Course number 050 451 - Second semester 2013
E-mail: Michco@kku.ac.th
Web: KKU.AC.TH/Michco

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Thursday Feb 27 th at 9:00
 Room 926
Paper dictionaries allowed
 30% of Course Grade
Recommended Study: Review your Presentation Material

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Find a successful industry in GMS, or one which shows potential to be successful (13 Nov)
 Explore reasons the industry located in GMS
 What is the nature of the business (capital or labor intensive, etc)
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Any spillover effects?
 What was the mode of entry for the businesses?
Study a GMS country in which the industry is successful (4 Dec)
What are the strengths of that country from a business perspective?
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What are the weaknesses?
 Look for barriers to further business success in the country
How do you see the business evolving (5 Feb)
Effect of ASEAN or other alliances (trade, labor mobility, etc)
 Relevant demographic, economic, trade projections
 Infrastructure, education, and other changes as a result of government or business initiatives
 Advice you would give to government units to encourage industry growth

Mekong River Commission
Secretariat

• JETRO (Japan External Trade Organization) established 1958 helps small to medium size Japanese firms maximize their global export potential
• JETRO-Institute of Developing Economies (IDE) Bangkok Research Center links
– http://www.ide.go.jp/English/Links/southeast_asia.html
– Good for links to government and university sites for the GMS countries
• Institute of Developing Economies (IDE) Bangkok Research Center publications
– http://www.ide.go.jp/English/Publish/Download/Brc/
– Relevant and relatively recent research reports
– Examples:
• "Five Triangle Areas in the Greater Mekong Subregion" Edited by ISHIDA Masami / Published in 2013
• "Economic Reforms in Myanmar: Pathways and Prospects" Edited by HANK LIM and YASUHIRO YAMADA / Published
2013
• "Cause and Consequence of FIRMS' FTA Utilization in Asia" Edited by HAYAKAWA Kazunobu / Published in 2012
• "Emerging Economic Corridors in the Mekong Region" Edited by ISHIDA Masami / Published in 2012
• "Industrial Readjustment in the Mekong River Basin Countries: Toward the AEC" Edited by Yasushi UEKI AND TEERANA
BHONGMAKAPAT / Published in 2012
• "Investment Climate of Major Cities in CLMV Countries" Edited by ISHIDA Masami / Published in 2010
• "Economic Relations of China, Japan and Korea with the Mekong River Basin Countries (MRBCs)" Edited by KAGAMI
Mitsuhiro / Published in 2010
• "Major Industries and Business Chance in CLMV Countries" Edited by UCHIKAWA Shuji / Published in 2009
• "A China-Japan Comparison of Economic Relationships with the Mekong River Basin Countries" Edited by KAGAMI
MItsuhiro / Published in 2009
• Mekong Institute (on the KKU Campus) http://www.mekonginstitute.org/

• http://www.mekonginstitute.org/images/abook_file/policy_bri ef_labour_supply.pdf
• From a study of a Laos SEZ
: “ The breakdown in occupational skills indicate mismatches in supply and demand for specific skills areas such as IT/computer operators, maintenance mechanics, welders, sewers/dressmakers, gem lapicides, and others. On the other hand, majority of students at TVET schools enroll in accountancy and Business management courses.”
• From a study of a Cambodian SEZ: “ The new SEZs that have been set up in the border areas with Thailand and Vietnam have reduced the pull factor to migrate to Phnom Penh for work. The preference of students for enrolling in academic courses such as management and accounting due to the perception that vocational training will lead to a career of hard labor and low wages in factories. In Laos, many prefer to migrate to Thailand where they can earn more even without the necessary educational credentials.”

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Rapid growth in emerging markets often fall into a middle income or development trap
 Very few emerging economies sustain rapid growth longer than a decade
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Simple improvements such as roads raise low income levels
To reach higher levels of income countries need advanced industries and institutions
Brazil, South Africa, Russia each have slowing growth rates
Many emerging economies rely on commodities for exports
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When the world economy grows, commodity exporters grow faster
Countries that successfully reached high income since the 1960s were not commodity exporters (Hong Kong, Singapore, Japan, Taiwan, S. Korea in Asia)
Emerging countries often have short periods of commodity driven boom (most lower income countries expanded rapidly from 2005-2010)
Development traps can move higher income countries backward
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Argentina and Venezuela last century
Philippines in the 1950s
Ruchir Sharma in the Wall Street Journal 23-1-2014

