive products, respectively, increased from 0.04 and 0.25 in the year 1970 to 25.20 and 6.68 in the year 2006 respectively (Yusuf and Nabeshima, 2009). Thailand’s economic status changed from that of a low-income country to an upper middle-income country by 2003. Behind this success lies prudent macroeconomic management, early adoption of export and foreign direct investment promotion policies, investment in physical infrastructure, and the expansion of school and university enrolment (World Bank, 1993).

Nonetheless, some scholars, such as Yoshihara Kunio (1988), strongly questioned the sustainability of Thailand’s economic prosperity. He describes the Thai economy as ‘Ersatz Capitalism’. Unlike Western countries, Japan and other first-tier East Asian NIEs, the Thai economy grew by overcoming bottlenecks with foreign technology and capital without making serious efforts to increase its own saving and upgrade technology. He believes that this type of capitalism cannot keep expanding. Kunio’s prediction came true. The country experienced a major economic crisis in 1997. Since then, the economic growth rates have decreased substantially, to 3–4 per cent annually, and they decreased even further, to 2–3 per cent on average after 2014, when the military took over the country. This growth rate has become the new normal for Thailand. The country’s once-rising-star and labour-intensive sectors, like textiles, clothing, toys and shoes, have lost their competitive edge to countries paying lower wages. The concern about middle-income trap is widespread among Thai policymakers, scholars and the public. More specifically, there is concern about the limited intensity of technology development in industry which has contributed to that competitive weakness. This has been reflected in a number of key economic indicators, especially the growth of total factor productivity (TFP). TFP’s growth indicates other contributors to a country’s economic growth beyond that of capital, labour and land. Apart from education and other social capital and institutional factors, it includes the progress of science and technology and innovation. Although Thailand’s economic growth rate in the past 50 years is rather impressive, this has been achieved largely by utilising factor inputs. Between 1987–1995, the Thai economy grew at the rate almost 10 per cent, and the TFP growth rate was only around 1.5 per cent (NESDB, 2007a).

1.2 Middle-income trap

The term “middle-income trap” (henceforth, MIT) is a relatively new phrase invented by Gill and Kharas in their East Asian Renaissance report (2007). However, it is appealing and perhaps ambiguous enough to become a powerful buzzword in the international development community within a short period of time. Whether or not a country has a “middle-income” level depends on the definition provided by the World Bank.² But the debate over the “trap” is another matter. Despite using the same phrase, the MIT literature varies considerably in the cases studied, the research methods employed, the underlying causes of the trap, and the policies suggested.

There are three schools of thoughts to explain why countries are in the MIT.

A. Getting education and institutions right

Studies in this group analyse middle-income countries, with special reference to the quality of education and institutions. For example, Jimenez et al. (2012, p. 16) explore Thailand and Malaysia compared to Korea, and they argue that human capital formation is fundamental to sustaining per capita income growth, as it equips workers with marketable skills. The list of MIT problems in Jitsuchon (2012, p. 16) is longer and summarised as “Thailand’s institutional weaknesses”. In addition to poor educational quality, an incomplete market in skills training, a low level of research and development (R&D) activities and spending, and flawed tax structure are included. A more comprehensive study of probit regressions covering 138 countries from 1955 to 2009 was conducted by Aiyar et al. (2013). High-quality institutions – defined as: strong rule of law; small government; and light regulation – are among significant factors contributing to change in growth, and slowdowns, of middle-income countries.

As for policy suggestions, Jitsuchon (2012, p. 19) proposes that the Thai government should not interfere with the market but should “devise the right incentive system so that economic agents would want to pursue their own prosperity … Providing public research infrastructure and tax benefits for implementing innovation and R&D activities is an example”. For Aiyar et al. (2013, p. 32), reforms should cover “prudential regulation to limit the build-up of excessive capital inflows … measures to enhance regional trade integration, public investment in infrastructure projects, and deregulation in areas where red tape is stifling private activity”. In short, the state should generate the best incentive systems and invest more in education, institutions, and R&D.

B. Changing export composition by following comparative advantage

Rather than education and institutions, the second school of thought points to a country’s export composition as critical to the success or failure of pursuit. Some studies in this group draw underlying theory from ‘old-school’ development economics.

