La01.005 a study on the impact of foreign direct investment on economic development of lao p.d.r.

MINISTRY OF EDUCATION
LAOS NATIONAL UNIVERSITY
MINISTRY OF EDUCATION AND TRAINING
NATIONAL ECONOMICS UNIVERSITY
KHAMSEN SISAVONG
A STUDY ON THE IMPACT OF
FOREIGN DIRECT INVESTMENT ON
ECONOMIC DEVELOPMENT OF LAO P.D.R.
A thesis submitted to the National Economics University
in fulfillment of requirements for the degree of
Doctor of Philosophy in Economics
Hanoi, 2014
Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail: luanvanaz@gmail.com
Luận Văn A-Z
0972.162.399

i
DECLARATION
I hereby declare that this dissertation is my own work and effort. The
dissertation has not been submitted anywhere for any award. All the sources of
information used have been well acknowledged.
Date: Signature
KHAMSEN SISAVONG
Luận Văn A-Z
0972.162.399

ii
ACKNOWLEDGMENTS
The Vietnam – Lao Cooperative Program Doctor of Philosophy (PhD) between
NEU and NUOL is very important, necessary, valuable and beneficial to our nations
because this project allows Lao people to upgrade and enhance their level to Doctorate
Degree.
Therefore, I would like to acknowledge the leaders, Administrators, Professors
of the National Economics University of Vietnam and National University of Laos to
give me this excellence opportunities to achieve my dream of PhD.
I would like to express my gratitude to Prof. Dr. Tran Tho Dat, Assoc. Prof.Dr.
Nguyen Thanh Ha and other professors who were in the committees for evaluation of
my dissertation in the early stages of my PhD study.
I am deeply indebted to Assoc. Prof. Dr. Nguyen Thi Tuyet Mai, my
supervisor who gives me clear guidelines and contributing her advises to my
dissertation.
I am also grateful to Prof. Dr. Somkod Mangnormek, Governor of Xiengkhuang
Province, member of Central Committee Party, Prof. Dr Kikeo Khaikhamphithoun,
Head of National Accademic of Politic and Public Administration, member of Central
Committee Party, Prof. Dr. Thongsalith Mangnormek, Head of National Economic
Research, Prof. Dr. Bounpong Keonoradome, President of Savannakhet University
who encouraged and supported me to reach my goal of PhD.
My special thanks go to my family, Sengsavanh College’s staff and my friends.
They are always pleased to encourage and to assist me during my PhD research.
Without your supports I could not complete and realize my dream.
Luận Văn A-Z
0972.162.399

iii
CONTENTS
DECLARATION..........................................................................................................i
ACKNOWLEDGMENTS .......................................................................................... ii
ABBREVIATIONS .....................................................................................................v
LIST OF FIGURES .................................................................................................. vii
LIST OF TABLES................................................................................................... viii
CHAPTER 1. INTRODUCTION.................................................................................1
1.1 Research Background ............................................................................................1
1.2 Rationale for the Research.....................................................................................3
1.3 Research Objectives and Research Questions.......................................................4
1.4 Scope of the Study.................................................................................................6
1.5 Contributions of the Study.....................................................................................6
1.6 Dissertation Structure ............................................................................................8
CHAPTER 2. LITERATURE REVIEW ON THE IMPACT OF FDI ON
ECONOMIC DEVELOPMENT..................................................................................9
2.1. Definition and Indicators of Economic Development..........................................9
2.1.1 Definition of Economic Development...........................................................9
2.1.2 Indicators of Economic Development .........................................................10
2.1.3 Theoretical Economic Overview .................................................................11
2.2 FDI and its Impact on Economic Development ..................................................14
2.2.1 Definition and Determinants of FDI............................................................15
2.2.2 Impact of FDI on Economic Development..................................................30
CHAPTER 3. OVERVIEW OF ECONOMIC DEVELOPMENT AND FDI IN
LAOS51
3.1. Overview of Laos’ Economy..............................................................................51
3.1.1. Economic Growth.......................................................................................52
3.1.2 Economic Structural Changes......................................................................53
3.1.3 Financial Sector Growth ..............................................................................54
3.1.4 Banking Sector Development .....................................................................55
Luận Văn A-Z
0972.162.399

iv
3.1.5 Inflation has been effectively managed ......................................................55
3.1.7 Workforce and Employment Balance..........................................................56
3.1.8 Balancing the Sources of Funds for Development ......................................58
3.1.9 Balancing the State Budget..........................................................................60
3.1.10 Balancing Imports and Exports..................................................................61
3.1.11. Sectoral Development, Regional and International Economic Integration
...............................................................................................................................65
3.1.12 Infrastructure..............................................................................................88
3.2 Foreign Direct Investment in Laos ......................................................................90
CHAPTER 4. RESEARCH METHODOLOGY ......................................................95
4.1 Research Questions..............................................................................................95
4.2 Variables and Measures.......................................................................................95
4.3 Data Description ..................................................................................................97
CHAPTER 5. RESEARCH FINDINGS..................................................................107
5.1 FDI and GNI per Capita....................................................................................107
5.2 FDI and Financial Capital.................................................................................108
5.3 FDI and Level of Technology............................................................................111
5.4 FDI and Human Capital.....................................................................................112
5.5 FDI and Energy and Natural Resources ............................................................113
5.6 FDI and Transportation and Communication....................................................114
CHAPTER 6. CONCLUSIONS AND DISCUSSION............................................116
6.1 Conclusions........................................................................................................116
6.2 Implications of the Study...................................................................................117
6.3 Limitations of the Study and Future Research Direction ..................................121
REFERENCES ..........................................................................................................123
Luận Văn A-Z
0972.162.399

