The Importance of Government Incentives Relative to Economic Fundamentals: The Case of Software Industry in Thailand

Studies on industrial clustering identify factors that nourish the clustering and thus aid in industrial development. We classify these as government incentives and economic fundamentals. Economic fundamentals, which we define as a set of essential factors conducive to the development of an industry cluster, may be the result of chance — for instance, geographical location and climate — or may be a result of long term government policies such as affordable and abundant higher education. We examine the importance of government incentives relative to the economic fundamentals in the development of the software services industry in Thailand. Our survey of investors, both foreign and domestic, in the software services industry in Thailand, found that economic fundamentals were perceived as being more important than government incentives in influencing investment decisions. This raises important questions for government policy. For example, is money used for tax breaks and grants efficiently spent? Or, could the money be better invested in improving the quality of human resources and infrastructure? Based on the findings of this study, recommendations are proposed for government policy and directions for future research.