5. Clusters and new industry path development

SMEs in Thailand show the following problematic characteristics (according to OECD, 2011):

  • A “missing middle” – i.e. a shortage of medium-sized firms with the capability to grow. This limits the innovativeness and competitiveness of the SME sector and its potential to participate in national and global value chains and to co-operate with large firms and universities.

  • An overly large share of entrepreneurs driven by necessity rather than by opportunity. These “necessity” entrepreneurs often have weak productivity and absorptive capacity for innovation, lack growth potential and suffer from low incomes and poor employment conditions.

  • A large gap in the level of entrepreneurship and SME activity between the higher-income central region and the other regions of the country. Entrepreneurial activity in the regions is about one-half the rate of Bangkok. Similarly, around two-fifths of recorded SMEs are located in Bangkok region and its surrounds, where only one-tenth of the population lives. This weak SME and entrepreneurship activity is likely to hold back the catch up of other regions with Bangkok as well as the development trajectory of the country as a whole.

  • A large brain drain from peripheral regions to Bangkok, which makes it difficult to retain educated youth with a bachelor degree in the Northern cities of Chiang Mai (even if this is the second largest city in Thailand) and Chiang Rai.

This chapter focuses on how cluster policy actions at regional level can help overcome these problems at the same time as developing higher value-added industry development trajectories in Thailand. It takes the case of the advanced agriculture and biotechnology and food-for-the-future regional innovation cluster in Chiang Mai and Chiang Rai. The analysis emphasises the importance of supporting start-ups and scale-ups in the cluster to develop and exploit advanced agricultural products, based in particular on biotechnology as a key enabling technology (KET), and proposes how to design appropriate cluster policies to support them.

Box 5.1 presents the relevance of the cluster concept for organising policy interventions to support the contribution of SMEs to new industry path development at regional level. It stresses the importance of seeing agglomerated regional clusters as being embedded within non-agglomerated national clusters, and the importance of start-ups and scale-ups to exploit the knowledge generated by universities and research organisations regionally and nationally. It shows how an expanded cluster policy in Chiang Mai and Chiang Rai is relevant to the objective of upgrading and diversifying its advanced agriculture and biotechnology and food-for-the-future industries.

Table 5.1 describes the main types of industry path development possible in regions and their mechanisms. Using this typology, Chiang Mai and Chiang Rai can realistically aim to achieve the following types of new industry path development:

  • Path upgrading (through climbing Global Production Networks, Renewal, and/or niche development).

  • Path importation.

  • Unrelated diversification.

The region has clear opportunities for path upgrading and path importation, as discussed below. However, the most powerful of the path development opportunities in advanced agriculture and biotechnology and food-for-the-future in Chiang Mai and Chiang Rai is unrelated diversification, also discussed below. The main emphasis of policy for advanced agriculture and biotechnology and food-for-the-future should be on promoting unrelated diversification.

The following opportunities can be pursued for path upgrading and path importation in the cluster.

Path upgrading by moving firms up the value chain is achievable in advanced agriculture and biotechnology and food-for-the-future in Chiang Mai and Chiang Rai by introducing new technologies (e.g. Industry 4.0) and major organisational changes, including upgrading skills and production capabilities in SMEs. Being part of a dynamic cluster will boost this development.

Path upgrading is also possible in the cluster through niche development in mature industries. An example of this taking place in advanced agriculture and biotechnology and food-for-the-future in Chiang Mai and Chiang Rai is the promotion of organic agriculture and food production. This has been driven by the use of symbolic, intangible knowledge in the marketing of the products. This could be for example in the form of story-telling about the history of the product, the environment in which it is being grown etc. (i.e. marketing innovation).

Path importation to the Chiang Mai and Chiang Rai advanced agriculture and biotechnology and food-for-the-future cluster can be achieved through successfully attracting FDI and an inflow of skilled individuals with competences and production capabilities not available in the region. The successful national biotech strategy, and the competences at the regional universities and science parks, increase the attractiveness of Chiang Mai and Chiang Rai for foreign firms and individuals. The development of strong cluster policy actions will also increase the region’s attractiveness.

