16 August EEC Thailand : How it works and the benefits it offers
The Eastern Economic Corridor (EEC) is the enhancement of the former Eastern Seaboard project. This mega-investment is Thailand’s Special Economic Zone (SEZ), and is now a leading economic zone in ASEAN drawing in multinational enterprises (MNEs) to invest, especially in the automotive, petrochemical and electronic industries. It has led to the establishment of 30 industrial estates and over 5,000 factories. With the development of this highly successful area, exports in the eastern seaboard have increased from 7%-12% and industry in the area has grown 12% in the past 20 years.
Why we need EEC?
The establishment of the Asian Economic Corridor (AEC) is a major factor that will transform Southeast Asia’s economy into a single market with free movement of goods, service, capital and skilled labour. With its lower costs, increased domestic consumption and improved infrastructure, ASEAN countries, particularly Vietnam, Philippines and Thailand, are attractive for investors, who have relocated their manufacturing base from China to countries in ASEAN. As a result, according to a recent JLL report, exports from Indonesia, Malaysia and the Philippines have increased 5-6% annually, while exports from Vietnam have raised from between 9-10%.
This is a great opportunity for Thailand to attract investment from foreign firms to invest here in Thailand. However, within the region, there’s strong competition on investment incentives, since each government tries to offer the best options to draw foreign investors to their countries. For instance, LG electronics, once based in Thailand, moved to Vietnam in 2015, as the Vietnamese government offered special incentives to MNEs in the high-tech field (Hoai An, 2015).
Thailand previously paid little attention to providing incentives for technology and innovation firms thereby losing a large amount of revenue from the relocation of foreign firms to other countries. Focusing only on developing the automotive and petrochemical sectors in the Eastern Seaboard did not make Thailand more competitive with other countries. The country needs to be upgraded in all sectors to strengthen future economy growth and be more competitive, particularly in technology and innovation which the government has purposed to do in the economic model of Thailand 4.0.
Thailand has its strategic location as an advantage since it offers easy access and convenient trade with ASEAN countries as well as China. And the Eastern Seaboard already has strong connectivity with bordering countries and it could become a hub for regional connectivity and a gateway connected to South China and India, enabling the ECC to drive Thailand as a hub of transportation, logistics and aviation.
The EEC aims to develop Thailand’s industry and takes into account the shifting of Thailand’s economy into an innovation-based economy. It covers three provinces—Chachoengsao, Chonburi, and Rayong totaling 13,285 square kilometers. The government anticipates US$43 billion investment over the next five years, mostly through Foreign Direct Investment (FDI), and Public-Private-Partnerships (PPPs). The investment mainly focuses on four core essential areas which are infrastructure, business/industry, tourism and new cities.
What can investor look forward to?
The EEC is designed to accommodate foreign companies investing in the Special Economic Zone by offering attractive incentives, which go beyond the current BOI’s regulations, eliminating some barriers and rules.
According to the government plans, it aims to promote automotive industries, smart electronics, affluent medical tourism, biotechnology, and food innovation in the region. And it plans to establish new robotics industries, aerospace engineering, logistics and aviation, biofuel industries, and medical services.
The investors can look forward to invest in these industries with sweetened incentives and enjoy benefits that the government has offered in the EEC, including tax incentives, infrastructure readiness, and the ease of doing business.
As every investor is looking for lower taxes, the government will provide attractive tax incentives with the reduction of personal income tax to 17% for executives. For experts and researchers working in specified zone there’s also a 50% deduction on corporate income tax over a period of five years for investing in certain key sectors such as the automotive industry, smart electronics, medical tourism, biotechnology and food innovation. Investment in these sectors gets up to a 15-year tax holiday with a tax cap (except the biotech industry which has no cap), according to BOI privileges, and an extra 5 years of 50% reduction after the tax holiday expires.
Athiphat Muthitacharoen from Chulalongkorn University says that Thailand’s average bilateral effective tax rate is 7.6%, lower than others in the ASEAN 5.
(Malaysia, Indonesia, Vietnam, Philippines and Thailand), with the general investment estimate being 60% for machinery 60% and 40% for building..
The data also indicates that Thailand’s EEC has an excellent strategic location for MNEs to invest due to the low corporate income tax charge.
One of the huge concerns of multinational enterprises (MNEs), is the availability and capability of infrastructure, as infrastructure hiccups can make logistics management complicated and result in high administrative costs.
As such, the EEC Board has made the development of new infrastructure and the enhancement of existing infrastructure (built during the Eastern Seaboard project) top priority. Some plans have already announced, including the expansion of U-Tapao Airport, which is expected to be a regional aerotropolis, handling approximately three million passengers annually. The ports of Laem Chabang, Map Ta Phut and Sattahip will be connected to high-speed trains on a double track railway. The future plans are the investment of high-speed train between Bangkok and Rayong, and motorway in Rayong. Moreover, airport cargo warehouses as well as inland container depots will be built to accommodate investors, so more cargo can be transported with less traffic.
