2019 21 February

DFDL Thailand | Thai Outbound Investment: Keys to Success in Southeast Asia

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As Thailand’s fast economic development attracts attention from overseas investors, a smaller but equally promising counter-trend is also beginning to emerge: Thai companies looking to expand their operations into neighboring countries. Numerous aspects of these CLMV countries (Cambodia, the Lao PDR, Myanmar, Vietnam) allow for rewarding investment opportunities, but achieving this potential requires real familiarity with the legal, economic, and cultural variables that affect how business is conducted across the region.

As Thailand prepares to upgrade its economic infrastructure in line with its vision for Thailand 4.0, this strategy of development has allowed some of its neighboring countries to quietly achieve a comparative advantage in several niche areas. Moreover, the relative lack of global investment attention in the CLMV countries means that Thai investors can benefit from entering the country before many of their competitors.

However, as with all foreign investments, special care must be taken beforehand to research the local business environment. Investors should always conduct a thorough feasibility study prior to making any commitments, covering everything from licensing and legal issues to market research and company culture in the destination country.
Here are some of the key areas to consider when preparing for investment in the CLMV region – or indeed anywhere in Southeast Asia:

 

Legal requirements

Restrictions vary from country to country on foreign ownership of land and business. In Vietnam and the Lao PDR, for example, foreign investors can lease but not own land. The Lao PDR allows for 99-year leases within special economic zones, although general terms are for 30-year leases, and other conditions must also be met. Official approval is typically needed to acquire a property or business in CLMV nations, although the essential criteria may vary based on a number of factors. Prospective investors will also want to know when they can legally begin development or construction on their new projects, but such scheduling also depends greatly on the local regulatory environment.

Minimum capital requirements vary between countries as well, and in some cases a strict reading of the law may be insufficient to gain a sense of what is needed. In the Vietnamese system, for certain types of investment (e.g. power projects), minimum capital requirements are not bound by established law, but instead are determined by the Ministry of Industry and Trade on a case-by-case basis. This system often results in high minimum capital requirements, though much depends on the type and scale of the project or development being proposed. A familiarity with local precedent can therefore be a great help in managing expectations.

Investors should determine the ceiling of foreign participation in that country, vis a vis their local partners – while also examining issues surrounding the international transfer of funds. Restrictions often exist for moving money in either direction, as a special bank account is often required for foreign investors to deposit money into, before being transferred to the local seller or contributed to the project company as development or operation costs.

Without access to the requisite local knowledge, such regulatory requirements can represent a serious obstacle to investment success. However, legal issues such as these can often be handled with minimal inconvenience when they are anticipated and well understood – and particularly if the investor has experienced local partners and legal counsel to guide them along the way.

 

Screening the right targets

Successful investment requires an extensive focus on the details at every level of the project. Investors must scout for ideal locations, determine which companies or properties would be fitting as targets for investment, and identify local businesses that can serve as efficient, reliable suppliers and distributors.

Each of these tasks is crucial, but challenging for investors unfamiliar with the local business landscape. They therefore require expert on-the-ground advice. Selecting the right partner, legal firm and broker during the preparation stage can greatly facilitate the rest of the investment process – particularly if they have the relevant experience.

Foreign investment has a high learning curve, as a failure to follow local procedures or acquire the necessary documents can result in costly delays. The right local adviser will be able to give accurate comparisons for practical investment, while also organizing meetings and preparing investors for the legal hurdles that are on the horizon.

 

Choosing the right investment strategy

Investors must decide whether a brand new business venture is appropriate, or if an acquisition or joint venture would be the more practical option. Working with established businesses can make things easier on the legal side, as the target company would already have the requisite development and operating license.

Investors must pay a premium to buy an existing business, but the strategy remains popular for reasons of convenience, speed and local expertise. Thai businesses tend to favor this option, with plenty of success stories as a result.

By way of example, consider the advantages that a Thai power company could enjoy when acquiring large scale energy projects in Vietnam. If local Vietnamese owners have initially set up the projects and acquired the necessary licenses, while also developing important connections with local authorities, the Thai power company could then inherit these beneficial business conditions upon purchase. With a well-established local partner to facilitate the investment, the company would be able to benefit greatly from this partner’s expertise, sophistication, and ability to communicate in English, as well as its prior experience in the energy sector.

Every investment strategy produces its own set of rewards and challenges; finding the best one in any given situation requires a detailed understanding of the investment conditions that shape business practice in each country.

 

Making the right impression

For any investment to get off the ground, issues surrounding finance must be settled on reasonable terms. Banks are an excellent source for credit, but only if investors can make an effective presentation to show that a loan agreement will produce the desired results. The more carefully a project has been planned out through local partnerships, legal, financial and technical feasibility studies, market research efforts and other key aspects of preparation, the more effectively the investor will be able to negotiate with the bank on the terms of the loan.

The importance of making a good impression, however, continues long after a loan agreement has been signed. Successful business operation in the destination country depends on working well within the local system, in terms of relationships with management, employees, business partners, and the surrounding community. A proper understanding of local culture can generate valuable goodwill and help smooth over any disagreements during the course of business.

 

For Thai outbound investment, the difference between success and failure can often be traced back to the level of initial research that is conducted, the preparation during the proposal and strategy phase, and the ability to adapt successfully to conditions on the ground. In each of these aspects, experienced local partner and legal adviser support can provide the necessary guidance for investors to find the way forward.