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Vietnam’s Ho Chi Minh Stock Exchange index is the world’s top performer this year, up 10%
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Vietnam’s market is considered a frontier market (the most risky)
Most emerging markets are having problems
Vietnam sets limits on foreign ownership %
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Many of the top listed firms are at their limit
The government is expected to soon raise the cap (from 49% to 60% in most sectors, excluding financial)
Several companies plan to make IPOs in Vietnam in 2014
 Several IPOs will be former state enterprises
 Vietnam Airlines works with Morgan Stanley and Citigroup to do the IPO
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Some state owned enterprises have governance and debt problems
Foreign investors view the IPOs as opportunities to participate in VN’s growth
 Growth was greater than 5% in 2013
 Vietnam is expected to benefit from regional economic integration and the TPP
PXP Asset Management and Dragon Capital are based in Vietnam
Wall Street Journal 23-1-2014 and Bloomberg

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As cheap as an assembly worker may be, an emerging trend in manufacturing, specialized robots, promises to be even cheaper.
The most valuable part of the computer is the motherboard loaded with microprocessors and memory
 This is already largely made with robots.
 People fit in batteries and snap on screens.
As more robots are built, largely by other robots, "assembly can be done in the USA as well as anywhere else," a technology analyst said. "That will replace most of the workers, though you will need a few people to manage the robots."
NY Times 7-12-2012

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 All of the successful economies of the last six decades owe their growth to rapid industrialization.
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In East Asia, Japan, South Korea, Singapore, Taiwan, and China all were very good at moving labor from the countryside (or informal activities) to organized manufacturing.
Earlier cases of successful economic growth, (US or Germany) were the same.
High productivity manufacturing is easy for poor countries to copy.
High-productivity services require a wide array of skills and institutional capabilities that developing economies accumulate only gradually.
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A poor country can easily compete with Sweden in manufacturing; but it takes centuries, to catch up with Sweden’s institutions.
Consider India, which demonstrates the limitations of relying on services rather than industry in the early stages of development.
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The country has developed strengths in IT services, such as software and call centers.
Most of the Indian labor force lacks the skills and education to be absorbed into such sectors.
In East Asia, unskilled workers were put to work in urban factories, making several times what they earned in the countryside. In India, they remain on the land or move to petty services where their productivity stays low.
Project Syndicate: Dani Rodrik 8-8-2012

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Successful long-term development requires a two-pronged push.
Long Term development requires an industrialization drive.
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Without an industrialization drive, economic takeoff becomes quite difficult.
Industrialization forms the platform.
It requires steady accumulation of human capital and institutional capabilities to sustain servicesdriven growth once industrialization reaches its limits.
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Without sustained investments in human capital and institution-building, growth will cease.
Developed economies are primarily service oriented – more than 60% of GDP from services
The growth through industry model has become a lot less effective for several reasons
 First, technological advances have rendered manufacturing much more skill- and capital-intensive than it was in the past, even at the low-quality end of the spectrum. As a result, the capacity of manufacturing to absorb labor has become much more limited. It will be impossible for the next generation of industrializing countries to move 25% or more of their workforce into manufacturing, as East Asian economies did.
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Second, globalization and the rise of China, has greatly increased competition on world markets
Rich countries are unlikely to be as permissive towards industrialization policies as they were in the past.
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Policymakers in the industrial core looked the other way as rapidly growing East Asian countries acquired Western technologies and industrial capabilities through unorthodox policies such as subsidies, local content requirements, reverse engineering, and currency undervaluation.
Core countries also kept their domestic markets open, allowing East Asian countries to export freely the manufactured products that resulted.
Project Syndicate: Dani Rodrik 8-8-2012

BKK Post
27-1-2014

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The trend among exporters of relocating to neighboring countries continues, said Sukij Kongpiyajarn, president of the Thai Garment
Manufacturers Association
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He said over the past five years, large garment manufacturers have invested in Cambodia, Laos, Myanmar and Vietnam.
This year, about 10 medium-sized enterprises are preparing to follow suit, mainly to tap the lower wages in these neighboring countries, said Mr. Sukij.
The low wages are a big incentive for Thai entrepreneurs, who have seen their labor costs spike dramatically at home in recent years.
As well, they have an opportunity to benefit from the Generalized
System of Preferences (GSP) in European countries and the US. The EU plans to lift the GSP this year, meaning the import tariff will rise to 12% in 2015 from 9.6% now.
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But Mr. Sukij said GSP privileges for Thai garments is on the list of free trade agreement negotiations between Thailand and the EU.
"If these talks are successful, the import tariff on Thai garment exports to the EU will be eliminated," Mr. Sukij added.