v
ABBREVIATIONS
AFTA Asean Free Trade Area
AGOA
APTA
ASEAN
ATIGA
BIT
BOP
CAP
CEPEA
EAFTA
ECE
ECOWAS
EU
Africasn Growth and Opportunity Act
Asia Pacific Trade Agreement
Association of South East Asian Nations
Asean Trade in Goods Agreement
Bilateral Investment Treaty
Balance of Payments
Carribean African Pacific
Comprehensive Economic Partnership in East Asia
East Asia Free Trade Area
Economic Commission of Europe
Economic Organization of West African States
European Union
FDI Foreign Direct Investment
FPI
FY
Foreign Portfolio Investment
Financial Year
GDI
GDP
Gross Domsetic Income
Gross Domestic Product
GNI Gross National Income
IMF
IPRs
International Monetary Fund
Intellectual property rights
ISCED
ISIC
Lao PDR
International Standard Classification of Education
International Standard Industrial Classification
the Lao People’s Democratic Republic
Luận Văn A-Z
0972.162.399

vi
LDCs Least developed countries
MFs Multinational firms
MIGA
MNC
NEM
NIEs
Multilateral Investment Guarantee Agency
Multinational Corporation
New Economic Model
Newly Industrializing Economies
NTA
ODA
OECD
National Tourist Authority
Official Development Assistance
Organization for Economic Co-peration and Development
OLI
OLS
Ownership, Locational, Internalization
Ordinary Least Square
OPIC
PPP
Overseas Private Investment Corporation
Purchasing Power Parity
SAPTA
TDS
UN
South Asian Preferential Trade Agreement
Total Debt
United Nations
US the United States
VAT Value Added Tax
WTO World Trade Organization
Luận Văn A-Z
0972.162.399

vii
LIST OF FIGURES
Figure 1: Economic structure 2006 – 2010 ...................................................................54
Figure 2 Export and Imports from 2005-2009. .............................................................64
Figure 3 Average size of agricultural land per household.............................................66
Figure 4. Average share of value added in the industrial sector 2006-2010.................70
Figure 5. Structure of service sector 2006-2010 ...........................................................75
Figure 6 Foreign direct investment, net inflows (BoP, current US$) ...........................92
Figure 7. Distribution of FDI in Lao PDR (US$ m) .....................................................93
Figure 8. Share of accrual FDI by country (% of total, as of August 2009) .................93
Figure 9. Ten biggest foreign investors in Laos (1989 – 2012) ....................................94
Figure 10. Graph of Correlation between FDI and GNI per capita............................107
Figure 11. Graph of Correlation between FDI and long-term debt service on external
debt ..............................................................................................................................110
Figure 12 Graph of Correlation between FDI and level of technology .....................112
Figure 13. Graph of Correlation between FDI and School enrollment, tertiary ........113
Figure 14. Graph of Correlation between FDI and Natural Resources......................114
Figure 15. Graph of Correlation between FDI and Mobile cellular subscriptions.....115
Luận Văn A-Z
0972.162.399

viii
LIST OF TABLES
Table 1. Comparison between actual and targeted GDP growth rate in the Sixth Plan
(2006-2010) ...................................................................................................................52
Table 2. GDP per capita (plan vs. actual)......................................................................53
Table 3. Share of labour by sectors ...............................................................................58
Table 4. Private domestic and foreign investment from 2006-2010 (USD billion)......60
Table 5. Export structure of Lao PDR by commodities 2005-2009 (%).......................62
Table 6. Import structure of Lao PDR by commodities 2005-2009 (%).......................63
Table 7. Inter-Country Comparison on Opened Trade or Integration 2006-2010 ........86
Table 8. Export Market Structure with Main Trade Partners, 2008..............................87
Table 9. Foreign direct investment, net inflows............................................................98
Table 10. GNI per capita ...............................................................................................99
Table 11. Gross capital formation (annual % growth) ................................................100
Table 12. Financial capital ..........................................................................................101
Table 13. Industry, value added (% of GDP)..............................................................102
Table 14. Human capital..............................................................................................103
Table 15. Oil consumption per capita..........................................................................104
Table 16. Transportation and communication.............................................................105
Table 17. FDI and GNI per capita Coefficient of Correlation ....................................108
Table 18. FDI and Financial Capital Coefficient of Correlation.................................108
Table 19. FDI and Level of Technology Coefficient of Correlation...........................111
Table 20. FDI and Human Capital Coefficient of Correlation....................................112
Table 21. FDI and Energy and Natural Resources Coefficient of Correlation ...........113
Table 22. FDI and Transportation and Communication Coefficient of Correlation...114
Luận Văn A-Z
0972.162.399

1
CHAPTER 1. INTRODUCTION
1.1 Research Background
Laos is a small landlocked country with an area of 236,800 square
kilometers. It shares its borders with Vietnam in the East, China in the North, and
Cambodia in the South, Thailand and Myanmar in the west. Two third of the
country is mountainous (northern part) thus its geographic circumstances constrain
both the quality and quantity of agriculture and cause difficulties to the
development of trade, social infrastructure and transportation and communication
links. However, the country has transformed from a landlocked to a land link and
cross road to other parts of the world.
Laos is located in the center of energetic and prosperous region of South East
Asia and possesses a high potential of natural resources, raw material and
hydropower. The country is divided into three main regions: northern, central and
southern regions. The current total population of Laos is 6.9 million (2012) with
major of those live in valleys of the Mekong river and its tributaries. The population
density is about 27 per. Sq. meter. Vientiane is the capital and the largest city, and
its population is about 800,000 residents.
After becoming independent in 1975, Laos established control over the
economy through the centralized fiscal and socialist government until 1985 but
during that period, the government had seen that the performance of the economy
was unable to reach expected goals. Economic management was weak due to the
lack of skilled labor force. External assistance was provided but projects were not
completed at a satisfactory level. In 1986, the Lao government implemented the
New Economic Mechanism (NEM) to open the country and provided incentives for
developers and investors and moved from a centrally planned economy to a market
oriented economic model.
Luận Văn A-Z
0972.162.399

