Asian Development Experience Vol. 1: External Factors for Asian Development

6 Official Development Assistance as a Catalyst for Foreign Direct Investment and Industrial Agglomeration

136 Asian Development Experience, Vol. 1 6 Official Development Assistance as a Catalyst for Foreign Direct Investment and Industrial Agglomeration Matsuo Watanabe 136 1. Introduction This chapter is intended to investigate the contribution of infrastructure development financed by Official Development Assistance (ODA) to attracting foreign direct investment (FDI) and to the formation of industrial agglomerations, with reference to the automotive industry in Thailand. Thailand has been one of the major production bases in ASEAN, and currently there are 700 automotive-related companies. The origin of the industry in Thailand dates back to the 1960s when the country invited foreign manufacturers, mainly Japanese, under the Import Substitution Industrialization (ISI) strategy. The country subsequently changed to an export-oriented strategy at the beginning of the 1970s, which has led to remarkable success in industrialization (including that of the automotive sector) and economic development. The success of the Thai automotive industry is evidenced by the expansion in the volume of production and exports which has been the largest of any ASEAN member. This expansion has been facilitated by a concentration of investments in the industry (known as ‘agglomeration’) from foreign parts suppliers, including those in the Eastern Seaboard (ESB) area. The determinants of FDI have been analyzed fairly widely in past literature, including the issue of FDI in ASEAN economies where provision of infrastructure as well as the existence of industrial agglomeration have had a positive impact in attracting FDI.1 This study investigates how the agglomeration of the automotive industry has taken place in Thailand. In particular, special attention is Official Development Assistance as a Catalyst for Foreign Direct Investment 137 placed on the shift in concentration on new investments over the last two decades in accordance with the development of infrastructure in the ESB and Bangkok Metropolitan area – a large part of which was financed by Japan’s ODA in the same period. This chapter is organized as follows. Section 2 reviews the Thai government’s past economic policy and the path to industrialisation. Section 3 gives an overview of the development of the ESB area with particular reference to the establishment of various types of infrastructure. After outlining the situation of the Thai automotive industry in Section 4, an analysis of the formation of the automotive agglomeration follows. Section 5, which concludes this chapter,2 discusses Thailand’s attractiveness to investors. 2. Thailand’s Economic Policy and the Path to Industralization Thailand has achieved remarkable industrialization in the last two decades largely due to FDI from Japan and other countries. In particular, the country has seen an industrial agglomeration of automotive and electricity industries which account for the successful industrialization mentioned in the previous section. The following sections examine the case of automotive agglomeration in the ESB area and Japanese companies’ investment behaviour which changed in accordance with infrastructural development in the ESB financed by Japanese ODA. First, Thailand’s chronological industrial policy infrastructural development plan for the ESB is reviewed. Next, the agglomeration of the automotive industry in the ESB is investigated by looking at the trajectory of the industry in Thailand and the process of agglomeration in the ESB, followed by the factors which enabled the agglomeration, including Japan’s ODA. Thailand’s industrialization dates back to the 1960s when the country introduced its ISI strategy. This was followed by an export-oriented strategy in the 1970s which has since been expanded by foreign capital inflows (Development Bank of Japan 2001). The Thai government embarked on industrialization at the end of the 1950s at a time when the main source of income was agriculture, i.e., rice. In 1961, an economic development plan was introduced to establish an industrial base by encouraging foreign investment.3 The ISI strategy, however, collapsed due to an increasing trade deficit caused by the import of capital goods. The government then altered its strategy in favour of promoting export-oriented industries by offering various incentives such as reducing customs on imports necessary for producing exportable goods and preferential financing for exporters. Through these 138 Asian Development Experience, Vol. 1 incentives, labour intensive industries, e.g. food processing and textiles, saw a notable growth. The National Economic Development Board (NEDB), and its successor, the National Economic and Social Development Board (NESDB), have played a significant role in Thai industrialization. The agencies report to the Prime Minister and have written nine National Economic Plans (NEP) since 1961 (Table 6.2). The first and...