Services in Thailand and Participation in Global Value Chains.

• Author: Kohpaiboon, Archanun

1. Introduction

   The importance of services linkages and global value chain (GVC) activities to improve the competitiveness of domestic firms has been recorded in several recent studies (see, for example, Gereffi and Fernandez-Stark 2010; Barrientos, Gereffi and Rossi 2010). Services create important linkages in GVCs that can have a direct or indirect impact on the productivity of manufacturing firms, mainly in terms of logistics, management and consulting, saving time and materials, and improving coordination (Nordas 2010). The impact of services is also seen on the demand side where firms can differentiate their manufactured goods by bundling them with services, effectively capturing consumer preferences and creating more producer-and consumer-surplus. Thus, services can be expected to strengthen both the supply and demand aspects of GVCs (Lodefalk 2015).

   Thailand's services providers can also benefit from the rapid expansion of cross-border trade in services by participating in multinational supply chains. With globalization, services are experiencing a similar transformation process as manufacturing. Historically, services providers were constrained by their ability to capture, store and process the value of intangible outputs. Although there were a few opportunities for services to be delivered and consumed simultaneously, the recent telecommunication reforms and the use of digital technology have significantly altered the business landscape in services. Today, the sector can be segmented according to business functions, such that knowledge can be commoditized and packaged, ultimately leading to improved product ownership and large-scale production.

   The services sector is heterogeneous, spanning a wide range of economic activities varying across countries. For instance, even seemingly identical business process outsourcing (BPO) can differ drastically between Thailand and the Philippines. This is also because the operation of services activities can be affected by local rules and regulations, as in the case of logistics and medical healthcare services. Such scenarios highlight the need for an in-depth country-specific analysis of the services sector.

   This paper examines the services GVC in Thailand and its impact on the country's overall economic development. The article is organized as follows. The next section focuses on the analytical framework of the sector. The third section discusses the basic features of services in Thailand, including its current performance and the prevalent policy environment. The subsequent section draws attention to the development of logistic services as a case study to identify areas where regional cooperation can play a role. The final section concludes with policy inferences.

2. Analytical Framework

   As mentioned earlier, services are heterogeneous in nature. This diversity masks a fundamental function that many services undertake in relation to overall economic growth and development. Services perform the "input" function, like facilitating transactions related to transport, telecommunications and financial services (Melvin 1989). As services frequently serve as direct inputs for a vast array of economic activities, they are the basic determinants of the productivity of firms.

   With globalization, the services sector is undergoing transformation that was previously experienced by only the manufacturing sector, thereby making it increasingly important in modern economies. Traditionally, services providers were constrained by their ability to capture, store and process the value of their intangible outputs. Additionally, there were few opportunities to create step-by-step pathways to the market as services had to be delivered and consumed almost simultaneously. However, telecommunication reforms and the use of digital technology in a growing range of business services are now driving a rapid emergence of supply in services. The innovative business process transformation that is strengthening small and medium-sized enterprises (SMEs) is also, in a way, creating globally integrated services firms (Brockman 2014).

   The services sector is on a quest to segment business functions, whereby knowledge can be commoditized and packaged, product ownership can be established, production can be scaled up and trade can take place independent of production. Services intermediates (generally described as knowledge-intensive business services) are now the fastest growing component of world trade and services, accounting for nearly half of the global trade in value-added. Commonly known as the "servicification" of manufacturing, it refers to the manufacturing sector's ability to increasingly buy, produce and sell more services (Pilat 2005; Pilat et al. 2008; Lodefalk 2015).

   For the past two decades, offshore services have emerged as a dynamic global industry, owing to the information and communication technology (ICT) revolution that began in the early 1990s. The ICT phenomenon has transformed the way companies conduct business, by separating production and consumption services. With globalization and intense competition, a growing number of firms in developed countries have started to offshore and outsource a variety of corporate functions to developing nations. While these firms are primarily driven by lower costs and access to talent, outsourcing also benefits the developing economies in terms of opportunities for employment and growth. The key competitive advantages include: low human resources costs; technological skills; language proficiency; time zone advantage; and geographic and cultural proximity to major markets. As a number of sophisticated tasks and knowledge-intensive activities are performed abroad, the supply of scientific, engineering and analytical talent offered by developing countries also becomes key in attracting outsourcing firms.

   In terms of market entry, the global value chain for offshore services provides policy makers with a tool to support decision-making. The chain incorporates all services that are currently being provided in the industry and value is correlated to employee education level. The lower value segments are basic services in information technology outsourcing (ITO) and business process outsourcing (BPO). Meanwhile, at the higher end of the value chain are services in knowledge process outsourcing (KPO), including market research and business intelligence that require highly specialized expertise. The other end of the spectrum includes specialized vertical R&D functions. This helps to widen economic opportunities for developing countries in the form of an international division of labour as they supply a cheaper, yet talented workforce to provide offshore services to customers in developed countries. Other desirable economic outcomes from being integrated into the offshore services include: attractive compensation; career development opportunities for graduates and professionals; employment generation in peripheral areas; reduced brain drain; and improved reabsorption of returning emigrants. Bearing these benefits in mind, some less developed countries plan to turn into services-driven economies by almost skipping the industrialization phase. (1)

3. Services Sector in Thailand: Trade Policy and Performance

   Historically, Thailand has been quite conservative in pursuing trade liberalization. While the country complied with the commitments set by the World Trade Organization (WTO), the overall openness of the services sector remains relatively restricted by global standards (Figure 1). Even though there has been a persistent push for further liberalization via regional agreements (various FTAs), reluctance to push further is evident.

   Among the signed FTAs, the most advanced is the liberalization commitment made under the ASEAN Economic Community (AEC). In the case of other agreements, the commitments were in line with WTO (Kohpaiboon et al. 2015). Table 1 calculates the points (number of subsectors) that each ASEAN member has committed to provide market access to, in the priority integration sector and other services. Each member submits its market access commitments according to three modes of service provision, i.e., Modes 1, 2 and 3. Due to concerns about the free flow of unskilled foreign workers, certain ASEAN members, including Singapore, have not made any commitment for Mode 4. As shown in Table 1, Thailand barely meets the minimum threshold of sixty-five points while the Philippines is the only country with lower commitment points.

   In Thailand, the services sector...