Thailand's three-pronged investment strategy, of which the International Headquarters (IHQ) programme is one part, will be vital in helping the country to address declining competitiveness and catch up with its regional peers' growing attractiveness for foreign direct investment (FDI), says HSBC.
In a report on the regional race for FDI, the bank noted that Thailand's own structural weaknesses, including high labour cost, poor availability of labour supply, and insufficient regulatory improvement, have resulted in deteriorating capacity as a key FDI destination in the region.
At the same time, it said, a lack of holistic and timely long-term investment strategies is another reason why Indonesia and Vietnam have been able to narrow the gap quickly with Thailand.
As well, some of Thailand's "hero industries" are seeing less and less growth, such as hard-disk drives, or face rising costs, namely garments and footwear.
"And after several years of planning, Thailand is opening its arms more widely than ever this year to win more FDI, using a three-pronged strategy," said the report. "We are finally starting to see some coordinated implementation of a new investment strategy and significant regulatory changes."
First, the Board of Investment (BoI) has introduced a new set of investment promotion incentives for 2015 to 2021, the first major change in strategy in three decades. The goal is to target more closely activities that are beneficial to long-term productivity growth. As well, Special Economic Zones (SEZs) are being established in key border provinces to foster stronger regional trade and investment links.
The IHQ scheme, meanwhile, will enable businesses to have more operational flexibility, save costs associated with procurement, foreign exchange transactions and international sales. These strategies "are aligned with one another" and the government's 1.9-trillion-baht infrastructure investment master plan, which will improve and expand the current logistics network, said the report.
Under the new investment promotion scheme, according to HSBC, the BoI has come up with key innovations including facilitation of outward direct investment along with inbound investment promotion.
Other important changes include an emphasis on industrial cluster development to enhance supply chain networks, additional incentives for less developed areas, and more integrated and coordinated resource pooling from related authorities such as the Revenue Department and Commerce Ministry to improve services and streamline procedures.
Thailand's current targeted industries include knowledge-based activities, focusing on research and development (R&D) and deign, and investments in infrastructure activities that add value to domestic resources and strengthen the supply chain.
For the SEZs, six projects have been officially introduced since 2014 in five border provinces with an additional seven to be established in five other areas. Businesses in the SEZs may apply for additional government privileges on top of the BoI incentives, while the Labour Ministry has also relaxed regulations so that they can employ unskilled foreign workers entering Thailand on a daily basis.
"The establishment of the SEZs not only encourages decentralisation of economic development away from the central region, but also to enhances Thailand's readiness for the Asean Economic Community (AEC)," said the report.
While the US dollar value of Thailand's exports to Asean expanded by 11.5% year-on-year on average between 2006 and 2014, cross-border exports to Cambodia, Laos, Myanmar and Malaysia grew even more impressively at 14.5% annually, it noted.
"Nevertheless, the success of the SEZ also depends significantly on the Thai government successfully implementing its infrastructure investment master plan, which aims to connect key cities and industrial areas to the logistics network," said the report.
Meanwhile, the IHQ and International Trading Centre (ITC) schemes are intended to help local and foreign businesses enhance productivity through cost saving and synergies, especially by centralising some functions such as inter-company loans and raw material procurement. In return, the host country can potentially benefit from an increase in business transactions within the economy.
The enhancement of Thailand's IHQ scheme was made possible partly due to the relaxation of capital flow and foreign-exchange regulations by the Bank of Thailand since 2010. In particular, companies now have more flexibility in foreign-exchange management and investment transactions under the corporate treasury centre licence that is now included in the IHQ grant, it said.
"Thailand is now offering more incentives compared to its neighbours," said HSBC, but it noted that the country's southern neighbour was not sitting still. Malaysia in May this year introduced a "Principal Hub" programme with a revised set of inducements for investors.
Under its Operational Headquarters (OHQ) programme, Malaysia has issued slightly more than 250 licences and approved nearly 30 other "global operation hubs", while Thailand has issued only about 120 licences.
"It remains to be seen if other factors will prevent Thailand from achieving its goals," the HSBC report said. "For instance, working culture and language may need further adjustments to bring Thailand closer to other global business hubs.
"Singapore and Hong Kong have additional advantages because they continually attract from all over the world, which further enhances the pool of human resources on top of their well-educated locals."