Thailand’s Innovation Deficit: A Growing Challenge for SMEs
Thailand’s small and medium-sized enterprises (SMEs) are facing a critical juncture. As global trade tensions intensify and the pace of technological change accelerates, Thai businesses—especially SMEs—are struggling to keep up with regional peers in innovation and competitiveness. The latest World Bank Thailand Economic Monitor (February 2025) paints a sobering picture: Thailand ranks lowest among major ASEAN economies in key innovation metrics, and this shortfall is having real consequences for business survival, employment, and the country’s long-term economic prospects.
SMEs are the backbone of Thailand’s economy, employing over 12.9 million people and accounting for more than 90% of all businesses. Yet, in 2024 alone, nearly 24,000 SMEs deregistered and over 1,200 factories—mostly small and medium-sized—shut down, resulting in the loss of more than 35,000 jobs. The majority of these closures occurred in the manufacturing sector, where the inability to innovate and adapt to changing market demands has become a critical vulnerability.
How Does Thailand Compare to Its ASEAN Neighbors?
According to the World Bank’s survey of innovation activity among ASEAN businesses, Thailand lags significantly behind its regional peers in several key areas:
- Process Innovation: Only 11.9% of Thai firms incorporate innovation into their production processes, compared to 40.9% in the Philippines, 37.9% in Vietnam, and 37.3% in Malaysia.
- New Product Development: Just 8.2% of Thai businesses introduce new products or services, while the Philippines and Vietnam report 32.9% and 23.2%, respectively.
- Foreign Technology Adoption: Only 5.6% of Thai firms use foreign technology, compared to 23% in Malaysia and 23.7% in Indonesia.
- Research & Development (R&D) Investment: A mere 1.1% of Thai businesses invest in R&D, far below the 21.9% in the Philippines and 15.7% in Vietnam.
These figures highlight a substantial innovation gap. The Philippines and Vietnam are emerging as regional leaders in business innovation, while Thailand’s low rates of technological adoption and R&D investment are holding back its SMEs from competing effectively in both regional and global markets.
Why Is Innovation So Critical for Thai SMEs?
Innovation is not just about inventing new products or technologies—it’s about finding better ways to produce, market, and deliver goods and services. For SMEs, innovation can mean the difference between survival and closure in a rapidly changing economic landscape. As Danucha Pichayanan, Secretary-General of the National Economic and Social Development Council (NESDC), has emphasized, the adoption of new technologies and innovative practices is essential for SMEs to meet evolving customer demands, reduce costs, and maintain competitiveness.
The consequences of failing to innovate are already visible. The wave of business closures in 2024 and early 2025 has been attributed in large part to the inability of many SMEs to adapt to new market realities. This has led to declining sales, reduced production output, and falling employment levels—trends that threaten the stability of Thailand’s labor market and the livelihoods of millions of workers.
Structural Barriers: Why Is Thailand Lagging?
Several structural factors contribute to Thailand’s innovation deficit:
- Low R&D Investment: Thai businesses invest far less in research and development than their regional peers, limiting their ability to develop new products and processes.
- Limited Access to Finance: SMEs often face significant barriers in obtaining the funding needed to invest in technology and innovation.
- Skills Gap: There is a shortage of workers with the digital and entrepreneurial skills needed to drive innovation.
- Regulatory Hurdles: Complex regulations and limited support for startups and SMEs hinder the growth of a dynamic innovation ecosystem.
- Dominance of Large Firms: The Thai economy is characterized by the dominance of a few large firms and state-owned enterprises, which can stifle competition and limit opportunities for smaller businesses to innovate.
The World Bank’s Systematic Country Diagnostic Update 2024 also points to broader challenges, including an aging population, high household debt, and uneven regional development, all of which compound the difficulties faced by SMEs.
Global and Regional Pressures: Trade Wars and Digital Disruption
Thailand’s innovation challenges are being exacerbated by external pressures. The ongoing wave of global trade wars has disrupted sales and production continuity, making it even more urgent for Thai businesses to find new ways to compete. At the same time, the rapid digitalization of the global economy is raising the bar for what it takes to succeed in both domestic and international markets.
Chris Bradley, a McKinsey strategist, notes that ASEAN as a whole—including Thailand—missed the first wave of the digital revolution. Today, the world’s largest and most profitable companies are technology giants that invest heavily in R&D and grow at unprecedented rates. Bradley argues that for Thailand to remain competitive, it must pivot strategically towards high-growth industries such as e-commerce, digital advertising, semiconductors, and electric vehicles—sectors where innovation and technological capability are paramount.
