What is Economic Zoning? History in Thailand and Relations with Domestic and Foreign Dirrect Investments (FDI)

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What is Economic Zoning? History in Thailand and Relations with Domestic and Foreign Dirrect Investments (FDI)

  1. 1. What is economic zoning? History of economic zoning in Thailand andrelate it with domestic and Foreign Direct Investment (FDI). by Choen Krainara Doctoral StudentRegional and Rural Development Planning Field of Study School of Environment, Resources and Development Asian Institute of Technology Bangkok, Thailand March 2009
  2. 2. What is economic zoning? History of economic zoning in Thailand and relate it with domestic and Foreign Direct Investment (FDI).1. Definition of Economic ZoningAccording to European Environment Agency (2009), Economic Zoning is a land-useplanning design or control where specific types of businesses or private sectorinvestment are encouraged within designated boundaries.2. The History of Economic Zoning in Thailand2.1 Rationale of Spatial Division of Economic ZoningRapid industrialization has led Bangkok and its extended vicinities to become cityprimacy. Bangkok metropolitan plays important roles as both commercial andadministrative centers of Thailand. The growth of Bangkok and its vicinities havebecome densely concentrated causing highly imbalanced spatial development as well asposing environmental degradation e.g. air and water pollution. In addressing thischallenge, Royal Thai Government has implemented policies on investment promotionsince 1993. Investment zones have then been used as a means to support governmentpolicies in decentralizing industrial base from the Bangkok Metropolitan Area to theperipheral provinces. In response, the Board of Investment subsequently announced"Policies and Criteria for Investment Promotion" in April, 1993, creating threeInvestment Promotion Zones throughout Thailand which were distinguished byeconomic factors i.e., the level of income and the availability of infrastructure in eachprovince (BOI, 2009). The respective Investment Promotion Zones were as follows:  Zone 1 consists of 6 central provinces with high income and good infrastructure: Bangkok, Samut Prakan, Samut Sakhon, Pathum Thani, Nonthaburi and Nakhon Pathom provinces.  Zone 2 comprises of 12 provinces. They are Samut Songkhram, Ratchaburi, Kanchaburi, Suphanburi, Ang Thong, Ayutthaya, Saraburi, Nakhon Nayok, Chachoengsao, Chonburi, Rayong and Phuket  Zone 3 includes the backward regions covering the remaining 58 provinces with low income and less developed infrastructure. All border provinces are located in this zone; thus all areas in the Zone 3 provinces are designated as Investment Promotion Zones.Please see details of investment zones in Map 1 below.Map 1 Displaying Investment Promotion Zones in Thailand
  3. 3. Source: Board of Investment of Thailand, retrieved fromhttp://www.boi.go.th/english/about/boi_privileges_by_location.asp, retrieved on 24March 2009 2
  4. 4. The financial crisis in the middle of 1997 changed the Thai economy. As a result, taxcollection was below target and public debts increased drastically affecting the fiscalposition of the government. Moreover, the global economic outlook and investmentenvironment had undergone change. In 2000, the Board of Investment consequentlyadjusted Thai investment promotion policies and criteria for granting tax privileges inorder to respond to the future economic and investment prospects.2.2 Basic Investment IncentivesThe BOI offers two kinds of incentives to promoted projects, regardless of location.These are:  Tax-based incentives include exemption or reduction of import duties on machinery and raw materials, and corporate income tax exemptions.  Non-tax incentives include permission to bring in foreign workers, own land and take or remit foreign currency abroad.2.3 Priority Investment ActivitiesThe BOI places priority on promoting the following major types of projects:  Agriculture and agricultural products  Direct involvement in technological and human resource development  Public utilities and infrastructure  Environmental protection and conservation  Targeted industriesThe BOI shall announce the list of priority activities or industries. Such projects will beentitled to the following privileges:  Exemption of import duty on machinery regardless of location  Corporate income tax exemption for eight years, regardless of location  Other privileges entitled for each Investment Zone.2.4 BOI Privileges by LocationPrivileges Investment Promotion Zones are classified as follows:1) Projects in Zone 1 are granted:  50 per cent reduction of import duty on machinery that is subject to import duty of not less than 10 percent.  Corporate income tax exemption for 3 years for projects located within industrial estates or promoted industrial zones, on the condition that such a project with capital investment of 10 million baht or more (excluding cost of land and working capital) obtains ISO 9000 or similar international standard certification within 2 years from its start-up date, otherwise the corporate income tax exemption will be reduced by 1 year.  Exemption of import duty on raw or essential materials used in the manufacturing of export products for 1 year. 3