2
The goals of the NEM were: Launching open market policies and the
introduction of market economy principles. The reform has attracted FDI projects in
the agricultural, industrial, hydropower electricity, mining and the service sectors.
These sectors of development have played an important role in the support of the
economic development in Lao P.D.R.
Laos has continuously pursued significant economic and institutional
reforms, aiming at improving social and economic wellbeing of its population by
consistently building itself a market oriented economy. Laos has achieved
remarkable economic growth and macroeconomic stability. It has witnessed a
significant rise in public and private investment.
These factors contributed to the annual average growth rate of over 6 percent
per annum from 1990 to 2009 and the annual average growth rate of about 8 percent
in 2012.
In order to promote and attract FDIs in Laos, the government has created
Special Economic Zones (SEZ) in compliance with the general investment policies
of the government. The government has implemented incentive policies to promote
both domestic and foreign investment in the special economic zone by shortening
the investment approval process in SEZ, facilitating business operations,
production, and services based on the mechanism of “smaller administration units
but wider society” or “one stamp mechanism” to generate a good environment for
investment.
FDI inflows in Laos have grown dramatically over the past decade and have
played an important role in the growth of the world economy as well as the ASEAN
Nations. In the developing world, FDI has become the most stable and largest
component of capital flows. As a result, FDI has become an important alternative in
the development finance process (Global Development Finance, 2005.)
Luận Văn A-Z
0972.162.399

3
Laos is a small and still poor country. Therefore, the investment from foreign
countries in terms of FDI is needed because FDI plays an important role in job
creation, economic growth, capital inflow, technology transfer, human resource
development, and wealth in the host country. Thanks to the economic reform, the
number of FDI projects and the income on international trade have increased
significantly and have had a direct impact on national income as well as GDP
growth.
1.2 Rationale for the Research
It has been suggested that Foreign Direct Investment (FDI) inflows have
played an important role in promoting economic growth in developing countries,
especially in the Southeast Asian countries (Nguyen, 2008). They are the source of
large capital, knowledge, expertise, technology transfer, and international market
access. Since the 1990's, the global flows of FDI have grown phenomenally and
have become the largest source of foreign private capital to reach developing
countries like Laos.
The attraction of the FDI is becoming increasingly important for Laos to
bring certain benefits to the national economy like the contribution to the GDP, the
total investment, and the balance of payment for the host country. However, the
impact of FDI largely depends on the economic conditions. Domestic investment,
personal savings, the mode of entry (merger, acquisition, or new investment), the
industry sector involved, and the country's ability to regulate foreign investment are
all factors affecting the impact size of the FDI (Earth Summit, 2002).
FDI has a substantial influence on social and infrastructure development as
well as technology transfer. It helps in stimulating employment, raising wages, and
replacing declining market sectors, consequently having cultural and social impact
if the investment is directed toward non-traditional sophisticated product (Earth
Summit, 2002).
Luận Văn A-Z
0972.162.399

4
Attracting FDI is the major concern and a desired outcome of Laos to catch
up and achieve economic growth. Since investors have certain requirements to
invest abroad, the host countries must posscess a standard macroeconomic
environment to attract those investors to bring their capital, technology, and
expertise. Hence, the role of the government in devising policies and building
economic infrastructure is a pre-determinant to attract FDI.
Location-specific attractiveness, political and economic stability, the
property and profit tax system, the market size and labor-force composition,
geographic proximity, the number of competitors, freedom of entry and exit from
domestic financial markets are all factors influencing the volume and the type of
capital inflows to Laos. In addition, energy and water resources, transportation and
telecommunication infrastructure are critical elements that have a great influence on
capital inflows and investments in the host countries.
Given the importance of FDI especially in developing countries like Laos,
theoretically as well as practically, there are however still inconclusive arguments
for and against the role of FDI inflows in enhancing economic development in a
country (cf., Nguyen, 2008). It has still been debate about whether FDI inflows are
beneficial or not to economic development, and what governments should do to
attract and use FDI inflows effectively (Kokko et al., 2003; Longani & Razin, 2001;
Masina, 2002; Nguyen, 2008). In addition, it has been suggested that the
relationship between FDI and economic growth may be country and period specific
(cf., Adegbite & Ayadi, 2010). Therefore, this study aims to explore the impact of
FDI inflows on some indicators of economic development in the context of Laos, a
developing country in Asia.
1.3 Research Objectives and Research Questions
This study seeks to analyse FDI inflows into Laos and to investigate their
impact on the economic development of Laos. It identified this impact by
responding to the country's characteristics and infrastructure as determinants for
Luận Văn A-Z
0972.162.399

5
capital inflows, transfer of technology, augmentation of human capital, and other
spillover benefits.
The desired outcome of this research aims at confirming the linkage between
FDI inflows in Laos and the economic development indicators including GNI per
capita, financial capital, level of technology, human capital, energy and natural
resources, transportation and communication.
The major economic development theories and models such as The Stage
Theory of Rostow, the Harrod-Domar model of savings and productivity of
investment, the Lewis Model of Dual Economy, the Dependency Theory, and other
scholarly models in the field assisted in establishing the base theory for the
research.
The research problem revolves around the notion that Laos is incapable to
achieve economic growth. Natural resources, human capital, financial capital,
transportation and communication, level of technology, and leadership, are all
important elements of sustainable economic growth. They are the foundation for
any economic development stimulation. The scarcity of these resources will stall the
economy and make it difficult to make growth progression.
Research Questions
This research tried to answer the questions: 1) What are the relevant
literature and the theoretical background on FDI and its impact on economic
development? and 2) Does FDI have a significant contribution to economic
development of Laos?
With regard to the impact of FDI on economic development, the research
aims to answer the following specific questions:
• Does FDI have a significant role on the GNI per capita?
• Does FDI have a significant role on the Financial Capital?
Luận Văn A-Z
0972.162.399

