Thailand's innovation challenge: complex products, simple tasks

Umbrella factory in Chiang Mai (courtesy of rustybadger under a Creative Commons license). Thailand's workers need to contribute more complex tasks to the supply chain.

The complexity of the products made in Thailand has increased drastically over the past 30 years (see the Thailand Economic Monitor, April 2011 (pdf)– especially section 3.2). Thailand went from exporting primarily raw commodities such as rice and rubber to becoming one of the world’s largest exporters of hard disk drives, integrated circuit packages, cars, and auto parts. Electrical, electronic and automotive products now comprise about 40 percent of Thailand’s exports.

But it is the sophistication of tasks, not products, that is important. Making a new laptop or car involves a large number of tasks. The product needs to be conceived, thousands (or millions) of individual parts need to be designed and engineered, then a process must be put in place to churn out each part. The final product then needs to be tested, packaged, and marketed (…and this is far from an exhaustive list of tasks!).

Tasks are performed across different countries in what are called supply chains, with each part of the chain contributing to the final value of the product. The classic example of this is the iPod: while an iPod is counted as an export of China, only a small portion of the value-added is actually produced in China. Each task involves a combination of machines and skills and the “complexity” of a task is related to the level of skills (pdf) required to perform it. For example, developing a new product requires more skills – it takes longer to learn how to do it – compared to testing a finished product.

High complexity tasks tend to add more value to the final product price and, accordingly, it is likely that workers performing these tasks will command higher wages. In addition, complex tasks are linked to team work and the emergence of technological clusters, which act as a catalyst for further growth. For example, if I want to design a new air-conditioning system for a car, it makes sense to work along with the engineers designing the car’s electrical and other systems.
 
Even as products became more complex, tasks performed in Thailand have remained simple. These consist primarily in assembly, testing and packaging. The research, design, development and branding of these sophisticated export products are still done mostly outside of Thailand and technology comes embedded into modern imported machinery. However, manufacturing wages and jobs have stagnated even as output in the sector has increased dramatically over the past decade.

Moving up the value chain means getting more Thai workers to perform complex tasks. This is where innovation comes in. Innovation can be thought of as a group of complex tasks that includes research, development, and design. It involves creating new products or processes, where “new” could mean “new-to-the-world” or “new-to-the-firm”. Thai workers need to participate in the innovation process to ensure Thailand can continue to grow strongly in the coming decades.

So what is constraining innovation in Thailand?

Research and Development (R&D)is a key aspect of innovation, but Thailand is lagging behind. In addition to the conventional role of generating innovations that are “new to the world”, R&D is also important to enhance the technological catch-up and generate innovations that are “new-to-the-firm”.

For example, Rachel Griffith from Manchester University and John Van Reenen from the London School of Economics find that R&D is important both for technological catch-up and “new to the world” innovation. They point out that much knowledge is acquired through ‘learning-by-doing’ and argue that the further a country lies from the technological frontier, the greater the potential for R&D to generate growth in total factor productivity through technology transfers from countries closer to the frontier. Thailand has been lagging its peers in R&D, both in terms of money spent, but also in terms of the number of R&D professionals.

The main cross-cutting constraint is the presence of a skilled workforce. The specific constraints to innovation depend on the nature of the firm – whether large multi-nationals or small local enterprises. But one cross-cutting constraint stands out and that is the lack of workers with the right skills.

Thailand does very well on access to primary and (lower) secondary education, where enrollment rates are high. In addition, government spending on education and access to higher secondary and tertiary education are in line with (or sometimes even better than) regional peers. However, this does not appear to translate into outcomes: Thailand is lagging behind Malaysia (and is well behind Korea) in math and science scores in standardized international tests. Moreover, according to the World Economic Forum, Thailand innovates less than countries with comparable higher education ratings.

I'd be interested in hearing your suggestions on how Thailand can raise the skills of its workforce. Any ideas?