Thailand goes to the polls on July 3, and the outcome is far from clear in what pundits say will be a very tight and tense race between some vehemently opposed political parties. An indecisive outcome will, at the very least, result in the need for a coalition government to be patched together and could potentially result in civil unrest and policy paralysis, warn some observers.

These are the first elections since 2008, when the Democrat Party took the reins of power after a court disbanded the incumbent party for electoral fraud. Indeed, the political backdrop in Thailand has been problematic for more than five years and there was a military coup in 2006 to oust then premier and billionaire, Thaksin Shinawatra. Although now in self-exile and his party officially disbanded, Mr Thaksin’s presence continues to be felt in Thailand. Meanwhile, the frail health of the revered King Bhumibol Adulyadej – the world’s longest-reigning monarch – has also become a source of increasing concern in recent years.

Surprising performance

And yet, despite these potent political risks, the Thai currency and stock market index have performed surprisingly well in recent years. There has been no mad rush to dump Thai assets or head for the exits. The same is largely true of FDI inflows, which have also held up surprisingly well, even when there were pitched battles in Bangkok’s main streets and an iconic shopping mall was burnt to the ground. Indeed, in fDi's most recent Global Outlook Report, Thailand was rated the fifth most popular Asia-Pacific host country destination for FDI projects, after China, India, Singapore and Australia. 

Thailand also ranked fourth in Asia-Pacific for the number of jobs created by FDI inflows last year, at more than 56,000, a rise of almost 40% on 2009, when the impact of the global economic downturn was still being felt and belt-tightening was at its height. Further, the Board of Investment’s FDI approvals rose by 65% year on year in 2010. In the automotive sector alone, more than $2.4bn in new investments has been pledged over the next three years, as Thailand continues to consolidate its role as south-east Asia’s auto hub.

Thai paradox

How is it, then, that foreign investors seem willing to tune out the political unrest in ‘the land of smiles’, which has resulted in prolonged street violence, closed airports, aborted summits, government buildings under siege, multiple border clashes and other classic examples of instability and uncertainty? Part of the answer to what Jean Dautrey of Assumption University in Bangkok has called “the Thai paradox” is one of relativity. Most of Thailand’s south-east Asian peers also display quite high levels of political risk – Indonesia and the Philippines are hardly bastions of political stability, for example. In that regional context, Thailand does not seem so grim.

And while rival Vietnam is stable politically, it burdens investors with high levels of bureaucracy, has inadequate infrastructure, operates an opaque tax regime and has an unreliable regulatory framework. As Joshua Johnson of management consulting company Tractus Asia points out: “While Thailand endures a chaotic political dynamic, industry overall has enjoyed a level of legal and regulatory predictability in its operating environment." And that kind of regulatory certainty should not be readily discounted.

In addition to relativity there is positivity. “Investors tend to look at Thailand differently to many other countries," posits one regional analyst. “The fact that the country has held together well and the polity remains intact, despite all the intense upheaval of recent years, can actually be perceived as a testament to the country’s robustness, and not a weakness.” 

Unlike Vietnam – increasingly becoming Thailand’s primary competitor for FDI inflows in mainland south-east Asia – many foreign investors have been resident in Thailand for more than four decades, and have become relatively sanguine about the country’s fractious politics. In the World Bank’s latest Doing Business rankings, Thailand comes a commendable 19th out of 183 countries, well ahead of most of its regional neighbours.

Need for skilled labour

But this is certainly not to suggest that Thailand’s host country platform cannot be improved on. A long-running shortage of skilled labour, particularly in the industrial area of the eastern seaboard, is often cited by investors as a vexing constraint. Another is inadequate intellectual property rights protection, which deters more high-end investment projects, and the virulence of counterfeiting. 

Last year, a complex legal case surrounding the giant Map Ta Phut Industrial Estate triggered investors’ concern, when an article in the country’s new constitution caused no less than 76 projects to have their operations suspended, for want of a requisite study on potentially harmful emissions. (The estate has been accused of harming the health of nearby residents, as a result of pollution.) The ruling was subsequently overturned by the Central Administrative Court and operations were able to resume, but the incident served to show that Thailand does occasionally generate some unwelcome stumbling blocks for investors.

Corruption perceptions

Thailand has also had difficulty shrugging off long-held perceptions of corruption in the country’s corporate community. According to Transparency International’s most recent Corruption Perceptions Index, Thailand ranks 78th in the world, on a par with China, Peru, Colombia and Greece. This score is much better than any of the other Mekong countries, as well as Indonesia and the Philippines, but behind that of rival Malaysia, and of course Singapore.

Nonetheless, Thailand has been able to attract some noteworthy FDI projects of late. For example, Hutchinson Technology of the US recently established its first overseas hard disk drive components facility in Ayutthaya province. The $135m plant follows in the footsteps of other hard disk drive manufacturers already present in Thailand, such as Toshiba, Hitachi and Seagate. And in June last year, the government announced that it was introducing new tax incentives to foreign firms that opt to locate their regional operating headquarters in Thailand.

Thailand also continues to try to leverage growing international investor interest in the so-called Greater Mekong Sub-region (comprising Cambodia, Laos, Myanmar and Vietnam), portraying itself as a bridgehead into these newly emerging markets. Although this has not always gone to plan, and the recent violent clashes on the disputed Thai-Cambodia border serve as a reminder of long-held tensions, the requisite infrastructure is slowly being put in place. Road bridges are gradually being erected across the Mekong, better linking Thailand with Laos, and the first ever railway link across the river opened relatively recently.

The latest figures from Thailand’s Board of Investment suggests that in the first four months of 2011, applications for more than 580 FDI projects were received, with an aggregate value of slightly over Bt170bn ($5.6bn). This is a marked increase on the figures for the same period last year and is yet further proof that foreign investors are comfortable in the country, despite its potential for instability.