  5. 5. 2) Projects in Zone 2 (excluding Laem Chabung Industrial Estate and industrialestates and promoted industrial zones in Rayong Province) are granted:  Exemption of import duties on machinery for projects located in industrial estates or promoted industrial zones, and 50 per cent reduction of import duty on machinery that is subject to import duty of not less than 10 per cent for projects located outside industrial estates or promoted industrial zones.  Corporate income tax exemption for 3 years, increased to 7 years for projects located within industrial estates or promoted industrial zones, provided that such a project with capital investment of 10 million baht or more (excluding cost of land and working capital) obtains ISO 9000 or similar international standard certification within 2 years from its start-up date, otherwise the corporate income tax exemption will be reduced by 1 year.  Exemption of import duty on raw or essential materials used in the manufacturing of export products for 1 year.3) Projects in Zone 3 (including Laem Chabung Industrial Estate and industrialestates and promoted industrial zones in Rayong Province) are granted:  Exemption of import duty on machinery.  Corporate income tax exemption for 8 years provided that a project with capital investment of 10 million baht or more (excluding cost of land and working capital) obtains ISO 9000 or similar international standard certification within 2 years from its start-up-date, otherwise the corporate income tax exemption will be reduced by 1 year.  Exemption of import duty on raw or essential materials used in the manufacturing of export products for 5 years.  Deduction from net profit of 25 percent of the projects infrastructure installation or construction costs in addition to normal depreciation, and such deductions can be made from the net profit of one or several years within 10 years form the date of first revenue derived from the promoted activity.4) Projects located in industrial estates or promoted industrial zones in 36provinces : (Chai Nat, Chanthaburi, Chiang Mai, Chiang Rai, Chumphon,Kamphaeng Phet, Khon Kaen, Krabi, Lamphang, Lamphun, Loei, Lop Buri, MaeHong Son, Mukdahan, Nakhon Ratchasima, Nakhon Sawan, Nakhon SiThammarat, Phangnga, Phattalung, Phetchabun, Phetchaburi, Phitsanulok, Pichit,Prachin Buri, Prachuab Khiri Khan, Ranong, Sa Kaew, Sing Buri, Songkhla,Sukhothai, Surat Thani, Tak, Trang, Trat, Uthai Thani, and Uttaradit) as well asLaem Chabung Industrial Estate and industrial estates or promoted industrialzones in Rayong province are granted the tax and duty privileges extended underBOI Policies and the following: 4
  6. 6.  50 per cent reduction of corporate income tax for 5 years after the exemption  Double deduction from taxable income of transportation, electricity and water costs for 10 years from the date of first revenue derived from promoted activity.  75 percent import duty reduction on raw or essential materials used in manufacturing for domestic sales for 5 years, based on annual approval (This incentive is not available to projects in Laem Chabung Industrial Estate and industrial estates or promoted industrial zones in Rayong province.)5) Projects located in 22 provinces: Amnat Charoen, Buri Ram,Chaiyaphum,Kalasin, Maha Sarakham, Nakhon Phanom, Nan, Narathiwat, Nong Bualamphu,Nong Khai, Pattani, Phayao, Phrae, Roi Et, Sakhon Nakhon, Sathun, Si Sa Ket,Surin, Udon Thani, Ubon Ratchathani, Yasothon, and Yala are granted the taxand duty privileges extended under BOI Policies and the following:  50 per cent reduction of corporate income tax for 5 years after the exemption period;  Double deduction from taxable income of transportation, electricity and water costs for 10 years from the date of first revenue derived from promoted activities;  75 percent import duty reduction on raw or essential materials used in manufacturing for domestic sales for 5 years, based on annual approval, for projects located in industrial estates or promoted industrial zones.It should be noted that in each zone the maximum value of a projects corporate incometax exemption is 100 percent of its investment capital, unless otherwise specified.Please find a summary of BOI Privileges by Investment Promotion Zone in Table 1. 5
