Is Chiang Mai a suitable Foreign Direct Investment Destination?

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Is Chiang Mai a suitable Foreign Direct Investment Destination?

FOREIGN DIRECT INVESTMENT

Foreign Direct investment occurs when multinational companies invest in productive capacity in countries rather than the one in which they are based. Foreign direct investment implies the actual productive capital which generates output, rather than in financial assets such as bonds or shares.  Governments are keened to encourage FDI as it brings valuable funds, which ultimately increases the overall investment in the country.

Foreign Direct Investment could create thousands of jobs as well as bringing in technical development.  This is if the multinational companies import technology to which the country doesn’t already posses.  Local people in the country being invest in gain knowledge and skills through training schemes and eventually resulting net gain in the national economy. However, foreign direct investment could also be fairly risky to any business.  If the market isn’t suitable to that particular firm, it could result in low growth potential/ profit levels.

For example, China has been the leader of foreign direct investment in the past decade. It’s the hottest and most popular economy for firms to explore.  Shanghai and Beijing, being the heart of China’s growth has seen improvements in almost all sectors.  The infrastructure in China has enhanced immensely over time promoting its economic development.  Statistics show that Shanghai now contributes to 1/8 of China’s GDP and almost ½ of China’s industrial output.  As we can see from the chart on the left, FDI in China has started to boom in the 1990s. In the mid 1990s, FDI has already accumulated 7% of the nations GDP.

In this coursework, I would asses and evaluate the implications and suitability of Chiang Mai as a FDI destination for investors.  A range of different theories will be applied when analyzing Chiang Mai as a potential investment center.  The reason in which we chose to analyze Chiang Mai is that it is based in an emerging market.  Emerging markets have adopted policies which encourage market forces and reduce government controls.  They grow fast and thus provide markets for developed countries.  Businesses love to explore potential new markets because they offer chances to expand sales.

Methodology

To investigate the suitability of Chiang Mai as a FDI destination, I will need to collect both primary and secondary data for a fair analysis. Fortunately, my school organized a school trip in order for us to experience first hand to collect information from local workers from a range of positions and status. Eg. Employees, managers, owners. I performed a variety of tasks including:

  • Visit an enterprise zone in the outskirts of Chiang Mai.  Where I toured two factories and spoke to local investment manager.
  • Visit Northern Regional Industrial Estate for an in-depth interview with representative of estate management office.
  • An in-depth interview with representative of local Department of Industrial Promotion
  • Visit local villages which have been impacted deeply by tourism and economic development.
  • Meeting with local Board of Investment representatives. This was extremely helpful as it provided me information on the situation of Chiang Mai what is being done to attract FDI.

Where to invest? Why?

Ask any economist or a successful entrepreneur, the most obvious factor in considering investment is the location.  Many complications arise from choosing the location but in the end it could be the reason to the success or failure of a firm. The location of a firm could determine the type of labour it wishes to employ.  Different countries perhaps specialize in different types of labour. For example, Northern Thailand specializes in handicraft and known for their hospitality.  On my visit to a Chiang Mai gem factory, I notice that it is filled with skilled handcraft workers.  However, if a firm is seeking for a more educated group of employees, then they should possibly invest in a country with a more suitable labour force.  The geographic location of the firm must be fairly examined as it is the means of transporting the goods of the firm to its targeted market.  The closer to the market, the lower its transport costs.  A firm would like to cut its costs in every way possible.  Likewise, the closer the factory is with its suppliers, the more cost cutting.

FDI is not only beneficial to certain individuals of the society; it is spread through out the economy via the theory of the multiplier effect.  As workers of an investing firm are paid their wages, they would decide to spend it on their essential needs, which in turn, become the income for other certain individuals. This cycle is repeated, known as the multiplier effect.  This ultimately boosts the economy of Thailand raising its standard of living.  

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A SWOT ANALYSIS

Looking at the SWOT analysis comparing the strengths and weaknesses, we can clearly see that the strengths outweigh the weaknesses suggesting that Chiang Mai is a desirable and attractive destination for FDI.  On the other hand, there are more threats than opportunities.  In this case, multinationals must plan through strategically in advance if their investment is actually worth the risk.  The SWOT analysis is only a general overview and cannot be specified to one single firm. A company ...

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