What is economic zoning?

History of economic zoning in Thailand and relate it with domestic and Foreign Direct Investment (FDI).

by Choen Krainara Doctoral Student

Regional and Rural Development Planning Field of Study School of Environment, Resources and Development Asian Institute of Technology Bangkok, Thailand March 2009

What is economic zoning? History of economic zoning in Thailand and relate it with domestic and Foreign Direct Investment (FDI).
1. Definition of Economic Zoning According to European Environment Agency (2009), Economic Zoning is a land-use planning design or control where specific types of businesses or private sector investment are encouraged within designated boundaries. 2. The History of Economic Zoning in Thailand 2.1 Rationale of Spatial Division of Economic Zoning Rapid industrialization has led Bangkok and its extended vicinities to become city primacy. Bangkok metropolitan plays important roles as both commercial and administrative centers of Thailand. The growth of Bangkok and its vicinities have become densely concentrated causing highly imbalanced spatial development as well as posing environmental degradation e.g. air and water pollution. In addressing this challenge, Royal Thai Government has implemented policies on investment promotion since 1993. Investment zones have then been used as a means to support government policies in decentralizing industrial base from the Bangkok Metropolitan Area to the peripheral provinces. In response, the Board of Investment subsequently announced "Policies and Criteria for Investment Promotion" in April, 1993, creating three Investment Promotion Zones throughout Thailand which were distinguished by economic factors i.e., the level of income and the availability of infrastructure in each province (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

Source: Board of Investment of Thailand, retrieved from http://www.boi.go.th/english/about/boi_privileges_by_location.asp, retrieved on 24 March 2009

The financial crisis in the middle of 1997 changed the Thai economy. As a result, tax collection was below target and public debts increased drastically affecting the fiscal position of the government. Moreover, the global economic outlook and investment environment had undergone change. In 2000, the Board of Investment consequently adjusted Thai investment promotion policies and criteria for granting tax privileges in order to respond to the future economic and investment prospects. 2.2 Basic Investment Incentives The 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 Activities The 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 industries The BOI shall announce the list of priority activities or industries. Such projects will be entitled 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 Location Privileges 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.

2) Projects in Zone 2 (excluding Laem Chabung Industrial Estate and industrial estates 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 industrial estates 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 project's 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 36 provinces : (Chai Nat, Chanthaburi, Chiang Mai, Chiang Rai, Chumphon, Kamphaeng Phet, Khon Kaen, Krabi, Lamphang, Lamphun, Loei, Lop Buri, Mae Hong Son, Mukdahan, Nakhon Ratchasima, Nakhon Sawan, Nakhon Si Thammarat, 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 as Laem Chabung Industrial Estate and industrial estates or promoted industrial zones in Rayong province are granted the tax and duty privileges extended under BOI Policies and the following:

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 tax and 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 project's corporate income tax 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.

Table 1: Summary of BOI Privileges by Investment Promotion Zone (Effective for applications submitted during 1 January 2005 - 31 December 2009) Granting Tax and Duty Privileges Zone 1 Zone 2 Zone 3 36 Provinces and Laem Chabang Industrial Estate and Industrial Estate /Promoted Industrial Zone in Rayong Province Outside Industrial Outside Industrial Estate/ Industrial Estate Promoted Estate Industrial Zone Zone 3 22 Provinces

Industrial Estate/ Promoted Industrial Zone

Import duty on machinery Corporate income tax Exemption

50 % reduction 3 years

Industrial Estate / Industrial Promoted Estate/ Industrial Zone Promoted (Excluding Laem Industrial Chabang Zone Industrial Estate and Industrial Estate/Promoted Industrial Zone in Rayong Province) 50 % Exemption 50 % Exemption Exemption Exemption reduction reduction 7 years* 3 years 8 years 8 years 8 years (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)

Outside Industrial Estate

Outside Industrial Estate

Exemption 8 years

Granting Tax and Duty Privileges

Zone 1

Zone 2

Industrial Estate/ Promoted Industrial Zone

Import duty on raw or essential materials used in manufacturing of export products Double deduction from transportation ,electricity and water costs 50 percent reduction of corporate income tax for 5 years