  7. 7. Table 1: Summary of BOI Privileges by Investment Promotion Zone(Effective for applications submitted during 1 January 2005 - 31 December 2009) Granting Tax and Zone 1 Zone 2 Zone 3 Zone 3 Duty Privileges 36 Provinces and Laem 22 Provinces Chabang Industrial Estate and Industrial Estate /Promoted Industrial Zone in Rayong Province Industrial Outside Industrial Estate / Outside Industrial Outside Industrial Outside Estate/ Industrial Promoted Industrial Estate/ Industrial Estate/ Industrial Promoted Estate Industrial Zone Estate Promoted Estate Promoted Estate Industrial (Excluding Laem Industrial Industrial Zone Chabang Zone Zone Industrial Estate and Industrial Estate/Promoted Industrial Zone in Rayong Province)Import duty on 50 % 50 % Exemption 50 % Exemption Exemption Exemption Exemptionmachinery reduction reduction reductionCorporate income tax 3 years - 7 years* 3 years 8 years 8 years 8 years 8 yearsExemption (Including Laem Chabang Industrial Estate/Promoted Industrial Zone in Rayong Province Remarks: √ = Shall be granted privileges. - = Shall not be granted privileges. * = (For all applications submitted during January 1, 2005 to December 31, 2009) 6
  8. 8. Granting Tax and Zone 1 Zone 2 Zone 3 Zone 3 Duty Privileges 36 Provinces and Laem 22 Provinces Chabang Industrial Estate and Industrial Estate /Promoted Industrial Zone in Rayong Province Industrial OutsideIndustrial Estate / Outside Industrial Outside Industrial Outside Estate/ Industrial Promoted Industrial Estate/ Industrial Estate/ Industrial Promoted Estate Industrial Zone Estate Promoted Estate Promoted Estate Industrial (Excluding Laem Industrial Industrial Zone Chabang Zone Zone Industrial Estate and Industrial Estate/Promoted Industrial Zone in Rayong Province)Import duty on raw or Exemption Exemption Exemption Exemption Exemption Exemption Exemption Exemptionessential materials used for 1 year for 1 year for 1 year for 1 year for 5 years for 5 years for 5 years for 5 yearsin manufacturing ofexport productsDouble deduction from - - - - √ - √ √transportation,electricity and watercosts50 percent reduction of - - - - √ - √ √corporate income taxfor 5 years Remarks: √ = Shall be granted privileges. - = Shall not be granted privileges. * = (For all applications submitted during January 1, 2005 to December 31 2009) 7
  9. 9. Granting Tax and Zone 1 Zone 2 Zone 3 Zone 3 Duty Privileges 36 Provinces and Laem 22 Provinces Chabang Industrial Estate and Industrial Estate /Promoted Industrial Zone in Rayong Province Industrial Outside Industrial Estate / Outside Industrial Outside Industrial Outside Estate/ Industrial Promoted Industrial Estate/ Industrial Estate/ Industrial Promoted Estate Industrial Zone Estate Promoted Estate Promoted Estate Industrial (Excluding Laem Industrial Industrial Zone Chabang Zone Zone Industrial Estate and Industrial Estate/Promoted Industrial Zone in Rayong Province)Deduct the project’s - - - - √ √ √ √infrastructureinstallation orconstruction costDuty on raw or - - - - 75% reduction for 5 - 75% -essential materials years*, with year-by year reductionused in the approval (Excluding Laem for 5manufacturing of Chabang Industrial years*,withdomestic sales Estate and Industrial year-by Estate/ Promoted Industrial year Zone in Rayong Province) approvalRemarks: √ = Shall be granted privileges. - = Shall not be granted privileges. * = (For all applications submitted during January 1, 2005 to December 31, 2009)Source: http://www.boi.go.th/english/about/boi_privileges_by_location.asp, retrieved on 25 March 2009 8
  10. 10. 2. 5 State of Investment in Thailand 1) Overall InvestmentInvestment approvals are performed by related government agencies. Domesticinvestment is mainly granted approval by Ministry of Industry and Ministry ofCommerce, while FDI approval is mostly carried out by the Office of the Board ofInvestment. Investments consisted of capital for both start-up and expansion phase.Both domestic investment and Foreign Direct Investment (FDI) play important role inthe Thai economy as it greatly help generate jobs and income for the Thai people.During the 9-years period from 2001-2009 (January-February), accumulative domesticinvestment amounted at 5.08 trillion Baht, while FDI in-flows to Thailand which mostlyinduced by the above outlined tax and nontax incentives accounted for at 2.74 trillionBaht. The aggregate domestic investment and FDI in-flows amounted as much at 7.83trillion Baht. In terms of annual average of investment, domestic investmentrepresented at 635,778 million Baht, whereas FDI in-flows totaled at 343,056 millionBaht.Regarding the patterns of investment, both domestic investment and FDI had shown asimilar movement. Domestic investment kept increasing from 2001 to 2005 and thensignificantly decreased since 2007. The major industries invested were food, textile andgarment, steel, automobile and parts, cement, electrical appliances and electronics, etc.