However, these strategies are not as radical in terms of path development as strategies for unrelated diversification. They are more likely to lead to ‘path extension’, which is the outcome of incremental innovations in firms, which may result in stagnation and decline (path exhaustion) (Isaksen and Trippl 2016).

The opportunities for unrelated diversification in the cluster offer the greatest steps towards diversifying the economy into more technologically-advanced specialisations that move up the ladder of higher knowledge complexity and value creation compared to the present level in the region. They should therefore be the main focus of the cluster policy efforts.

Unrelated diversification involves firms moving into new industries or areas of production by combining their existing knowledge bases with new, unrelated knowledge. The food industry in Chiang Mai and Chiang Rai can be characterised as a traditional industry based on synthetic, engineering knowledge. However, start-ups and scale-ups can combine this knowledge with new analytical, science-based knowledge in KETs (particularly biotechnology, but also nanotechnology and digitalisation) to diversify into advanced agricultural products, functional food and beverages, food-for-the-future, medical food and cosmetics. Internationally, the introduction of science-based, analytical knowledge from biotechnology has led to the generation of high value-added functional foods with particular health benefits (Zukauskaite and Moodysson, 2016), and there are firms in Chiang Mai and Chiang Rai that are already doing this, supported by the national and regional food clusters.

The outlook for future unrelated diversification in Chiang Mai and Chiang Rai is very promising. On the demand side, there is an almost unlimited international market for safe and healthy food, functional food and beverages, non-chemical plant and herb-based medicine and cosmetic products. On the supply side, Northern Thailand seems to have the natural resources and scientific knowledge to successfully develop products to meet this demand. Overall, the food and beverage industry in Thailand contributes 23% of GDP and Chiang Mai and Chiang Rai have key agricultural production and processing specialisations in vegetables, fruits and herbal products. Thailand, both nationally and in the Chiang Mai and Chiang Rai regions, also has the knowledge exploration capabilities in KETs – in particular biotechnology, together with nanotechnology and digitalisation – that are critical to generate new and advanced agricultural products in start-ups and scale-ups, particularly in functional foods.1

Longan is a good example of how biotechnology can be integrated in agricultural products to increase their value. Longan contains a number of active, healthy ingredients, and research aimed at extracting compounds from longan seeds is ongoing at several universities, which are seeking to develop other important by-products to be used for medical purposes. For example, in the Northern Food Valley, biotechnology is being used to produce an anti-aging agent. In another case, a functional food is being produced in the form of a beverage to help sleeping, based on research conducted by Chiang Rai University in co-operation with Natural Beverage Corporation, Ltd.

There are also examples of using research in biotechnology to add value to other agricultural products in Chiang Mai and Chiang Rai:

  • A start-up called Sleep Well manufactures beverages that aid sleep using vanilla and honey.

  • Tofusun produces bed-time milk from soybeans fortified with melatonin to aid sleep.

  • A start-up called Morinaga produces a candy with lactic acid bacteria to prevent the common cold.

  • A tech start-up called Juiceinno8, and funded by TukTuk500 Venture Capital, produces fruit juice without natural sugar to help prevent diabetes.

  • The Tea Gallery Group, a group of SMEs in Chiang Mai, produces fermented tea, called “Kombucha”, with documented health benefits including reduced cholesterol, blood pressure, inflammation, migraines and fatigue.

Unrelated diversification in advanced agriculture and biotechnology and food-for-the-future in Chiang Mai and Chiang Rai can build on the actions of the Thailand Industrial Development Strategy 4.0. This targets a broad set of “s-curve”, “locomotive” industries and aims to help them grow by supporting the introduction of advanced technology and innovation, in particular in SMEs. In the case of advanced agriculture and biotechnology and food-for-the-future, the policy targets applications of research in functional food, medical food, food supplements and food innovation, as these are among the most dominant industries in Northern Thailand, as well as in biofuels and bio-chemicals and medical, health and cosmetics products made from herbs and plants. These sectors are also supported by Thailand’s National Biotechnology Policy Framework 2012-2021, which targets agriculture and food, medicine and public health, bio energy, and bio industries.