Industrial Estate / Promoted Industrial Zone (Excluding Laem Chabang Industrial Estate and Industrial Estate/Promoted Industrial Zone in Rayong Province) Exemption Exemption Exemption for 1 year for 1 year for 1 year

Outside Industrial Estate

Outside Industrial Estate

Zone 3 36 Provinces and Laem Chabang Industrial Estate and Industrial Estate /Promoted Industrial Zone in Rayong Province Industrial Outside Estate/ Industrial Promoted Estate Industrial Zone

Zone 3 22 Provinces

Industrial Estate/ Promoted Industrial Zone

Outside Industrial Estate

Exemption for 1 year

Exemption for 5 years

Exemption for 5 years

Exemption for 5 years

Exemption for 5 years

Remarks: *

= Shall be granted privileges. = Shall not be granted privileges. = (For all applications submitted during January 1, 2005 to December 31 2009)

Granting Tax and Duty Privileges

Zone 1

Zone 2

Industrial Estate/ Promoted Industrial Zone

Deduct the projects infrastructure installation or construction cost Duty on raw or essential materials used in the manufacturing of domestic sales

Outside Industrial Estate / Industrial Promoted Estate Industrial Zone (Excluding Laem Chabang Industrial Estate and Industrial Estate/Promoted Industrial Zone in Rayong Province) -

Zone 3 36 Provinces and Laem Chabang Industrial Estate and Industrial Estate /Promoted Industrial Zone in Rayong Province Outside Industrial Outside Industrial Estate/ Industrial Estate Promoted Estate Industrial Zone

Zone 3 22 Provinces

Industrial Estate/ Promoted Industrial Zone

Outside Industrial Estate

75% reduction for 5 years*, with year-by year approval (Excluding Laem Chabang Industrial Estate and Industrial Estate/ Promoted Industrial Zone in Rayong Province)

75% reduction for 5 years*,with year-by year approval

= 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 Remarks:

2. 5 State of Investment in Thailand 1) Overall Investment Investment approvals are performed by related government agencies. Domestic investment is mainly granted approval by Ministry of Industry and Ministry of Commerce, while FDI approval is mostly carried out by the Office of the Board of Investment. Investments consisted of capital for both start-up and expansion phase. Both domestic investment and Foreign Direct Investment (FDI) play important role in the 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 domestic investment amounted at 5.08 trillion Baht, while FDI in-flows to Thailand which mostly induced by the above outlined tax and nontax incentives accounted for at 2.74 trillion Baht. The aggregate domestic investment and FDI in-flows amounted as much at 7.83 trillion Baht. In terms of annual average of investment, domestic investment represented at 635,778 million Baht, whereas FDI in-flows totaled at 343,056 million Baht. Regarding the patterns of investment, both domestic investment and FDI had shown a similar movement. Domestic investment kept increasing from 2001 to 2005 and then significantly decreased since 2007. The major industries invested were food, textile and garment, steel, automobile and parts, cement, electrical appliances and electronics, etc. (Office of Industrial Economics, 2009). While FDI increased at smaller pace of that domestic investment with highest investment in 2005, and then varied and started declining in 2008. The major industries invested were automobile and parts, services e.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 investment and FDI is notably moving downward resulting from global and domestic economic recession. As a result, the total investment in the whole Kingdom considerably began falling since 2008. This reflected the overall national economic performance which should cautiously be taken care through responsive policies/strategies and measures in order to maintain economic growth, full employment and prosperity. Please see details of Domestic and Foreign Direct Investment Values in Thailand in Figure 1 below.

Figure 1: Domestic and Foreign Direct Investment Values in Thailand During 2001-2009 (January to February)
1,600,000 1,400,000 1,200,000
Million Baht

1,000,000 800,000 600,000 400,000 200,000 0

2001 2002 2003 2004 Year 2005 2006 2007 2008 2009 ( JanFeb)

Zone 1 (FDI) Zone 3 (FDI) Total Domestic Investment

Zone 2 (FDI) Total Foreign Direct Investment Total Investment in the Whole Kingdom

