A new paradigm in global investment flows is being seen as the COVID-19 pandemic has triggered massive supply chain adjustments. Realizing the fragility of global supply chains and the intensifying trade and technology war between the US and China, multi-national companies have begun to diversify risks from China. Reshoring or the practice of moving the production and manufacturing of innovative products back to the company's original country, and diversification or the process of building a new production base or supply chain for mainstream products in order to diversify risks in case of emergency are emerging as global trends post-pandemic.
Amid these trends, Thailand may benefit from diversification because Thailand can serve multinational companies as an alternative destination for their new production bases. However, multinational companies have choices in setting up production bases in any ASEAN member state, based on a number of factors: 1) market size; 2) market access to third countries if their production is geared towards export. Any ASEAN member state that has a trade agreement with leading global markets will have an edge to attract investments; and, 3) production costs, which include labor costs. In terms of market size, it is clearly seen that Thailand cannot compete with Indonesia, the Philippines and Vietnam. Additionally, Thailand has yet to join the CPTPP and enter into a free trade agreement with the EU, which means that Thailand's trade privileges are not comparable to those of Vietnam. Last but not least, Thailand's minimum wage is higher than that of Indonesia, the Philippines, Vietnam and Malaysia. Therefore, Thailand is less competitive in terms of labor costs.
Although Thailand is not as competitive as its ASEAN peers in terms of market size, trade privileges and labor costs, Thailand boasts several strengths. These include tax incentives for investments in the industries using advanced technologies, sufficient infrastructure and integrated supply chains in the automotive and electrical industries and several segments of the electronic industry. Since supply chains in such industries cannot be built over the short term due to their complexity, some foreign investors will continue to use Thailand as a production base in ASEAN. Once multinational companies have diversified their supply chains from China to other countries post-pandemic, we at KResearch expect that Thailand's FDI will increase by approximately USD1.1-1.4 billion during 2021-2023, which is an increase of 0.7-0.8 percent over that reported for 2018-2020, primarily in the industries that have integrated supply chains.
Over the long-term, Thailand, however, may face challenges in maintaining FDI in the industrial sector because many manufacturing bases will be built around the world amid the diversification trend. As FDI will likely be diversified more broadly, Thailand's FDI in the manufacturing of mainstream products may decline in the future. The reshoring trend may also inhibit Thailand's opportunities to attract FDI in high-tech industries, as well. A sustainable solution for Thailand, therefore, is to have its own advanced technologies, enhance its innovation capability and upgrade its human resources.