3. A snapshot of Thailand’s competitiveness

Thailand’s competitiveness moved from the production of agricultural to industrial goods between 1980 and the mid-1990s. This transition was accompanied by fast growth in labour productivity, at yearly rates often above 8%. Productivity has slowed in the past few decades, as Thailand no longer benefits from shifts of labour from agriculture to more productive manufacturing activities. Nonetheless, one-third of the population is still involved in agriculture and, as the government looks to Thailand 4.0, it remains important to ensure that an agrarian population, already the lowest income sector in the country, does not get left further behind. Their function remains important for the Thai economy, for example in respect of food security.

Competitiveness in labour intensive manufacturing is constrained by rising labour costs related to an ageing workforce and higher worker expectations. Rising labour costs have not matched with improvements in worker skills and the capability of firms to engage in higher value added activities in manufacturing and services. The Thai government confronts the competitiveness challenge with highly ambitious plans and programmes to enhance productivity of five existing and five new target sectors (including some services), boost innovation capacity and accelerate human resource development (Chapter 2). While competitiveness is a concern across all sub-national regions in Thailand, most efforts in terms of infrastructure development, incentives and knowledge centres are provided for the Eastern Economic Corridor (EEC) and the wider Bangkok area.

Thailand’s productivity challenge might become yet more important as the world has moved into a global economic crisis related to the COVID-19 pandemic. There are a number of reasons why this crisis might further impair global and Thai productivity growth, including higher transactions costs, lower mobility, and a reduced scope of resource reallocation across firms, sectors, and countries. SMEs are likely to be the most affected, potentially increasing already severe productivity inequalities. On the other hand, innovations prompted by the need for new ways of working could generate a positive productivity impulse. While crisis implications on productivity should be taken into account for short and longer term policy priorities, it is important to take stock of Thailand’s competitiveness even if it is based on pre-crisis data at the moment. Understanding Thailand’s competitiveness will help identify structural strengths and weaknesses of the economy and inform policy directions during the recovery.

Thailand’s labour productivity in targeted manufacturing and service sectors lags considerably behind levels in more advanced economies, despite some recent improvements. This is associated with persisting dominance of lower value added activities within targeted sectors. On the contrary, activities of strategic priority (such as manufacture of modern batteries, aircraft and spacecraft, bio fertilisers, or advanced business and IT services) are far from having a comparative advantage on international exporting markets. Research and development (R&D) has increased in recent years, resulting in a patenting surge of Thailand-based inventions, but total innovation output still needs enhancement in order to catch up with economies such as Malaysia and Singapore.

Competitiveness remains highly unequal across regions and provinces, with wider Bangkok and the ECC leading the way and reporting growing productivity in priority activities. Significant productivity disparities are also observed across foreign and large domestic firms as well as SMEs. Foreign firms are the most productive in all sub-national regions, closely followed by large domestic firms. SMEs are only half as productive as larger and foreign firms in wider Bangkok and EEC and the situation is more acute in less developed regions. Despite their competitive advantage, foreign and large domestic firms often consider labour shortages as a major constraint for their operations, which they increasingly address with in-house training. However, many of these firms still expect the government to increase efforts to provide adequate training and skills to workers in Thailand.

Based on the assessment in this chapter, a few policy directions can be derived. They will be discussed in details in subsequent chapters.

  • Competitiveness has been improving in activities that are targeted under current development plans. Chapter 4 further confirms that investment has been expanding in many of these areas, but Thai-based manufacturers and services firms have still a lot of potential to improve and expand operations in targeted activities. Chapter 5 assesses to what extent Thailand’s investment promotion and facilitation efforts support the transition of Thai-based businesses from lower toward higher value added activities and how the current crisis has influenced these efforts. Chapter 11 further elaborates on this question by proving policy options on how outward foreign direct investment (OFDI) could help Thai industries to move lower value added activities to less developed neighbouring countries and to acquire knowledge and technologies in more advanced industries.

  • Important disparities exist across sub-national regions and firm types. The chapter focuses mostly on measures related to economic competitiveness and shows how they may constrain Thailand’s plan to move towards inclusive and sustainable development. Chapter 5 discusses how investment promotion and facilitation could help to address some of these inequalities. Beyond reducing inequalities, promoting responsible business conduct is important. Chapter 9 takes stock of Thailand’s policy efforts on RBC and shows what could be done further to use RBC as tool for advancing economic competitiveness and sustainable development, particularly during the current crisis as well as its recovery where RBC could be under stress.

  • An important policy objective is to enhance investment in green technologies and renewable energy. Subsequent chapters will put the question of environmentally sustainable production at the centre of discussion by looking at how foreign investment contributes to the greening of industry (Chapter 4) and identifying what the government is doing to enable competitiveness and investment in this area (Chapter 10). Upholding the need for economic greening despite the current economic crisis will be key for achieving Thailand’s development objectives.

  • A strong legal framework for both foreign and domestic investors is an important condition for the transition to higher value added production, expansion of innovation capacity and importantly for the development of services. Chapter 6 examines how Thailand could approach a reform agenda in the area of regulatory restrictions to foreign investment, particularly in services, and how to clarify the legal framework for foreign entities. Chapter 7 further investigates to what extent the legal framework for investment may challenge investment growth, focusing on intellectual property protection and contract enforcement.

