Incentives to build the Thai software industry?
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Changes in the incentives offered to companies in Thailand's infant software industry could lead to increased Foreign Direct Investment (FDI) by leading software companies worldwide.
A recent study by MBA students at the Asian Institute of Technology (AIT) in Bangkok found that foreign software firms may not value the incentives that are currently being offered, incentives such as tax breaks and training grants. They value other, not so obvious, benefits that Thailand offers such as higher quality of life.
The educational, learning, and technology transfer benefits of FDI are often greater than the raw money that FDI injects into local economies.
Local residents, in this case Thais, gain invaluable experience by working with world class software professionals investing in their economy, experience they would only normally be able to gain by studying abroad and then getting jobs in areas specialising in software development areas around the world, like Silicon Valley near Stanford University in the San Francisco Bay Area or the area around MIT in Boston.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What kind of benefits besides cheaper labour might lead foreign software companies to locate operations in Thailand?
2. Which of benefit is most important, according to a recent survey at Asian Institute of Technology?
3. Which benefits are provided by the Thai government? Which are not?
4. In what areas do benefits fall short of standards desired by investors?
5. How do local companies and foreign companies differ in the benefits they find most important?
6. What factors are important in investment decisions?
Which factors rank lower in importance for investors?
7. What is the major factor holding back investment in Thailand by major software companies?
8. What concrete recommendations does the report make for improvement?
9. Is the hiring of foreign software professionals currently permitted?
10. What is the problem with the procedures for hiring foreign software professionals, according to the authors? How might these problems be overcome?
11. Is intellectual property really a big problem?
12. What indirect benefits might better intellectual property protection have for attracting foreign investment? What areas of IP does the suthor suggest be targetted?
13. What is causing increased telecommunications cost for software firms operating in Thailand?
Article: Bangkok Post March 21, 2007
Do BOI incentives work?
MBA study looks at what persuades investors in the software sector to come to ThailandTONY WALTHAM
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The study was performed with help from the Board of Investment (BoI) and included three interviews with companies and incorporates 27 responses to a total of 83 questionnaires sent to foreign and local software companies here. A summary of the research paper, entitled "The Relative Importance of Government Incentives in the Development of the Software Sector in Thailand," prepared by Christoffer Larsson and Sundar Venkatesh was made available to Database.
The findings reveal several "gaps", where reality falls short of levels desired by investors in the software industry here. These are around intellectual property protection, access to investment capital, international links, a shortage of networks to access export markets and suitable human resources - in particular, in finding experienced technical professionals and sourcing management skills and English-language skills.
Other significant findings are that local companies regard tax incentives as very important while foreign companies find the permission to hire foreign professionals to be a key attraction.
The researchers found that natural factors such as geographical location and climate or the result of long-term government policies such as affordable and abundant higher education were seen by investors as being far more important than government incentives when it came to making investment decisions.
This raises the question of whether money used for tax breaks - and grants, if introduced - is being efficiently spent, or if it could be more wisely invested in improving the quality of human resources and infrastructure, the AIT MBA students suggest.
If tax incentives can attract flagship clients that may act as a catalyst to kick-start the industry, the rewards could be large, the authors say. But this is still not the case in Thailand, the summary report notes, adding that one of the main reasons for this is the limited pool of software professionals available which currently hovers at 35,000 - about half of which are software developers. This vacuum of talent clearly makes large investments in the software services industry in Thailand risky, they add.
In analysing the availability of incentives, the researchers report that small local companies complain that it is difficult to take advantage of tax incentives; in contrast, foreign companies complain that the process of hiring foreigners is too complicated.
The report's recommendations include urging that policy-makers consider offering a choice of incentives or making them customizable for large potential investors while also making some of the incentives available to existing companies here as well as spending more money on better education and infrastructure, improving IP protection and making the task of hiring foreign professionals here easier.
Noting that the current incentives are only offered to new investors, the paper says it is important to offer continuing inducements to maintain existing investments in addition to attracting new ones.
It also says that the responses indicate that the foreign ownership issue is a concern for foreign software companies in Thailand. One company interviewed decided to leave Thailand in preference for India and foreign ownership was stated as the main reason, the summary of the study says.
Proposed incentives for existing companies are to allow foreign ownership and the freedom to hire foreign professionals which would cost Thailand little but have the potential to prevent existing companies from leaving, and instead encourage them to expand operations, the summary says.
Training grants can be used as a customized incentive, it suggests, saying that respondents, particularly the local ones, value training grants highly. Why not introduce a custom-designed incentive that would offer more flexibility with the possibility of convincing investors through negotiation and which might hold the potential to catch the large projects Thailand had so far failed to attract, it asks.
Offering grants as a mandatory incentive is expensive and the report suggests that the money could be better spent on improving education and infrastructure - factors indicated in the study as being more important in attracting investments.
Yet, offering grants to potential flagship clients may still be a good idea, it adds. In contrast to tax breaks, capital and training grants have a direct impact in reducing the investment cost, and thus would be more attractive.
Policy-makers should allow for a choice of incentives, suggest the AIT students, adding that the response to tax incentives is similar to that of grants. They are perceived as being of high value by local companies, but less so by foreign companies. It is therefore questionable whether foreign companies should enjoy tax breaks that are costly to the government, the study observes.
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The findings also urge easing the procedure of hiring foreigners, the authors conclude, noting that since employment of foreigners is already permitted, there is no reason to make this more difficult than necessary. The current problem is that while obtaining the work permit is straightforward, the non-immigrant visa that is required for a work permit is more troublesome to get. For instance, foreigners hired locally must be flown out of the country, sometimes out of the Asian region, for them to obtain the non-immigration visa, the authors observe.
