15 August 2007

Opinion & Analysis: Does Thailand Want Foreign Investment?

Michael Doyle*

The government’s proposed changes to the Foreign Business Act fail to recognize market realities and would send the wrong message to the outside world

Like many others, I have watched the developments concerning the government’s proposed revisions to the Foreign Business Act  (FBA) with a lot of anticipation.

The portion of the proposed revisions which has caused the most resistance from foreign investors as well as many Thai’s concerns preferential voting rights for foreign shareholders of Thailand registered companies.

Under the current rules, companies which are majority-held by Thai’s are allowed to give preferential voting rights to the company’s minority foreign shareholders giving the foreign shareholders effective control of the company while still be legally classified as a Thai company.

The proposed revisions to the FBA would change this situation, however,  by re-classifying companies which give preferential voting rights to foreigners as “foreign” instead of “Thai” even though the majority of the company shares are held by Thai’s.

This re-classification would subject these affected companies to much more government regulation and may cause many of these companies to cease operation.
 
The government’s reasoning behind the proposed changes is that companies structured in this way violate the spirit of the FBA as the majority Thai shareholders of these companies are merely nominees with no real ownership or authority.

The government also argues that this change in the long term will be good for the foreign investment climate in Thailand because it would promote an environment of more transparency in the market which many foreign investors would like to see.

I agree with the government that many companies registered in Thailand currently use nominee shareholders in violation of the law.  There is no question about that.  And I, also, agree that promoting transparency is generally a good thing.

However, I do not agree with the government’s position on this issue because I believe that the proposed revisions to the FBA would be detrimental to Thailand’s interests in the short, medium and long term for the following reasons.

1. It Would Hurt Thailand’s Global Competitiveness

First of all, I think revising the law as proposed would send absolutely the wrong message to the outside world. 

One of the reasons why Thailand has been so successful in attracting foreign investment over the years in my opinion is that its framework regulating foreign investment has been more open than that of its neighbors’ specifically in comparison to China, Vietnam, Malaysia, India and Indonesia.

When I say ‘open’ here I mean that foreigners were generally allowed to invest in more sectors in Thailand than they were allowed in the above mentioned countries.

This situation has subjected Thailand’s local businesses to a lot of foreign competition, but, in my opinion, as a whole, the country has received a net benefit from this policy through the jobs which have been created and technology and know how which was transferred to Thailand because of it. 

However, if the government implements the proposed changes to the FBA then this competitive advantage will cease to exist for Thailand.  Thailand will be seen as having a very similar foreign investment framework as the other countries mentioned above.  In actuality the situation would be far worse than that as the current trend in each of these countries has been to liberalize their foreign investment laws and become more open to foreign competition and investment.

In my opinion, if the government implements the proposed changes it would be clear evidence to the rest of the world that Thailand is moving in the exact opposite direction.

2. It Would Not be Fair to the Exiting Foreign Run Companies Operating in Thailand

The changes proposed would be enforced against foreign investors retroactively.

This would mean that many companies which have been established to date which are in 100% compliance with the current law would be required to substantially change their corporate structures in order to be in compliance moving forward.

Yes the proposed change does provide for a grace period affording the affected companies some period of time to implement the measures necessary to come into compliance, but the point is that in my opinion by doing this the government is establishing a disturbing precedent. 

The precedent would be that even though foreign investors complied with the letter of the law when they entered the Thai market, the government may now change its mind, and by doing so, force these companies as to substantially restructure themselves because of it.

As stated above, up until now companies were allowed to grant minority foreign shareholders preferential voting rights.  Right or wrong this has been the status of the law for years, and many, many companies structured their businesses exactly like this.

Now the government is telling those companies (if the proposed changes go through) that even though their companies were legally compliant at the time their companies were established now they will be required to change.

If the proposed change only affected new foreign investors, from a time standpoint anyway, it would at least be fair.  However, to make the changes applicable to existing foreign investors as well in my opinion is not fair.

3. It Would Go Against Market Realities

Every country on the planet is dealing with the realities of an increasingly integrated world. It is how the governments of these countries chose to deal with these realities which will in large part determine the country’s long-term global competitiveness. 

My own country (the US) is dealing with this as well. 

Last year many people in the US went crazy when Chinese companies made serious bids to purchase Unocal and Maytag.  A couple of decades before that it was the Japanese who caused alarm by buying big chunks of real estate in California and the Western US. 

In both of these situations there were cries for the US government to legislate against such foreign investment. In fact, it may have been easy for many US politicians to initiate such legislation.

But it didn’t, and the reason that it didn’t was because it knew that in the long term the US would benefit more by not being reactionary to what was happening at the time, but rather, use the situation as an opportunity to show the world that the US remained open to foreign investment.

In my opinion, the same is true of Thailand.

In the short term, due to political events which have transpired here and other reasons, it may be very easy for the government to justify imposing measures such as the changes to the FBA which would make it considerably more difficult for foreigners to invest here.

However, in the long term, I believe this move would show to the world that instead of becoming more integrated into the global economy Thailand seeks to isolate itself from it.  That instead of embracing globalization and finding creative ways to balance both local and international interests – Thailand withdraws.  I, for one, hope this does not occur.

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*Michael Doyle is a US attorney and partner with the Thailand Law Firm, Seri Manop & Doyle Ltd. He is also the author of the book Doyle’s Practical Guide to Thailand Business Law .  His email address is michael@serimanop.com