The Importance of Government Incentives Relative to Economic Fundamentals: The Case of Software Industry in Thailand

By Larsson, Christoffer; Venkatesh, Sundar | Journal of Southeast Asian Economies, December 2010 | Go to article overview

The Importance of Government Incentives Relative to Economic Fundamentals: The Case of Software Industry in Thailand


Larsson, Christoffer, Venkatesh, Sundar, Journal of Southeast Asian Economies


I. Introduction

Countries have been using a combination of government incentives to facilitate industrial development including development of specific sectors. Equally important for this development is a set of essentials that a country should have. We call these economic fundamentals and contrast these with government incentives. Economic fundamentals could be the result of chance such as geographical location and climate or the result of long-term government policies such as affordable and abundant higher education.

If economic fundamentals are indeed distinct from government incentives in influencing investment decisions, it would be useful for policymakers to understand the relative importance of each in decisions made by investors.

Section II is a review of the literature on industrial policy and success factors of current software industry clusters. Section III describes the theoretic model adopted in this study. Section IV provides an overview of the software services industry in Thailand and the government policies in promoting this industry. In section V we describe our methodology, data and sample. Section VI reports our findings and analysis. Section VII concludes with a discussion of the results.

II. Review of the Literature

To our knowledge there are no current studies on the development of high-skill sectors that have divided success factors between government incentives and economic fundamentals.

However, there are studies focused on the development of industrial clustering and software industry, in particular, discussing the role the government has had in this development.

H.1 Is There a Case for Industrial Policy?

There is an intense debate on whether active government intervention, including sector-specific government incentives, is an effective instrument in the industrial development of a country. It is an issue that is dividing economists, and there are arguments both for and against industrial policy. One of the reasons behind this is that while it is easy to recognize failures, successes are more difficult to prove. For instance, consider the argument that Japan's industrial policy was crucial for its success. As we do not know how Japan would have developed without these policies, it is also difficult to attribute its success to its industrial policy (Pack and Saggi 2006).

A more interesting approach to industrial policy is provided by Rodrik (2004). The approach is focusing on how governments should act to get its industrial policies right and it is less concerned about its pros and cons. Rodrik defines industrial policy as "an interactive process of strategic cooperation between the private and the public sectors which, on the one hand, serves to elicit information on business opportunities and constraints, and on the other hand, generate policy initiatives in response", i.e., instead of viewing industrial policies, as some opponents would call a "distortion" of market forces, they should act as a complement that maximizes its potential to contribute to economic growth while minimizing the risks that it will generate waste and rent-seeking.

Rodrik also disagrees with the claim that there is a shortage of evidence on the benefits of industrial policy. On the contrary, his survey of successful sectors in Latin America reveals that "it is difficult to come up with real winners in the developing world that are not a product of industrial policies of some sort".

While the academic debate on this issue will continue, the trend seems to be toward more active government interventions rather than less. Even Hong Kong, known for its off-hand government policies, has revisited the government's role in promoting economic growth, and is now making special efforts to encourage the growth of six industries (The Economist 2010).

11.2 The Role of Government in Two Recent Software Industry Successes

India and Ireland are two recent software industry successes that are worth taking a closer look at. …

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