6
• Does FDI have a significant role on the country's level of technology of
Laos?
• Does FDI have a significant role on Human Capital of Laos?
• Does FDI have a significant role on the Energy and Natural Resources
availability of Laos?
• Does FDI have a significant role on the Transportation and
Telecommunication infrastructure of Laos?
1.4 Scope of the Study
This study focuses on the role of FDI on some indicators of economic
development in the context of Laos. Other aspects of development such as social
and environmental issues (i.e., poverty ratios of different sectors, education and
health care, environment pollution and damage) are not addressed in this
dissertation.
This study mainly employed the data to analyse the relationships between
FDI and Laos’ economic development indicators during the period 1990-2012. The
analyses of correlations were used to serve the objectives of this research.
1.5 Contributions of the Study
Investigation into the effects of FDI on the economies of host countries is
considered one of the two most important and most researched issues in
international business (Driffield & Love, 2007). This study aims to examine the
impact of FDI on several economic development indicators in the context of Laos.
The study is important to help Laos enjoy further economic development as well as
contributes to the literature of FDI and economic growth in the context of
developing countries.
Luận Văn A-Z
0972.162.399

7
FDI has been suggested as a determinant of economic development in both
developed and developing countries. Its important role in promoting economic
growth and bringing many benefits to the economy is especially emphasized in the
context of developing countries. However, the literature also provides mix findings
pertaining to the effects of FDI, and there has been suggested that the link between
FDI and economic development may be country and period specific. Therefore, it is
important and meaningful to examine the impact of FDI inflows on economic
development in Laos, a developing country which has received very modest
research attention to date.
By focusing on six main research questions pertaining to the relationships
between FDI inflows and various indicators of economic development, the research
has contributed to both theoretical and practical sides. From theoretical perspective,
the research helps to enrich the knowledge about the important topic pertaining to
FDI’s impacts on economic development in general and in the context of a
developing country in particular. From practical perspective, the research findings
provide significant implications to policy makers in Laos.
The issue of FDI and its important role is more important for developing
countries and the countries in transition like Laos because they lack capital, know
how, and managerial skills. Understanding the role of FDI would help making good
policies to attract more FDI for the purpose of economic development. Therefore,
the results of this dissertation are expected to provide significant implications for
policy makers. The results can be applied in the area of attracting the FDI flows.
The dissertation can also provide recommendations for a better business conditions
for investment and doing business.
Briefly, the findings of this study help to enrich the knowledge about the
important topic pertaining to FDI’s impacts on economic development in general
and in the context of a developing country in particular. The study also provides
implications to policy makers.
Luận Văn A-Z
0972.162.399

8
1.6 Dissertation Structure
This dissertation includes six main chapters. The brief content of each
chapter is presented in the following.
CHAPTER 1. INTRODUCTION
Chapter 1 briefly introduces the research background, research motivations,
the objectives, and the structure of the dissertation.
ECONOMIC DEVELOPMENT
This chapter reviews the literature on economic development, FDI and
focuses on the impact of FDI on economic development.
CHAPTER 3. OVERVIEW OF ECONOMIC DEVELOPMENT AND FDI
IN LAOS
Chapter 3 focuses on providing an overview of the state of FDI in Lao
P.D.R., Lao government policies and Laos’ economic growth since 1990.
CHAPTER 4. RESEARCH METHODOLOGY
This chapter outlines the research methodology and data sources used to
answer the research questions.
CHAPTER 5. RESEARCH FINDINGS
This chapter presents the key findings on the relationships between FDI
inflows and various indicators of economic development in Laos over the period
1990-2012.
CHAPTER 6. CONCLUSIONS AND DISCUSSION
The final chapter summarizes the research findings, provides implications,
and discusses limitations of the study and offers suggestions for future research.
Luận Văn A-Z
0972.162.399

9
ECONOMIC DEVELOPMENT
2.1. Definition and Indicators of Economic Development
2.1.1 Definition of Economic Development
Economic Development is the progress in an economy and is a measure of
the welfare of humans in a society. It usually refers to the adoption of new
technologies, transition from agriculture-based economy to industry - based
economy, and general improvement in living standards (Businessdictionnary.com).
Similarly, the International Economic Development Council defines economic
development as an “activity that seeks to improve the economic well-being and
quality of life for a community, by creating and/or retaining jobs…”
(smallbusiness.chron.com).
Economic development is a normative concept. It means that it applies in the
context of people's sense of morality (right and wrong, good and bad). The
definition of economic development given by Todaro (1994) is an increase in living
standards, improvement in self-esteem needs and freedom from oppression as well
as a greater choice. The most accurate method of measuring development is the
Human Development Index which takes into account the literacy rates and life
expectancy which affect productivity and could lead to economic growth. It also
leads to the creation of more opportunities in the sectors of education, healthcare,
employment and the conservation of the environment. It implies an increase in the
per capita income of every citizen (Todaro, 1994).
Economic development can also be referred to as the quantitative and
qualitative changes in an existing economy. Economic development involves
development of human capital, increasing the literacy ratio, improve important
infrastructure, improvement of health and safety and others areas that aims at
Luận Văn A-Z
0972.162.399

10
increasing the general welfare of the citizens. The terms economic development and
economic growth are used interchangeably but there is a big difference between the
two. Economic growth can be viewed as a sub category of economic development.
Economic development refers to government policy to increase the economic, social
welfare and ensure a stable political environment. Economic growth on the other
hand refers to the general increase in the country products and services output
(source: whatiseconomics.org).
2.1.2 Indicators of Economic Development
According to United Nations Human Development Report (2001) and report
research of bbc.co.uk, some key indicators of economic development are presented
as follows.
- GDP per capita (Gross Domestic Product- the value of all the finished
goods and services produced within a country’s borders in a specific time period).
- Human Development Indicators (life expectancy, Infant mortality rate,
Poverty, Access to basic services, Risk of disease)
- Literacy rates (Access to education )
- Measures of poverty
- Demographic indicators
- Unemployment
- Government spending priorities
- Gender equality
- Infrastructure development
In literature, previous studies have examined various aspects of economic
development such as economic growth, GDP per capita, transportation (road
Luận Văn A-Z
0972.162.399

