Thailand's SMEs Face an Innovation Gap as ASEAN Rivals Advance

Millions of jobs depend on businesses struggling to adapt

Thailand's small and medium-sized enterprises employ more than 12.9 million people and account for more than 90% of the country's businesses. Yet only 1.1% of Thai firms invest in research and development, compared with 21.9% in the Philippines and 15.7% in Vietnam. That gap sits at the heart of a growing challenge for an economy facing rapid technological change and mounting pressure on trade.

The World Bank's February 2025 economic assessment places innovation and the future of smaller businesses at the centre of Thailand's competitiveness debate. Its findings show Thailand at the bottom among the major ASEAN economies compared on production innovation, new products, foreign technology adoption and business investment in research.

The pressure is already visible in business registrations and factory employment. Nearly 24,000 SMEs deregistered during 2024, while more than 1,200 factories, mostly small and medium-sized operations, closed. Those factory shutdowns resulted in more than 35,000 job losses. Manufacturing accounted for most of the closures.

By June 17, 2025, the central concern was how to help smaller companies adapt before declining sales and production caused further damage to employment. Access to money, workers with suitable skills, technology and markets all form part of the answer. The challenge is especially pressing because foreign investment and regional digital commerce are creating opportunities that many domestic businesses remain poorly equipped to take up.

Where Thailand falls behind its neighbours

The World Bank's comparison of innovation activity among ASEAN businesses shows a gap across several stages of business development: improving production, creating products, using technology from abroad and investing in research.

• Process innovation: 11.9% of Thai firms introduce innovation into production processes, compared with 40.9% in the Philippines, 37.9% in Vietnam and 37.3% in Malaysia.
• New products or services: 8.2% of Thai businesses introduce them, compared with 32.9% in the Philippines and 23.2% in Vietnam.
• Foreign technology adoption: 5.6% of Thai firms use foreign technology, compared with 23% in Malaysia and 23.7% in Indonesia.
• Research and development: 1.1% of Thai businesses invest in it, compared with 21.9% in the Philippines and 15.7% in Vietnam.

The production figures put the scale of the difference in plain terms. At 40.9%, the share of firms adopting process innovation in the Philippines is more than three times Thailand's 11.9%. For new products and services, the Philippine figure of 32.9% is about four times Thailand's 8.2%.

Research and development, often shortened to R&D, means work to develop or improve products, technologies and processes. Thailand's 1.1% figure measures the share of businesses making such investments. It shows how few firms are taking part in an activity that can help them respond to changing customer needs.

The Philippines and Vietnam stand out in the comparison for their business innovation activity. Malaysia and Indonesia also show much wider use of foreign technology than Thailand. For Thai SMEs, the problem therefore extends beyond inventing something new: it includes bringing existing technology into everyday business operations.

Innovation reaches beyond new inventions

Danucha Pichayanan, secretary-general of Thailand's National Economic and Social Development Council (NESDC), has stressed the need for SMEs to adopt new technologies and innovative practices. The practical aims are to meet changing customer demands, reduce costs and remain competitive.

Innovation can involve a better way to make a product, organise production, market goods or deliver a service. A business can improve how it works without developing an entirely new technology. For a smaller company with limited resources, making these improvements can be central to keeping customers and maintaining sales.

Thailand's low rates of process innovation and foreign technology adoption point to difficulty on both fronts. Few firms are changing how they produce, and few are drawing on technologies developed elsewhere. That leaves many businesses exposed when competitors can supply goods more efficiently or respond more quickly to buyers.

The closures seen in 2024 and early 2025 have been attributed in large part to the inability of many SMEs to adapt to changing market conditions. Declining sales, reduced production and falling employment connect the innovation problem directly to household livelihoods. For workers, the consequences appear as fewer jobs and less secure employment, rather than as an abstract ranking against neighbouring economies.

Finance, skills and regulation constrain smaller firms

Thai SMEs face several connected barriers to adopting technology. Limited access to finance makes it difficult to fund new equipment, digital systems or research. Low investment in research then restricts businesses' ability to develop new products and improve production methods.

Workers also need the digital and entrepreneurial skills required to put new tools into use. Buying technology is only one step. A company needs people who can apply it to production, sales and business decisions. A shortage of those skills limits how much firms can gain from investment.

Complex regulations and limited support for startups add to the pressure. At the same time, the dominance of a small number of large companies and state enterprises can restrict competition and the opportunities available to smaller businesses. SMEs must therefore deal with obstacles inside their own operations and in the markets where they compete.

The World Bank's 2024 country diagnostic update identifies wider challenges, including an aging population, high household debt and uneven regional development. Those conditions compound the difficulties facing smaller firms and form part of the setting in which innovation policies must operate.

The barriers reinforce one another. A firm with little money may struggle to invest in technology or staff training. A firm without the necessary skills may struggle to turn new technology into better products or lower costs. Addressing finance alone would leave other practical constraints in place.

Trade tensions and digital competition increase the pressure

Global trade tensions have disrupted sales and the continuity of production, increasing the urgency for Thai businesses to find new ways to compete. Rapid digitalisation is changing what customers expect and what businesses need to operate successfully at home and abroad.

Chris Bradley, a McKinsey strategist, argues that ASEAN, including Thailand, missed the first wave of the digital revolution. He points to the position of technology giants among the world's largest and most profitable companies, with heavy research spending and exceptionally rapid growth.

Bradley's proposed response is a strategic shift towards industries with strong growth potential, including e-commerce, digital advertising, semiconductors and electric vehicles. Each depends heavily on technology and the ability to keep improving products or services.

