Explaining Thailand’s Automotive Manufacturing Success

Abstract

We argue that the success of Thailand's export-oriented automotive industry was based on three factors. First was the substantial public investment in productivity-raising port facilities and related infrastructure, beginning in the 1990s, that constituted the Eastern Seaboard economic corridor. The second was the exchange rate depreciation that accompanied the 1997-99 Asian Financial Crisis.Jointly, these two factors made manufacturing production for export more profitable. The third was two key policy changes adopted by the Thai government shortly after the crisis, and partly in response to it: (a) abolition of restrictions on foreign ownership, and (b) abolition of local content requirements.

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“…Since the early 1990s, protectionist measures inherited from the ISI model were gradually dismantled in a so-called rationalization phase. First, under Anand Panyarachun's government (1991to 1992, tariffs on vehicles and auto parts kits were reduced to less than a third of their previous levels, all quantitative restrictions on imports were converted into tariffs, and the free production of any type of model that was hitherto prohibited was enabled to increase the scales of production (Warr and Kohpaiboon 2018). Second, in 1993, in compliance with WTO requirements on trade-related investment measures (TRIMs), foreign ownership restrictions on automobile manufacturing were removed in 1997, leaving Thailand as the first developing country to do so.…”

“…The 1997 Asian financial crisis accelerated this liberalization process in several ways. On the one hand, it dismantled the political alliance of sectors that had matured under the import substitution phase and that were opposed to opening the economy (Doner 2009;Warr and Kohpaiboon 2018). On the other, massive capital outflows forced the government to try to increase foreign direct investment through trade liberalization (Warr and Kohpaiboon 2018).…”

“…On the one hand, it dismantled the political alliance of sectors that had matured under the import substitution phase and that were opposed to opening the economy (Doner 2009;Warr and Kohpaiboon 2018). On the other, massive capital outflows forced the government to try to increase foreign direct investment through trade liberalization (Warr and Kohpaiboon 2018). Lastly, the devaluation of the baht promoted exports at the same time as Thailand joined the WTO.…”

“…However, there is not a unified diagnosis in the literature reviewed as to which was the main driver of its success. For instance, Warr and Kohpaiboon (2018) suggested that it was the result of the liberalization process combined with heavy investments in infrastructure 12 made over the previous dec-ade. Moreover, authors like Natsuda and Thoburn (2014) underscored the relevance of industrial policy to produce those results.…”

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“…The share of manufacturing in total exports rose from 2 to 78 per cent (Figure 9). Since 2000 some export-oriented manufacturing industries, most notably the automotive sector, have been spectacularly successful (Warr and Kohpaiboon 2018). This increasingly manufacturing-oriented structure of exports mirrored a decline in the export shares of raw and processed agricultural products.…”