(Office of Industrial Economics, 2009). While FDI increased at smaller pace of thatdomestic investment with highest investment in 2005, and then varied and starteddeclining in 2008. The major industries invested were automobile and parts, servicese.g. hotel and utilities for industries, electronics, steel, chemicals, agro-industries,machinery, and transportation parts, etc. The major investors were from Japan,Singapore, China, Malaysia, Indonesia, United States of America, the Netherlands,Germany, England, and India, etc. (BOI, 20009). The trend of both domestic investmentand FDI is notably moving downward resulting from global and domestic economicrecession. As a result, the total investment in the whole Kingdom considerably beganfalling since 2008. This reflected the overall national economic performance whichshould cautiously be taken care through responsive policies/strategies and measures inorder to maintain economic growth, full employment and prosperity. Please see detailsof Domestic and Foreign Direct Investment Values in Thailand in Figure 1 below. 9
  11. 11. Figure 1: Domestic and Foreign Direct Investment Values in ThailandDuring 2001-2009 (January to February) 1,600,000 1,400,000 1,200,000 1,000,000 Million Baht 800,000 600,000 400,000 200,000 0 2001 2002 2003 2004 Year 2005 2006 2007 2008 2009 ( Jan- Feb) Zone 1 (FDI) Zone 2 (FDI) Zone 3 (FDI) Total Foreign Direct Investment Total Domestic Investment Total Investment in the Whole KingdomSource:Data on Total Domestic Capital Investment for the year 2001 to 2008 was from Office of Industrial Economics, Ministry of Industry of Thailand, retrieved from http://www.oie.go.th/industrystatus1/r_OctDec51/r_OctDec51_1.html, retrieved on 25 March 2009.Data on Foreign Direct Investment for the year 2001 to 2006 was from Office of Industrial Economics, Ministry of Industry of Thailand, retrieved from http://www.oie.go.th/industrystatus1/r_OctDec51/r_OctDec51_1.html, retrieved on 25 March 2009.Data on Foreign Direct Investment for the year 2007-2009 (January-February) obtained from Office of the Board of Investment, Thailand.Remark: Data on both Domestic Investment and Foreign Direct Investment for the year 2004 were represented with 11 months.It is evident contribution of investments towards national economic growth anddevelopment. During 2001-2007, approximate annual average at 14.55 % of domesticinvestment contributed to the national Growth Domestic Product (GDP), whereasaround annual average at 5 % of FDI shared to GDP. Hence the magnitude of domesticinvestment was larger than FDI for 2.91 times. Thailand should therefore strive todiversify national economy based on two-pronged approach through fostering domesticinvestment and expanding FDI. Rural industrialization could meaningfully be furtherintensified in order to promote domestic investment and employment in rural area inorder to support sustainable rural development. 2) Share of Foreign Direct Investment by Investment ZonesFollowing to the Government policy on designating investment zones, it was provedsuccessful in terms of decentralizing industries out of Bangkok and vicinities. Yet, theinvestments were shifted to largely concentrate in zone 2, which dominated by theEastern Seaboard Development region-Chachoengsao, Chonburi and Rayong provinces- 10
  12. 12. . This is apparent that during 2007-2009 (January-February) the annual average share ofFDI in zone 2 accounted for as high at 69 % of total FDI, followed by zone 3 at 19 %and zone 1 at 14 %, respectively. As a result, investment in zone 2 left behind theinvestment gaps as higher than zone 1 for 4.99 times and zone 3 for 4.1 times.Furthermore, combining of investments in zone 1 and zone 2, the magnitude ofconcentration of investments highly reached at for 83 %. It is notable that thedominance of zone 2 is also widening interregional disparities in Thailand. Therefore, itis crucial to rationally more divert of both FDI and domestic investment toward zone 3in order to promote equitable benefits of investment for development. Please find detailsof share of foreign direct investment during 2007-2009 (January-February) in Figure 2. 