Monday, February 26, 2007

Thai Economics 101: I Don't Get This


BoI mulls tax breaks for firms

Move would boost Thai companies operating overseas amid domestic slowdown

Why would you move Thai companies overseas if there was a domestic slowdown? This makes absolutely no sense to me at all. In Western countries, it is a big deal to send operations abroad. You know, the whole outsourcing controversy, sending jobs overseas, and all the jazz?

To help Thai enterprises operating abroad, the Board of Investment (BoI) is considering granting tax incentives, particularly tax breaks, on repatriated earnings, says executive investment adviser Vittaya Praisuwan.

Again, this makes no sense. Why would you give a company tax breaks to move overseas, but only if they send their money home? Why not just give tax cuts to companies in Thailand or if you need foreign reserves, encourage foreign business to invest in Thailand with incentives instead of bullshit capital controls and FBA that take their rights away?

"To help local businesses expand abroad is one of the BoI's aims this year, so they can gain a bigger slice of foreign markets and counter any economic slowdown at home," he said last week.

What the fuck? Why would you push domestic companies out of the local market? That would be like the US giving tax breaks to GM for moving its operations overseas. And how does sending your domestic companies abroad help the local economy? Shouldn't they be creating jobs at home? Shouldn't they be developing the economy at home? Why do they need to be given government incentives to go abroad? Is this madness or what? Why not give Thai companies tax incentives to develop the poor parts of Thailand? Isaan, for example, hello?

If I was a poor farmer, this is an issue I would hit the streets over. Can you imagine not having enough money for uniforms for your kids or not enough to send them to university, but the Thai government is giving Thai multi-national companies tax breaks to invest abroad? And for what, exactly? So that Thai companies can act like big shots? Act like the mighty multinationals do? What is the purpose?

Investors should explore business opportunities abroad, because there are advantages like lower production costs in terms of raw materials and labour, as well as export privileges to third-party countries.

Again, more stupidity. Why would the Thai government condone an exodus of Thai capital when it uses those incentives above to lure foreign capital?

So far, some firms have set up foreign operations mainly in Laos, Cambodia, Burma and Vietnam. The government wants local investors to widen their horizons.

The Thai government goes hat in hand all over the world begging for foreign investment, then cheating foreign companies out of their investment by changing the FBA laws, yet it applauds its domestic companies for going abroad. Why have international capital come to Thailand if the Thai government is encouraging its own companies to leave? And why shouldn't foreign countries treat Thai capital to the same hostility that Thais treat foreign capital? After the FBA changes, capital controls, and the right-wing nationalism fomented by the Thai government over Temasek, why would any country be hospitable to Thai companies, especially when the Thai government is giving that company subsidies to compete with the local producers? Is this insanity, hypocrisy or what?

The BoI said statistics for foreign direct investment (FDI) showed only 40 per cent was by investors from developing countries, while the remainder was from developed nations.

However, foreign investment from Thailand accounted for less than 1 per cent of total FDI.

Please note the horrible English in the two paragraphs above.

As a consequence, the government is considering tax privileges to encourage Thai investors to set up offshore operations, Vittaya said.

"Incentives like tax breaks on repatriated earnings should encourage more entrepreneurs to invest abroad," he said.

Currently, repatriated earnings are taxed at 30 per cent.

Does this mean Thai companies are taxed twice, here and abroad?

The BoI will put the plan to its committee, which will then submit it for Cabinet approval.

A decision should be announced within three months.

Previously, the government's focus was on neighbouring countries for investment promotion. But this year, it is looking farther afield to other developing countries, in Asia, Africa and Eastern Europe, he said.

The board will conduct a road show to promote the establishment of offshore companies this year. So far, targeted markets include Bangladesh, Pakistan, Sudan, Kazakhstan, Russia, Kenya and South Africa.

That is lovely. Give tax breaks to invest in 3rd World countries when your own country is 3rd World. And I'm sure that those countries will love the fact that Thai companies will repatriate all their earnings and get a tax cut for it.

Businesses of great potential include processed agriculture, automobiles, electronics and electronic appliances, construction, garments, furniture and value-added services like consultancy, design and management services.

With a few exceptions, aren't those all businesses that have BOI privileges in Thailand? Thai Consultancy and management? Kidding right?

Vittaya said the BoI was focusing more on promoting foreign operations to help boost foreign-currency reserves.

Boost foreign reserves? What was the list of 3rd world countries with worthless currencies that it wants to do with business again? And if Thailand wants to boost foreign reserves it is easier that the capital comes to Thailand rather than Thai capital going out and being repatriated. And if Thailand needs foreign capital, why the stupid capital controls and foreign business restrictions that scares capital from coming into Thailand?

Recent Bank of Thailand data show Thailand has foreign reserves of US$66.5 billion (Bt2.38 trillion).

Asked about problems Thai firms face when going international, Vittaya suggested they should first gather all of the information available on their target markets.