Felipe et al. (2012, p. 33) argue that development and growth should be seen as “a process of structural transformation of the productive structure, whereby resources were transferred from activities of lower productivity into activities of higher productivity”. Using a data set with 124 countries from 1950 to 2010, they found that products have different consequences for economic development. Successful catch-up occurs in countries with a “diversified, sophisticated, and nonstandard level export basket”. For example, while Korea was able to gain comparative advantage in a significant number of sophisticated products, Malaysia and the Philippines were only able to gain comparative advantage in electronics. Specific to Latin American and the Caribbean countries, Lin and Treichel (2012) argue that they have been caught in the MIT because of their inability to upgrade from low to high value-added production. Although not following the above underlying theory, the econometric findings in Eichengreen et al. (2013, pp. 11–12) also emphasise the importance of export compositions, among other contributing factors: “Countries accumulating high quality human capital and moving into the production of higher tech exports stand a better chance of avoiding the middle income trap”.

Policy suggestions vary in this group, but they generally prefer the state to function as a facilitator who supports a country’s transformation towards higher value-added exports. For example, Lin and Treichel (2012) assert that the government should play a crucial role in helping firms overcome information, coordination and externality problems. Elsewhere, Lin (2012, p. 397) clearly proposes that: “The best way for a developing country to achieve sustained, dynamic growth is to follow comparative advantage in its industrial development and to tap into the potential of advantages of backwardness in industrial upgrading”.

C. Industrial upgrading by the proactive state

Similar to the second group, this body of literature emphasises exports and production structures. Nevertheless, it explicitly supports the role of the state in acquiring indigenous technology for latecomers. For example, Ohno (2009) maps out four stages of catch-up industrialisation: (1) having simple manufacturing under foreign guidance; (2) developing supporting industries but keeping production under foreign management; (3) internalising skills and knowledge by accumulating industrial human capital; and (4) acquiring the capabilities to create new products and lead global market trends. The MIT is defined as the “glass ceiling” between the second and third stages. Proactive industrial policy, with a strong commitment to global integration and private sector driven growth, is accorded the key role in solving the problem (Ohno, 2009, pp. 29–30).

Considering the perspectives of small countries,³ the special issue on the MIT in Studies in Comparative International Development emphasises the competitive squeeze from the low and the high-end, highlighting the intense pressures on middle-income countries in the current globalisation process. Therein, Paus (2012, p. 130) demonstrates that: “Sustained broad-based upgrading happens where there is a proactive government with an overall focus on capability accumulation and deliberate attention to advancing social capabilities in sync with the needs of private sector upgrading.”

1.3 National and sectoral innovation system concepts and outline of the book

Unlike the three schools of thoughts, this book will illustrate that Thailand’s MIT is caused by failures of the country’s innovation systems in technological learning and industrial upgrading. The book is divided into two parts. Part 1 focuses on the analysis of national innovation systems, that is, key actors, their interaction and collective learning, and influential institutional factors. Part 2 deeply investigates the innovation systems of Thailand’s strategic industrial sectors, namely, the electronics, automotive and food industries.

Part I: Thailand’s national innovation system: performance of key actors

The national innovation system is an interactive system of existing institutions, private and public firms (either large or small), universities and government agencies, that produce knowledge within national borders. Interaction among these units may be technical, commercial, legal, social and financial, as the goals of interactions may be the development, protection, financing, or regulation of new knowledge (Niosi et al., 1993).

We will use this concept to analyse the technological and industrial development of Thailand from Chapter 2 to Chapter 6.

Chapter 2: Science, technology and innovation policy of the Thai government

The chapter examines policy content, formulation and implementation processes in the past 50 years, until the military took over the government in 2014. It highlights that despite some changes in policy content and processes, Thailand’s STI policies were static. These circumstances are very different from East Asian countries like Korea, Taiwan and Singapore, which are more successful with technological catch-up. The Thai government emphasised the R&D capabilities of firms, while neglecting other important capabilities for catch-up, namely. design and engineering. It perceived that firms were the users of STI ca...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• Lists of tables
• Preface
• Acknowledgements
• List of abbreviations
• 1 Introduction
• PART I Thailand’s national innovation system: performance of key actors
• PART II Sectoral innovation systems of strategic industries
• Bibliography
• Index