The Thailand Industrial Development Strategy 4.0 and the National Biotechnology Policy Framework are successfully building Thailand’s research capacity in biotechnology. There are a number of key components to this:

  • The National Centre for Genetic Engineering and Biotechnology (BIOTEC), established in 1983, has multiple laboratories for conducting research and providing technical services in agricultural, biomedical and environmental sciences. For example, the BIOTEC Food Biotechnology Laboratory helps improve and upgrade the processing and quality of traditional Thai fermented food.

  • The National Science and Technology Development Agency (NSTDA) acts as a bridge between research in BIOTEC and industry. It does this by providing resources to industry to develop a critical mass of industry researchers to apply biotechnological research in product and process innovations. NSTDA has focused on five target sectors, including agriculture and food, energy and environment and health and medicine.

  • The regional universities in Chiang Mai and Chiang Rai undertake applied research directed to developing applications for local industry.

  • The regional science parks (especially NSP) play a key role in applied R&D, connecting universities with industry. At NSP, for example, specialists and researchers from industry, universities and NSTDA collaborate to develop biotechnology applications to be exploited by regional industry. NSP is part of a system of Thailand Science Parks (TSPs), which further serve as a one-stop service centre to assist foreign and domestic firms engaged in scientific and technological research.

It may be rather surprising that Thailand, as a middle-income country, has developed cutting-edge biotechnology research in many areas with a strong focus on application. However, Thailand’s effort to build a strong biotechnology research capacity must be seen in the context of the country’s position as a global leader in agriculture and as one of the top exporters of food in the world. This led to a strategic decision to transform agriculture into a knowledge-based industry using biotechnology as a KET with applications in agriculture and the aquatic field, but also beyond in the medical and industrial (e.g. bioeconomy) sectors.

Similar use of biotechnology as a KET has been seen in several high-income countries in the last ten years. Several European countries have developed industrial policies at national level to support biotechnology, and several European Union regions have included advanced agriculture and food-for-the-future as part of their regional smart specialisation (S3) strategies.

Thus Thailand has embarked on industrial and innovation policies that are broadly state-of-the-art internationally. These policies are not only a set of “paper plans”, but have been implemented and are starting to produce promising results. Thailand has demonstrated exemplary policy design by building up an advanced basic research capacity in biotechnology at BIOTEC in Bangkok directed towards applications in sectors that are of significant importance for the Thai economy and linking it to applied research at regional universities and science parks located in proximity to the regional firms and specialisations that should integrate the new technologies to advance their products and processes, e.g. agriculture and food in Chiang Mai and Chiang Rai.

However, the missing link in the current arrangements to develop the advanced agriculture and biotechnology and food-for-the-future strategic sectors in Thailand is a more effective cluster policy that can increase the absorptive capacity of start-ups and scale-ups and put them in a position to exploit the produc-relevant research results being generated nationally and regionally. A policy is needed that:

  • effectively introduces scientific and marketing knowledge to start-ups and scale-ups in order to secure the exploitation of research; and

  • operates in regions outside of the capital region in order to spread the economic growth generated.

These are the major missing pieces in the policy puzzle that will help unlock the potential of SMEs for the development of the s-curve, strategic driving sectors at regional level in Thailand. The potential design of this policy is discussed in the section below.

There are two main components of the proposed cluster development policy for advanced agriculture and biotechnology and food-for-the-future in Chiang Mai and Chiang Rai regions:

  • creation of an overarching cluster management organisation (CMO); and

  • introduction of direct cluster development actions for the regional innovation cluster (in addition to the existing tax incentives for innovation).

Adequate and long-term funding is required for these actions. For example, funding is made available to supported clusters for 10 years in Norway and Sweden, where the support comes partly from government and partly from matching funding from the other triple helix stakeholders (research and business actors) participating in the cluster. Adopting the principle of matching funding brings a strong commitment by the stakeholders to seriously engage in systematic and long-term co-operation to promote innovativeness and increased (global) competitiveness.