100 90 80 70 Percentage 60 50 40 30 20 10 0 Year 2007 2008 2009 ( Jan-Feb) Zone 1 Zone 2 Zone 3Source: Office of the Board of Investment of ThailandFigure 2: Share of Foreign Direct Investment Divided by Investment ZonesDuring 2007 To 2009 (January-February) 3) Share of Domestic Investment to Share of Foreign Direct InvestmentIn 2001, the share of total domestic investment increased to 72.75 % and much declinedto 61.74 % in 2003, and then from 2004-2008 its annual average fluctuated at around 67%. The tendency may continue varying. While the share of FDI slightly increased at27.25 % in 2001, then from 2003-2008 its annual average varied at around 36.63 %.The trend may keep on changing. During 2001-2008, the annual average share ofdomestic investment accounted for 66.18%, while the annual average share of FDIrepresented at one-thirds of total investment in the Kingdom. It is understandable thatboth domestic and FDI will be moving in the similar trend. It is important to note thatThailand still needs FDI in-flow in order to help generate employment and income aswell as cultivating technology transfer and spillover effects, human capital and skillformation and integration of national trade with the global economy. It is also vital forThailand to attract FDI by providing quality infrastructure and human capital. Strongbackward linkages with Multinational Enterprises should be enhanced so that win-win 11
  13. 13. benefits of FDI can be ultimately realized. Please find details of share of domesticinvestment to share of foreign direct investment in Thailand during 2001 to 2008 inFigure 3 below. 100 90 80 70 60 Percentage 50 40 30 20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 Total Foreign Direct InvestmentYear Total Domestic InvestmentSource: Investment statistics of various years from Office of Industrial Economics andOffice of the Board of Investment of ThailandFigure 3: Share of Domestic Investment to Share of Foreign Direct Investment inThailand During 2001 To 2008 4) Industrial development along Thai border areaAs a result of promoting investment particularly in Zone 3, there is a prominentinvestment platform along Thailand-Myanmar border area. It is located in Maesoddistrict, Tak province, which plays a significant role as major industrial developmentlocation in Northern part of Thailand. Maesod district is home to labor-intensiveindustry particularly for garment productions. In 2003, Tak province had 464 factories.Maesod alone hosted 235 factories, which accounted for 51% of the whole provincewith total investment capital at 1,500 millions Baht, and it generated export values at3,100 millions Baht per year, (NESDB). The key labor-intensive industries were textileand garment, canned food, wood furnitures, jewelry and accessories. In addition, therewas increasing emergence of service industries e.g. garage and car maintenance shops,etc. The principal reason for investors in locating these industrial plants in Maesod wasto take advantage of cheap labor from Myanmar and investment incentives in Zone 3. In2003, approximate 10,000 Myanmarnese workers were employed in Maesod district. 12
  14. 14. ConclusionDomestic investment plays major role while Foreign Direct Investment acts ascomplementing role in joint contribution to national economic growth, incomegeneration, employment and development. Adopted Investment zones have been quitesuccessful in dispersing industries out of Bangkok. However, good infrastructure hasled to such concentration of industries be densely located in zone 2 and parts of zone 1which is negative to zone 3. It is thus challenging for Thailand on how to furtherdistribute investment activities to regional provinces in zone 3. Border industrializationin the form of border economic zone can be one of the means to spread out investmentactivities to border regions. This is believed to not only help minimize interregional andintra-regional disparities in Thailand but also bring about opportunities to share benefitswith border cities in neighbouring countries especially Myanmar, Lao PDR andCambodia timely in response to increasing regionalization. Likewise, Thailand shouldalso continue diversifying investments in order to promote equitable competiveness ofboth rural and urban economies. ReferencesBoard of Investment. (2009). Statistics on Foreign Direct Investment for the Year 2007, retrieved from http://www.boi.go.th, on 24 March 2009.Board of Investment. (2009). Statistics on Foreign Direct Investment for the Year 2008, retrieved from http://www.boi.go.th, on 24 March 2009.Board of Investment. (2009). Statistics on Foreign Direct Investment for the Months of January to February, 2009, retrieved from http://www.boi.go.th, on 24 March 2009.http://www.boi.go.th/english/about/boi_privileges_by_location.asp, retrieved on 24 March 2009.http://www.boi.go.th/english/about/statistics_investment.asp, retrieved on 25 March 2009.http://glossary.eea.europa.eu/terminology/concept_html?term=economic%20zoning, retrieved on 24 March 2009.http://www.nesdb.go.th/Default.aspx?tabid=94, retrieved on 27 March 2009.http://www.oie.go.th/industrystatus1/r_OctDec51/r_OctDec51_1.html, retrieved on 25 March 2009.http://www.oie.go.th/industrystatus1_th.asp, retrieved on 25 March 2009. 13

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