Labour productivity, or value added per worker, is a simple measure to illustrate competitiveness. Labour productivity trends reflect Thailand’s transition from an agrarian economy towards an industrial powerhouse in the 1980s and early 1990s, as seen in other emerging economies in Asia. Average productivity growth exceeded 8% during this period (Figure 3.1). Productivity gains were achieved through a reallocation of under-utilised rural labour from agriculture to labour-intensive manufacturing, as well as capital accumulation and imported technology embodied in growing foreign firm activity. Productivity growth started to decline in the 1990s, even before the 1997 crash, driven essentially by structural misalignments, particularly with respect to insufficient skills development (Chapter 2).

Labour productivity grew on average at around 3% over 2000-18, well below the rates achieved during the industrialisation period in previous decades. Slower productivity improvements reflect trends in other countries at the upper middle-income level that can no longer shift labour from agriculture into more productive manufacturing activities. Nonetheless, one-third of the population is still involved in agriculture and as the government looks to Thailand 4.0, it remains important to ensure that an agrarian population, already the lowest income sector in the country, does not get left further behind. Their function remains important for the Thai economy, for example in respect of food security.

Thailand’s competitive advantage in labour-intensive manufacturing industries may also be challenged due to its ageing workforce and thus rising labour costs, although one-third of employment is still in low-productivity agriculture, a share seen in less advanced countries such as Indonesia and Viet Nam. Labour reallocation may have been discouraged by relatively high agricultural commodity prices as well as Thailand’s rice-pledging policy, through which the government bought rice at above market prices. Some of that labour may still be absorbed in manufacturing as these policies have now been abolished.

In the 12th five-year development plan (2017-21), Thailand has set its labour productivity target at 2.5% annual growth. While these growth rates are within reach, given trends seen over the past years, the Thai economy is nonetheless confronted with significant challenges to boost productivity more sustainably, and the Thailand 4.0 plan and related strategies have adequately identified those challenges. Future productivity will be determined by firms’ capacity to move into higher value-added activities within each sector, increasingly develop modern and digitalised services, engage in innovation activities, and develop and access adequate human capital – along with more balanced regional development, important regulatory reforms and infrastructure enhancements.

Thailand’s productivity challenge might become yet more important now that the world has moved into a global economic crisis related to the COVID-19 pandemic. There are a number of factors why this crisis might further impair global and Thailand’s productivity growth and result in increasing productivity disparities across firms, sectors and countries (Baldwin and Weder di Mauro, 2020). In the short term, ‘measured productivity’ is likely to fall as the Thai government – and rightly so – has implemented policies to avoid or reduce labour lay-offs even if firms’ outputs decline and support ‘survival’ of a maximum number of firms, particularly SMEs, which are most affected (Chapter 2, Box 2.1). In the longer run, aggregate productivity impacts may depend on outcomes along four channels, which are all influenced by public policies (Di Mauro and Syverson, 2020):

  • Within-firm productivity growth: Thai crisis-related policies encourage firms to keep employees on the payroll which will help ensure that knowledge of these employees is not lost and can be put back to work productively once firms start operating again. On the other hand, many firms have been innovating new ways of working and producing, mostly involving digital technologies. Some of these innovations may yield insights that raise productivity even after the crisis. Unlike other countries, Thailand has been relatively hesitant to implement structural policies to promote and enable such innovations (OECD, 2020a). Moreover, barriers of movement of goods and labour – particularly across countries – are increasing transaction costs. This could lead to less efficient production and yield difficulty in finding the (foreign) labour skills required for Thailand’s upgrading plans (Chapter 5).

  • Resource reallocation between firms: Productivity disparities between SMEs and large firms in Thailand are already severe (see below). During the crisis, small firms are likely to suffer the most and are more likely to exit without state support. Larger firms are typically better prepared to adjust operations during crises. Thailand introduced extensive packages to support SMEs (Chapter 2, Box 1.1). While unconditional support for SMEs makes sense in the short-run, state supported finance will need to be provided to relatively more performing SMEs and innovative start-ups during the recovery and beyond. This does not mean that future state support and promotion should only target (large) technology-frontier firms, but rather SMEs with relatively higher potential for upgrading and productivity growth in order to level the playing field and reduce disparities.

  • Reallocation across sectors: The crisis will also involve reallocations across sectors in Thailand. Air and other transport services, tourism and possibly some retail activities are likely to face more persistent contractions. On the other hand, sectors like healthcare (including pharmaceuticals, medical equipment, bio technology and healthcare services) and ICT are expected to grow, including due to additional incentives provides to these sectors (Chapter 5). Thailand’s manufacturing sector that currently suffers from interrupted global value chains may turn out to be quite resilient and start growing again soon after the crisis, like during the floods in 2011 (Chapter 2; and Miroudot, 2020). Many of the targeted sectors under Thailand 4.0 could thus remain future growth pools, but it is difficult to predict how aggregate productivity will be affected by sectoral reallocations.

  • Accumulation of physical and human capital: Unlike during wars, physical capital is not being destroyed during this crisis but some infrastructure for travel and tourism will be obsolete or underutilised for a potentially longer period. Similarly, the stock of human capital should not be reduced as a result of the crisis, except if foreign talents have left and decide not to return. On the other hand, there is a risk that important projects to develop large-scale infrastructure projects (such as railways, airports, and renewable energy) and initiatives to develop human capital will be delayed or cancelled. While the crisis could slow the speed of capital accumulation, the need to develop key infrastructure and improve skills will be essential for a sustainable crisis recovery (Chapter 10).

