ISSN 2434-2459

ISS Research Series No. �

AGISSS

Gakushuin University
May ����

Rethinking the Middle-Income Trap
in Emerging Asian Economies:
China, Malaysia, and Thailand
Akira SUEHIRO

Association of Gakushuin International Social Sciences Studies
�- �- � Mejiro, Toshima-ku, Tokyo ���- ���� JAPANRethinking the Middle-Income Trap in Emerging Asian
Economies: China, Malaysia, and Thailand
By
Akira SUEHIRO 1
Faculty of International Social Sciences, Gakushuin University

Abstract
East Asia is an important area of “emerging economies” in the world
because a large number of countries or regions have successfully achieved
rapid economic growth over the past few decades. Nevertheless, since theend of 2000s, economists at international financial institutions such as theWorld Bank and Asian Development Bank (ADB) have cast their doubt on
the “East Asian miracle”, and insisted that East Asian economies weregoing to experience the problem of middle-income trap where upper
middle-income countries have suffered economic stagnation and have faceddifficulties in shifting to high-income countries.
A typical case is Malaysia, which moved into an upper
middle-income category of country in 1991, but has failed in shifting to ahigh income-country for over twenty years. In 2012, ADB also pointed outthat China would face the same problem of middle-income trap so far as she
continued to depend on the low-cost advantage of the source of growth. ADB
suggested China to switch its growth pattern from an input-driven one to an
innovation-driven one to escape the possible trap in the near future.
In this study the author picks up the three countries of China,
Malaysia, and Thailand as case studies, and he aims to investigate thecurrent situations of these countries in terms of wage level, laborproductivity, and R&D activities (innovation). After confirming thesituations of increasing wage-level and low-level innovation, he compares1akira.suehiro@gakushuin.ac.jp
1

the responses of the three countries to the middle-income trap in specialreference to the role of government.
At first, he selects China. He claims that China is requested to shift
the sources of growth from over-investment and exports to domestic
consumption, together with productivity improvement through innovationand industrial upgrading. In the case of Malaysia, he focuses on theincreasing role of foreign workers in manufacturing sector (no significant
contribution to productivity improvement), and compares the policy agenda
between the National Development Plan (NDP: 1991-2010) and the New
Economic Model (NEM: 2010-2020). He clarifies by illustrating that thepolicy targets of the NEM in Malaysia are similar to policy options
suggested by ADB for China.
Lastly, in the case of Thailand, he points out the big gap between thegovernment policy targets (the promotion of new-age or next generationindustries) and actual competitiveness of local big firms, mostly familybusinesses based on agro industries and service sectors rather than core
manufacturing industries. Therefore, government policies responding to the
middle-income trap are less effective if there is no full-scale collaborationfrom foreign firms. He finally suggests that Thailand is expected to seek amore independent way in which local Thai firms can demonstrate their own
advantages on the basis of Thai-ness and hospitality.

I. THE LIMIT TO THE INPUT-DRIVEN GROWTH PATH
What is the ‘middle-income trap’?
Starting around the end of the 2000s, a certain term was often used in
discussions about emerging Asian countries. This was the ‘middle-income
trap’, a favoured term of economists at international institutions andAmerican think tanks. 2
2This literature includes the World Bank (Yusuf and Evenett 2002; Gill and Kharas2007), IMF (Aiyar, Duval, Puy, Wu, and Zhang 2013), Asian Development Bank (ADB
2012a), the National Bureau of Economic Research (Eichengreen, Park, and Shin2013), and the Levy Economics Institute of Bard College (Felipe, Abdon, and Kumar2012).
2

For example, in Asia 2050 (ADB 2012a), the Asian Development Bank
provided two long-term forecasts for Asia as a whole, giving an optimistic
scenario (the Asian century) and a pessimistic scenario (the risk of gettingcaught in a middle-income trap). Kenichi Ohno (2009) tackled this issue
from the perspective of a ‘development trap’ and industrial policy.
The Asian Development Bank addressed this issue in relation to China
in 2012 in Growing Beyond the Low-Cost Advantage: How the People’s
Republic of China Can Avoid the Middle-Income Trap (ADB 2012b). Theysuggested the path China could take to upgrade from anupper-middle-income country to a high-income country through a
combination of four elements: technically advanced domestic firms,
high-value goods and services, developed markets, and innovation in
products and processes (11).
That same year, the World Bank raised the same issue in a report titled

China 2030: Building a Modern, Harmonious, and Creative High-Income
Society (World Bank and Development Research Center of the State Council,

People’s Republic of China 2012). They pointed out the difficulty involved
for middle-income countries to shift to high-income countries. In fact, among
101 middle-income countries or economies in 1960, only 13 countries or
economies could reach the high-income level in 2008, namely Equatorial
Guinea, Greece, Hong Kong, Ireland, Israel, Japan, Korea, Mauritius,
Puerto Rico, Portugal, Singapore, Spain, and Taiwan. Four out of those 13(Hong Kong, Korea, Singapore, and Taiwan) belong to the so-called Asian
newly industrialized economies, or the Asian NIES (Suehiro 2008, chapter
1).
Research by World Bank economists Yusuf and Nabeshima (Yusuf andNabeshima 2009) on Malaysia and studies by Kenichi Ohno (Ohno 2009),
Tran Van Tho (Tran 2010), and Nguyen Cao Due (2015) on Vietnam isrepresentative of their respective areas. 3 Around 2011 in Thailand, thecentral bank and the National Economic and Social Development Board
started to discuss this issue, warning that Thailand’s international
competitiveness was declining. Following government economists, Japanesescholars have also turned their eyes to this issue since 2013, as we see in
Egawa (2013), Oizumi (2016), and Suehiro (2017).
For more empirical studies on Malaysia, please see Tham and Loke (2011) andKumagaya (2014).

3

3

The term middle-income trap was first used by the World Bank’s Gilland Kharas in An East Asian Renaissance (Gill and Kharas 2007). They
argued that three transformations were required for emerging Asian
countries (middle-income countries) to continue their growth: (1)transformation from diversification to more specialization (based on
economies of scale) in production and employment; (2) transformation froma focus on investment to a focus on innovation; and (3) a shift fromequipping workers with skills that allow them to adjust to new technologies
to prepare them to shape new products and processes.
Gill and Kharas sounded a warning that economic growth in thesecountries would be sluggish without steady progress through these threetransformations and that the emerging Asian countries would be caught ina middle-income trap, as is the current situation for many middle-income
countries in the Middle East and Latin America (17–18). Likewise,
Eichengreen et al. (2013) defined countries suffering the middle-income trap
as those that had undergone average GDP growth of at least 3.5% forseveral years and subsequently stepped down by at least 2% between
seven-year periods. Similar observations are shared by the IMF Group(Felipe et al. 2012; Veerayooth 2015, 56).
In particular, the study of Felipe and others notably explored the issueof middle-income trap by employing two major criteria: the income range
used to distinguish a middle-income country, and the average duration ofstagnation in the same category of middle-income country on the basis ofpast experiences. They surveyed 124 countries or economies and categorized
middle-income countries as those having GDP per capita of between $2,000
and $11,759 in terms of 1990 PPP (Purchasing Power Parity) US dollars (alower-middle-income country having less than $7,250 and an
upper-middle-income country having more than $7,250). They calculated
the average years of transition and discovered two facts: 28 years for thetransition from a lower-middle-income to an upper-middle-income level and
14 years from the latter to a high income level.
As of 2010, 30 out of 38 lower-middle-income countries remained as suchfor more than 28 years. Five out of 14 upper middle-income countries stayedin the same income range for more than 14 years. If looking at Southeast
Asian countries, we find that Malaysia is one of the five that may havefallen into the upper-middle-income trap, while Indonesia is in danger of4remaining in the lower-middle-income trap.
The study of Felipe and others focuses on past economic performance interms of per capita income. On the other hand, if we focus on the growth
pattern of a country, we find that the middle-income trap closely connectswith the path of trying to achieve economic growth through additional
inputs of cheap labour and low-cost capital. In other words, it refers to thesituation in which the low-cost advantages have been tapped out because ofwage increases that exceed increases in productivity and a downward trend
in investment efficiency (Suehiro 2014, chap. 6).
A country’s growth rate will therefore decline unless improvements inlabour quality (increased skills and technical know-how) and technologicalinnovation can increase labour productivity. The country will hit theso-called wall of input-driven growth. The middle-income trap highlighted
by international institutions has virtually the same meaning as this wall.
Doubts about the theory of the middle-income trap
This paper first considers the example of Malaysia, which is a typicalcountry facing the middle-income trap (Table 1). 4 Malaysia transitioned towhat the World Bank defines as an upper-middle-income country in 1979. It
subsequently dropped back down to lower-middle-income status, and,
although it regained its status as an upper-middle-income country in 1991,
it has so far been unable to join the group of high-income countries, as thestudy of Felipe and others has pointed out (Felipe, Abdon, and Kumar2012).
Between 2010 and 2015, per capita GNI in Malaysia increased from
US$9,069 to US$9,766, or by merely US$700, in contrast to the case of
China, which impressively increased per capita GNI from US$4,516 to
US$7,925 in the same period. Malaysia clearly remains at a standstillcompared to Taiwan, which took 15 years to transition to a high-income
country after becoming an upper-middle-income country in 1973, and South
Korea, which took 16 years to transition to a high-income country after
becoming an upper-middle-income country in 1978.
Table 1 is constructed on the basis of nominal per capita GNI, not the real per capita
GDP such as 1990 PPP dollars, according to the definition of the annual report of theWorld Bank (appendix in the World Bank Development Report).

