By Chalerm Jaitang (Prince of Songkla University), Zhaohua Li (Lincoln University), and Christopher Gan (Lincoln University)
Introduction
Small and Medium-sized Enterprises (“SMEs”) are essential to Thailand’s economy. Although they account for only 15% of all enterprises (excluding micro-enterprises), they contribute to 32.50% of the country’s GDP and generate 40.86% of total employment [1]. Because of their economic importance, understanding the risks that threaten their survival (insolvency) is critical for Thailand’s growth and stability.
The insolvency risk and financial vulnerability of Thai SMEs stem from a combination of internal factors (such as firm-level management practices) and external influences, including macroeconomic conditions and institutional quality. Notably, Thailand continues to face persistent institutional challenges. In 2024, the country ranked 107th out of 180 in the Corruption Perceptions Index [2], and it performed poorly on several worldwide governance indicators in 2023: voice and accountability (35.78th percentile), political stability (36.02nd), and control of corruption (35.85th) [3].
Given these challenges, our study examines how institutional weaknesses, specifically corruption or rent-seeking behaviour by public officials, affect the insolvency risk of Thai SMEs. In addition to assessing the impact of corruption on insolvency risk, we investigate how firms adjust their financial policies in response to such institutional pressures.
Recognizing that not all firms are affected equally, our analysis also considers how the effects of corruption vary by firm age and ownership structure, offering a more nuanced understanding beyond general patterns.
Our findings are detailed in our recent publication in Applied Economics [4]. This blog presents a concise summary of the study and its key insights
The Data
Our analysis uses data from the Department of Business Development (“DBD”) of Thailand [5], covering 5,150 Thai SMEs across 17 industries and all 77 provinces. The study period covers 2017 to 2021, yielding a total of 22,711 firm-year observations, of which 16.77% are classified as insolvent.
To capture corruption exposure, we use the provincial-level corruption and allegation cases per capita, sourced from the Office of the National Anti-Corruption Commission (“NACC”) and the Public Sector Anti-Corruption Commission (“PACC”) of Thailand.
Our analysis explores how corruption influences the insolvency risk of Thai SMEs and how firms adjust their financial policies in response, with particular attention to variations based on firm age and ownership structure. The dataset includes 22,711 firm-year observations in total. Of these, 2,931 observations pertain to new firms (operating for no more than three years since establishment), while 19,780 observations represent mature firms (operating for more than three years). In terms of ownership, the dataset comprises 18,558 observations of Thai-owned firms (100% Thai-invested) and 4,153 observations of foreign-owned firms, which include both mixed Thai-foreign and fully foreign-invested enterprises.
Conclusion
Our study reveals that firms located in provinces with higher levels of corruption experience greater insolvency risk and perform worse — they are more likely to report negative net income and have lower returns on assets — than firms in less corrupt areas. Our regression analysis confirms that corruption significantly increases the insolvency risk for Thai SMEs, supporting the “sanding the wheels” hypothesis: corruption or rent-seeking by public officials raises business costs, hinders firm performance, and constrains business growth.
We further explore how the impact of corruption differs by firm age and ownership structure. The results indicate that mature firms are more vulnerable to corruption than younger firms. Their longer operational history increases their reliance on public infrastructure and regulatory approvals, leading to more frequent interactions with public officials and heightened exposure to rent-seeking behaviour. Thai-owned firms face greater risks in corrupt environments compared to foreign-owned firms. Domestic firms often have fewer institutional protections and less political leverage, making them easier targets for exploitation by local bureaucrats.
Our study also highlights that Thai SMEs adjust their financial policies in response to corruption. Mature, Thai-owned, and foreign-owned firms increase their cash reserves in provinces with higher levels of corruption. These reserves serve as “grease payments” or buffers to navigate bureaucratic red tape. Among these, mature and Thai-owned firms raise debt levels when internal resources are insufficient. However, foreign-owned firms tend to hold higher cash holdings without increasing their debt to respond to corruption, indicating a different strategy between Thai-owned and foreign-owned firms. New firms do not significantly adjust cash or leverage in response to corruption, likely due to limited capital and restricted access to credit.
Crucially, we find that higher cash reserves can partially mitigate the adverse impact of corruption on insolvency risk for mature and Thai-owned firms. However, increased leverage in corrupt environments tends to worsen insolvency risk across mature, Thai-owned, and foreign-owned firms, underscoring the financial fragility associated with debt under institutional uncertainty.
Additionally, stronger-performing firms, those with higher returns on assets and positive net income, are naturally less prone to insolvency. Medium-sized firms are more resilient than smaller ones. In terms of legal structure, juristic ordinary partnerships are less likely to become insolvent than ordinary partnerships, whereas companies show a higher probability of insolvency than ordinary partnerships, possibly due to greater operational complexity and financial exposure.
Implications and Limitations
Our findings offer several important implications for Thai policymakers, particularly in recognising corruption as a structural barrier to the effective operation and sustainable growth of SMEs. First, corruption significantly raises the insolvency risk for Thai SMEs, especially for mature and domestic Thai-owned firms, by imposing hidden costs that reduce operational efficiency and financial stability. Second, the necessity to hold excess cash in response to corruption reduces firm efficiency and limits growth, as these funds are diverted from productive investment.
In light of these challenges, the Thai government should prioritise anti-corruption initiatives and develop support mechanisms that reduce the costs and uncertainties associated with doing business. We recommend the establishment of provincial business facilitation centres, connected to the Office of Small and Medium Enterprises Promotion (“OSMEP”). These centres can assist SMEs with license approvals and public service access, reduce face-to-face interactions with officials, lowering rent-seeking opportunities, and create a more transparent and business-friendly environment. Improving governance structures would also enhance Thailand’s global rankings in the Ease of Doing Business Index, the Corruption Perceptions Index, and the Worldwide Governance Indicators.
Our study has some limitations that warrant consideration. Our study is based on registered SMEs classified as juristic persons and excludes micro-enterprises and non-registered businesses, which form a significant portion of Thailand’s informal sector. These smaller firms may face different challenges and adopt different coping mechanisms when dealing with corruption. Therefore, our findings may not fully capture the broader dynamics affecting the entire spectrum of Thai enterprises. Non-registered firms and micro-enterprises typically operate within the informal economy and may encounter corruption and insolvency risks differently from registered SMEs. Their financial responses and strategies to cope with corruption or rent-seeking behaviours are also likely to vary. Future research should extend the analysis to include this underrepresented sector to obtain a more comprehensive picture of corruption’s impact across the Thai business landscape.
Closing Remarks
Understanding how corruption affects the insolvency risk and shapes the financial strategies of SMEs is essential for strengthening Thailand’s economic foundation. By recognising these institutional challenges and implementing targeted policy solutions, policymakers can foster greater resilience, transparency, and long-term growth for Thai SMEs. We hope our research contributes to the broader conversation on governance, private sector resilience, and economic development in Thailand.
*This blog article is an adapted summary of our paper, “The Impact of Public Officials’ Corruption on the Insolvency Risk and Financial Policies of Thai Private SMEs,” originally published in Applied Economics.
[1] https://www.sme.go.th/uploads/file/20240919-124025_SME_Annual_lowres_final.pdf
[2] https://www.transparency.org/en/cpi/2024/index/tha
[3] https://www.worldbank.org/en/publication/worldwide-governance-indicators/interactive-data-access
