Financing Choices for Technological Upgrading: Evidence from Interviews with Thai Firms.

• Author: Ishido, Hikari

This research investigates the significance of technological innovation for Thailand's industrial development through equity participation in the form of foreign direct investment (FDI). The pecking order theory suggests that to finance technological upgrading, firms tend to prioritize internal funding, and use debt and equity financing as the last resort. In the context of incessant technological change, however, equity financing might be a better choice. This research highlights some aspects of how that is the case by analysing firm-level performance data from Thailand and then conducting in-depth interviews with top executives from several companies located in the Eastern Economic Corridor (EEC). We find that the conventional pecking order theory does not hold when it comes to external financing decisions. The interview insights reveal that, while a majority of companies prioritize internal financing, capturing technology (as intangible assets) via equity as well as non-equity linkages with foreign firms is also observed. Given that technological upgrading can result from FDI inflows by foreign firms, a truly "joint" nature of equity and non-equity forms of investment projects would serve as a win-win option for Thai and foreign firms, especially under the "Thailand 4.0 " policy framework.

Keywords: Pecking order theory, external financing, intangible capital, international investment, technology transfer, Thailand.

Article received: January 2021; revised: December 2021; accepted: March 2022

1. Introduction

   Being at precisely the centre of Southeast Asia, Thailand enjoys a key strategic location for manufacturing, trading, and logistics (Thailand Board of Investment 2016). The country has continuously improved its economic model, starting from "Thailand 1.0" (which focused on the agricultural sector and light industries) to "Thailand 2.0" (more complex industries) and then to "Thailand 3.0" (emphasis on attracting foreign direct investment to make Thailand a production hub). Currently, the Kingdom is gearing towards "Thailand 4.0", which underscores a value-based, creative, and innovation-driven economy. The Thai government has invested considerably in infrastructure, particularly in the Eastern Economic Corridor (EEC) (formerly known as the Eastern Seaboard area) to transform the nation into a premier investment destination in Asia (Thailand Board of Investment 2017). The EEC is a great boost to regional economic growth as well, with its strong connectivity to other Southeast Asian countries for setting up new manufacturing and innovation hubs and industrial clusters. Besides Thai and foreign companies operating in the Corridor for over three decades, foreign direct investment (FDI) inflows have also given a boost to the domestic economy via several channels--technology transfer, new labour skills, increased market competition, trade integration, exposure to new markets, and enterprise development (Kurtishi-Kastrati 2013).

   While the government foresees the long-term benefits from FDI in the EEC in preparation for Thailand 4.0, a big part of its national plan is to support the country's growth in the field of R&D and promote private investment in new technology and innovation. Many companies that have long been operating in the EEC are facing the challenge of rapid technological change, and business executives need to carefully decide on key investment schemes needed to capture the positive synergy between Thai firms and their foreign partners.

   Technology transfer and capital inflow from abroad are important to indigenous companies. The accompanying externalities such as technological support, production, new products, know-how and new skills for operation, and other intangible assets are significant means of increasing the productivity of local businesses (Aitken and Harrison 1999). To take full advantage, however, companies in the host country must develop some complementary technological capabilities of their own, too (Armas and Rodriguez 2017). In the case of Thailand, firms operating in the Corridor will face a considerable challenge in preparing themselves to reap the benefits of such technology transfer from their partner firms located abroad. Given this background, this study sheds light on how executives perceive and capture the synergy from joint ventures with international firms. Another aim of this research is to understand the underlying financing decisions in using capital to support new technology, and determine whether the traditional pecking order theory (POT) applies to these organizations.

   Investing in innovation and technology normally requires a large amount of capital and it usually takes years before significant economic returns are generated. While a number of papers have studied the relationship between the determinants of capital flow (see, for instance, Bhat, Chanda and Bhat 2020; Rafiq, Iqbal and Atiq 2008; Thippayana 2014; Zafar, Wongsurawat and Camino 2019), this research analyses business executives' perception of capital financing in the modern technology landscape, whether it still follows the POT framework, or leads to other financing preferences such as private equity.

   Specifically, the objectives of this research are twofold. First, it intends to gain insights into how executives of Thai companies in the EEC utilize innovation and other externalities emerging from the transfer of technology and intangible assets while carefully designing investment schemes to capture positive joint venture synergies. Second, the study aims to explore the executive and financing decisions related to the capital structure of technology transfer. Since extant studies in related fields have mainly applied quantitative methods to analyse such decisions (see, for example, Fischer et al. 1998; Paul,

   Whittam and Wyper 2007), this paper attempts to understand the point of view of business managers in charge of making these calls.

   For this purpose, we interviewed executives from twelve listed companies currently operating in the EEC in Thailand. All participants were senior-level officials responsible for deciding the key strategic directions of their companies. Although we cannot draw generalized conclusions, key excerpts from these interviews can help policymakers understand the managerial implications of capital structure decisions in today's technology transfer era.

   The remainder of this paper is organized as follows. In the next section, we review some of the existing studies on technology transfer and capital structure theory related to financing choices. In the third section, we describe our sample and interview methodology and then utilize quantitative methods to determine the validity of the pecking order theory. The subsequent section reports our interview results, while the final section concludes with the main findings, policy implications and suggestions for future research on the subject.

2. Literature Review

   2.1 Technology Transfer

   Foreign direct investment (FDI), coupled with the host country's public policy initiatives, contributes significantly to the development of the domestic economy via several means: increased supply of capital and technology; a more competitive business environment; enhanced regional and global trade integration; and rapid development of enterprises. All these factors can help the host country secure capital inflows, create new jobs, and eventually alleviate poverty (Gupta, Yadav and Jain 2020; Kurtishi-Kastrati 2013). On the other hand, the benefits of FDI to the home country's economy include exposure to new markets and greater competition for local businesses.

   For Thai firms to capture the benefits of the transfer of technology and intangible assets from businesses based overseas, carefully constructed corporate finance and investment schemes are needed. Here, it is important to note that, while profitability can at times be negatively related to the financing of innovation (Nylund Petra et al. 2019), some firms have the propensity to utilize internal financing for R&D (Ughetto 2008). In the case where external technology is needed to "leapfrog", implicit or tacit technology transfer can be secured through foreign equity participation.

   Thus, because of the sector-specific and (possibly) country-specific nature of the links between technological upgrading and the associated financing costs, it is vital to investigate the case of Thai firms, especially those in the EEC, given the government's emphasis on Thailand 4.0.

   2.2 Foreign Direct Investment and Financing Choices

   This research also aims to establish a link between FDI and a company's financing decisions (or its capital structure). The inflow of foreign investment and technology can affect the domestic firm's performance in terms of productivity, profitability, and growth opportunities (Rutkowski 2006), and these variables are important determinants of a company's capital structure (Kayo and Kimura 2011). This implies that FDI, profitability, and decisions related to capital financing are all interconnected (Campello 2006; Anwar and Sun 2015).

   While a number of existing studies have focussed on the determinants of capital structure (Huang and Song 2006; Thippayana 2014; Titman and Wessels 1988), they have rarely analysed foreign investment in relation to financing decisions of domestic companies. This trend is also observed in the case of Thailand-based studies (Tongkong 2012; Udomsirikul, Jumreornvong and Jiraporn 2011).

   In order to fill this void, our study considers not just capital financing decisions but also underscores the need for foreign investment in the context of technology transfer. We rely on a quantitative model as well as on interviews to derive deeper explanations of how business executives make the relevant strategic choices.

   Since the development of the Modigliani-Miller theorem in 1958, which assumed perfect capital markets, three major capital structure theories have...