4

5

Table 1 Year of Shifting to High-Income or to Upper-Middle-Income Economy in Asian Economies
Item
Country/
EconomyGrouping

Per Capita Nominal GDP ($)

The Year of Entering into a Group

2015

2010

1990

High-Income

Upper-Middle- Lower-MiddleIncome
IncomeSingapore

High-Income

52,88946,57011,8641981

Before 1962

・・・

Hong Kong

High-Income

42,42332,55013,4851978

Before 1962

・・・

Japan

High-Income

32,47742,93525,124

1967

Before 1962

・・・

Korea, Republic

High-Income

27,221

22,151

6,642

1993

1978

Before 1962

TaiwanHigh-Income

23,29819,864

8,178

1988

1973

Before 1962

Malaysia

Upper-Middle

9,766

9,069

2,417

－

1979-86, 1991

Before1962,1987-90

China

Upper-Middle

7,925

4,516

316

－

2010

1998

ThailandUpper-Middle

5,816

5,112

1,508

－

2010

1966

Indonesia

Lower-Middle

3,346

3,125

631

－

－

1979

Philippines

Lower-Middle

2,899

2,145

715

－

－

Before 1962

Vietnam

Lower-Middle

2,111

1,334

98

－

－

2008

Laos

Lower-Middle

1,812

1,147

204

－

－

2010

India

Lower-Middle

1,582

1,388

375

－

－

2007

Notes: In 2014, World Bank defined high-income economies as economies with a GDP per capita of $12,736 or more;
upper-middle-income economies as those with a GDP per capita between $4,126 and $12,725; lower-middle-income
economies as those with a GDP per capita between $1,045 and $4,125; and low-income economies as those with a GDP per
capita of $1,045 or less (World Development Indicators 2016).
Sources: Compiled by the author based on both World Development Reports (various issues) and the World Development
Indicators 2016 Online (accessed 10 February 2017).

This highlights how Malaysia has been caught in the middle-income
trap. More precisely, Malaysia has hit the ‘wall for transitioning to ahigh-income country’ (Suehiro 2014, 127). By contrast, Thailand and China
both joined the group of upper-middle-income countries in 2010. It is unfair
to apply the middle-income trap theory used in relation to Malaysia tocountries that have only just become upper-middle-income countries.
Moreover, an issue confronting both of these countries, and an issue forIndonesia, which is on the verge of becoming an upper-middle-income
country, is the clarification of what policies are required to transition into
high-income countries.
Lastly, India and Vietnam both finally escaped from the group of
low-income countries in 2007 and 2008, respectively, so they cannot be
discussed in the same terms as Thailand and China. This is because theissue that India and Vietnam face is clarifying what policies are needed fora future transition into an upper-middle-income country, not a high-income
country.
An interesting point in Table 1 is the trend of Latin American countries.
6After having previously been a high-income country, Argentina dropped
back down into the upper-middle-income country category in 1968. While
Brazil and Mexico are both referred to as middle-income countries, they
have fluctuated between being upper- and lower-middle-income countries.
Except for Malaysia, such examples have not been evident in Asia.
At any rate, it is clearly unreasonable for international institutions togroup emerging Asian countries together as middle-income countries, eventhough their per capita income levels differ, and assert that they are allcaught in a hidden trap. What instead need to be considered are the hidden
problems in the growth patterns common to these countries; in other words,
the problems of growth limitations grounded in the low-cost advantage.
Rather than referring to this problem as the middle-income trap, this paper
refers to it as the ‘limit to the input-driven growth path’.
‘The Myth of Asia’s Miracle’ and ‘Innovative East Asia’
A similar argument to that of the middle-income trap was presented in ‘The
Myth of Asia’s Miracle’ (Krugman 1994), a paper by Paul Krugman that
aimed at criticizing The East Asian Miracle, published by the World Bank
(1993).
Krugman asserted that the previous high growth in East Asia was due
to additional inputs of capital and labour, not technical innovation. He thus
predicted that if wages in Asia rose and investment efficiency declined,
Asian growth would eventually slow down and the ‘miracle age’ would end.
Krugman’s prediction came true with the outbreak of the Asiancurrency crisis three years later, and his thesis became famous overnight.
The currency crisis was ultimately attributed to a combination of suchinternational factors as large, speculative movements of short-term
international funds and such domestic factors as fragile financial systems
and poor corporate governance (Suehiro 2008, chap. 4). It was not aconsequence of the higher wages and lower investment efficiency purported
by Krugman.
Nevertheless, World Bank economists took the currency crisis as aturning point, considering all East Asian economic development after thattime as ‘input-driven growth’ and emphasising its negative aspects. For
example, Yusuf and Evenett asserted the following in Can East Asia
7

Compete? (Yusuf and Evenett 2002).
Except for the low-income economies, innovation will be theengine of growth for much of East Asia now that the initialresource-intensive phase of industrialization is ending [meaning
the end of the input-driven growth era]. Innovation in a broad
range of areas, from products to services and businessorganizations, will be the principal source of increases in
productivity and in export competitiveness. (3–4)
Furthermore, they note the importance of tackling three areas: (1)creating an environment that stimulates research and development (R&D)
by public and private entities which form the fundamentals of innovation;(2) integrating the manufacturing sector with the financial and services
sectors; and (3) leveraging information and communications technology. In
addition, regarding (1), Yusuf and Evenett discuss the importance of
creating corporate clusters of networked firms based not on
government-driven policies but on open competition.
The arguments presented in these reports are virtually the same as the
middle-income trap argument that became popular in the early 2010s(Aiyar et al. 2013; Eichengreen et al. 2013; Veerayooth 2015). The
phenomenon had therefore been noted more than 10 years earlier. So why
was there interest in the ‘limit to the input-driven growth path’ at this time?
The following section considers this point from the aspects of wages andlabour productivity.
II. HIGHER WAGES AND LOWER LABOUR PRODUCTIVITY
End of the low-cost advantage era
The main reason that the Asian Development Bank and others discussed
China from the perspective of the middle-income trap was the pronounced
rise in nominal wages starting in the late 2000s (Figure 1). The main
attribute of East Asia’s economic development is that its industrialisation islabour-intensive and focuses on export-oriented industries. Therefore, theability to continually secure a high-quality labour force at comparatively
8low wage levels is vital to sustaining industrialisation.
On this point, China has a population of 1.3 billion, with enormouslabour reserves living in its countryside, and it was even said back aroundthe early 2000s that there was no limit to China’s labour supply. In fact,
farmworkers who have moved from rural villages to the city (180 million
people as of 2011) have supported the development of labour-intensive
industries (Kan 2013).
However, a labour shortage appeared in coastal cities’ industrial areasin the late 2000s, and both nominal and real wages started to rise. The
concern about China’s economy in the mid-2000s, which focussed on‘whether or not China had already reached a Lewisian turning point’,
reflected this phenomenon. For reference, a Lewisian turning point
indicates a break point at which real wages start rising as excess labour
from the farm sector (nonmodern sector) is absorbed by the modern sector in
the cities.
Figure 1 Wage Level in Urban Workers in China, 1996-2014 (Yuen/Year)
60,00056,36051,48350,00046,76941,79940,00036,53928,89830,00020,85620,00010,00015,920
9,333
5,980

0
1996 1998 2000 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Compiled by the author based on information from IV. Employment andWages in China Statistical Yearbook 2015.