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As labor becomes more expensive, companies have incentive to become more capital intensive
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Higher labor costs force companies to invest in automation and productivity
Labor intensive businesses include garment manufacture, furniture, leather
According to the TDRI these labor intensive businesses tend to relocate
Most Thai businesses are small and medium enterprises, though these generate only about 1/3 rd of GDP
 Larger firms are better able to invest in automation and compliance
 Yet SMEs are where much innovation and employment occurs (OECD)
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Since 2005 nearly all job creation in Thailand came from small enterprises
Thailand, and in particular the Bangkok area, has one of the highest rates of entrepreneurship in the world
Thailand has one of the lowest rates of unemployment in the world
OECD Studies on SMEs and Entrepreneurship © 2011

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GSP (Generalized Scheme or Generalized System of Preferences) are designed to promote economic growth in the developing world through duty free treatment of certain products *
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The US program was set to expire in July 2013, and included Thailand and Cambodia in the GMS
The US program did not apply to textiles or apparel
 The EU scheme was modified in January 2014 to include human rights and environmental considerations
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Myanmar has been eligible for EU GSP since July 2013, after labor reforms
Thailand, Vietnam, and Cambodia are eligible in certain product categories
Cambodia has GSP status with the EU and US
From next January, many products exported from Thailand to the EU will lose their tariff privileges as the GSP system is reformed. Those products include meat, fish, precious stones, pearls, tuna, shrimp, and rubber products. (1)
 Thailand is expected to exit from the EU GSP in 2015 as the country achieves middle income status.
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In 2014 the tariff for frozen shrimp will increase from 4.2 per cent to 7.12 per cent.
While a director of CP Foods (UK) Limited, said the loss of GSP privileges would cause difficulty for Thai exporters, the head of the EU Delegation to Thailand said this country would be eligible for reduced tariffs after forming an FTA with the union.
* US and EU trade representative web sites; (1) Nation 7-9-2013

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Partners
Laos-Thailand
AFTA (ASEAN Free Trade)
ASEAN-China
Thailand-India
Thailand-Australia
Thailand-New Zealand
ASEAN-South Korea
Thailand-Japan
ASEAN-Japan
ASEAN-Australia-New Zealand
ITA – 70 partners
2007
2007
2008
2010
1996
In Effect Notes
1991
1992
2004
Low utilization by Thai companies
2004
2005
2005
Low utilization (13%)
Thai auto exports to Australia – why?
WTO – imported IT components may be exempt from tariffs.
Adapted from Shiino, K. 2012 “Overview of Free Trade Agreements in Asia” BRC Research Report #9, IDE-JETRO Bangkok

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Thailand is the only founding member of ASEAN in the GMS (Bangkok 1967)
Vietnam joined ASEAN in 1995, Lao PDR and Myanmar in 1997, and
Cambodia in 1999
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The new members are often collectively referred to by their initials CLMV.
By joining ASEAN, they have all committed to the ASEAN Free Trade Area (AFTA) agreement, though on a different timetable than Thailand
Lao PDR adopted their New Economic Mechanism in 1985
Vietnam initiated the Doi Moi (renovation) policy in 1986
Cambodia recognized the private sector in 1986 and began to have trade relations with the West after nearly a decade of isolation
Thailand had begun to transform its economy to focus on export-oriented industry in the 1970s.
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In the mid-1980s major inbound investment took place, as
Companies from Japan and other newly industrialized economies in East Asia saw opportunities in a market economy and relocated their factories to Thailand
China began their transition from a command economy to a market-oriented system under the reforms initiated by Deng Xiaoping, in the late 1970s.
http://www.mekongmigration.org/finalised%20BEZ%20pdf%20file.pdf

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Thai exporters response to FTAs are limited by rules of origin requirements
 Cost of compliance with rules of origin paperwork is effectively a tariff of 2-7% (a)
 Use of an FTA is highly concentrated among a few products
The costs of ROO compliance varies among partners
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Importing countries may create obstacles
Utilization of FTAs is often low
FTAs are rarely utilized outside of existing trade relationships
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Primary users of FTAs are large local firms (not global firms)
FTAs mostly benefit large companies due to COO costs
(a) Kohpaiboon, Archanun 2010 “ Exporters' response to FTA tariff preferences : evidence from Thailand”

Trade routes from East Asia to South Asia, the Middle
East, and the Suez Canal pass through the Straits of
Malacca, northwest of
Singapore. The area is a haven for pirates. In
November two large tankers were hijacked there. The
East-West corridor would connect East Asia to the
Indian Ocean well north of the Straits.