11
access), information network, industry establishment, techonology, financial capital
flow, foreign trade, and human capital (e.g., Adegbite & Ayadi, 2010; Kotrajaras et
al., 2011; Mengistu & Adams, 2007; Phimphanthavong, 2012; Prasad & Sharma,
2012).
In this study, the author examines the impact of FDI on economic
development in Laos, focusing on some economic development indicators
including:
- Gross National Income (GNI) per capita
The GNI per capita is the dollar value of a country’s final income in a year,
divided by its population. It reflects the average income of a country’s citizens.
Knowing a country’s GNI per capita is a good first step toward understanding the
country’s economic strengths and needs, as well as the general standard of
living enjoyed by the average citizen (Wikipedia).
- Financial Capital
- Level of technology
- Human Capital
- Energy and Natural resources
- Transportation and Communication
2.1.3 Theoretical Economic Overview
Rostow (1960) argued that all countries passed through the same historical
stages of economic development and underdeveloped countries were at an early
stage compared to the advanced world (e.g., Europe and North America). He
identified societies in their economic status as passing through one of five stages:
the traditional society, the preconditions for take-off, the take-off, the drive to
maturity, and the age of high mass- consumption.
Luận Văn A-Z
0972.162.399

12
Lewis' Dual Economy model (1954) was based on the assumption that many
LDCs had dual economies with both a traditional agricultural 'informal' sector and a
modern industrial 'formal' sector. The traditional agricultural sector was described
with low income, low productivity, low saving, and high unemployment rate. The
industrial sector on the other hand was technologically advanced, with high
investment level operating in urban environment. According to this model, surplus
labor in the traditional agricultural sector should migrate to the modern sector where
the high rising marginal product is. Migrating surplus labor would have no effect on
agricultural productivity since marginal productivity of the rural workers is close
to zero.
In his 1954 paper on Economic Development with Unlimited Supplies of
Labour, Lewis argued that the modern sector would have larger savings,
accumulation of capital, and investment, and consequently economic growth.
Capital accumulation comes from the higher wages in the modern sector compared
to the rural sector. The underdeveloped countries have a larger population than
capital and natural resources, employing workers with insignificant productivity,
zero or even negative (Fields, 2004).
According to the traditional model of economic development and its
proponents like the Harrod-Domar growth model, the absence of the high level of
savings in underdeveloped countries contended that the stimulus for economic
growth could only be achieved from an outside capital provided by MFs through
foreign direct investment (FDI) since they have the capabilities and the resources to
provide that capital and transfer modern technology to the underdeveloped nations.
Harrod-Domar model suggested that the economy's rate of growth depends on the
level of saving and the productivity of investment; that is, the capital output ratio.
The model was developed to help analyze the business cycle. However, it was later
adapted to explain economic growth. It argues that the main ingredient of economic
growth is to expand the level of investment both in terms of fixed capital and human
Luận Văn A-Z
0972.162.399

13
capital. To do this, policies are needed to encourage saving and/or generate
technological advances that enable firms to produce more output with less capital or
lower their capital output ratio (Pool & Stamos, 1990).
Opposing the traditional model, the equity structuralist model stated that
underdevelopment could only be explained in a historical context. The state of
underdevelopment was the result of colonization that allowed a small minority to
own and control the majority of the land, the primary raw materials, and the
illegitimate political power (Pool & Stamos, 1990).
Dependency theory (Pool & Stamos, 1990) on the other hand, has explained
the underdevelopment based on the Marxian analysis. It argues that the MFs have a
negative impact on developing nations and market structure, challenging both the
traditional and the structural models. Because of the MFs power of economy of
scale and barriers to entry (technology and capital resources), they are an obstacle to
competition from the local firms in the host countries.
The Dependency theory has presented the practice of transfer pricing
(overpricing imports and under pricing exports) by the MFs to gain benefits at the
expense of the developing countries. Additionally, developing countries were
targeted by MFs to transfer their economic surplus to the developed world by
extracting and controlling raw materials, and accessing cheap labor markets.
In his classic 1956 work, Solow proposed that the study of economic growth
should begin by assuming a standard neoclassical production function with
decreasing returns to capital. He suggested that the rate of saving and population
growth could determine the steady state of per capita income. Since these variables
vary across nations, they reach different levels of GDP per capita. Therefore, when
the rate of saving is high, the richer the country is, and when the population growth
is high, the poorer the country is (Mankiw et al., 1992).
Luận Văn A-Z
0972.162.399

14
Mankiw et al. (1992) said that Solow's model was successful in predicting
the effects of saving and population growth on economic development but did not
predict the magnitude of that effect. Therefore, they augmented Solow's model by
including accumulation of human as well as physical capital to the formula of
economic growth. They concluded that for a given rate of human capital
accumulation, higher saving or lower population growth leads to higher level of
income and thus a higher level of human capital. Hence, accumulation of physical
capital and population growth has greater impacts on income when accumulation of
population growth rates. This would imply that omitting human capital
accumulation biases the estimated coefficient on saving and population growth.
Heady (1979) indicated that the real problem in the least developed countries
is the imbalance between the accumulation of capital and the production level.
These countries face a necessity to increase the exports level of their raw materials
of which their prices constantly fall, while imports of industrialized materials,
technology, and other finishes products of which the prices rise up. Consequently,
per capita income gap between the developed nations and LDCs is always
increasing, in addition to the relative increase of population growth.
2.2 FDI and its Impact on Economic Development
In literature, there are various FDI theories including production cycle theory
of Vernon, strategic behaviors, industrial organization, internalization eclectic
paradigm, complement theory of FDI, the theory of internationalization of FDI (OLI
paradigm), the resource based theory, the business network theory, the theory of
new economic geography, diversified FDI and risk diversification model, policy
determinants of FDI, etc. It is important to have critical points of view towards the
theories relating to FDI. This chapter focuses on some main issues related to FDI
theories and FDI’s impact on various aspects of economic development. However,
the first section will present definition of FDI and the reasons for FDI.
Luận Văn A-Z
0972.162.399