Opportunities in Digital Transformation and E-Commerce
Despite these challenges, there are signs of progress and opportunity. The Department of Industrial Promotion (DIPROM) has urged Thai SMEs to embrace mobile and social commerce, digital payments, and sustainable business practices to tap into ASEAN’s booming e-commerce market, which is expected to exceed US$230 billion by 2026. SMEs are encouraged to develop mobile apps, leverage social media platforms for direct sales, and adopt payment innovations such as e-wallets and QR codes.
Thailand has also been at the forefront of digital payments innovation in the region. The linkage between Thailand’s PromptPay and Singapore’s PayNow systems enables instant, low-cost cross-border mobile transfers, providing a blueprint for regional digital integration. Such initiatives can help SMEs access new markets and streamline their operations, but broader adoption of digital tools and platforms remains a challenge for many smaller businesses.
Policy Responses: What Needs to Change?
Recognizing the urgency of the situation, the NESDC and the World Bank have called for a range of policy measures to support SME innovation:
- Expand Access to Finance: Making it easier for SMEs to obtain funding for technology adoption and innovation projects.
- Invest in Skills Development: Providing education and training programs focused on digital and entrepreneurial skills.
- Enhance Regulatory Frameworks: Streamlining regulations to encourage competition, trade, and investment, and to support the growth of startups and digital businesses.
- Promote R&D and Technology Transfer: Encouraging greater investment in research and development, and facilitating the adoption of foreign technologies.
- Strengthen Participation in Global Value Chains: Leveraging regional integration and foreign investment to boost high-tech industries and connect Thai SMEs to international markets.
Melinda Good, World Bank Country Director for Thailand and Myanmar, underscores the need for bold action:
“Investing in innovation ecosystems, skills for the future, and creating an enabling regulatory environment will enable Thais to adapt to global challenges and thrive in the future.”
Foreign Investment and Regional Integration: A Mixed Picture
Foreign investment in Thailand has surged, with a 118% increase in approved foreign companies in the first 11 months of 2024. Much of this investment is concentrated in high-tech sectors such as automotive engineering, electronics, and software services, particularly in the Eastern Economic Corridor (EEC). However, these investments have not yet translated into widespread innovation among Thai SMEs, and job creation from foreign firms has actually declined.
Regional integration efforts, such as the ASEAN Digital Economy Framework Agreement and the expansion of cross-border payment systems, offer new opportunities for Thai businesses to participate in regional value chains and access larger markets. Yet, to fully benefit from these trends, Thai SMEs must overcome their innovation deficit and build the capabilities needed to compete in a digital, interconnected economy.
Case Study: The Impact of Business Closures
The closure of Nissan’s factory in Thailand following failed merger talks with Honda is a stark example of the challenges facing the manufacturing sector. The move is expected to result in the loss of about 1,000 jobs and reflects broader trends of declining competitiveness and the need for cost management and technological adaptation. Such closures underscore the importance of innovation in maintaining business viability and protecting employment.
Looking Ahead: Can Thailand Close the Innovation Gap?
Thailand’s path to sustainable, inclusive growth depends on its ability to foster a more innovative and dynamic SME sector. This will require coordinated efforts from both the public and private sectors, including targeted investments in R&D, skills development, and digital infrastructure. Policymakers must also address structural barriers such as limited access to finance and regulatory hurdles that stifle entrepreneurship and innovation.
As the World Bank and NESDC have emphasized, empowering SMEs and startups with the right tools, financing, and skills is essential for unlocking Thailand’s potential for long-term growth. The stakes are high—not just for individual businesses, but for the millions of workers and families who depend on a vibrant SME sector for their livelihoods.
In Summary
- Thailand’s SMEs face mounting challenges from low innovation rates, global trade tensions, and weak competitiveness.
- The country ranks lowest among major ASEAN economies in process innovation, new product development, foreign technology adoption, and R&D investment.
- Nearly 24,000 SMEs and over 1,200 factories closed in 2024, resulting in significant job losses.
- Structural barriers include low R&D investment, limited access to finance, skills gaps, and regulatory hurdles.
- Policy responses focus on expanding access to finance, investing in skills, enhancing regulatory frameworks, and promoting R&D.
- Digital transformation and regional integration offer new opportunities, but SMEs must overcome the innovation gap to compete effectively.
- Empowering SMEs is critical for Thailand’s economic resilience, job creation, and long-term prosperity.