As illustrated in Figure 1, the rate of wage increase in China in the
2000s exceeded 10% per annum. Moreover, in 2012, vice president Xi
Jinping (who became the head of state the following year) suggested a policythat would condone wage increases of about 13% per year for the following
9

four years to improve living standards and expand domestic demand, andafter that there was no stopping higher wages in China. 5
While the degrees vary, sharp wage increases also occurred in Thailand
and Vietnam. For example, in January 2013, the Thai government adopted
a policy concerning the minimum wage, increasing it from a daily wage levelof between 162 baht (regional provinces) and 215 baht (Bangkok and its
surrounding five provinces) to a nationwide uniform figure of 300 baht
(implemented in the capital area starting in April 2012). While this policy
was intended to confirm that wage levels in the capital had alreadyexceeded 300 baht, it also reflected the Thai government’s desire to shift toan industry structure oriented towards technology and knowledge-intensive
industries by constraining the entry of foreign-owned companies that werelooking for a low-wage labour force.
Furthermore, Thailand had been confronted with a chronic labour
shortage since 2000. Therefore, the government not only issued work
permits to foreign workers from Cambodia, Laos, and Myanmar (CLM) who
had legally entered the country to work, but also gave temporary work
permits to illegal immigrants from CLM on the basis of agreements withthose countries.
These foreign workers were employed in such wide-ranging occupations
as fishing, transporting of paddy, harvesting of natural rubber and palm oil,and construction, as well as in menial jobs in various manufacturing sectors
and housework. According to publicly released data (Ministry of Labour,
Office of Foreign Workers Administration), as of 2011, Thailand had 580,000
legal workers and 1.25 million illegal immigrants and people withtemporary work permits, for a total of 1.83 million foreign workers, of whom
more than 80% were from Myanmar (Takeguchi 2014). The large presence of
foreign workers is highlighted by the fact that private-sector companies inThailand employ about 11 million Thai people in manufacturing,
construction, and service sectors.
There has also been a pronounced increase in wages in Vietnam inrecent years. According to the World Bank’s Vietnam Development Report
2008 (World Bank 2007), the minimum wage was 290,000 dong per month
5For literature referring to the interrelationship between the Chinese economy and the

middle-income trap, please see Eichengreen, Park, and Shin 2011, ADB 2012b,
Peerenboom (2014), Kan Ryu (2014), and Kato and Kajitani 2016.
10

in 2004, but at foreign-owned companies in ‘Area 1’, which includes Hanoi
and Ho Chi Minh City, it was 487,000 per month (World Bank 2007, 43).
Subsequently, the minimum wage in Area 1 has been raised almost every
year, rising to 450,000 dong (810,000 dong for foreign-owned companies) in
October 2006, then increasing to 1.35 million dong (1.55 million dong forforeign-owned companies) by January 2011. Minimum wages at Vietnameseand foreign-owned companies were then unified in October 2011 and raised
to 2 million dong (US$100). The minimum wage has continued going up
since then, reaching 2.35 million dong (US$112) in 2013, and 2.75 million
dong (US$131) in 2014 (data from the Japan External Trade Organization’s
Hanoi Office).
Vietnam’s policy of rapid wage increases is not due to an overall
workforce shortage, as is the case in China and Thailand. It should be seenas the result of two issues: the inherent problem for developing countries of
not enough workers qualified for employment in modern factories, and therecent rise in the cost of living.
Two indicators of labour productivity
Increased labour productivity is vital if economic growth is to be maintained
when wages are rising. Two metrics indicate increased labour productivity.
One metric is growth of labour productivity, which is measured as theannual growth rate in the amount of production per capita (the amount ofvalue added). The other is the differential in labour productivity, which ismeasured by taking the amount of added value produced per capita in the
top developed country (the US) as 100 and looking at how much the same
figure for a given country varies from the US figure.
It is important to note that the annual growth rate in labour
productivity has constantly been higher in Asia than in all other regions in
the world, including developed countries. According to the results of anInternational Labour Organization (ILO) survey, the annual growth rate inlabour productivity from 1990 to 2005 averaged 3.87% for Asia as a whole,and 3.33% for Asia excluding China. By contrast, labour productivity
growth in Latin America was a very low 1.35%. In addition, the figure for
Asia was about twice that of the US (1.80%) and Japan (1.41%) (McMillan
and Rodrik 2011).
11

The issue to be raised here is not the annual growth rate of labour
productivity over a certain time period, but rather the change in the annual
growth rate over time. This is because the growth rate of labour
productivity tends to fall when capital stock increases with progress inindustrialisation. Figure 2 shows the data for each country over four time
periods, using the Productivity Databook of the Asian Productivity
Organization (APO 2015).
Figure 2 Per-Hour Labour Productivity Growth, Using 2011 PPP, 1990-2014 (%)
10.3
10.0

8.0

1990-1995

9.0

1995-2000

7.7

6.3

5.8

6.0

4.7

4.1

4.0

3.1

6.4

6.2

2000-2005

6.2

5.3

2005-2014

5.2

4.3

3.5

3.2

3.1

3.6 3.7
3.1

2.3
2.0

1.2

1.0

2.5

2.0 2.1
1.1

1.4

2.3
1.5

1.0

1.0

0.0

China

India

Korea

Malaysia Thailand Singapore

Japan

USA

Source: Compiled by the author based on Asian Productivity Organization (2015: 65).

As shown in the figure, all countries apart from China and India aretrending downward in their annual growth rate of labour productivity. Even
though China has fallen from 10.3% in the early 1990s, it showed a highannual growth rate of 9.0% on average from 2005 to 2014. On the other
hand, Thailand has experienced a sharp decline, from 5.2% in 2000–2005 to
3.2% in 2005–2014, while Malaysia also showed a similar decline, from 3.1%
to 2.3%, in the same period. A downward trend can also be confirmed forSouth Korea (from 4.3% to 3.5%) and Singapore (from 3.7% to only 1.1%),
which are high-income countries.
Still, we cannot necessarily say that China does not have a problem withlabour productivity. Taking the United States to be 100 and comparing the12amount of added value produced per worker indicates that China was only 7
in 2000 and 19 even in 2014 (Figure 3).
Figure 3 Per-Worker Labor Productivity Level of Major Countries, USA=100 (2011 PPP)
120

110

115

1980
2000

100

2010

82 82
80

71

73

72
63

2014
66
56

60

50

47

43

40

32
21

20

18

23

19

12

12

7

5 7

China

India

2
0

Singapore

ＥＵ15

Japan

Korea

Malaysia

ThailandSource: Computed by the author based on Asian Productivity Organization (2016: 65).