While these reflections should be taken into account for short and longer term policy priorities, it is important in the rest of this chapter to take stock of Thailand’s pre-crisis competitiveness. It helps identify strengths and weaknesses of the Thai economy, informing policy directions during the recovery.

Targeted productivity and growth engines in the Thailand 4.0 strategy include a number of manufacturing industries, namely (bio) fuels, (bio) chemicals, electronics, automotive, machinery (robotics), and food (Chapter 2). Activities effectively targeted in these industries cannot be singled out in broad sector classifications available for productivity analysis and are not explicitly defined in official strategy documents. Nonetheless, competitiveness dynamics of ‘approximated target sectors’ provide an indication where Thai manufacturers stand in their Thailand 4.0 readiness and are examined in this section. Further below, the analysis looks more closely at target industries and uses specific activities prioritised for promotion by the BOI to analyse competitiveness in those activities and sub-sectors.1

The manufacturing sector has been an important driver of growth and productivity in Thailand and there is hope that it recovers relatively fast from the crisis (Chapter 2). Its share in GDP has increased roughly from 20% in the 1980s to 30% today. However, the gap in manufacturing labour productivity relative to advanced economies remains considerable (APO, 2018). Manufacturing productivity in Thailand corresponds to approximately 60% of that in Malaysia and although it equals productivity in China.

Strong industrialisation has provided the basic capabilities in all target sectors. Most of these industries are those that are relatively more capital-intensive (fuels, machinery, automotive, electronics, chemicals) and, as expected, report relatively higher productivity than labour-intensive industries such as apparel, furniture and wood sectors (Figure 3.2). The food sector is an exception. It is also among the target industries and – given its labour-intensive characteristics – reports lower productivity.

Thai manufacturers in capital-intensive sectors have considerably improved labour productivity. Over 2011-16, average firm productivity increased by 25% in fuels, 47% in computing machinery, 15% in motor vehicles, and 9% in chemicals. Nonetheless, productivity levels remain at medium levels and therefore mean that Thai manufacturers are far from being positioned at the top end of the value chain. The productivity gap with advanced economies remains high in all capital-intensive sectors and particularly in chemicals.2

In the food sector, the productivity gap with more advanced peers is much lower, but firm productivity in the food sector stagnated over 2011-16. At the aggregate sector level, productivity has even decreased, with decreasing total value added and increasing employment. Improving productivity in the Thai food sector is particularly important given its size and thus potential for overall competitiveness. Food is by far the largest manufacturing sector in Thailand, both in terms of value added (19%) and employment (22%), followed by motor vehicles with 12% of total value added and, in terms of employment, fabricated metals with just 7%.

Another competitiveness indicator is revealed comparative advantage (RCA) which is used for calculating a country’s relative advantage or disadvantage in a certain industry as evidenced by its trade flows. Thailand has a RCA in an industry if it exports relatively more in that industry compared to the rest of the world.3 RCA is calculated for a total of almost 100 sub-sectors in ten broad manufacturing sectors.

Beyond just counting the number of sub-sectors with a RCA, it is useful to consider all sub-sectors and classify them into classical, emerging, declining and marginal:

  • Classical sub-sectors are those in which Thailand had a RCA in at least 4 years in both 6-year periods used in this analysis: 2005-10 and 2011-16. Classical sub-sectors are thus those in which Thailand has traditionally a relative advantage of production and exporting.

  • Emerging sub-sectors are those in which Thailand has gained comparative advantage more recently; that is, Thai producers had a RCA in at least 4 years over 2011-16 but in less than 4 years over 2005-10. Accordingly, emerging sectors could be considered as potentially new growth pools.

  • Declining sub-sectors are sectors in which Thailand has been losing comparative advantage over the past decade. These sub-sectors had a comparative advantage in the past, but over 2011-16 they had a RCA in less than 4 years.

  • Marginal sub-sectors are those that did not have a RCA in at least 4 years in both periods. These sectors may thus be further away from getting a competitive edge in Thailand’s manufacturing sector.

This analysis has its limits in assessing comparative advantage of production. For example, many low-tier supplying industries in transport equipment may be highly developed in Thailand but not export-oriented given the large domestic automotive industry. This could explain a low number of RCA sub-sectors in the Thai automotive industry (Figure 3.3).

Among Thailand’s target sectors, a strong competitive edge is confirmed in the food sector. Thailand has a RCA in 10 out of 17 sub-sectors in the food industry of which 2 sub-sectors are emerging; namely production, processing and preserving of meat and meat products; and soft drinks and production of mineral waters. The chemicals and transport equipment sectors have also been improving comparative advantage over recent years, although from a lower base: chemicals had a RCA in 3 out of 9 sub-sectors over 2005-10 and gained a competitive edge in basic chemicals over 2011-16. Transport equipment had a comparative advantage in 2 sub-sectors in the late 2010s, and was losing RCA in one sector (bicycles) more recently while gaining competitiveness in 2 other sub-sectors (parts and accessories for motor vehicles; and motor vehicles). The ICT, electronics and medical device sector traditionally had a comparative advantage in 7 of 15 sub-sectors but has been losing ground in 2 sectors (watches and clocks; optical instruments). All non-targeted sectors have lower numbers of RCA sub-sectors, with mostly stagnating or falling trends.4

Beyond looking at broad target sectors, the classical, emerging, declining and marginal sub-sectors in Thailand are further grouped into the level of strategic priority for Thailand 4.0 implementation (Figure 2.4). The extent to which a sub-sector is of strategic priority is identified by matching sector level data available for the RCA analysis with activities promoted by the BOI and the extent of generosity of incentives provided. The more generous the BOI incentives are for a given sector, the higher is the strategic priority according to this classification.5

The analysis reveals that among the classical sub-sectors 90% (or 23) are of medium or low strategic priority (Figure 3.4), while only 10% (or 2) sub-sectors are classified as high priority. This finding reflects that Thailand is not putting high strategic priority on activities in which firms have a long-standing comparative advantage, as these classical activities are not expected to require additional support and prioritisation.