15
2.2.1 Definition and Determinants of FDI
2.2.1.1 Definition of FDI and reasons for FDI inflows to developing countries
Definition of FDI
FDI has been defined by OECD (2012) and OECD International Direct
Investment Statistics (database), that are presented as follows.
FDI is defined as cross-border investment by a resident entity in one
economy with the objective of obtaining a lasting interest in an enterprise resident
in another economy. The lasting interest implies the existence of a long-term
relationship between the direct investor and the enterprise and a significant degree
of influence by the direct investor on the management of the enterprise. Ownership
of at least 10% of the voting power, representing the influence by the investor, is the
basic criterion used.
Inward stocks at a given point in time refer to all direct investments by non-
residents in the reporting economy, while outward stocks are the investments of the
reporting economy abroad. Corresponding flows relate to investment during a
period of time. Negative flows generally indicate disinvestments or the impact of
substantial reimbursements of inter-company loans.
The FDI index gauges the restrictiveness of a country's FDI rules through
four types of restrictions including foreign equity limitations, screening or approval
mechanisms, restriction on key foreign employment, and operational restrictions.
The OECD FDI regulatory restrictiveness indexes presented here
demonstrate that the service sector tends to have higher FDI restrictions across
countries, followed by primary sectors. The manufacturing sector remains the most
opened economic sector.
In the same line, according to investopedia.com, FDI refers to an investment
made by a company or entity based in one country, into a company or entity based
Luận Văn A-Z
0972.162.399

16
in another country. FDI differs substantially from indirect investment such as
portfolio flows, wherein overseas institutions invest in equities listed on a nation's
stock exchange. Entities making direct investments typically have a significant
degree of influence and control over the company into which the investment is
made. Open economies with skilled workforce and good growth prospects tend to
attract larger amount of FDI than closed, highly regulated economies.
When analyzing FDI, it is important to differentiate it from Foreign Portfolio
Investment (FPI). FPI is passive, non-fixes holdings of foreign stocks, bonds, or
other financial assets. Investors look for profit from the rate of return on their
investment and no management control is assumed. It is noted that the most
accepted definition of FDI is the one given by the International Monetary Fund
(IMF). IMF defines FDI as the acquisition of at least 10% of the ordinary shares or
voting power in an enterprise by nonresident investors, and direct investment
involves a lasting interest in the management of an enterprise and includes
reinvestment of profits (cf., Agrawal & Khan, 2011). Therefore, the distinguishing
feature between FDI and FPI is that FDI has some form of control over operation
and influence over decision, but with control comes risk and commitment. Risk is
something which multinational enterprises (MNEs) prepared to take. MNEs can be
defined as “companies headquatered in one country but having some upstream
and/or downstream operations in other countries” (Lee & Rugman, 2009; p. 62). So,
those organizations which conduct FDI in other countries can be classified as
MNEs.
Reasons for FDI inflows to developing countries
Yoonbai (2000) examined the reasons behind the flow of FDI in countries
like Korea, Malaysia, Chile, and Mexico. The research found that this flow was
influenced by two factors on a global level: recessions faced by many industrialized
economies and the global interest rate drop. Internal factors like (a) country-specific
productivity shocks, (b) demand shocks, (c) inflation shocks,(d) monetary shocks,
Luận Văn A-Z
0972.162.399

17
(e) credit worthiness because of macroeconomic stabilization, (f) widespread
liberalization of financial market, and (g) a successful resolution of debt problems
were found relatively less important.
A study by Ito and Rose (2002) explaining the nature of international
competition among MFs in the tire industry and the determinants of an MFs
decision to establish a subsidiary in a foreign country showed that the number of
competitors, the host country characteristics, and the foreign experience of the firm
defined the pattern and location of the firm investment. Oligopolistic reaction and
FDI theories with binomiallogit and logistic regression models were used in the
study. The data sample included eight major tire firms; (Bridgestone, Continental,
Dunlop, Firestone, General, Goodrich, Goodyear, Michelin, Pirelli, and Uniroyal),
and a total of 939 observations for the years 1982, 1987, and 1992. It was also
found that factors associated with FDI decision are (a) location-specific
attractiveness, (b) political and economic stability, (c) low corporate tax, (d) large
market size, (e) geographic proximity, (f) size of the foreign market, (g) number of
competitors, and (h) anticipation of profit.
An earlier cross-country data analysis using representative countries from
Asia and Latin America (Calvo, Leiderman, and Reinhart, 1996) also outlined the
causes of the capital inflows to developing countries in the 1990s, and the
macroeconomic effects on them because of this inflow. The concluded causes were
(a) the sustained decline in the world interest rate which motivated the investors to
the high-investment yields and improving economic prospects of Asia and Latin
America's economies, (b) the 1990s recessions in the U.S., Japan, and many
countries in Europe made the profit opportunities in developing countries appear
more attractive, (c) the trend toward international diversification of investments in
major financial centers and toward growing integration of world capital markets, (d)
the significant progress that many heavily indebted 12 countries made toward
Luận Văn A-Z
0972.162.399

18
improving relations with external creditors as well as adopting sound monetary and
fiscal policies with trade liberalization.
The Earth Summit (2002) indicated that the most heavily indebted and
low- income countries are mostly dependent on bilateral and multilateral financial
aid to carry on their development strategies. However, since the 1990s the global
flow of FDI has grown phenomenally and has become the largest source of
foreign private capital to reach developing countries.
Albuquerque (2003) examined the volatility of the FDI inflows to developing
countries compared to other forms of financial inflows. Research showed that there
was substantial evidence that FDI flows are less volatile than other forms of
financial flows to developing countries, for example, the Latin America debt crises
in 1980. The FDI collapsed but other forms of capital inflows fall was seven times
greater. Mexico's debt crisis in 1994 is another example, where FDI fell in 1996
by 27%, while other forms fell by 89% for portfolio equity and by 45% for debt
flows.
The level and relative importance of FDI has fluctuated over time, and was
high in the early parts of the 20th century, low in the middle part and growing high
towards the end. Recently, there has been increase in FDI to developing countries,
though concentrated in a few regions and countries. Inward FDI to developing
countries has always been concentrated in a handful of countries, in part reflecting
their economic wealth, but also reflecting the ability of countries to create the
conditions to ensure efficiency and strategic asset for FDI needs including good
quality of human resource and technological capabilities.
There has been a marked shift towards liberalization of FDI regime, and FDI
is regarded more favorably. No longer can it be assumed that FDI is mainly
negative (as it may have been a dominant perception in the 1970s ). Appropriate
Luận Văn A-Z
0972.162.399