Singapore already caught up with the United States, at 115 in 2014, andeven Japan was low at 66, reflecting the low productivity of its service sector.
Furthermore, in 2014, Malaysia was 50, and Thailand was not only low at
23 but should be looked at for the very moderate pace of improvement overthe past 35 years, from 1980 to 2014.
The OECD (Organization for Economic Co-operation andDevelopment)’s theory of newly industrialising countries, or NICs (OECD1979), and the author’s book Catch-Up Industrialization (Suehiro 2008)refer to a catch-up index that illustrates the extent to which the per capita
income differential between developed countries and emerging
industrialised countries is contracting. However, prior to the 1980s, thecatch-up index used by international institutions and economists was thedifferential in productivity with the United States at 100. The
representative study on this issue is Abramovitz’s classic thesis ‘Catching
Up, Forging Ahead, and Falling Behind’ (Abramovitz 1986).
When using the differential in productivity, it is important to note thelarge gap with the United States that still exists even for a high-income
country such as South Korea, not to mention emerging Asian countries.
13‘Criticism of Catch-Up Industrialization’ is provided in chapter 6 of Suehiro(2014). However, in regard to a metric illustrating the differential inproductivity of an individual country, it should be noted that the catch-up
index remains an issue for NIES as well as for emerging Asian countries
such as China.
One way to reduce the differential in productivity with developed
countries is to upgrade the country’s industrial structure by shifting the
manufacturing sector from low-value-added industries to high-value-added
ones, or by shifting from manufacturing to the service sector. Another way isto switch from an input-driven growth path to an innovation-led growthpath.
III. INTERNATIONAL COMPARISON OF INNOVATION AND R&DNational innovation systems
Innovation can be discussed at two levels: the national level and thecorporate level. This section considers innovation at the national level. 6 A
representative work is Nelson’s National Innovation Systems: A
Comparative Analysis (Nelson 1993). In the first chapter of this book,Nelson and Rosenberg assert that the systems and organizations
established by a nation, particularly expansion of higher education andimplementation of fit-for-purpose industrial policies, are indispensable forpromoting innovation. Similarly, Freeman, who has conducted research on
Japan’s technological development, developed solid arguments in his article‘The “National System of Innovation” in Historical Perspective’ (Freeman
1995).
Freeman asserted that the prospect of a country achieving innovation
was defined not only by government policy but by strong systemic andorganizational factors as well, including corporate organizations andindustrial organizations. Therefore, he focused on Germany’s introductionof a technical education system in the past (in contrast to what was done in
the UK) and Japanese manufacturers’ policy of focusing on the workplace(in contrast to what was done in the US).
Furthermore, after comparing Japan with the former Soviet Union in
6For innovative works at the corporate level, please see chapter 4 in Suehiro 2014.

14

the 1970s, and East Asia with Latin America, Freeman used South Korea
and Brazil as case studies to explain how differences in national systems ofinnovation impact economic performance.
A particularly salient feature of Freeman’s thesis is the regional
comparison he makes between East Asia and Latin America. This is because
he uses some unique metrics to explain why Asian NICs (later Asian NIES)
have experienced more economic success than Latin American NICs (13).
He used the following seven unique metrics: (1) the spread of higher
education and the proportion of engineering students amongst university
students; (2) differences in whether the import of technology led to domestic
technological changes and R&D; (3) the proportion of industry R&D in total
R&D expenditures; (4) the extent of infrastructure for developing scienceand technology; (5) the relative importance of foreign direct investment andthe level of implementing Japanese management models; (6) the size ofinvestment in telecommunications infrastructure; and (7) the share ofelectronics industries as compared to all industries. Asian NICs
outperformed Latin American NICs on all seven metrics.
These intentionally chosen metrics clearly highlight the focus ofFreeman’s thesis on the manufacturing sector and production sites, with apronounced concentration on the telecommunications and electronics
industries. Such arguments were directly linked to the strong interest inJapanese-style production systems (such as the Toyota production method)
as US manufacturing declined and Japanese manufacturers made rapid
progress in the late 1980s. 7
However, Japan headed into a long recession with the bursting of the
bubble economy. Interest in Japanese production systems swiftly waned,and arguments about ‘national innovation systems’ referencing Japan’s
success also disappeared. Replacing this were ‘cluster theory’, advocated byMichael Porter of the Harvard Business School, which focused on
geographic concentrations of manufacturers, service industries, and R&D
institutions in designated regions and their interconnectedness (Porter1998), and the World Bank’s Innovative East Asia: The Future of Growth(Yusuf 2003).
The previous discussions that focused on the lead role of government,
improvements in manufacturers’ production technologies, and education
7For the Japanese production system, please see Suehiro 2008, chap. 10.

15and training at production sites receded, and arguments favouring
collaboration between the government and the private sector, tie-ups
between the manufacturing and nonmanufacturing (finance and services)
sectors, and the building of flexible corporate networks including
universities and accounting firms came to the fore.
International comparison of R&D expenditure and R&D personnel
Let us return to our discussion of innovation at the national level. Such
metrics as the ratio of R&D expenditure to nominal GDP, per capita R&D
expenditure, population density of R&D personnel, the number of patentapplications and acceptances, and the number of scientific articles
published in international peer-reviewed journals assess whether aparticular country is actively innovating.
Table 2 highlights the results of the first two of the above-mentioned
metrics using data from information on the UNESCO STAT. As the tableillustrates, compared with European countries (apart from Sweden), Japanand Asian NIES have a higher ratio of R&D expenditure relative to GDP.
However, European countries have a slightly higher per capita R&D
expenditure metric.
Nevertheless, what is most interesting is the extremely wide gap
between the Asian NIES and ASEAN countries. One indicator of whether acountry is science and technology focused is whether its ratio of R&D
expenditure to GDP is more than 2%. As shown in the latest year (2014),
Malaysia had 1.26%, Thailand had 0.48%, and Indonesia was less than 0.1%.
This puts them a long way from transitioning to a high-income country.
While Latin American countries’ metrics are slightly higher than those of
ASEAN countries, they are still much lower than the Asian NIES.
Another feature common to ASEAN countries is the lack of notable
improvement in performance between 2000 and 2014. Upgrading scienceand technology education and pursuing R&D should have been importantnational targets for both Malaysia and Thailand during those 15 years.
Nevertheless, no results are evident in the two countries in general, and in
Thailand in particular. There is a striking contrast in this regard whencompared to China’s performance, which is aiming to be a ‘leading nation inscience and technology’.
16Table 2 Expenditure of R&D in Major Countries including Emerging Asia: 2000, 2010 and 2014
Countries/
Economies

R&D expenditure against GDP （%)

R&D expenditure per capita ($）

2000

2010

2014

2000

2010

2014

Japan

3.00

3.25

3.58

786

1,104

1,309

Korea

2.18

3.46

4.29

401

1,063

1,485

Taiwan

1.90

2.80

3.00

419

1,080

1,389

Singapore

1.82

2.01

2.18

767

1,420

1,797

China

0.89

1.72

2.04

26

159

269

Malaysia

0.46

1.03

1.26

60

214

324

Thailand

0.24

0.23

0.48

18

29

76

Indonesia

0.06

0.08

0.08

3.1

6.5

8.5

India

0.74

0.79

0.82

15

35

39

Brazil

0.99

1.15

1.23

90

164

194

Chile

….

0.33

0.37

….

60

85

Mexico

0.31

0.45

0.53

33

66

92

Sweden

3.42

3.21

3.16

930

1,341

1,426

USA

2.62

2.74

2.72

953

1,323

1,441

France

2.08

2.17

2.25

555

806

905

Germany

2.39

2.71

2.86

640

1,093

1,318

Note: R&D expenditures per capita include both public sector and private sector.
Sources: (1) GDP (%): http://www.globanote.jp/p-data-g/?dno=1190&post_no=10315; (2) Per capita(persons): http://www.globanote.jp/p-data-g/?dno=2580&post_no=10315. Original data are extracted
from UNESCO STAT.

China’s technology promotion policy was provided in the ‘Guidelines on
the National Medium-Term and Long-Term Program for Science andTechnology Development (2006–2020)’, announced in 2006 (Science Portal
China 2016). The key words in these guidelines are ‘indigenous innovation,
leapfrogging in priority fields, enabling development, and leading thefuture’. ‘Indigenous innovation’ is not borrowed technology but refers to the‘national innovation capability’ to develop domestic new technologies (Table3). 8
According to Kato (2016), ‘development of indigenous technology’ does not exactly
mean the creation of fully self-reliant technology. Conversely, the majority oftechnology in China is borrowed from abroad and is improved to adjust to local mass
markets. Therefore, technology formation in China shows a typical case of an informal
system of Chinese capitalism. Likewise, Marukawa (2013) also insisted that Chinese
technological development is not the ‘catch-up’ type but rather the ‘catch-down’ type inthe sense that they downgrade both the level of production technology and the qualityof products to meet local market needs. See also Sato 2014.

817

Table 3 National Science and Technology Development Plan (2006-2020) in China
Item

Code

(1) Guidance by the State : Fo ur Majo r Slo gans
1

自主創新 Self-reliance innovation. Enhancement of state capacity of innovation;
combination of local technology with foreign one.