Source: 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 and development. During 2001-2007, approximate annual average at 14.55 % of domestic investment contributed to the national Growth Domestic Product (GDP), whereas around annual average at 5 % of FDI shared to GDP. Hence the magnitude of domestic investment was larger than FDI for 2.91 times. Thailand should therefore strive to diversify national economy based on two-pronged approach through fostering domestic investment and expanding FDI. Rural industrialization could meaningfully be further intensified in order to promote domestic investment and employment in rural area in order to support sustainable rural development. 2) Share of Foreign Direct Investment by Investment Zones Following to the Government policy on designating investment zones, it was proved successful in terms of decentralizing industries out of Bangkok and vicinities. Yet, the investments were shifted to largely concentrate in zone 2, which dominated by the Eastern Seaboard Development region-Chachoengsao, Chonburi and Rayong provinces-

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. This is apparent that during 2007-2009 (January-February) the annual average share of FDI 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 the investment 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 of concentration of investments highly reached at for 83 %. It is notable that the dominance of zone 2 is also widening interregional disparities in Thailand. Therefore, it is crucial to rationally more divert of both FDI and domestic investment toward zone 3 in order to promote equitable benefits of investment for development. Please find details of 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 2007 Zone 1
Year

2008 Zone 2

2009 ( Jan-Feb) Zone 3

Source: Office of the Board of Investment of Thailand Figure 2: Share of Foreign Direct Investment Divided by Investment Zones During 2007 To 2009 (January-February) 3) Share of Domestic Investment to Share of Foreign Direct Investment In 2001, the share of total domestic investment increased to 72.75 % and much declined to 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 at 27.25 % 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 of domestic investment accounted for 66.18%, while the annual average share of FDI represented at one-thirds of total investment in the Kingdom. It is understandable that both domestic and FDI will be moving in the similar trend. It is important to note that Thailand still needs FDI in-flow in order to help generate employment and income as well as cultivating technology transfer and spillover effects, human capital and skill formation and integration of national trade with the global economy. It is also vital for Thailand to attract FDI by providing quality infrastructure and human capital. Strong backward linkages with Multinational Enterprises should be enhanced so that win-win

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benefits of FDI can be ultimately realized. Please find details of share of domestic investment to share of foreign direct investment in Thailand during 2001 to 2008 in Figure 3 below.
100 90 80 70 60 50 40 30 20 10 0

Percentage

2001

2002

2003

2004

2005

2006

2007

2008

Total Foreign Direct InvestmentYear Total Domestic Investment

Source: Investment statistics of various years from Office of Industrial Economics and Office of the Board of Investment of Thailand Figure 3: Share of Domestic Investment to Share of Foreign Direct Investment in Thailand During 2001 To 2008 4) Industrial development along Thai border area As a result of promoting investment particularly in Zone 3, there is a prominent investment platform along Thailand-Myanmar border area. It is located in Maesod district, Tak province, which plays a significant role as major industrial development location in Northern part of Thailand. Maesod district is home to labor-intensive industry particularly for garment productions. In 2003, Tak province had 464 factories. Maesod alone hosted 235 factories, which accounted for 51% of the whole province with total investment capital at 1,500 millions Baht, and it generated export values at 3,100 millions Baht per year, (NESDB). The key labor-intensive industries were textile and garment, canned food, wood furnitures, jewelry and accessories. In addition, there was 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 was to take advantage of cheap labor from Myanmar and investment incentives in Zone 3. In 2003, approximate 10,000 Myanmarnese workers were employed in Maesod district.

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Conclusion Domestic investment plays major role while Foreign Direct Investment acts as complementing role in joint contribution to national economic growth, income generation, employment and development. Adopted Investment zones have been quite successful in dispersing industries out of Bangkok. However, good infrastructure has led to such concentration of industries be densely located in zone 2 and parts of zone 1 which is negative to zone 3. It is thus challenging for Thailand on how to further distribute investment activities to regional provinces in zone 3. Border industrialization in the form of border economic zone can be one of the means to spread out investment activities to border regions. This is believed to not only help minimize interregional and intra-regional disparities in Thailand but also bring about opportunities to share benefits with border cities in neighbouring countries especially Myanmar, Lao PDR and Cambodia timely in response to increasing regionalization. Likewise, Thailand should also continue diversifying investments in order to promote equitable competiveness of both rural and urban economies.

References Board 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.

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