19
policies benefit from FDI include building up local human resource and
technological capacities to capture productivity spillovers.
Renewed confidence in the positive benefits of FDI has led many countries
that were restricting FDI in the 1990s and 1980s to be more open towards FDI in
1990s (Safarian, 1999) and beyond. Governments are liberalizing FDI regimes as
they associate FDI with positive effects for economic development in their countries
(e.g., Lall, 2000s). Much of potential for economic development was not realized 3-
4 decades ago because many countries have severe restrictions toward foreign
ownership, and many of quality local capabilities were not in place. This is
gradually changing. Almost all countries now actively welcome FDI.
They have liberalized their investment regime, but at different points in time.
South – East Asian economies: in 1960s, Hongkong {China}, Singapore, Malaysia
were first, while other Asian countries (Republic of Korea, China and India) and
Latin America countries began to liberalize in 1980s and 1990s (even the Republic
of Korea, which had previously restricted FDI and imported technology through
licensing, decided after the Asian crisis in 1997 to open more to FDI for the capital
and technology it could bring). Many African countries followed only in 1990s.
Countries now actively try to attract FDI and have established FDI promotion
agencies for this, thereby aiming to change an FDI screening task into true FDI
promotion. The proliferation of other tools included incentives, expert processing
zones, Science parks, etc. Restrictions on FDI on the other hand have declined as
competition for FDI increased: there has been a decrease in the inclined as
performance requirements (UNCTAD, 2003).
2.2.1.2 Determinants of FDI
It has been considered that imperfections in market throughout the world
create the desire to invest in other countries, and therefore, firms conducting FDI
are opportunists who are continually looking for possibilities to explore. Firms are
motivated to engage in FDI for a number of reasons. Wall and Rees (2004) have
Luận Văn A-Z
0972.162.399

20
identified three main factors including 1) supply factors, which include reduced
production cost, more favorable location, lower distribution costs, better availability
of natural resources and access to technology; 2) demand factors, which include
better marketing power through a presence on the ground, protection of a brand
name through a better monitoring and closer proximity to business customers; and
3) political factors, which are the benefits of avoiding set trade barriers as well as
tax and economic incentives from host governments. The presence of just one of
the aforementioned reasons supports the decision to engage in FDI rather that
pursuing an alternate means of serving a foreign market, such as exporting,
licensing or franchising.
Firms who choose to invest abroad are commonly more competitive than
their peers, who remain satisfied with a domestic market. Not all firms choose FDI,
as it is inherently risky due to the degree of unknown when operating in a foreign
market. However, increased risks mean greater incentives, and those firms who
manage to become more successful of a result of their FDI activities receive large
reward (United Nations, 2006).
There have been a number of theories and approaches that help explain the
motivations of FDI and identify FDI’s determinants. The following will present
some of these.
Internalization
Internalization was conceptualized by Ronals Coase (1937), who found that
FDI and associated internalization take place when transaction costs, i.e. the cost of
negotiating, enforcing and overseeing a contract, are high and in such cases firms
internally can be suitable substitute for market. Alternatively, when these costs are
low, this positively supports the case for working in partnership with other firms,
being parts of the market, and using mutually beneficial licensing and franchising
agreements. The firm is left to decide whether it is more cost effective to own and
Luận Văn A-Z
0972.162.399

21
run a facility oversea (internalize) or it is better to establish a contract with a foreign
firm to run, license or franchise on their behalf (Wall & Rees, 2004). The
internalization theory developed from the imperfections in the market.
Internalization can be seen as a form of vertical integration, where the firms takes
ownership of duties and/or goods that it formerly relied on a third party to provide.
Hood & Young (1979) argue that it is not just the ownership of a firm’s specific
asset that gives it its advantages, which is the process of being able to internalize
the asset, rather than selling it, which gives the MNE its overriding advantage.
Overall, knowledge provides a firm with a monopoly advantage and only through
discriminatory pricing, instead of licensing for example, can MNEs capitalize fully.
Transactions with other firms consume time, and additional costs can be
incurred during searching periods and in uncontrollable events. Therefore, replacing
these market inherent obstacles with internal processes can reduce insecurity. The
internalization argument provides reasons why firms prefer FDI in some
circumstance to importing and exporting, and why they may refrain from licensing
or franchising (Moosa, 2002). The internalization argument does not appear to have
any theoretical foundations, and Rugman (1986) supports this by stating that due to
its generality, internalization can be seen as more of an approach than a theory.
Also, with internalization, centralization is promoted. This may not be beneficial in
all firms, especially those that are innovative (ibid).
The costs of internalization need to be taken into consideration: more
accounting and ownership of information is required; the costs of communication
increase; and the dislike of MNEs in some host countries cause political
discrimination that could affect the firm adversely. All of these costs need to be
justified (Hood & Young, 1979). MNEs have to consider the full picture when
making future FDI decisions and as Grosse (1985) put it, MNEs are complex and
that the internalization principle features are a small part of a larger picture in the
Luận Văn A-Z
0972.162.399