Source: Chiang Mai University
USER 2007

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In a December 2013 GMS-Japan meeting, Japan agreed to provide
660BB yen (212 BB baht) in financial assistance to the GMS
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Priority for these funds is infrastructure linking GMS countries
A favored project is the Southern Corridor linking Cambodia,
Thailand, Myanmar, to India
A recent project is the Mekong River bridge between Mukdahan and
Savannakhet, is part of another E-W corridor
The Japanese have backed micro finance in the poorest areas
China invests significant resources in North to South infrastructure, especially into Myanmar and Laos
 These tap natural resources in both countries and provide trade links
 A railroad project in Myanmar financed by China will cost $20BB
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Revenues will be used to pay back the loans over 50 years
Ultimately, the railroad will provide China access to the Indian Ocean (bypassing
Singapore)

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Special Economic Zones (“SEZs”) are geographical areas that offer special trade incentives to firms located within them
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The most important fiscal goal of an SEZ is to facilitate economic growth through reduced tariffs and more efficient customs controls (customs clearance is often cited as an obstacle to trade between GMS countries)
SEZs often help developing nations rework inefficient trade policies and dilapidated or non-existent infrastructure
Since 1942 (Puerto Rico) over 3,000 zones have appeared in 135 countries, many of them emerging markets
Types of Special Economic Zones Zones
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Free Trade Zones are tax-free areas that provide logistics facilities for trade, shipping, and import/export operations in a reduced regulatory environment, with less stringent customs controls
Export Processing Zones offer fewer tax benefits than an FTZ. These provide manufacturers geographic concentration – such as Lat Krabang
Industrial Estate
Freeports may arise out of old military bases and tend to be more services oriented (Clark and Subic in the Philippines)

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The GMS has hundreds of SEZs in operation or planned with 300 in VN alone
China has had the most success in implementing and profiting from SEZs
 Most of China’s SEZs are very large and specialize in products and services labor intensive, assembly-oriented products
 China’s Shenzhen Village transformed a small fishing village into a booming urban metropolitan area with an export-oriented economy
Successful SEZs specialize in a specific product or industry, and are located close to transportation outlets and supported by dense and efficient infrastructure.
 Manufacturers using SEZs with undeveloped infrastructure and poor access to global commerce will fare poorly.
 The SEZs that must build the infrastructure in addition to the SEZ unit development also incur additional costs that reduce the overall profitability of the SEZ for the host country.
Successful SEZs provide access to employees
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SEZs that have communities within them enable better access to employees than SEZs where employees must commute great distances to and from the developments.
The development of service industries inside an SEZ or very nearby also helps to increase the profitability and economic efficiency of the corporations doing business within the zone.
Megan Murray, 2010 http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Special_Economic_Zone.html

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What drives success (NYT 25 January, 2014)?
Michael Johnson is generally considered one of the greatest and most consistent sprinters in the history of track and field
 What was his frame of mind before a race?
 How does this relate to business?

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From http://www.daoheuanggroup.com/history/
Dao-Heuang was founded in 1991 by Mrs. Leuang Litdang as a small import-export company in the Laos PDR
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The original company specialized in importing wine and perfume from France, as well as alcohol and cigarettes from Singapore.
The company also handled a wide range of household goods imported from Thailand.
Dao-Heuang Group (DHG) was organized in 1998.
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It began to diversify into other products and begin exploring opportunities for producing coffee, tea, agricultural products and industrial goods.
In 2008 DHG began new service industry businesses for hotels and food and beverages establishments.
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 Duty Free shops in Pakse and Savannakhet
 Bottled water, fruit drinks
In 2010 the company signed international partnership agreements to grow, refine, and package its coffee through all production steps in-country (Pakse) for the first time.
DHG planned to join the new Lao Securities Exchange in 2011, and opened a hotel in
Pakse.
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Rebranding efforts
Expansion of Duty Free in Vientiane

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The LSX opened in late 2010 and by June 2013 had only two listed companies
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A power company and a bank joined in 2011
Laos World Plc was added in December 2013
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Founded by a Thai businessman
Operates convention and exhibition facilities under a BOT agreement
Laos limits foreign share ownership to 5%
Few companies will disclose the information required for listing
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The Korean head of the LSX said company owners don’t understand why they have to reveal their financial statements to the public.
Company leaders need to understand the mechanism of the stock market, as well as the need for compliance and transparency in trading.
International Business Times 25-6-2013

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Currency is a defining issue for SE Asian carriers because
$US costs exceed $US revenues
Most airlines in SE Asia will report 2013 losses if $US keeps rising relative to their home currencies
 For Indonesia’s Garuda Airlines
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Rupiah fell 14% versus $US from June to September, 2013
50% of revenue is in rupiah (travel originating in Indonesia)
60% costs are in $US (fuel and aircraft leases are in $US)
Garuda lost $11.4MM in the 3 rd quarter
In late September Indonesia’s government began to allow hedging (losses on hedging would be considered normal business risk)*
The $S has been relatively stable versus the $US.
 Singapore Airlines 3 rd quarter profit was $161M
*Jakarta Post 26 September, 2013