He advised businessmen to screen prospective partners carefully and establish good relations with local operators.

Petchanet Pratruangkrai

The Nation

Seriously, I'll be probably the only one who pays attention to this, but if I were a foreign investor and a foreign government doing business in Thailand, I'd be going "What the hell?"

I'm not an economist, but if you were a 3rd World country like Thailand with a serious poverty problem in many parts of the country, why would you be giving tax incentives for your best companies to relocate outside the country because it is cheaper? Wouldn't you be giving tax incentives for them to develop Thailand? Wouldn't you be telling them to develop Isaan or the deep South?

Just in yesterday's paper, Surayud was begging Malaysian companies to invest in the South.

I don't get this at all. Am I wrong in my analysis? What am I missing?


Anonymous said...

True, but if the companies set up operations outside Thailand, they will have more opportunities to explain to foreigners the virtues of the self-sufficient economy! That alone is worth the tax breaks. :-)

Fonzi said...

That was funny.

And the thing is, you are probably right.

Anonymous said...

no need to encourage local companies to develop the north-east - the TAT has that sorted out already - they will use farangs with isan wives to promote the region to their friends at home and then they will rip them off as well.

Anonymous said...

fonzi, this is a sad but typical example of poor journalism from the press in general and The Nation in particular. Your question goes to the heart of this story. How does taking capital out of the country and investing it elsewhere increase Thailand's economic and social welfare as opposed to investing it at home? A thinking reporter would not have missed to ask that question and a good editor would not have accepted the report as printed. Unfortunately, these are two commodities The Nation lacks, not to mention journalistic ethics. But then The Nation has jumped the shark a long time ago.

BangkokAl said...

Are you an academic? The reason I ask is that academics are about the only group left that hold the belief that economics is a zero-sum game. Your item seems based on the theory that if Thai firms move overseas, that would affect (badly in your opinion) on their domestic operations. That would be opposite of everyone else, though. Example: Does Toyota sell fewer cars in Japan because it operates in America and in Thailand?

Fonzi said...


Thanks for your response. No, I don't believe economics is a zero sum game. The issue is not whether it is good for the company or not, which is something I could care less about. The intention of every business is to make a profit. By the way, you make an inference that I did not make. I never said that a company going abroad would be bad for its domestic operations.

Why wouldn't a domestic company be happy with a government giving it a competitive advantage with a tax break to move it operations abroad?

The problem I have is that the Thai government is willing to subsidize with taxpayer money private business operations abroad when there is no evidence that this tax cut will benefit the public.

The thing I don't get is why would the Thai government give a tax break to a Thai government to go overseas while domestic companies are taxed at a higher rate.

You don't think this is crazy?

And if the domestic economy is depressed, why would you encourage operations to go abroad, especially to countries who have close to worthless currencies?

And like I noted, if the problem is to boost foreign reserves as the article stated, there are more efficient way to do it.

By the way, the point is not about Toyota selling or making cars in Japan or the US.

The point is why would the Japanese government give tax cuts to Toyota to intentionally push their operations to the US, especially if the Japanese economy is depressed.

Does that make sense to you?

Anonymous said...

You are talking at the level of the firm. A firm invests overseas to take advantage of cheaper production factors and/or to get around protectionist barriers. The benefits accrued to the host country include taxation, employment, and perhaps growth of other supporting industries. The firm gains access to a market, higher profits. The home country gets a dip through taxation on repatriated income. Admittedly, that can be used wisely to increase social welfare. Is this gain in welfare more or less than if the same capital is invested in the home country (all things being equal)? At the level of the firm, there is everything to gain. Are you certain of the benefits to the home country like Thailand that is in need of investment?

Toyota selling just as many cars wherever they are manufactured means diddly-squat to Thailand if it should move its Thai production facilities to Indonesia or Vietnam. And all things being equal, in the long run, would Toyota have the same market size in Thailand? If GM picks up and leaves for Mexico, would they be selling the same number of cars in Detroit, all things being equal? Try to convice the Detroit city council it is a non-zero sum game. And I don't think the council is made up of academics.

You have to be careful when using terms like zero-sum game, free trade, absolute welfare gain. This is what Johann Galtung say of comparative advantage so beloved by free traders. A country is urged to export oil because that is its most abundant commodity. Concentrate on producing oil, export it, and exchange it for tractors because it is not competitive at manufacturing the tractors. Over time, the well runs dry and all it has left is a hole in the ground. The country that assigns for itself the role of tractor manufacturer goes on to produce a knowledge industry needed to sustain that role. Whose welfare is better served by this comparative advantage?

A true blue economist hides behind the mantra of overall welfare gain. Hence, the Toyota anthem. You need to look past it to really see the consequences of a policy that sounds good on the surface. And that requires a different discipline.

Now then why would it make sense for me to give any firm a tax break for exporting jobs by moving production somewhere else?