2

重点飛躍 Realize leaving development by adapting core and advanced
technoloies to state economy, people's life and national security.

3

発展支援 Support a sustainable development by developing basic technologies aswell as versatile-type technologies on the basis of current needs.

4

未来牽引 Creating new market needs, the new type of industries and the future
economic society by diffusing basic research and advanced technology.

(2) Natio nal Targe ts of the Plan
1

The ratio of R&D expenditure against nominal GDP shall exceed 2.5% by 2020.

2

The contribution of science and technology to the GDP growth, or more exactly
speaking, total factor productivity (TFP) is computed as 60% and over.

3

The dependency ratio of foreign technology (cost of introducing foregn
technology/(R&D expenditure for domestic technology + cost of introducing
foreign technology) is less than 30%.

4

Ranking the Top Five Countiries in the World in the fields of patents andscientific academic papers (citation)(3) Ke y Se cto rs to be Pro mo te d: 11 Se cto rs and 68 Ite ms①Energy (5), ②Water and Mineral resources (7), ③Environemnts (4)、④Agriculture (9), ⑤Manufacturing (8), ⑥Transportation (6), ⑦Information andmodern service industry (7), ⑧Medical and healthcare services (5), ⑨Urban
development (5), ⑩Public safety industry (6), ⑪Defense industry (6, but not
identified).
(4) Ne w Advance d Te chno lo rie s to be Pro mo te d: 8 Fie lds①Biotechnology, ②Information and technology, ③New materials industry, ④Advanced manufacturing technology, ⑤Advanced energy industry, ⑥Maritime
technology, ⑦Lazer industry, ⑧space development industry.
Source: Compiled by the author based on the documents in Science Portal China.
Retrieved on 28 November 2016 from <https://….
https://www.spc.jst/go.jp/policy/science_policy/chapt3/3.01/3_1_1/3_1_1_1.html.

At the same time, the government established four major nationaltargets in science and technology: (1) the ratio of R&D expenditure to GDP
will reach 2.5% by 2020; (2) the contribution of technological progress to
GDP growth or total factor productivity will account for 60% and over; (3)the cost of importing foreign technology against the total cost of developing
new technology will account for less than 30%; and (4) China will be ranked18

in the top five in terms of the number of patents and scientific articles inpeer-refereed international journals. In brief, the Chinese government’s
stance completely focused on a traditional approach to innovation or thecreation of a national system of innovation.
On the other hand, the reference to ‘leading the future’ in the guidelines
indicates the government’s vision to enable basic research and create newindustries from a long-term perspective. New industries or new advanced
technologies designated by the government fell into eight fields:
biotechnology, information and technology, new materials, advanced
manufacturing technologies, advanced energy, maritime technology, laser
technology, and space development. These industries are assumed todevelop under the dominant role of government-owned corporations. The
government therefore is expected to make a more direct contribution rather
than an indirect contribution to innovation. Such a view, as mentioned
above, is quite different from that in Porter (1998), Yusuf and Evenett(2002), and Yusuf (2003).
Propelled by this technology promotion policy, China’s ratio of R&D
expenditure to GDP successfully exceeded the national target of 2.0% in
2014. 9 Therefore, even though both China and Thailand occasionally both
became upper-middle-income countries in 2010, China seemed to gain anadvantage with regard to advancing to become a high-income country. On
the other hand, the absence of fundamental structural reforms will make
China risk being caught in the middle-income trap in the near future (WorldBank and Development Research Center of the State Council 2012; Kan
Siyu 2013).
In the next part, three countries—China, Malaysia, and Thailand—are
examined in relation to their patterns of experience in avoiding the
middle-income trap. According to the survey research of Veerayooth (2015),
the patterns of avoiding the middle-income trap are classified into threemajor groups: (A) establishing appropriate education and institutions; (B)changing export composition through comparative advantage; and (C)promoting industrial upgrading through state intervention.
Differences in the three groups are affected by the different roles played
by governments in instituting innovative measures. Group C is
9The figure of 2.0% is an important criterion when we judge whether a certain country

belongs to an innovation-oriented state.

19

characterized by the most active role of government in innovation andindustrial upgrading, while group A is characterized by a minimal state rolein industrial promotion; rather, the state is expected to facilitate suchinfrastructure as an educational system for the sake of promoting
innovation. Group B maintains a position between group A and group C,
where both private firms’ efforts (supply side) and the condition of the world
market (demand side) are more important than government policies ofpromoting exportable products. A shift to higher-value-added exports isrealized through market mechanisms rather than state intervention(Veerayooth 2015: 56–57).
In this paper, China is supposed to represent group C, while Malaysia
and Thailand belong to group B. It is true that the governments of Malaysia
and Thailand have constantly intended to play significant roles in bothindustrial upgrading and changes in export composition. But new industries
and new products have eventually been introduced by foreign firms ingeneral, and by multinational firms in particular. Government roles arelimited as compared to the case of China. In addition, local private firms
seem to have discovered their competitive advantages in resource-basedindustries and the service sector rather than core manufacturing industries.
They also seem to have focused on niche products and niche markets rather
than new products and new production technology (Khoo, Tsunekawa, andKawano 2017).
Comparing two countries in particular reference to the role ofgovernment in formulating national economic plans, Malaysia seems tofollow the pattern of group C because the government is empowered tosupervise the private sector. Likewise, the Thai government is also given
the power to support targeted industries through tax incentives andsemigovernment institutions (sathaban). However, its actual contribution isvery limited. 10 In this sense, it is safe to say that Thailand belongs to group
A. Keeping these characteristics in mind, let me examine the experience ofeach country in reference to its effort of avoiding or overcoming the
middle-income trap.
For the active role of Thai government in industrial upgrading, see Intarakumnerd(2010) and Suehiro (2010). Intarakumnerd (2017) introduces the case studies of thehard disk drive, the automobile, and food processing in reference to the public-private
partnership and the role of semigovernment agencies such as the Thai Automotive
Institute.
1020

IV. THE RESPONSE OF THREE COUNTRIES: CHINA, MALAYSIA, AND
THAILAND
China: Growing beyond the low-cost advantage

Growing Beyond the Low-Cost Advantage: How the People’s Republicof China Can Avoid the Middle-Income Trap by the Asian Development
Bank (in cooperation with the National School of Development, Peking
University), 11 which was introduced at the beginning of this chapter,stated the following (ADB 2012b, 3).

International experiences show that, in many countries, growthslowed significantly after they attained middle-income status. Theyfind they were caught in what is increasingly known as the‘middle-income trap’. On one hand, they could no longer competewith low-income countries because of rising wages. On the other,
they were unable to compete with high-income countries because
they have not shifted into higher-value production throughinnovation and industrial upgrading.
So what are the issues China faces in transitioning into a high-income
country? Table 4 summarizes the points highlighted in the AsianDevelopment Bank’s report.
The Asian Development Bank listed seven risks and problems for
China: (1) large productivity gaps as compared to advanced countries (seealso Figure 3 in this paper); (2) labour market changes and the rapid rise inwages (see Figure 1 in this paper); (3) a growth pattern that relies
excessively on public investment (high saving) and exports; (4) widening
domestic income inequality; (5) exploitation of natural resources andenvironmental degradation; (6) an international backlash against the rapid
growth in China’s presence in the world economy; and (7) the weakness ofinstitutions in supporting long-term growth. These almost duplicate theitems listed in the World Bank’s China 2030 report (World Bank and DRC
This ADB report was actually written by Juzhong Zhuang, Paul Vanderberg, andYiping Huang.
11

21

2012).
Table 4 The Middle-Income Trap Facing Contemporary China and the ADB Policy Options, 2012
FieldsRisks and Problems

New Direction for Long-term Growth

Large technology and productivity gaps with
PRC growth needs to be driven increasingly
advanced countries
by productivity improvements throughLabor markets and Rapid rise of wages. PRC is approaching the innovation and industrial upgrading.
wages
so-called "Lewis turning point"
Productivity

Growth has relied too much on investment
Sources of growth(high saving) and net exports

Shift of the sources of growth from overinvestment and exports to domestic
consumption; development of service
industries

Rising income inequality: Gini coefficient
Income inequality increased from 30 in the early 1980s to 43.4
in 2008

Reducing income inequality to make growthmore inclusive; enhancing governanceRapid growth has created pressure on its
Pressures onnatural resources and the environment
natural resources(water shortage, pollution).