For the seven emerging sub-sectors, none receives a high strategic priority. At first glance, one may expect that emerging sectors have become emerging over recent years as a result of high prioritisation, but prioritisation would not have translated into competitive shifts yet, given that strategic priority in this chapter is based on the most recent BOI promotion policy (2015-21) and the data used for this analysis only go up until 2016. Additionally, high prioritisation of the current emerging sub-sectors would not be justified in a Thailand 4.0 context as these sectors involve relatively low value-added activities (e.g. basic chemicals, articles of concrete, sawmilling and planing of wood). Just like for classical products, emerging sectors do not need additional support as they are already competitive.

The declining sub-sectors are predominantly of low priority for Thailand. Out of 7 sub-sectors, 5 are classified as low priority and 2 are of medium priority. Declining industries include relatively low value-added activities in wood and paper products as well as garments. In the Thailand 4.0 context, it is indeed advisable not to provide additional incentives for activities that are losing comparative advantage, particularly if they involve low value-added activities.

Thailand has over 50 sub-sectors in the marginal category, with no systematic RCA over the past decade (Figure 2.4). This is not worrisome, particularly if marginal activities involve activities of low priority. Across manufacturing industries, a number of low and medium priority sectors are marginal. These include for example the manufacture of bodies for motor vehicles or trailers, and the production of paints (low priority), or the manufacture of garments and footwear, wood containers and pharmaceuticals (medium priority). As such, these activities may involve activities within sectors that are targeted in the Thailand 4.0 strategy more broadly but are not prioritised given their lower value added.

Most high priority activities are also pooled in the marginal category, as Thai producers do not have a RCA in these activities. They include for example the manufacture of accumulators and primary batteries, aircraft and spacecraft, or fertilisers. If Thailand has no RCA in these activities because current capabilities are far from those needed to be competitive, it would not be useful to put them as high priority and it would not be realistic to see them emerging as future growth pools. However, if producers are not far from having a competitive edge in high priority activities, an additional boost provided by state support and incentives could be considered as an important and positive trigger.

The analysis indicates that capabilities and competitiveness are still lagging considerably in high-priority activities but that they have been improving over recent years. The average RCA score in high priority activities is currently at 0.45, up from 0.35 over 2005-10 (Figure 2.5). A RCA score of 1 or above indicates that an activity/sector has a comparative advantage in a given economy. Revealed scores in high priority activities that are well below 1 (as revealed in high-priority activities) mean that Thai producers are still confronted with lagging competitiveness.

Significant productivity disparities are also observed across foreign and large domestic firms as well as SMEs. Foreign firms are the most productive in all sub-national regions, closely followed by large domestic firms. SMEs are only half as productive as larger and foreign firms in wider Bangkok and EEC provinces and fall even further behind in less developed regions. Some of these disparities are partly alleviated through business linkages between foreign and domestic firms. Thai firms that develop linkages with foreign firms are more productive relative to Thai firms that do not (Chapter 4).

Recognising firm-level disparities between foreign and large domestic firms on the one side and domestic SMEs on the other side is highly important when it comes to the design of policies and programmes related to Thailand’s upgrading in global value chain positions in support of progress toward Thailand 4.0. While SMEs are often less productive than larger firms, SMEs in Thailand are revealed to face particular difficulties to compete and upgrade due to the dominance of large domestic conglomerates as well large affiliates of foreign firms. These disparities are likely to increase during the crisis. It is further shown that it is mostly large firms, both domestic and foreign, that are benefiting from BOI promotion, which puts larger firms in an additional competitive advantage vis-à-vis domestic SMEs (Chapter 5). BOI promotion involves tax incentives such as tax holidays to attract investment into targeted, high-value activities in which domestic SMEs often do not compete.

Thailand 4.0 ambitions can only be attained if public policies help to level the playing field for all types of firms. For example, all firms – independent of whether or not they are promoted – should benefit from import duty reductions and may benefit from merit- or performance-based support (see Chapter 5). It is of utmost importance to put the emphasis on SME upgrading, even if upgrading does not involve technology frontier-type of activities. BOI promoted firms may receive performance-based tax exemptions if they engage in developing and training local suppliers. SMEs themselves may receive specific information and technical support from the BOI, as well as from a number of other state agencies involved in the promotion and support of local firms and SMEs (e.g. the Ministry of Industry, or the Office of Small and Medium Enterprise Promotion).

A fundamental objective of Thailand’s development plans and strategies (e.g. 20-year strategy, 5-year plan, Thailand 4.0, BOI Investment Promotion Policy; Border SEZ development; BCG economic model) is inclusive growth across regions, including in less developed regions and areas. The government recognised the challenge of regional development a long time ago and has used different strategic approaches to address the problem. In the past, regional development was approached with subsidies, cash-handouts to the poor and regional investment promotion (Chapter 2). More recently, the government has focused investment promotion on the development of industrial clusters and border special economic zones (SEZs). It is therefore important to assess Thailand’s competitiveness from a regional perspective.