The creation of an overarching cluster management organisation (CMO) aims to create a structure to:

  • create new networks and collaborations between start-ups and scale-ups and universities, science parks and research laboratories to help start-ups and scale-ups acquire new and more advanced technology;

  • increase the knowledge absorption capacities of start-ups and scale-ups by offering advice and coaching and supplier development programmes; and

  • help create an overall shared vision and development plan for the cluster by bringing together cluster stakeholders to discuss challenges and plans.

A CMO can be seen as a formal organisation, including a set of cluster management agents who undertake actions to create networks and co-operations between participants in the cluster. The cluster management agents can play the role of account managers working with specific firms and research organisations to identify their development needs and collaboration opportunities.

In addition, some of the specific roles that the CMO can play are discussed in chapters 2-4 with respect to developing a vision for regional entrepreneurship development in the cluster and co-ordinating policy actions in this area, targeting higher-quality business development services (BDS) on start-ups and scale-ups with innovation and export potential in the cluster, and attracting FDI to the cluster and supporting the development of FDI-SME linkages in the cluster as the scale of the FDI grows.

The CMO should also undertake vision building and strategy development work for the cluster. This should be undertaken through a bottom-up Entrepreneurial Discovery Process (as referred to in the European Union Smart Specialisation Policy) involving ideas generation and consensus building by regional entrepreneurs in business and institutional entrepreneurs at universities, research organisations and science parks, as well as regional and local government authorities to identify projects to support the development of the cluster. The CMO can help combine this local vision with top-down national government policies.

Direct expenditure and long term financial support is required to build a strong CMO for advanced agriculture and biotechnology and food-for-the-future in Chiang Mai and Chiang Rai. Much of the current cluster networking work undertaken by the existing small-scale cluster initiatives in Chiang Mai and Chiang Rai appears to be undertaken as unpaid work outside of normal working hours. This makes it difficult to put enough time into developing the clusters to fulfil their potential and leads to important tasks not being carried out or carried out too slowly. It also reduces the commitment of firms participating in the cluster initiatives to engage wholeheartedly in developing the clusters.

In addition to the creation of a CMO and cluster management agents, direct funding is needed for cluster firms to participate in a range of projects that will increase their innovation and exporting activities. One of the main areas for this funding is for applied research projects undertaken by research organisations, which could be undertaken on behalf of selected groups of start-ups and scale-ups.

Thailand’s existing cluster policy initiatives offer support that is largely indirect and available in a non-targeted manner. The main existing initiative is Thailand’s Cluster-based Special Economic Development Zones Policy, which came into effect in 2015 and is led by the Ministry of Industry. This offers tax and non-tax incentives to companies for R&D and innovation investments in co-operation with academic institutions or other research organisations in specific sectors and locations in the country. There are two types of cluster: Super Clusters and Other targeted clusters.

  • Super Clusters include ‘first s-curve’ industries, e.g. automotive and parts and smart electronics, which develop by using advanced technology, and ‘new s-curve’ industries, which involve future industries (e.g. robotics and medical hub). Food Innopolis is one of the first-wave Super Clusters, and the only representative of agriculture and biotechnology.2 It is a national initiative built up of regional clusters with different industrial specialisations. It is expanding to regional science parks, among them the Northern Science Park in Chiang Mai, which will focus on rice, fruits, vegetables and organic products, and is financing co-operations with a range of regional universities in these areas.

  • Other targeted clusters include the Thailand Food Valley agro-processing cluster, which was established in 2014 to support SMEs in the advanced agriculture and food sectors in collaboration with the Ministry of Agriculture and Cooperatives, Department of Industrial Work, Ministry of Science and Technology, Thai Chamber of Commerce and the Federation of Thai Industries. The cluster focuses on sustainability, improving the value chain, food quality, increasing exports, and bringing technology and innovation to the sector (www.behance.net). Launched in 2016, Chiang Mai is the first pilot location for the Thailand Food Valley programme, defined as Northern Food Valley 1, including a focus on coffee (“the city of coffee”) as an important sub-sector, while Chiang Rai will belong to Northern Food Valley 2, with tea (“the city of tea”) as a sub-sector (www.northernfoodvalley2.com).