Promoting green growth to conserve
resources and protect the environment

External economic As the World's second largest economy,
environment
impact of the PRC becomes significant

Strengthening international and regional
economic cooperation

Ge ne ral

Weakness in governance and institutions to
support the long-term growth

Deepening structural reforms: reforms ofenterprises, labor and land markets, thefinancial sector, and the fiscal system

Source: Summarized by the author based on information from ADB (2012).

The measure that is stressed the most in the report is productivity
improvement through innovation and upgrading of the industrial structure.
The report also proposes the adoption of three strategies: (1) inclusive
growth to reduce income inequality; (2) a shift from a growth path that hasrelied too much on investment and exports of industrial goods to one basedon increasing domestic demand and developing the service sector; 12 and (3)environmentally friendly growth (green growth) that both conserves
resources and protects the environment.
Computing the percentage of contribution by important activities to GDP growthrate between 2009 and 2011 (just after the worldwide financial crisis), we see that thelargest contribution in China is gross capital formation or investment (48%), followedby final consumption at household (35%) and exports (28%). By contrast, in the UnitedStates, the largest contribution is final consumption at household (71%), followed bygovernment consumption (18%) and investment (15%). International financial
instituions such as the IMF, therefore, insisted that China rebalance its growth
pattern (Suehiro 2014, 211–216).
12

22

Still, these economic challenges are very broad and lacking in detail,although China has started the state-led policy of developing science andtechnology on the basis of self-reliance innovation as summarized in Table 3.
Among the seven policy issues in Table 4, the most important one isprobably structural reform. However, structural reform is a problem thatlies at the root of the socialist system. 13 The implementation of a ‘reformand open’ path provides the dream and incentives for economic growthshared by both corporations and Chinese citizens, but the pain that
accompanies structural reform creates conflicts of interest for relatedparties. Considering such difficulties, China’s path of transition to ahigh-income country is not necessarily going smoothly.
Malaysia: From ‘new economic policies’ to a ‘new economic model’
The Malaysian economy is currently in crisis. Under the Mahathiradministration, the economy achieved a certain degree of success, withgrowth in production and exports of industrial goods, mainly from theelectric appliance and electronics sector, as well as rectification of
inequalities between ethnic groups under policies favouring ethnic Malays(the Bumiputra Policy; Torii 2006). However, there has clearly been an
economic slowdown since the 2000s (see also Table 1).
Let’s compare the growth rates of two periods on either side of the 1997
Asian currency crisis: the 10 years from 1987 to 1996 and the 10 years from2000 to 2009. In the 10 years before the Asian currency crisis, the annual
growth rate for Malaysia’s manufacturing sector was 13.9%, which was
higher than that of China (12.6%), Thailand (11.8%), and Vietnam (6.6%).
However, in the decade starting in 2000, Malaysia’s growth rate
plummeted to 3.7%, which was lower than that of China (10.8%), Vietnam(10.5%), and Thailand (5.6%). The same is true for the annual growth rate ofexports. Malaysia’s annual rate of export growth was 11% from 2000 to 2009.
This was not only below that of booming China (23%) and Vietnam (21%),
but also below that of Thailand (14%).
Yusuf and Nabeshima attribute this economic stagnation to the bias ofexport products towards electric and electronic goods. While the makeup of
13A similar idea is shared among Kan Siyu (2013), Peerenboom (2014), and Kato and

Kajitani (eds.) (2016).

23

Malaysia’s exports was similar to that of other Asian countries (andcompetition with China was severe), little progress was made towards
diversification, there was no shift towards high-value-added export products,
and training of personnel to develop new technologies and new products did
not take place (Yusuf and Nabeshima 2009, chap. 2 and 3).
The electric and electronics sectors, which drove the Malaysian economy,grew into a large industry accounting for more than 70% of manufactured
exports and more than 50% of total exports at the end of the 1990s. However,after Seagate (the largest manufacturer and exporter of hard disk drives in
the world) closed its plant in 2000, Intel, Motorola, and Dell all either
shrunk their operations or closed their plants in 2001, shifting theirproduction bases to China (Yusuf 2003, 294). In 2002, Malaysia ceded toChina its title as the number one exporter of PCs to the US market.
The most serious issue for Malaysia was the high proportion of foreign
workers (mostly workers coming from Indonesia, followed by those from
Bangladesh and Nepal) in the manufacturing sector. The percentage of
foreign workers, which accounted for a mere 2% in 1990, rose to 10% in 1995,
to 21% in 2004, and surpassed 28% in 2008 (see Figure 4). Migrant foreign
workers are thought to have hardly contributed to the improvement oflabour productivity and innovative works. This is because they have no
incentives due to their short-term employment contracts and their unstableworking status. As a result, the Malaysian government froze new
employment of foreign workers in 2009, when the number of foreign
workers totalled 2.3 million, and set a policy to reduce it to 1.5 million by
2015 (Tham and Loke 2011).
Nevertheless, the number of foreign migrant workers in unskilled fields
remains at a very high level. According to the latest survey of theInternational Labour Organization (ILO), the ratio of migrant employment
to total manufacturing employment was 37% in 2009, and 34% even in 2014.
Likewise, the ratio of migrant employment to total construction
employment remained 30% and 34% in the corresponding years (ILO 2016,2). 14
14To tackle this problem, the Eleventh Malaysia Plan (2016–2020) has stated that acomprehensive immigration policy for foreign workers will be developed, with the
Ministry of Human Resources (MOHR) assuming the lead role in policy making. At thesame time, the Institute of Labour Market Information and Analysis (ILMIA) has also
been established under MOHR to carry out labour market studies, including
24

Figure 4 Migrant Workers in the Malaysian Manufacturing Sector, 1981-2010 (%)
30.0

28.4

25.0

22.1

26.9 26.5

23.8

20.5
20.0

18.2
13.6 14.1

15.0

15.3

16.2

10.2
10.0

5.0
1.0

1.6

2.0

0.0
1981 1985 1990 1995 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010

Source: Tham, Siew-Yean and Wai Heng Loke (2011). "Industrial Deepening in
Malaysia: Lessons for Developing Countries," Asian Development Review, 28 (2), p.102.

To deal with this situation, the Najib administration announced its New
Economic Model (NEM) in March 2010 following the expiry of the National
Development Plan (NDP, 1991 to 2010), which in turn had succeeded the
New Economic Policy (NEP), which was aimed at correcting the economic
inequalities between ethnic groups. At the same time, the government
embarked on the Economic Transformation Programme (ETP), which aims
at escaping from the middle-income trap (Nukaya 2012).
Table 5 compares the NEM with the NDP implemented during theMahathir and Abdullah administrations. The NEM under the Abdullah
administration consists of seven strategies. It is a radical transformationthat involves a shift (1) from an investment-driven growth path to a
productivity-focused growth path; (2) from being government driven to
private sector led; (3) from centralization to local autonomy; (4) from a focus
on balanced regional growth to the creation of strategic clusters; (5) fromfavouring specific industries and companies (steel, cement, automobiles,etc.) to favouring technologically capable industries and companies; (6) froman export focus on the G3 market (Europe, US, and Japan) to a focus onmarkets within Asia; and (7) from relying on foreign workers to selectively
estimating labour supply and demand from 2015 to 2030 (Othman and Rahim 2014) .
25

appointing foreign specialists and attracting skilled professionals fromoverseas.
Table 5 Two National Development Plans in Malaysia: NDP and NEM
National Plan

Natio nal De ve lo pme nt Plan (NDP)

Ne w Eco no mic Mo de l (NEM)

PeriodFrom 1991 to 2010

From 2010 to 2020

Governments

Mahathir bin Mohamad; Abdullah bin
Haji Mohd Najib
Haji Ahmad Badawi

Growth strategy

Growth through capital accumulation Growth through productivity

Public/private

Dominant state participation in theeconomyPrivate sector led growth

Policy installment

Centralized strategic planning in thedecision-making process

Localized autonomy in decisionmaking process

Local development

Balanced regional growth

Cluster and corridor-based economic
activities

Industrial policy

Favor specific industries and firms

Favor technologically capapble
industries and firms

Export promotion

Export dependence on G-3 markets(US, Europe and Japan)

Asian (including ASEAN) and Middle
East orientation

Human resources
development

Retain and attract skilled
Restriction on foreign skilled workers,
professionals, including return ofincreasing unskilled foreign workers
overseas brains

Source: Compiled by the author based on information from Malaysia National Economic Advisory
Council (NEAC) (2010).