The analysis below reveals persistent productivity gaps across and within regions, with wider Bangkok and EEC leading the way. While a strategic focus on boosting higher value added activities, particularly in the EEC, will help Thailand on its path towards a modern and highly developed economy, additional efforts will be required to reduce regional inequalities and to develop a different competitive edge in lagging regions.

Thailand’s manufacturing activity is very much concentrated in the wider Bangkok region as well as in the three provinces of the EEC. Above 40% of value added is created in the Bangkok Metropolitan Area (BMA) and 25% in the EEC (Figure 3.6). The rest of the Centre (excluding EEC) receives 15% of value added while the other regions report only marginal shares at 5% or below. The picture looks somewhat different for employment: while BMA also has a high share of 40% of total manufacturing employment, EEC’s share is at 15% much lower compared to its contribution to value added. Other regions in the South, North and Northeast report higher shares in terms of employment than in terms of value added.

Unequal distribution of value added and employment across regions reflects their different sectoral composition. The labour-intensive food sector is dominant in the South, North and Northeast. It is responsible for 40-50% of value added and 30-40% of employment in these three regions. Food is also the dominant sector in BMA and the Centre, with value added and employment contributions at 20-25%, but more productive and capital-intensive sectors are also important, particularly in the BMA. A low employment share in the EEC relative to its value added share is due to the dominance of capital intensive industries: motor vehicles, fuels, chemicals and machinery are jointly responsible for almost two-thirds of total value added in the EEC.

Regional disparities are further revealed in terms of labour productivity (Figure 3.7). Manufacturing firms’ labour productivity is on average three times as high across provinces in BMA and EEC as compared to the Centre (excluding EEC) and the South; and they are more than six times as productive compared to firms in the North and Northeast (Figure 3.7, Panel A). A closer look at average firm productivity in each province further shows that disparities not only exist across regions but also within regions. For example, the least productive province in BMA (Bangkok) is as productive as the most productive provinces in the Centre and South. Meanwhile, the most productive provinces in the North and Northeast are more productive than the least productive provinces in the Centre and South.

Productivity disparities have also increased over time. While productivity of firms in the Centre, South, North and Northeast was stagnant over 2011-16, those firms located in BMA and EEC considerably improved productivity over the same period (Figure 3.7, Panel A). This holds particularly for firms in the most productive province within BMA (Samut Sakon), where average labour productivity increased from USD 16 000 per worker to USD 20 000 (or by 25%). Improvement is also pronounced in the most productive province in EEC (Chachoengsao). Chachoengsao was the least productive province in EEC in 2011 but firms have been able to improve productivity by 40% over 2011-16, making the province the top performer within the EEC.

Regional disparities are further exacerbated when looking at productivity performance of different firm types (domestic SMEs, large domestic firms, and foreign-owned firms). Across regions, SMEs need to do more to catch up with large domestic and foreign-owned firms in terms of productivity (Figure 3.7, Panel B). This is a pattern also found in other emerging and developed countries (OECD-UNIDO, 2010). The SME productivity gap is however much lower in BMA and EEC compared to the rest of Thailand. Average productivity of large domestic firms and foreign-owned firms was relatively balanced across regions (approximately USD 25-30 000 per worker) in 2017; while regional productivity variation of SMEs is much more pronounced. Recent research also finds significant disparities in terms of export and product innovation capacity between leading firms and provinces and laggards at risk of being left in Thailand (Apaitan et al., 2017).

The analysis further shows to what extent regional value added is generated in sectors that are more or less prioritised under Thailand 4.0 and whether high priority activities – in case they are expanding – are likely to boost growth and productivity across regions. Most manufacturing value added has been generated through activities that under the current policy receive medium priority (Figure 3.8, Panel A). These activities include those in which Thailand has established a comparative advantage over the past decades, for example, the assembly of electronics and automobiles as well as the production of parts with medium levels of complexity in those sectors.

The contribution of high priority activities to total value added is generally low, but almost zero in the South, North and Northeast (Figure 3.8, Panel A). High priority activities are concentrated in wider Bangkok and EEC and have contributed about 12% to total value added in both regions in 2016, up from 10% in 2011. In the rest of the Centre, those activities have contributed about 9% to manufacturing value added in both years.

Productivity of high priority activities is consistently above levels in medium and low priority activities across regions (Figure 3.8, Panel B). This reflects the technology- and capital-intensity of production and is thus in line with expectations. It illustrates that prioritising those activities and thus helping to expand them would indeed boost overall and regional growth and productivity. However, even within high-priority activities significant productivity differences across regions can be observed. Firms operating in high priority activities in the EEC in 2017 are six times more productive than firms in those activities in the North or Northeast. While productivity in high priority activities has only improved in the BMA and EEC over 2011-16, in these two regions the rate of productivity growth has been significant (10% in BMA; 25% in EEC).

The development of competitive service sectors has great potential to enhance inclusive growth and productivity in Thailand. It can create productive jobs, enable access to goods and services for all parts of society, including in less developed regions, as well as for SMEs, and generate positive spillovers on manufacturing productivity in GVCs. The role of services has increased over time for countries at all stages of development, contributing both to economic growth and jobs. A key driver of this shift has been the ICT revolution and digitalisation, making services increasingly tradable, transportable and storable, and thus promoting productivity growth in services and downstream industries.