The Thai government also offers Public-Private Partnerships, which is a great opportunity for foreign companies to invest in the EEC. Under the Eastern Economic Corridor Act, foreign investors, collaborating with the Thai government in infrastructure projects, will acquire special regulatory rights under the sped-up PPP process, which takes only three months to implement.
Within the EEC, investors are allowed to trade using foreign currencies directly without having to exchange them into Thai baht. This will enable easier trade resulting in the growth of imports and exports, since the foreign exchange risk is minimized, which impacts directly on company income, especially small companies having low profits and it also reduces cost of exchange risk management.
Analysis of EEC Potential
To analyze the EEC’s potential, it is important to examine another successful SEZ, Shenzhen, established nearly 40 years ago. Shenzen’s GDP growth is approximately up to 9% year-on-year, according to 2017 statistics from its municipal bureau. It has well-planned development in almost every aspect. The keys to success that make it prosperous and effective are its strategic location, connected transportation, very attractive investment incentives, the ability to create forward and backward linkages between the SEZ and domestic industry, and the effective administration of government.
Its strategic location makes Shenzhen a regional hub for trading and investing in South China. It is located along the seacoast with easy access of transportation – port, truck, and rail – and it is well-connected to other cities in China as well as Hong Kong, Taiwan and Vietnam.
Chinese firms are suppliers of raw materials to other industries for foreign firms, or foreign firms that have strong links with domestic firms. According to the Zhejiang University Press, there’s a strong forward and backward linkage in the ICT industry as over 85 percent of the firms build their downstream linkages with local firms in Shenzhen and 94 percent have upstream linkages with vicinity firms. The intense linkage between local and foreign firms impacts the SEZ’s success.
If foreign firms only import raw materials and export finished goods to other countries without connecting to domestic firms there is a negative cash flow out of the country, and these foreign firm, instead of supporting domestic firms to encourage economic growth, then become tough competitors and would result in SEZ failure. Therefore, the Thai government should advocate industrial linkage between those foreign and local firms through established business clusters or by creating connections in each industry.
Another important factor that makes Shenzhen successful is the effective administration of government policies. The government has been developing and reforming the process continuously to boost Shenzhen as a one-stop-service centre. According to the 2015 China Urban Competitive Report, the Shenzhen government made efforts to attract more innovative technology firms and it is now home to over 1,000 innovative firms. The process of planning and developing the city has to be transparent with no corruption. Government policies to encourage foreign investment, include 100% foreign business ownership in Shenzhen, a land lease of up to 99 years, allowing transferring derived profits back to investing countries, 15% corporate income tax with exemption of local income tax, and reduction of 10% after the expiration of tax exemption.
The Thai government is making efforts to commit to the EEC by following the examples of successful SEZs such as Shenzen. Thailand has a competitive location advantage and the government will offer investment incentives similar to Shenzhen’s. However, the key points (industrial linkage, government transparency and persistent policies) still need to be addressed.
Thailand’s new SEZ is located in the eastern part of the country where the main deep-sea ports are based, and it is conveniently situated in the middle of Southeast Asia. The EEC’s strategic location makes it convenient for investors to import and export raw materials and finished goods to border countries – Cambodia, Lao, Vietnam, Myanmar, Malaysia and Singapore. In addition, when the expansion of ports, airports, highways, and high-speed rails, are finished and connected the linkage will facilitate the movement of products and services between the EEC and domestic firms. And the distance between the capital and Eastern area is quite short resulting in the growth of trading within the country.
However, location alone will not bring the EEC success. What will really drive its success is the government’s administrative policies and encouragement. Shenzhen succeeded because the Shenzen government could connect domestic firms to international firms through transparent consistent policies. Shenzhen allows foreign firms with 100% ownership to invest in the SEZ; but local firms can still partner with foreign firms, supported by the government. The industry linkage is an essential factor in driving the sustainable development of the EEC’s industrialized cluster. This could be done by increasing the percentage of foreign ownership, but, the Thai government has still not made a decision on offering 100% shareholder rights to foreigners.
Providing full foreign business ownership seems to be the ultimate incentive, but the Thai government should still ensure local partnership. From 1985-2005, industrial linkages were low in Thailand, but since the government started giving more favorable foreign incentives there are strong forward and backward linkages especially in the Thai automobile industry, highlighting a successful industrial linkage between domestic and international firms.
The Thai government should encourage the proper environment for supporting
Thai firms by helping them to upgrade their capability, efficiency, and quality so they can compete with the standards of foreign firms.
Eastern Economic Corridor (EEC) is the enhancement of the former Eastern Seaboard which had been committed by government and associated institutes for over the past 30 years. This mega project investment is Thailand Special Economic Zone (SEZ) and initiated the eastern area into leading economic zone in ASEAN and draw in multinational enterprises (MNEs) to invest, especially the investment on manufacturing for automotive, petrochemical and electronic industries. It also leaded to establishment of 30 industrial estates and over 5,000 factories (Dr. Kobsuk Pootrakool, 2560). With highly successful area development, the economic in the eastern area had raised 7%, export increased 12% and industry grew 12% during the first 20 years (BOI, 2017).