Thailand's challenge: a shift to innovation-led growth

opinion November 21, 2012 00:00

By George Abonyi
Special to The

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China has become the largest market for Thai exports, and enthusiasm is high for the Asean Economic Community (AEC), targeted for 2015. Asian emerging markets are expected to create new opportunities that the troubled US and EU economies no longer provide

Asia’s growth is still dependent on now-anaemic developed economies. The Asian Development Bank estimates that more than 71 per cent of Asia’s final manufactured exports are for markets outside Asia, particularly the US and EU. These will remain key, if sluggish, final markets for Thailand’s manufactured exports over the medium term. And China’s role is shaped not by the size of its GDP, but by its capacity to generate net demand for imports. Household consumption as a share of GDP has fallen since the late 1990s from over 55 per cent to around 35 per cent in 2011. 

This reflects income transfers from households to firms, primarily powerful state-owned enterprises. Therefore the hoped-for domestic consumption-driven growth is as much a challenge of uncertain politics as economics: shifting spending power away from these enterprises. 
Furthermore, while China is a major importer of parts and components from Thailand and other Asian countries, it is mostly for final assembly of products such as iPhones for export to developed markets. It is not yet a major market for the region’s manufactures. Thus, for China to become a growth locomotive for countries such as Thailand, it would need to raise its domestic consumption as a proportion of GDP, and its imports of final goods from the region. 
Yet the long-term trend is clear: with the region’s growing population and increased incomes, 40 per cent of global consumer spending is expected to come from Asia by 2030. 
Beyond China, a more integrated AEC is a key part of this shift, with a projected population of 650 million by 2020, half aged under 30. Emerging Asia’s middle-class households, with annual disposable income of US$5,000-15,000, are expected to increase significantly by 2020. But most of this growth will be at the low end of the middle-class range. 
Average annual disposable income in Asia is projected at under $6,000 by 2020, as compared with close to $40,000 in developed economies. The vast majority of the populations of emerging Asia will continue to be low-income and lower middle-income in the coming years. And fragmented markets, a high rural population and growing income inequality will condition discretionary spending. Nonetheless, emerging Asia presents considerable business opportunities for Thai firms. 
The challenge to Thai firms is not just to export, but to strengthen their capacity for innovation responsive to consumers in Asian emerging markets. Discussions of innovation have mostly focused on research and development for leading-edge technology. Thailand is lagging on these measures. For example, in 2011 Thailand invested approximately 0.2 per cent of GDP in R&D, as compared with South Korea’s 3.22 per cent, Singapore’s 2.25 per cent and China’s 1.44 per cent. 
Furthermore, estimates of the Thai private sector’s share of investment in total R&D range from 35 per cent to 45 per cent, as compared with 77 per cent for South Korea, 76 per cent for Taiwan and 66 per cent for Singapore.
The nature of Asian emerging markets suggests a broader perspective on innovation. Benefits of innovation may be captured anywhere along the value chain, from development of new technologies to changes in marketing and distribution systems. 
For many Thai firms, particularly smaller enterprises (SMEs), adapting existing technology to local user needs may be the most accessible route to commercially viable innovation for Asian emerging markets. Investments in early interactions with potential consumers on product development, in process improvements and in new types of business systems can play a central role in shaping innovation and commercialising new ideas. This is especially important for markets where consumers with high aspirations but limited disposable incomes and constraints not found in developed economies look for products at a relatively low cost and are better suited to local user conditions. 
There are examples, particularly from India and China, of successful innovations for emerging markets and beyond. First Energy’s Oorja stove, developed originally for rural India, is a low-smoke, low-cost, highly efficient stove, powered by rechargeable batteries with pellets from organic bio-fuel made of processed agricultural waste; it is now beginning to be marketed in Southeast Asia. China’s Galanz developed microwave ovens that are simple, energy efficient, low cost, small and flexible for local needs, with novel applications for stir-frying, deep-frying and steam cooking; then built on local success for expanding global exports. In India and China, GE developed ultrasound and electro-cardiogram (ECG) machines specifically to meet income, infrastructure and service constraints found in emerging Asia; they have now also found lucrative niche markets in the US. 
Taking advantage of Asian emerging-market opportunities requires a national commitment – jointly by government and the private sector – to innovation-led growth. Thailand has enormous potential for innovation, reflected in the inherent capacity for design, and globally admired crafts and products. But exploiting this potential for international markets requires strengthening Thailand’s “national innovation system”: interacting policies, institutions and programmes related to innovation in both the public and private sector. 
This involves not only needed investment in cutting-edge R&D, but also addressing existing gaps such as financing for early-stage innovation, particularly for SMEs, and supporting infrastructure such as “innovation parks”, successful elsewhere in Asia. 
Considerable payoffs can come from innovation all along the value chain, including from investment in areas such as user-oriented product development, and new types of marketing, sales and distribution practices.
Dr George Abonyi, based in Ottawa, is visiting professor at the Department of Public and International Affairs and the Executive Development Programme, Maxwell School, Syracuse University, and senior advisor to Thailand’s Fiscal Policy Research Institute.