The Thailand 4.0 plan prominently reflects the rising role and importance of services (OECD, 2020b). Thailand’s targeted services sectors include backbone services such as logistics and aviation but also high-end business services activities including R&D, data analysis, consulting, education and health services as well as the promotion of the digital economy. Among BOI’s most prioritised activities for investment, i.e. those receiving the most generous tax incentives, the majority involve services activities (Chapter 5).

Increasing strategic focus on services is timely, but Thailand’s services development still needs enhancement to catch up with that of economies that have a competitive advantage in high-end services and high-tech manufacturing activities that depend on competitive services inputs. Thailand’s share of services in GDP is approximately 55% (Figure 3.9, Panel A), corresponding broadly to its services share in the late 1990s. This share is similar to that of middle-income countries on average (including lower middle-income countries); and is almost 20 percentage points below the average share of high-income countries. Service sector development should be supported to reach their full potential as services would increasingly be needed to maintain growth and move up the value chain in production.

With economic development, ICT-enabled, modern services are expected to gain in importance relative to other services. On the one hand, broad access to, and availability of, modern backbone services (such as logistics, telecommunications and financial services) is essential for inclusive growth and enhanced participation in GVCs, including by SMEs (Low, 2016 and 2013; Rentzhog and Anér, 2015). On the other hand, modern business services – including professional services like legal, consulting, engineering and advertising, as well as R&D, data and computer services – are important inputs into advanced manufacturing production and help to enable innovation. As the next industrial revolution unfolds, international production fragmentation may be slowing, and manufacturing activities might be concentrated in advanced production hubs (De Backer, 2016). Manufacturing will be increasingly automated and make extensive use of advanced, digital technologies such as big data analytics, the internet of things and Blockchains – all enabled through advanced business services (OECD, 2017).

The share of modern services in total services value added remains low in Thailand compared to advanced countries. Thailand’s services use and imports in manufacturing correspond to the ASEAN average, but lie considerably below services use in OECD countries (Figure 3.9, Panel B). Recent empirical evidence shows that limited use of, and competitiveness in, services is associated with lower productivity in Thai manufacturing industries (OECD, 2019).

A relatively low share of services in GDP and limited costs of services in production could be due to greater efficiency and significant competitive pressure, or on the contrary, to unproductive services and a focus on low value added activities. Beyond the size of the sector, it is therefore important to study the extent of competitive pressure, efficiency and productivity as well as the quality of services in order to evaluate the full potential services may have for inclusive growth in Thailand.6 Thailand’s competitive edge in services is limited to travel services, including potentially sophisticated and targeted health- and business-related travel services (Figure 3.10, Panel A), but this sector is now suffering and will suffer for a while in light of the COVID-19 pandemic and related travel restrictions.

Productivity in logistics and communications services in Thailand has rapidly been catching up with frontier providers such as Singapore (Figure 3.11), while relevant authorities should place more emphasis on improving productivity and competitiveness in backbone services (ASEAN-World Bank, 2015). Peers in Asia, such as Malaysia and China, are also subject to lagging productivity in logistics and communications and are rapidly catching up with advanced countries. Further improving competitiveness in communications will also make Thailand more resilient to future pandemics where high quality communication infrastructure and services are key for business continuation.

A simple proxy of competitive pressure (or efficiency) in backbone services is the ratio of value added per unit of gross output – where value added includes labour costs and profits, and output additionally includes all input and external services costs. This ratio is higher in Thailand compared to more advanced countries and could point to persistent high mark-ups and inefficiencies in these backbone services in Thailand that are still highly restricted for new foreign and domestic market entrants (OECD, 2019).

Given its strategic location in Southeast Asia and its relative development, Thailand has the potential to become a rising logistics hub as projected by current ambitions (Chareonwongsak, 2018). However, current trends point to remaining competitiveness challenges in logistics. For example, Thailand had a comparative advantage in transport services in the late 2000s, which has been fading since then (see above Figure 3.10, Panel B). The World Bank Logistics Performance Index provides another measure of quality and efficiency of transport and logistics services (World Bank, 2018). Under this metric, Thailand has considerably been improving its performance, ranking among the world’s 30 best performing logistics hubs in 2018, up from 45 in 2016. Still, Thailand will need to accelerate its performance to catch up with advanced services economies in the OECD.

Logistics costs relative to GDP can shed further light on specific inefficiencies relative to transport and inventory holding. A downward trend in logistics costs can be seen in Thailand since the early 2000s, which is mainly driven by decreasing inventory holding costs (Figure 3.12). However, costs at approximately 14% of GDP remain high relative to the world average of 11% and specifically relative to logistics costs in Europe at 9.5%, or those in the US and Singapore at 7.5% (Wongsanguan, 2018).

Similarly, Thailand’s productivity in financial and business services is still relatively low, and has been stagnant over the past two decades (Figure 3.11). In finance and business services, China has made tremendous improvements over the past decade, positioning China increasingly well in the race towards higher value added activities both in services and manufacturing. These services are still far from having a RCA in Thailand (see Figure 3.10, Panel B).