Eliminating this bureaucratic formality would aid in overcoming human resource shortages and also increase technology transfer effects and this problem could be easily eliminated through better cooperation and coordination between ministries, they suggest.
IP protection receives the highest importance and is the largest "gap" revealed by the survey. Existing research suggests that this may be more of a perceived problem than a real problem, and the study supports this argument. The authors note how the director of one interviewed company who had marked IP protection with the maximum gap in the questionnaire expressed little concern when asked directly about the problems this posed to his company.
Nevertheless, the paper suggests that perceived problems can be more important than real ones and that taking actions on software piracy and copyright is a trust-building measure that will assure investors that Thailand is trustworthy in terms of its intentions.
The cost of telecommunications received one of the largest complaints among companies leasing Internet lines from Communications Authority of Thailand (CAT) and is perceived to be one of the highest in the region. As an immediate step, this AIT research paper urges that subsidies be considered as an incentive offered by BoI.
Vocabulary (in discussion above)
Foreign Direct Investment (FDI) - money invested in a country from outside the country by foreign businesses (FDI consists of businesses or assets owned in the country in contrast to portfolio investment which consists of stocks and bonds that are owned)
Asian Institute of Technology (AIT) - Thailand's foremost technical university (See Wikipedia on Asia Institute of Technology)
quality of life - the overall enjoyment of life (wellbeing, comfort, fulfillment, or satisfaction, not necessarily more money or income; see Wikipedia on quality of life)
the software sector - develops, customises, and maintains software (including software sellers like Microsoft, consulting companies like IBM and Accenture)
incentives, inducements - rewards to make people do something
government incentives
proposed incentives
customized incentive
custom-designed incentive
mandatory incentive
allow for a choice of incentives
offer a choice of incentives
tax benefits, tax breaks, tax incentives - reductions in taxes (in order to make people do what you want them to do)
a grant - money given by government or other organisation for a purpose
training grants - government money for training and education
Board of Investment (BOI) - the Thai government agency responsible for investment promotion policy (See BOI website)
flagship clients - the best customers that a company has
a catalyst - something that causes a change, something that causes an event to happen (from chemistry)
kick-start - quickly start something that has stopped (from when you start a motorcycle)
hovers at - moves around this value, sometimes above, sometimes below
vacuum of talent - shortage of talent, shortage of trained and skilled workers
IP protection - intellectual property protection (patents, trademarks, copyrights, trade secrets)
the foreign ownership issue - the current issue in Thailand of nominee shareholders
respondents - people who answer a survey
joint venture - when two or more companies do business together (for example a foreign company and a Thai company; See Wikipedia on joint venture)
bureaucratic formality - details slowing business down (when dealing with the government and other large organisations)
technology transfer - when local people and companies learn from foreign businesses which introduce new technologies and practices
perceived problems - the problems that people feel exist
Useful word combinations or collocations:
trust-building measure
trustworthy
Communications Authority of Thailand (CAT) - government agency administering internet connections, part of the ICT ministry
Answer Key:
1. What kind of benefits, besides cheaper labour, might lead foreign software companies to locate operations in Thailand?
a. Quality of life
b. Tax benefits.
c. Training grants.
2. Which of benefit is most important, according to a recent survey at Asian Institute of Technology?
Quality of life.
3. Which benefits are provided by the Thai government? Which are not?
Tax benefits and training grants are provided by the government, but quality of life is not.
4. In what areas do benefits fall short of standards desired by investors?
a. Intellectual property protection,
b. Access to investment capital,
c. International links,
d. A shortage of networks to access export markets
e. Finding experienced technical professionals
f. Finding skilled managers
g. Finding staff with English-language skills
5. How do local companies and foreign companies differ in the benefits they find most important?
Tax incentives are important for local companies.
Permission to hire foreign professionals is more important for foreign companies.
6. What factors are important in investment decisions?
Which factors rank lower in importance for investors?
a. Geographical location
b. Climate
c. Affordable and abundant higher education
d. Government incentives
Government incentives seem to rank the lowest among investors.
7. What is the major factor holding back investment in Thailand by major software companies?
The most important factor holding back investment by the most desirable investors ("flagship clients") is "the limited pool of software professionals available" this pool of software professionals in Thailand "currently hovers at 35,000 - about half of which are software developers."
8. What concrete recommendations does the report make for improvement?
a. Offering a choice of incentives
b. Making incentives customizable for large investors
c. Making incentives available to existing investors
d. Spending more money on better education and e. infrastructure
f. Spending more money on better infrastructure
g. Improving IP protection
h. Making hiring foreign professionals easier
9. Is the hiring of foreign software professionals currently permitted?
Yes. ("employment of foreigners is already permitted")
10. What is the problem with the procedures for hiring foreign software professionals, according to the authors? How might these problems be overcome?
The problem is "bureaucratic formalities," that "the non-immigrant visa that is required for a work permit is...troublesome to get. For instance, foreigners hired locally must be flown out of the country, sometimes out of the Asian region." "Better cooperation and coordination between ministries" might help solve the problems.
11. Is intellectual property really a big problem?
IP protection ranked highest in importance in the survey, however respondents didn't provide any details as to why they thought it was important, so it might not actually be that important.
12. What indirect benefits might better intellectual property protection have for attracting foreign investment? What areas of IP does the suthor suggest be targetted?
It might build trust with foreign investors. The author suggests that software piracy and copyright be targetted.
13. What is causing increased telecommunications cost for software firms operating in Thailand?
Companies leasing lines from Communications Authority of Thailand (CAT) feel they pay the highest fees in the Southeast Asian region.
