Thailand's Governance Vulnerabilities and the Erosion of Foreign Direct Investment in Southeast Asia

In 2025, Southeast Asia remains a critical hub for global foreign direct investment (FDI), with ASEAN nations collectively attracting an average of $220 billion annually in inflows since 2021, according to a UNCTAD report. Yet, Thailand-a once-dominant economic leader in the region-has seen its appeal to foreign capital wane amid escalating political risks and governance vulnerabilities. The country's political instability, coupled with institutional inefficiencies and corruption, has created a volatile environment that deters long-term investment, even as neighboring economies like Vietnam and Malaysia consolidate their positions as more stable alternatives, as noted in a Thailand TV analysis.

Political Turmoil and Capital Flight

Thailand's political landscape in 2025 has been defined by the abrupt removal of Prime Minister Paetongtarn Shinawatra by the Constitutional Court in August, reigniting tensions between populist and royalist-military factions, as reported by a Khao24 report. This instability has delayed critical economic reforms and the FY2026 budget, stalling public spending and state investment. The consequences are stark: Thailand's GDP growth forecast has been downgraded to 1.2–1.8% for 2025, lagging behind Vietnam's 5.5% and Malaysia's 4.2%, according to a McKinsey review.

Capital outflows have further exacerbated the crisis. Foreign investors withdrew over $2.3 billion from Thai equities in 2025, while the SET Index plummeted 24% year-to-date, as detailed in a Thailand TV piece. The baht's depreciation to 32.8 per U.S. dollar reflects broader investor anxiety, compounded by regional tensions with Cambodia and U.S. tariff negotiations, according to an MCG Asia analysis.

Governance Vulnerabilities: Corruption and Institutional Inefficiency

Thailand's governance challenges are deeply entrenched. The 2025 Corruption Perceptions Index (CPI) ranks Thailand 107th globally with a score of 34, significantly below Singapore's 84 and Vietnam's 40, according to Statista data. This score reflects persistent issues with public sector corruption, judicial inefficiency, and weak enforcement of property rights, as noted in an Allianz report. Meanwhile, the World Bank's Political Stability Index places Thailand at -0.28, indicating moderate instability compared to Malaysia (0.17) and Vietnam (-0.04), per The Global Economy ranking.

Institutional inefficiencies further compound these problems. Thailand's siloed governance structures hinder coordination on critical reforms, such as its net-zero transition, while limited financial autonomy at the local level stifles innovation and accountability, according to an OECD study. A 2025 report by the Office of the National Anti-Corruption Commission notes that while business-friendly policies have improved slightly, perceptions of electoral democracy and public reform remain stagnant, as summarized in an ONACC report.

Sector-Specific Impacts and Investor Caution

Despite these challenges, Thailand's FDI landscape is not entirely bleak. The Eastern Economic Corridor (EEC) continues to attract investment, accounting for 31% of total FDI in H1 2025 through 57 foreign projects, according to The Financial Analyst. Sectors like banking, energy, and digital infrastructure-backed by initiatives from tech giants like AWS and Microsoft-remain resilient, per the Cushman & Wakefield outlook. However, politically sensitive sectors such as tourism and healthcare face prolonged uncertainty. Tourism, a key growth driver, has seen visitor numbers decline due to both political instability and global economic headwinds, as reported by Thailand Business News.

U.S. investors, in particular, have scaled back commitments. High interest rates, Trump-era trade policies, and regional tensions have pushed U.S. firms to redirect capital to more stable markets, according to a The Nation report. Meanwhile, Thai companies are increasing investments in the U.S. to mitigate trade surpluses and avoid potential tariffs, per a The Nation article.

Regional Comparisons and Long-Term Outlook

Thailand's governance vulnerabilities contrast sharply with the relative stability of its neighbors. Vietnam's political cohesion and Vietnam's 40 CPI score, coupled with Malaysia's multi-ethnic unity government, have made these nations more attractive to foreign capital, as discussed in an Eurasia Review piece. Indonesia, despite its own challenges, has leveraged its National Counter-Terrorism Agency to stabilize security concerns, further bolstering investor confidence, according to TradingEconomics data.

For Thailand to reclaim its position as a regional economic leader, analysts argue that resolving political fractures and strengthening institutional frameworks are imperative. Targeted incentives for digital infrastructure and renewable energy could attract FDI, but without addressing corruption and policy inconsistency, Thailand risks further capital flight and economic stagnation, conclude analysts in a Morgan Lewis report.