A key ingredient of Thailand’s development plan includes the promotion and expansion of innovation. Investment and innovation policies aim to foster investment into R&D activities within the ten target sectors identified under Thailand 4.0 (Chapter 2). The expansion of innovation capacity is particularly promoted in the area of core technologies (including biotechnology, nanotechnology, advanced material technology and digital technology) and implemented through various government programmes often led by the Ministry of Higher Education, Science, Research and Innovation (MHESI). Biotechnology and digital technologies are likely to be further prioritised in light of their importance for resilient economies during pandemics.

Trends in innovation output in Thailand, measured by the number of patent applications, show a clear expansion in recent years.7 Total patent applications to the European Patent Office (EPO) of Thailand-based inventors have been increasing each year since the early 2000s, and have spiked since the introduction of new and ambitious development strategies around 2015 (Figure 3.13, Panel A).8 Yearly applications doubled between 2000 and 2014, from about 20 applications to 40. Applications have surged since then to more than 70 per year. Malaysia has traditionally reported higher innovation output compared to Thailand but their total number of patent applications are today broadly aligned. In other Southeast Asian economies, with the exception of Singapore, innovation activity is broadly absent.

Aggregating total innovation output over 2000-16 reveals that Malaysia is an outstanding country for Thailand to observe in order to develop on the issue (Figure 3.13, Panel B). Malaysia-based inventors have jointly filed three times as many patent applications to the EPO compared to Thailand-based inventors. These trends also match with respect to applications in specific technologies, although in medical technologies and pharmaceuticals, inventors in Thailand are slightly closer to the volumes of patent applications of their peers in Malaysia.

The volume of innovation output in terms of patent applications corresponds to trends in research and development (R&D) activity in Thailand. R&D expenditure by private businesses and public institutions fluctuated around 0.2% of gross domestic product (GDP) in the 2000s and has gained importance since 2010 (Figure 3.14, Panel A). R&D expenditures have quadrupled relative to GDP over the past decade. These trends closely match the number of researchers employed in the field of R&D.

Despite the surge in R&D activity, Thailand needs to invest more in R&D when compared to Malaysia as well as OECD countries, at least relative to size of Thailand’s economy and population (Figure 3.14, Panel B). For example, OECD countries spend, on average, 2.5% of GDP on R&D and employ 4000 R&D researchers per million people. Thailand’s R&D expenditures correspond to one third of those in the OECD and it employs half as many researchers per million people as the OECD.

Relatively low R&D activity in Thailand as a whole may not match R&D and innovation capacity in specific regional hubs within Thailand or with capacities of highly-innovative frontier firms. R&D activity in the manufacturing sector is concentrated in the wider Bangkok region as well as in the EEC. These regions host not only the bulk of innovation but are also responsible for the bulk of lower value added activities in Thailand (as illustrated above). Accordingly, the share of all manufacturing firms engaging in R&D in these two regions at 4-5% in 2016 is still very low (Figure 3.15, Panel A). In line with aggregate trends, R&D activity is increasing. In 2011, the share of firms with R&D expenditures was just about 3% in both regions.

R&D activity is almost exclusively pooled among large domestic and foreign manufacturers (Figure 3.15, Panel B). Almost 30% of large domestic firms – firms with more than 200 employees – engaged in R&D in 2016, up from just 20% in 2011. With a share of 15% of all foreign firms, foreign investors are less likely to spend on R&D in Thailand compared to their large domestic peers. This could illustrate that foreign firms may still not consider Thailand as an innovation hub and are therefore less likely to establish R&D centres compared to domestic firms which may have limited alternatives to locate R&D elsewhere. In fact, foreign firms are more likely to report that government support and incentives for R&D should be strengthened. The most recent government efforts have certainly addressed this concern, which is starting to pay off. Preliminary statistics confirm that R&D spending in 2018 increased by 36% and is expected to increase by more than 30% in 2019.9

The lack of adequate human resources has long been a challenge for Thailand’s competitiveness (Chapter 2, Figure 2.2). Thailand’s plan to become a value-based, innovation-driven economy, and to attract investment accordingly, is only possible if the skills gap and mismatch is addressed quickly and current crisis should not delay government efforts to address this important channel. This holds not only for the most advanced skills of researchers, engineers and managers, but also and essentially for skills of technicians and vocational workers. Thailand 4.0 has made the development of skills a key policy priority.

The development of skills needed in the labour market depends on a strong system of basic education, upon which worker skills can be developed. Access to basic education at the primary and secondary levels is almost universal and public expenditures on education, at 4% of GDP, are comparatively high. Nonetheless, the quality of basic education needs some improvements in order to meet with global benchmarks. The OECD Programme for International Student Assessment (PISA) tests 15-year students in the area of mathematics, reading and science. Thai students need to enhance basic skills compared to comparator countries in Asia and the OECD average since their outcomes have been declining since 2012 (Figure 3.16). Differences of access to high quality education are significant. Students from low income families, and often from rural backgrounds, are less likely to have access to high quality education (OECD, 2018). The government is addressing challenges of basic education with a strategic plan based on recommendations from the OECD-UNESCO (2016).

Thailand faces the challenge of developing adequate worker skills. For its plan to move to higher value activities and innovation, the availability of vocational skills and science, technology, engineering and mathematics (STEM) skills are essential. Thailand would also need to boost English language skills of its workforce.