Among the aforementioned policies, (1), the productivity-focused growthpath, is the same as the policy proposals made by international institutions
in relation to China. In other words, the aim is to revise the input-driven
growth path. Meanwhile, items (2) to (5) aim at correcting the distortions inresource allocation resulting from the Bumiputra Policy (in the NEP and
NDP) so that the economic structure is in tune with the era of globalization.
However, there is strong resistance to revising the Bumiputra Policy,
even from within the ruling party. In addition, the percentages of R&D
expenditures against nominal GDP are stagnant—1.03% in 2010 and 1.26%
in 2014, lower than those of China (1.72% and 2.04% respectively). As
Kawano (2017) introduces in excellent examples of local private firms’
activities in the natural rubber industry, Malaysia begins to promote
notable innovation in resource-based industries. However, carefully
examining these case studies, we recognize that local private firms (Top26

Glove and Kossan) have mainly developed niche products, such as medical
surgical gloves, with the improvement of imported technology rather than
new products with new production technology.
In core manufacturing industries such as the automotive industry, thegovernment has not been successful in inviting new multinational
corporations into Malaysia after the Asian currency crisis. Reviewing theseelements, Malaysia is likely to face a much harder path of transition into ahigh-income country than China (Nukaya 2012; Onozawa 2014).
Thailand: Pursuing new age industries and ‘Thai-ness’
Last is the case of Thailand. National Economic and Social Development
Board Secretary General Arkhom stated the following about the direction of
the Thai economy, taking into consideration the 11th National Economic
and Social Development Plan that was inaugurated in October 2011
(Arkhom 2011). 15 His idea is summarized as in the following.
‘When comparative advantage was being discussed from the 1960s to
the 1980s, a factor and resource input growth strategy was not only
mainstream, but it also worked. Once the era of competitive advantage
began, the policy shifted to efficiency and productivity-led growth strategy.
In the 2010s, the policy needs to shift to an innovation- and creative-led
growth strategy.
So far, this does not differ much from what has already been said byinternational institutions. What is unique about it is the substance of the‘creative economy’ (setthakit sarngsan) needed for this to be achieved.
Secretary General Arkhom referred to four examples of creative economy:(1) industries using cultural assets and natural resources (tourism, Thai
food, spas, etc.), (2) the performing arts, (3) media (movies, music,
animation), and (4) functionally creative industries (advertising, fashion,urban planning, etc.). In short, the target is shifting fromlow-cost-advantage-based manufacturing industries to service industries
that emphasise ‘Thai-ness’. In fact, the 11th National Economic and Social
Development Plan extolled the cultivation of knowledge-based industries
15Arkhom was appointed Minister of Transportation under the Prayudh

administration in 2014 to promote the mega projects including a high-speed railway
system.
27

(the service sector; Porametee 2011).
The approach of seeking out ‘Thai-ness’ as Thailand’s competitive
advantage is also confirmed in the Thailand Board of Investment’s ‘New
Investment Promotion Strategy (2013 to 2017)’ in Table 6 (Udom 2013).
Table 6 10 Industries to be Promoted in the Future of Thailand (January 2013)
10 Industries

Type of products or business(A) Industrial foundation

１．Basic infurastructure
and logistics①industrial zone, ②power generation from natural gas, ③water
resourcese, ④mass transit, ⑤commercial airport, ⑥logistics

２．Basic industry①steel, ②petrochemicals, ③pulp and paper, ④machinery etc.

３．Medical device and scien①medical device, ②medicine, ③medical food, ④scientific equipment
etc.

４．Alternative energy and ①power generation from renwable energy, ②recycling, ③industrial
environmental services
waste disposal service, ④energy service company （ESCO） etc.
５．Services that support
industrial sector①R&D, ②HRD, ③engineering design, ④software, ⑤calibration, ⑥
regional headquarter, ⑦trade & investment support office etc.

(B) Advanced Core Technologies that helps elevating Thai industry
６．Advance coretechnologies①biotechnology, ②nanotechnology, ③advanced material technologyetc.

(C) Industries that are developed from domestic resources and Thainess
７．Food and agriculturalprocessing industry①processed food, ②food additive, ③herbal extract, ④plant
propagation, ⑤products from natural rubber, ⑥bio-fuel such as
ethanol, bio-diesel.

８．Hospitality & wellness①tourism and sports promotion activities, ②Thai motion picture
production, ③dedecated health center, ④retirement home and carecenter(D) Industries that Thailand is competent to be global's manufacturing base
(Global Supply Chain)
９．Automotive and othertransport equipment①cars, ②motorcycle, ③train, ④electric train, ⑤aircraft, ⑥
shipbuilding and maintenance.

１０．Electric and electrical ①electronic design, ②organics & printed electronics, ③HDD/SDD
appliancesand parts, ④solar cells, ⑤white electrical appliances.
Source: Compiled by the author based on Udom (2013: 16-17).

This New Investment Promotion Strategy was groundbreaking because
it was the first time the Board of Investment (BOI) had left out
labour-intensive industries (textiles and clothing, athletic footwear, etc.)from the list of industries to be promoted. In addition, the scheme also28

revised the zone-based incentives policy that prioritized investment inregional provinces and shifted from a system of tax incentives (exemption of
up to seven years on corporate tax and import duties) to a policy ofnonfinancial facilitation (such as deregulation of land ownership andemployment of foreign specialists). This resulted in strong objections fromindustry associations of the excluded industries and regional chambers ofcommerce.
Table 6 provides a summary of the New Investment Promotion Strategy.
My focus here is to show the level of Thai-ness evident in the formulation of
the four basic strategies and the choice of the 10 areas to be promoted.
Industries targeted for investment promotion are wide-ranging, and I do nothave a particular problem with this, as such is to be expected of agovernment document.
First, as discussed in Suehiro (2014, chap. 5), 4 of the 10 industries
being promoted—(2) basic industry, (6) advance core technologies, (9)automotive and other transport equipment, and (10) electronic products andelectrical appliances—are industries in which foreign-owned companies
have an overwhelmingly large share, so it is hard to expect muchparticipation from Thai companies.
However, Thai companies will be able to use their competitive
advantage in four of these sectors: (1) basic infrastructure and logistics, (4)alternative energy and environmental services, (7) food and agriculturalprocessing, and (8) hospitality and wellness. In particular, within (7),processed foods, herbal extracts (cosmetics), natural rubber products, andbiofuels are products that can effectively use domestic resources, while
within (8), tourism and sports promotion, health-care services, long-term
accommodation for foreigners, and retirement home and care facilities wereselected on the basis of leveraging Thailand’s national characteristic of
hospitality.
In May 2014, a Thai military group launched a coup d’etat to stop
unproductive political conflict between pro- and anti-Thaksin groups thatstarted in 2013. Under the Prayut Chan-ocha government, the Ministry ofIndustry rearranged the previous policies and investment targets andsubmitted a cabinet with a new idea of promoted industries (Figure 5).
According to this new idea, industrial policies occur in two different
29stages: the first stage encompasses the short- and mid-term plan to enhance
the competitiveness of existing industries such as new-generation
automobiles, medical and welfare tourism, and agriculture andbiotechnology; and the second or new stage is the long-term plan to nurse
future-type industries that reflect the new surging of Thailand’s economy,such as robotics, biochemistry, digital technology, and Thailand as a medical
hub. On the one hand, it is very easy to understand that the first stage
exactly follows the previous BOI’s investment plan of targeted industries assummarized in Table 6. On the other hand, the second stage, or the newsurging of Thailand’s economy, is very ambitious, comparable to the
National Science and Technology Development master plan (2006–2020) in
China.
Figure 2 Industrial Policies and Clusters Strategy in Thailand (2015)
Short and Mid-term Plan

Long-term Plan

The First Stage S-shape Curve

New S-shape Curve

Enhancement of existing industries'
competitivenessNursing the future industries torealize the new take-off of theThailand economy①New Generaltion Automotive, ②Smart Electronics, ③Affluence,
Medical and Welfare Tourism, ④Agriculture and Biotechnology, ⑤
Food for the Future.