The downside of the strong reliance of these programmes on R&D tax incentives is that they are provided to all firms in sectors and regions designated as clusters. The incentives may therefore go both to firms in need of this support, and firms that would have undertaken the subsidised R&D and innovation activities without the support. In addition, start-ups and scale-ups very often only generate a taxable surplus after some years of operation, which means that in the first years, when they are in most need of support, they do not have any advantage from tax exemption.3 These issues reduce the effectiveness of tax incentives as a cluster development measure.

In addition, support needs to be introduced that is focused more on networking and capacity-building for selected firms with strong growth potential. These activities, for example, could include training programmes to increase the absorptive capacity of cluster firms, R&D projects between cluster firms and universities and science parks, and creating meeting places locally, regionally and nationally for learning and knowledge exchange among firms. They could also include business advisory services and supplier development programmes. In addition, cluster firms could identify needs-driven R&D projects that could be funded for groups of start-ups and scale-ups.

In designing these activities much can be learned from successful cluster development policies in Norway and Sweden presented in Box 5.2-Box 5.3 below.

Further inspiration for developing a regional CMO and direct strategic support measures for cluster development in advanced agriculture and biotechnology and food-for-the-future in Chiang Mai and Chiang Rai can be drawn from the example of a cluster specifically focused on food innovation in the region of Scania in southern Sweden (Box 5.4).

It would also be useful in Thailand to create a platform for different regional clusters to exchange information and ideas and to network together. This platform can provide operational support for different clusters, as well as capacity-building support for professionals working in CMOs. It can also provide a platform to strengthen diversification projects involving firms and research institutions in different clusters. Box 5.5 sets out a model from Austria.

There is strong potential to develop advanced agriculture and biotechnology and food-for-the-future in Chiang Mai and Chiang Rai using biotech as a KET. This is based on a successful national strategy to develop research in relevant areas with potential for commercialisation, including through BIOTEC and national and regional universities and research organisations. However, there is a missing link in terms of the exploitation of the research by SMEs in their products in international markets. One of the major responses to this should be the creation of a cluster management organisation and cluster development agents to create networks between SMEs and universities, research organisations and science parks and to provide support to entrepreneurs and firms with start-up and scale-up potential to integrate new technologies and improve their marketing and business organisation.

The existing cluster policy is not sufficient for this task. The policy focuses particularly on tax incentives for R&D and innovation projects with individual firms. This approach should be expanded to include the long-term funding of an overarching cluster management organisation for advanced agriculture and biotechnology and food-for-the-future in Chiang Mai and Chiang Rai. This organisation would support the creation of a vision for cluster development in consultation with cluster stakeholders, increase the visibility and marketing of the cluster, and undertake networking and brokering of connections between groups of SMEs and the universities, science parks and research organisations for technology transfer. It should also fund direct cluster support measures including direct financing of training programmes and collaborative R&D projects.

There are many international examples of cluster policies adopting this approach, some of them illustrated in the chapter, including within European Union regional smart specialisation strategies. Overall, a change in Thailand’s cluster policy is required to support the absorption of knowledge generated through public research by start-up and scale-up SMEs. The key policy recommendations are presented below:


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← 1. A ‘functional food’ is defined as food with added ingredients for which scientific evidence of positive health effects can be demonstrated. In other words, it is a hybrid form between nutrition and a pharmaceutical.

← 2. Although Food Innopolis belongs to the Super Cluster category, the tax and non- tax incentives are the same as for firms in Thailand Food Valley, as agriculture and biotechnology is only defined as a ‘first S-curve’ sector. For industries defined as ‘future industries’ and belonging to the ‘new S-curve’ industries, a 10-15 years corporate income tax exemption as well as a personal income tax exemption for international specialists to work in the specified areas are under consideration by the Ministry of Finance.

← 3. Research from Norway shows that three times as many firms with deficit apply for a similar tax exemption as firms with a surplus. Thus, in Norway a cash reimbursement scheme is applied to make this incentive interesting for start-ups and scale-ups that have not yet generated a surplus.

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