Thailand has a systematic undersupply of secondary and lower vocational skills. In 2013, the labour market demand of secondary and lower vocational skills corresponded to above 50% of total demand, while the supply of those skills was only around 10% of total supply (Figure 3.17, Panel A). Many students in Thailand decide to proceed with higher education because the remuneration is expected to be considerably higher with a university degree (Ramos, 2016) and vocational education is not as valued and accepted by Thai society as in other countries such as Germany and Switzerland. The Office of the Vocational Education Commission, along with programmes of the BOI and Ministry of Science and Technology, have recently boosted efforts and programmes to increase both the quantity and quality of vocational skills and make technical training more attractive to Thai students (Anuroj, 2018). These programmes are increasingly developed and coordinated with the private sector and require students to combine practical training in companies with classroom education (see Chapter 2).

The supply of workers with bachelor or higher university degrees was above 60% in recent years, while total demand for university graduates is estimated at just 10-15%. This has also resulted in a relatively high share of unemployed university graduates (Figure 3.17, Panel A) and the allocation of graduates in occupations for which they have received no or insufficient training during their studies. This mismatch further implies that many workers have remunerations below those that they would have in an occupation better corresponding to their qualifications (Pholphirul, 2017).

The higher education system has not been producing the types and quality of graduates required by the labour market. For example, in 2010, approximately 15 000 engineers graduated from Thai universities but the predicted demand was more than 6 times as high (Iredale et al., 2014). STEM qualifications are required by 40% of total demand of workers with university degree in Thailand, while only 20% of total supply of higher education graduates have a background in STEM (Figure 3.17, Panel B). However, recent estimates indicate that the supply of graduates in STEM may broadly match absolute demand, given the overall excess of higher education supply: the number of STEM graduates needed per 1 000 people was estimated at 120 in 2013, broadly corresponding to the average supply of STEM graduates over 2013-18. However, the quality and competencies of these graduates may nonetheless not correspond to employer expectations (Saovane and Kanchanit, 2018). The problem may thus no longer be the quantity but rather the quality of STEM skills. A CEO Survey conducted by the Oxford Business Group in 2018 shows that engineering, R&D and computer technology skills remain those most needed in Thailand (Oxford Business Group, 2018). The creation of the MHESI in 2019 and its determined reform agenda – including related to enhanced coordination and joint initiatives of government agencies, educational and research institutions, industry and the local community – is an essential step to address the skills and innovation challenge.10

Government efforts and adaptation of firms to labour shortages may be starting to pay off in Thailand’s manufacturing sector. In Thailand’s two manufacturing centres (wider Bangkok or BMA; and EEC), labour shortages have been decreasing over recent years. In BMA, 15% of all firms reported that labour shortages were a concern for their operations in 2016, down from 25% in 2011 (Figure 3.18, Panel A). These numbers correspond to 10%, down from 15%, in the EEC. Over 5% of firms in BMA and over 10% of those in EEC provide in-house training to their workers to address skills gaps and foster extension of competencies of their workers.

Foreign and large domestic firms are the types of firms most likely to report shortages of skills in the Thai labour force, but this problem was considerably reduced over 2011-16. While in 2011 around 30% of foreign and large domestic firms have reported labour shortages to be a major problem for their operations, only around 20% said the same in 2016 (Figure 3.18; Panel B). The provision and expansion of in-house training among foreign and large domestic firms is particularly common: over 40% of firms provide training with increasing numbers in recent years. Rising and relatively high shares of in-house training among larger firms (foreign firms are often large too) is due to the requirement for firms with more than 100 employees to do so under the Skills Development Act 2002. While firms have been adapting themselves with worker training to address the skills gap, more than a fifth of foreign and large domestic firms still expect the government to increase efforts to provide adequate training and skills to workers in Thailand.


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← 1. While manufacturing remains a priority under Thailand 4.0, it is important to note that it is services activities that are promoted most actively both within manufacturing sectors (e.g. R&D and data analytics) but also in backbone services (e.g. logistics) (see section further below in this chapter).

← 2. Productivity data at the industry level are not available for other comparator countries in the region.

← 3. RCA is based on the Ricardian comparative advantage concept and was introduced by Balassa (1965). Calculation details can be found in Feenstra (2016), for example.

← 4. Apaitan et. al. (2017) confirm Thailand’s impressive transition from an agrarian economy to a highly industrialised and sophisticated economy using The Atlas of Economic Complexity developed by Hausmann et al. (2011). They found that the product space in Thailand 4.0 industries is relatively dense, that is, Thailand has a diversified portfolio of economic activities in which manufacturers have a RCA.

← 5. A detailed discussion on the BOI incentives is provided in Chapter 5.

← 6. Productivity and other competitiveness measures for services are widely used, but they come with significant challenges given that measuring appropriate output is often difficult in services (OECD, 2019). These caveats should be kept in mind when using these measures.

← 7. Innovation output may not always be in the form of patenting new technologies. Innovation may also involve improvements of existing or the development of new products, or improvements of production processes and marketing methods. In this section, the focus is on the patenting of technologies given its priority under the Thailand 4.0 strategy.

← 8. Inventors worldwide typically aim to file patent applications in large markets, and particularly in the EU and the US, to exploit rents in these markets through the sale of patent protected products. Trends in patent applications to the EPO of Thailand-based inventors broadly match applications to the United States Patent and Trademark Office. In this section, only applications to the EPO are reported.

← 9. See https://thaiembdc.org/2019/10/02/thai-spending-on-rd-rises-by-nearly-one-third/

← 10. The MHESI combines higher education policy, previously under the Ministry of Education, with science and technology policy under the former Ministry of Science and Technology.

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