⑥Robotics,⑦Avitation and Logistics,⑧Biofuels and Biochemical, ⑨Digital
Industry, ⑩Medical Hub.

Sources: Compiled by the author based on Oizumi (2016: 4-5) and Ministry ofIndustry, Thailand (2015).

Glancing at the Ministry of Industry’s plan, Thailand seems to aim atreviving the active role of the state in industrial policies as we saw before
the 1997 Asian currency crisis. According to the classification of Veerayooth(2015), Thailand seems to shift its position from group A to group C.
However, such an observation is not accurate because there is neither
institutional support nor budgetary backup to realize its plan. It is likely
30

that the government will entrust the development of both existing andfuture industries to private firms, including multinational corporations.
In my recent work examining the possibility of Thai firms
demonstrating their advantages, I pointed out three major sectors (Suehiro
2017): (1) oil refineries, natural gas, and petrochemicals under the control of
the PPT group 16 (government-linked companies); (2) export-oriented
agro-industry, including new energy industries based on biotechnology; and(3) service industries based on Thai-ness and Thai hospitality such as
tourism, medical and health-care services, restaurants and fast food,housing, and entertainment.
Table 7. Major Family Businesses in Agro Industry and Service Sector, as of 2015
Category

Agro industry

Type of businesses
Beer, soft drinks

TCC (Thai Beverage, Oishi), Boon Rawd Brewery (Singha)

Rice, silo, warehousing

CP (CP Intertrade), Capital Rice, Asian Golden Rice

Sugar + Ethanol

Mitr-Phol, Thai Roon Ruang, Kwang Soon Lee

Natural rubber

Sri Trang Agro Industry, Thai Hua Rubber, Von Bundit, Teck
Bee Hang, Thai Rubber Latex Corporation

Broiler chickens

CP (CP Foods), Betagro, Laemthong Sahakarn

Canned tuna, shrimp

Thai Union Frozen Products (TUF) , CP (CP Foods)

Construction

Italian-Thai Development (ITD), Ch. Karnchang

Property, housing Real estates, Propert businessand industrial
Housing industry
estates

L&H, CP (CP Land), TCC (Univentures, TCC Land)
Pruksa Real Estate, Supalai, Quality House

Industrial estate

Saha Group, Amata, Hemaraj

Convenience stores

CP (CP All: 7-Eleven), Central (Familymart), Saha Group

Supermarkets, C&C

CP (Siam Makro), Central (CPN), Siam Future

Department store
Shopping malland other service Restaurants
industries
Chains of fast foodEntertainment

Name of Group/ Family Business (specific company)

Central (Central, Robinson), The Mall, TCC
Central (CRC), MK Restaurant, Saha Group
Mahakijsiri (Nesle coffee), Minor Group (Pizza Hut)Hotel services

Central (CENTEL), CP (CP Land), Dusit Thani

Hospital, healthcare services

BGH (Bangkok Dusit Medical Service), Thonburi Hospital

CinemaMajor Cineplex

TV Programs

BEC World, Grammy, Kantana

Source: Compiled by the author based on information from his field survey.

What is interesting to us is the fact that leading groups of family-owned
business are unexceptionally involved in both agro-industry and service
PTT group is the conglomerate under the management control of the former state
enterprise of Petroleum Authority of Thailand (PTT). They do not use the name of PAT
because that PAT has already been used by the Port Authority of Thailand (PAT).
16

31

industries, as shown in Table 7. Typical cases are the CP (Charoen
Pokphand) Group of the Chearavanont family, the Central Group of the
Chirathivat family, the TCC Group of the Sirivadhanabhakdhi family, theTUF Group of the Chansiri family, and the Saha Group of the
Chokewattana family.
These family-owned groups are active in developing new products andnew production technology in agro-industry (Intarakumnerd 2017). They
also are very active in promoting their overseas activities in ASEAN
countries in general, and in CLMV (Cambodia, Laos, Myanmar andVietnam) in particular. They look for new business opportunities inmanufacturing and nonmanufacturing by constructing strategic businessalliances with large Chinese firms (Suehiro 2017). In Thailand, the active
player is not the government, but a private firm. Family businesses seek
their own positioning in Asian markets regardless of support from thegovernment.
V.

THE ROLE OF THE STATE IN NEW CHALLENGES

Computing the average annual growth rates for the three countries in the
16 years from 2000 to 2015, China shows the best economic performance(9.53%), followed by Malaysia (5.08%) and Thailand (4.06%). 17 As comparedto the average figure in the world (3.79%), Thailand still maintains a better
position. However, the increased rate of per capita GNI in Thailand between
2010 and 2015 is merely 114% (from US$ 5,112 to US$ 5,816), lower than
the average figure of upper-middle-income countries, 124% (US$ 6,240 to
US$ 7,737) (Table 1).
Malaysia suffered the lowest rate, 108% (from US$ 9,069 to US$ 9,766),
but its absolute level of per capita GNI in 2015 is the nearest position to therate of high-income countries. According to the World Bank’s definition, percapita GNI of high-income countries was US$ 12,736 and over in 2014. It isapparent that Thailand is far behind Malaysia.
Contrary to the expectations of Porter (1998) and Yusuf and Evenett(2002), in emerging Asia, the role of the state was not replaced by flexible
networking of various actors in manufacturing, services, and academic
circles. Rather, as the case of China apparently demonstrates, the state has
17These figures are computed from the IMF World Economic Outlook 2016 (IMF 2016).

32

continued to play its active role in promoting a national system ofinnovation, and in otherwise facilitating the institutions’ support of private
firms’ innovation.
Under the Thaksin administration (2001–2006), Thailand also
formulated the National Competitiveness Plan on the basis of a partnership
between the public and private sectors (Suehiro 2010). This ambitious planis comparable to the national 10-year plan ‘Made in China 2025’ totransform Chinese manufacturing industries into the strongest ones in theworld. However, a military coup d’etat took place in September 2006, ending
not only the Thaksin government but also the active role of government ineconomic fields, including industrial policies. Since the end of 2006,
Thailand has suffered both continuous political turmoil and economic
stagnation.
After the military coup d’etat in May 2015, the Prayudh government has
successfully realized political stability throughout the whole country but
has failed to bring about economic recovery due to the slowdown of exports,
the sharp decline of primary commodity prices, and the limitations ofdomestic consumption. To overcome economic stagnation, the Prayudh
government invited Somkid Jatusripitak, who had been Finance Ministerand Deputy Prime Minister in the Thaksin administration, to become
Deputy Prime Minister in charge of economic fields.
Somkid attempted to introduce economic policies similar to those of theThaksin era as expressed in the cluster strategy in Figure 5. However, he
hardly seems to have been successful in reconstructing a strong partnership
between the public sector and the private sector. Rather, private firms,
including family-owned firms, are going to discover their own competitive
advantage in agro-industry and the service sector rather than in core
manufacturing industries. This direction has inevitably led Thailand to a
slowdown of its economic growth.
The World Bank optimistically predicted that China would transition toa high-income country in the mid-2020s (World Bank 2012). It is highly
likely that Thailand’s transition to a high-income country will be later thanChina’s and even Malaysia’s. On the other hand, the direction being
targeted by Thai private firms and their choice of sectors or fields withcompetitive advantage are much clearer than Malaysia’s.
This fact suggests to us that Thailand is possibly seeking a different
33path from China, namely, not becoming a high-income country with arelatively high economic growth rate, but instead remaining an
upper-middle-income country with a moderate economic growth rate. The
latter is a more realistic path for a country and puts less of a burden on theThai people.
Even though Thailand’s income level stalls at that of an
upper-middle-income country (approximately US$ 13,000), I do not think
this would be a wrong choice for the Thai people if Thailand can find its own
place within Asian markets and use this to gain social stability. This isbecause the author does not see a transition to a high-income country as the
only path available for upper-middle-income countries.

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