Small and medium enterprises in Thailand

Thailand Small and Medium Enterprises

The Industrial Sector and Its Regulators. The industrial sector has contributed the most to the economic growth of Thailand, with manufacturing as its most important sub-sector, followed by construction, mining and quarrying. Manufacturing, accounting for approximately 25% of each addition to the incremental Gross Domestic Product, has relied heavily on agricultural products, such as rubber, textile, food processing, beverages and tobacco. Employment in the manufacturing sector has constituted more than 25% of the labor force

Thailand's most important exports have been processed food, leather, wood, rubber and basic metals. The industrial sector is under the supervision of the Ministry of Finance, the Board of Investments, the Ministry of Commerce, the Ministry of Industry, the Industrial Finance Corporation, the Bank of Thailand and the National Economic and Social Development. The Ministry of Finance administers taxes and duties and provides refunds on exports and has a decisive role on government equity participation, foreign borrowing for project support and protection through tariff. The Board of Investment provides incentives for investments. Price control and international trade are regulated by the Ministry of Commerce. The Ministry of Industry issues factory licenses and is in charge of industrial regulations and the enforcement of zoning laws, while providing technical assistance, training in management and financing for small and medium-sized enterprises (SMEs). The Industrial Finance Corporation of IFC makes long-term loans available to medium and large-scale businesses. The Bank of Thailand provides the foreign exchange to certain industries and exporters at certain terms. And the National Economic and Social Development Board sets up policy guidelines and targets for the industrial sector.

Growth Impediments to SMEs in Thailand. Like many developing countries, especially in the Asian region, the private industrial sector Thailand has considerable energy and assets and is duly responsive when provided with adequate means to respond. But currently, it confronts problems and obstacles that must be promptly and properly addressed.

First, micro-enterprises and many small and medium-sized enterprises in Thailand operate informally, in that operate outside the formal legal system of the country. The set up does not benefit all employees, but works only as a form of substitution for workers who find difficulty in finding jobs. Examples are those laborers displaced by the economic crisis and resorted to informal street-vending and women who earn money from home because of their limited economic opportunities. Thailand's formal rules, enforcement systems and cultural conditions are so strict and prohibitive that small entrepreneurs are not able to use their talents and other resources for their living.

These businesses also find difficulty in acquiring finance for their informal operations. They cannot borrow at a reasonable cost because they do not possess legal status to the land they occupy, as required by law. This impasse leads them to resort to illegal or usurious money lenders who charge too much and can lend only small amounts.

These informal and small businesses in Thailand have limited access to their formal legal system and this likewise limits their profitability. Ideally, the system should enforce contracts, protect their property rights, install and implement predictable rules and dispute resolution mechanisms on a long-term basis so that these enterprises can innovate, scale up and increase their know-how and benefits. As it is, an informally and arbitrarily enforced, even cruel, system limits their productiveness or makes them counterproductive. Many debtors who cannot pay back their creditors often land in jail.

In the meantime, entrepreneurs operating under the formal legal system are disadvantaged by these informal enterprises' implicit subsidies through uneven enforcement and the deficient mechanisms used in protecting property and contracts. These circumstances discourage formal businesses from investing or investing some more to increase productivity. Informal businesses charge less because they do not pay or avoid paying the legal taxes and other regulations, which formal businesses pay and observe and, as a result, are compelled to increase their charges. In so doing, they lose their fair share of the market. Moreover, they are unable to drive the informal entrepreneurs out of competition. The poor or lack enforcement of the law thus hurts the formal entrepreneurs, prevents them from attaining greater productivity and allows the informal ones to persist, instead.

Workers' rights and the buying public's rights to quality goods are likewise not sacrificed or unprotected. Informal businesses sell the same goods but at cheaper cost and poorer quality or without safety guarantee.

If an informal enterprise wants to change to formal status, it faces obstacles too. In Thailand, as in similarly developing countries in the region, a formal business is overtaxed. They are overtaxed because there are not many of them to equitably share the tax burden. Business registration is also tiresome, long and expensive. Government rules, requirements and regulations are complicated and the costs are high. The more complex the rules, the greater the incidence of bribery, which discourages or rules small business registrants out because they cannot afford legal or litigation costs.

Small or informal businesses are also not inclined to go formal. If those in developed countries have the inclination because they can easily raise capital by mortgaging their assets, Thailand's mortgage laws are weak and the banks are not prone to finance small businesses. Formalizing an informal business should theoretically make selling easy beyond geographical boundaries, but poor infrastructure and strict or abusive customs regulations constrain opportunities. Bankruptcy laws, which work to protect formal businesses in developed countries are ineffective in developing ones and also expose formal businesses to increased risks.

Second, these informal small and medium-sized businesses face obstacles to growth, rather than function as engines of job creation by providing new entry and healthy competition and, therefore, raise efficiency and growth towards economic development. Their share in employment is only approximately 30% at a 17% GDP, as compared with those in developed countries, which have an average of 50 or 60%. This illustrates that developed countries have much fewer small and medium-sized businesses.

For SMES to grow into large businesses requires certain conditions. The business atmosphere must be conducive and there are existing institutional structure to support that atmosphere for both large incumbents and smaller new entrants into the field. Rules constrain SMEs, which can only compete with bigger businesses in select niche markets. On the whole, competition with established and bigger businesses is extremely difficult or improbable. They have no chance unless reasonable compliance costs, such as those installed in societies with fairer systems of competition, SMEs cannot grow and become productive.

They struggle against ineffective or arbitrary taxes, burdensome business regulations and other restrictions.

The lack of skills and these SMEs' informality backfire at them. New ideas or tapping untapped market may excite their imagination, but their total productivity remains low. They use older technologies or employ inferior or unskilled manpower who observe un-updated practices. Business costs often go beyond the salaries and wages they pay their workers or else, their objectives and output are misaligned. Quality standards are also compromised.