For smaller Thai businesses, that shift requires capabilities as well as a change in business direction. Participation in these industries depends on access to technology, skilled workers and financing. The same weaknesses visible in the ASEAN innovation figures could limit how widely SMEs benefit from growth in these sectors.

Digital commerce offers a route to more customers

The Department of Industrial Promotion, known as DIPROM, has urged Thai SMEs to use mobile and social commerce, digital payments and sustainable business practices. Its call comes as ASEAN's e-commerce market is expected to exceed US$230 billion by 2026.

Mobile commerce means buying and selling through mobile devices, while social commerce uses social media platforms to reach customers and make sales. DIPROM has encouraged SMEs to develop mobile applications, sell directly through social platforms and use payment tools such as electronic wallets and QR codes.

These options connect innovation to activities that business owners already recognise: finding buyers, receiving payments and managing sales. They offer a practical entry point for firms that are not yet developing new products or conducting research.

Thailand has also taken a leading regional role in digital payments. The connection between Thailand's PromptPay and Singapore's PayNow allows instant transfers between the two countries through mobile payment systems at low cost. It provides a model for closer digital integration across national borders.

For SMEs, easier payments can support access to new markets and simplify operations. Wider adoption remains a challenge, however. The opportunity presented by regional e-commerce depends on more small businesses being able to use digital tools in their daily work.

Foreign investment has not spread innovation widely

Thailand recorded a 118% increase in approved foreign companies during the first 11 months of 2024. Much of the investment was concentrated in industries using advanced technology, including automotive engineering, electronics and software services, particularly in the Eastern Economic Corridor (EEC).

Those investments have not yet translated into widespread innovation among Thai SMEs. Job creation from foreign firms has also declined. The combination highlights the difficulty of turning the arrival of foreign businesses into broader gains for domestic companies and workers.

Closer links between smaller Thai firms and international production networks form part of the policy response. These networks, often called global value chains, involve businesses in different places contributing to the production of goods or services. Stronger participation could connect SMEs with technology, customers and industries beyond their existing markets.

Regional initiatives offer another opening. The ASEAN Digital Economy Framework Agreement and the expansion of payment systems connecting countries could help Thai firms reach larger markets and participate in regional production and services. Businesses still need the skills and technology to make use of those connections.

Factory closures make the employment risk concrete

The shutdown of more than 1,200 factories in 2024 brought the challenge into manufacturing communities. Most were small or medium-sized operations, and the loss of more than 35,000 jobs shows the direct cost to workers when production stops.

Nissan's factory closure in Thailand following failed merger talks with Honda provides another example of the strain facing manufacturing. The move was expected to result in about 1,000 job losses, against a wider pattern of declining competitiveness and pressure to manage costs and adapt technologically.

The employment figures place innovation policy alongside an immediate need to protect livelihoods. Businesses that cannot respond to changes in costs, technology or demand face pressure on their viability. Workers and families then bear the consequences through lost income and reduced employment opportunities.

The sequence of developments shows how the pressures have accumulated:

• 2024: Nearly 24,000 SMEs deregistered, and more than 1,200 factories closed, causing more than 35,000 job losses.
• First 11 months of 2024: Approved foreign companies increased by 118%, with investment concentrated in sectors including automotive engineering, electronics and software services.
• February 2025: The World Bank placed SME innovation at the centre of its assessment of Thailand's competitive future.
• 2024 and early 2025: Business closures, weaker sales and reduced production increased concern about employment and firms' ability to adapt.
• 2026: ASEAN's e-commerce market is expected to exceed US$230 billion, presenting an opportunity for businesses able to sell and receive payments digitally.

What the proposed policy response would address

The NESDC and the World Bank have called for action across financing, skills, regulation and technology. Their proposals seek to make innovation more accessible to SMEs and startups while improving the conditions in which those businesses compete.

Melinda Good, World Bank country director for Thailand and Myanmar, described the priorities in terms of preparing people and businesses for change:

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.

The measures proposed include easier access to funding for technology and innovation projects; education and training in digital and entrepreneurial skills; simpler rules that support competition, trade and investment; and greater support for startups and digital businesses.

Greater research spending and technology transfer are also priorities. Technology transfer means helping businesses obtain and use knowledge or technology developed elsewhere. Alongside stronger participation in global value chains, it could help smaller Thai firms connect with industries using advanced technology and with international markets.

Public and private investment in research, skills and digital infrastructure would need to work together. The policy proposals address barriers that occur at different stages, from securing money for a project to finding trained workers and reaching customers. No timetable for putting the full package into effect was specified.

For Thailand, the central task is to turn investment and regional opportunity into improvements that reach ordinary businesses. More competitive SMEs would support employment and give millions of workers and their families a stronger stake in the country's economic growth.

Key Points

• SMEs employ more than 12.9 million people and account for more than 90% of Thailand's businesses.
• Thailand trails the major ASEAN economies compared on process innovation, new products, foreign technology adoption and business research investment.
• Nearly 24,000 SMEs deregistered in 2024. More than 1,200 factory closures caused over 35,000 job losses.
• Limited financing, skills shortages, complex regulation and concentrated markets restrict smaller firms' ability to adapt.
• Approved foreign companies increased by 118% in the first 11 months of 2024, but innovation has not spread widely among Thai SMEs.
• ASEAN e-commerce, digital payments and regional integration offer opportunities, with the e-commerce market expected to exceed US$230 billion by 2026.
• The proposed response combines funding, training, simpler regulation, research, technology transfer and stronger connections to international markets.