Publication Code: Y92E
by Robin Boadway, Frank Flatters and Jean-Fran?ois Wen
The purpose of this study is to investigate differences in the investment environments faced by small and large firms in Thailand. We begin by reviewing the various possible sources of bias against small firms, and discussing some of the policy issues raised by these biases. We then present a methodology which is used to estimate differences in the required rates of return for different types of investment for both small and large firms in Thailand. We finish by estimating of the direction and magnitude of the biases imparted by Thailand's fiscal system and investment promotion policies. The fiscal system, broadly defined, includes direct and indirect taxes, the instruments of trade policy, economic regulations, such as those administered by the Board of Investment (BoI), and various forms of licensing of economic activities.
In evaluating these effects of the fiscal system, there are two separate, but related issues to consider. The first is whether the fiscal system itself imparts a negative bias against small firms either explicitly or implicitly. If so, the "playing field" is not level and a case could be made on policy grounds for making it so. The second is that there may be reasons why the fiscal system should treat small firms preferentially. The operation of the market economy itself may be biased against small firms, thereby making it efficient for policy to compensate. Or, there may be certain externalities that result from the operation of small firms which migh justify preferential treatment. The first few sections will serve to put the study into context by reviewing briefly the sorts of arguments which might justify fiscal incentives to small firms. Our focus throughout will be on the interaction of fiscal incentives with the investment, or capital, decisions of firms, although some of the same arguments apply to current decisions as well.
Incentives for investment are widely used policy instruments, and can take a variety of different forms. In developing countries, common instruments are tax holidays, investment tax credits, import tariff remissions on capital equipment and raw materials, protection from imports, and assistance in financing, including low interest loans and equity participation. There are a variety of economic reasons that can be given for investment incentives, although it will be ultimately a matter of judgment as to whether the incentives are justified in a given case. It is useful to begin by summarizing the arguments for providing fiscal incentives to investment in general before turning to the treatment of small firms in particular.
November 1992