Most importantly, these SMEs lack access to adequate financing and long-term capital that can manage and diversify the high risks they face. Banks impose high interest rates and reduce loan amount even when the SME is judged creditworthy. This is a huge obstacle to SMEs, which, as previously mentioned, resort to usurious or often-fraudulent moneylenders.

Third, there is a lack of competitive pressure on big enterprises. Large businesses are supposed to provide the vigor to the private sector business environment. In many developing countries like Thailand, however, these large businesses take advantage of their superiority in the environment and extinguish the entrepreneurial zeal in SMEs by strengthening the barriers between them in protecting their advantage. These local informal businesses can survive and function without too much regulation in a fairly competitive environment, but under the circumstances, the SMEs need appropriate and more responsive and sympathetic regulations in order to function effectively.

These business giants also exert and assert lobbying power to slow down or deter financing under competitive terms or government progress in improving market misalignments. Observers note that this condition affects poor people who must contend with higher prices and lower-quality goods. Corruption and a weak or arbitrary law enforcement increase the misalignment, for example in the form of subsidies, special licenses and other privileges, offered as incentives to further the advantage of dominant businesses.

Income Tax and Laws for Foreigners in Thailand. All employees in Thailand must secure a tax identification within 60 from his or her receipt of income, regardless of the source of the income. Income covers salaries, wages, bonuses, allowances, gratuities, pensions, handouts, commissions, education payments, house rent allowances, utility bills, profits or any gains arising from business, commerce, and professions, whether the person resides in Thailand or not.

Business and transport expenses, costs incurred, looking after dependents, gifts, insurances and assistance expenses are exempt from taxes. A resident may apply for exemption from double taxation if he or she is a national of another country with a double taxation agreement with Thailand and if he or she is present in the latter for less than 183 days in the year under taxation.

Investors or employers with ten or more employees must contribute half of their share of social security to the Social Security Fund for their employees, who must pay the other half. The purpose of this Fund is to assist employees in times of accident, illness, disability or death under non-work-related circumstances. Employers are obliged to contribute 5% of the employee's income at a maximum contribution of Bht 15,000 per month within 15 days in the month succeeding the payment of income.

Small Retailers vs. Big Chains. There has been much unrest in industry, as in the alarming rate at which small retailers have been closed down by big ones. The Federation of Thai Industries, for example, urged the government to quickly pass a law to control these big chains, which were mostly foreign-owned, from furthering their abuses. Prime Minister Chuan Leekpai, chairman of a committee of small and medium-sized enterprises, deplored the growth of these foreign retailers in the country and asked the Ministry of Commerce to review the impact of the investment of these foreign retailers on Thai-owned small and medium enterprises. The SMEs noted that about 10 small local retailers had been closing down each month. They claimed that large foreign retailers had hired local industries and shut these Thai firms down and out of the market.

Another committee began studying comparable laws in countries like Japan and Indonesia in considering a model for regulating foreign retailers. Off-hand, a law that will be drafted will limit the location and store hours of these retailers. Government authorities disagreed with the SMEs that foreign retailers would open 100 more branches in Thailand, emphasizing that the countries foreign business law limits that number and requires each foreign investor to pay at east 100 million for each branch.

Business in Thailand Only 2% E-Commerce. E-commerce in Thailand is only 2% in comparison with prosperous Asian countries with 30% or more, according to an international publication. The Economist Intelligence Unit (2001) said that the growth of e-commerce in Thailand has been hampered by regulatory constrictions, high costs, and a lack of familiarity with computer technology.

The International Data Corporation added that only 15% of the SMEs in Thailand utilize online sales, procurement or inventory management. The SMEs account for 90% of Thailand's industrial GNP.

Requisites for Entrepreneurship. The foundations for a healthy entrepreneurship are global and domestic macro environments, physical and social infrastructure and the rule of law, according to the Center for Entrepreneurial Leadership Clearinghouse on Entrepreneurship Education.

A global macro business environment exists if the country connects with the dynamic global economy, which provides the markets and rules that will, in turn, enable the country competitive access to market opportunities. This environment will enable to continuous and open transfer of technology and ideas and, thus, stimulate private sector businesses, in Thailand's case, the mammoth SMEs. This transfer of technology and ideas and the consequent stimulation of the private sector occur through open markets, optimum foreign investment, effective development aid and efficient transfer of technology and knowledge.

It requires a displacement of the agricultural forces of protection that have clearly obstructed the development of an export-oriented private sector in the rural areas.

A domestic macro environment includes the elements of peace and political stability, good governance with policy predictability, transparency and accountability and sound macro-economic policies. Both external and internal business conflicts raise cost and the level of uncertainty and discourage both domestic and foreign investors. Conflict also inhibits private sector enterprises because it destroys human capital, dislocates scarce public funds, destroys land and reduces natural resources.

Physical and social infrastructure encompasses roads, power, ports, water and telecommunications in addition to basic education and health. When these two basics are built up, the lives of the poor are directly improved and the growth of businesses is enhanced. Records show that costs on technical inefficiencies inroads, railways, power and water alone reached $55 billion in losses in the early 1990s or 1% of the combined GDP of developing countries, which include Thailand. It is common knowledge that well-maintained infrastructure speeds up the transport of goods and raw materials, sustains energy-intensive production and makes information readily available and communication easy and timely. These all accrue to improving a nation's commerce and poor physical infrastructure often leads to low business activity. Telecommunications and the increasingly-developing information technology have helped bridge the barriers of poor physical infrastructure. Efficient access to global information has proven to be a vital part of the basic infrastructure of modern economies. But statistics on e-commerce in Thailand show that it is behind other developing countries themselves.