22
FDI decision making process. Nevertheless, FDI evidence across many countries is
in general supports of the hypothesis of firm’s preference for FDI (Moosa, 2002).
Eclectic paradigm
The eclectic paradigm, constructed by Dunning (1981) proposes three
determinants of FDI of which each relates to advantages of conducting direct
investment as a preference to other methods of serving foreign customers (Bende –
Nabende, 1999). The three variables of the eclectic paradigm are ownership,
location, and internalization (OLI), and these act like a three legged stools, of which
each leg is equally as important as the other (Dunning, 2000). Dunning asserts that
firms will become involved in FDI when all three factors are present.
Ownership advantage (O): A unique advantage must be present which can
counter the disadvantage of competing with firms on their home grounds. A firm
can gain this by having one of three forms of assets. Two main advantages arise
from having one of the aforementioned: First, a firm will have more effective
production and marketing, and second, a firm will have an international,
competitive advantage due to having a string ownership advantage over the local
firms (Bende- Nebende, 1999; Griffin & Putsay, 2002).
Location advantage (L): There must be increase in profitability from
exploiting a firm’s ownership advantage in a different location rather than in its
domestic market, and this may come in the form of economic, market, cultural, or
prospect benefit (Wall & Rees, 2004 ). The advantages of the location can either be
used to directly serve the foreign market or as a convenient base from which to
export. The location advantage needs to be considered in relation to the current state
the host country as well as the foreseenable development path of the home country
(Bende – Nebende, 1999).
Internalization advantages (I): There must be increasing benefits from having
full control over the foreign business rather than using an independent local firm to
Luận Văn A-Z
0972.162.399

23
carry out those duties. There are a rang of situations where internalization can be
beneficial, from circumstances where local firms cannot be trusted either for
tarnishing the brand of a firm or being incapable of performing the required duties,
through to being overpriced (Griffin & Pustay, 2002). With internalization, firms
have the opportunity to fully exploit the ownership advantages. Firm advantages
commonly revolve around their knowledge of making a product or provide a
service, and internalization provides opportunity to keep that particular information
secure, as this could be the core of their competitiveness (Czinkota, Ronkainen and
Moffett, 2005).
The three elements of Dunning’s eclectic theory have been assembled using
the supports of other theories, namely Sermon’s product life cycle, Hymen’s
ownership advantage, and internalization by Coase. When combined, they bring
together separate areas, which allow them to provides greater and more detailed
criteria to judge the suitability of FDI. Therefore, eclectic paradigm has three times
the power of each of the theories which make it up. Dunning (1997) also suggests
four type of seeking behavior that stimulate firms to engage in FDI. These include
resource seeking to attain physical or human resources, market seeking to use or get
close to a foreign market, efficiency seeking to gain access to more efficient labor
or technology, and strategic assets seeking to acquire resources and capabilities that
help to capitalize on competencies or to prevent an asset being lost to a competitor.
Traditionally, FDI was motivated by lower cost of production overseas with the
view of exporting to serve other markets rather than serving domestic market, but
reasons for investing abroad vary tremendously. More recently, FDI has been
undertaking to serve domestic markets, and this is particularly evident in developing
countries (IMF, 2003).
The eclectic paradigm does justify the who, where and how of FDI, but
unlike the product life cycle theory, the eclectic paradigm is incapable of indicating
exactly when a firm should invest overseas. If its plans are delayed, a firm may find
Luận Văn A-Z
0972.162.399

24
itself beaten by other investors because local partners are scarce or natural resources
are limited. Also, if the country has a small market, the firms who move first could
saturate the market and confrontation could result in reduced profitability for a
firm. Timing is an important consideration. When firms move into developing
countries and fail to consider, it could mean that a firm invests after the optimum
time (Ramasamy, 2003). Foreign investment does not happen instantly, but once
the commitment has been made it may be irreversible. After investment, and while
waiting for operations to commence, a firm’s golden benefits of a market may slide
away. This could cause a knock-on effect and result in delays in entering the next
market, as all of this affect the firm negatively when compared to proactive
competition.
Complement Theory of FDI
The complement theory, as synthesis of the Heckscher-Ohlin model, the
Rybczinski theorem, Linder’s hypothesis, and the Vernon product cycle hypothesis,
was developed by Kojima in the late 1970s. Kojima’ thesis offers an alternative
hypothesis to Mundell’s substitution Theory (Ozawa, 1979). He argued that FDI
originates from the comparatively disadvantaged industries of the home country,
which are potentially comparatively more advanced industries in the host country,
depending on the different stages of economic development in home and host
countries.
Kojima’s approach predicts that export-oriented FDI occurs when the source
country invests in those industries which have a comparative advantage in the host
country. FDI is considered as the transfer of superior production function to replace
inferior ones in the host country (Kojima, 1975).
Thus, Kojima derived the result that export-oriented FDI is welfare
improving and trade creating since it can promote both host countries’ and source
countries’ export, in particular, Japanese export business to market distortion
Luận Văn A-Z
0972.162.399

25
created by government policies in the developing countries (Tsurnmi, 1979).
Obviously, besides Asia, this can be extended to other transition countries.
The Resource-Based Theory
Summarizing multiple MNCs’ incentives, Behrman (1972) proposed and
developed a typical FDI. This classification is based on industrial organization
theory and corporate governance. According to Behrman, MNCs are always seeking
one of four types of results: resources, markets, efficiency (global Sourcing FDI),
and strategic assets. However, because ownership and internalization advantages are
supply-side factors, they are not considered by Behrman. The resource-based theory
of the firm (Bamey, 1991; Grant, 1991; and Davidow, 1986) creates a methodical
basis for MNC investment strategy to achieve competitive advantage by
understanding the external forces that strongly effect an organization (Lindelof and
Lofsten, 2004).
Accordingly, MNCs aim to possess resources that are rare, unique, and
limited to beat their competitors. The resource-based theory has been developed to
explain how organizations achieve sustainable competitive advantage (Caldeira and
Ward, 2003). Accordingly, firms must look for unique attributes that may provide
superior performance (Barney, 1991; Caldeira & Ward, 2003). This theory focuses
more on the advantages associated with the complexity of managing multiplicity of
activities and functions in a volatile but innovated global economy (Dunning, 2000).
The finding of Tondel (2000) supports a hypothesis of market-seeking and resource-
seeking investments prevailing in Central and Eastern Europe and former Soviet
republics. Kudina and Jakubiak (2008) also find that market-seeking orientation has
the most positive effect on investment performance, followed by skilled labor and
cheap input orientation countries.
Resmini (2000) argues that a statistically significant position between FDI
and market size, wage differential, the stage of the transition process and the
Luận Văn A-Z
0972.162.399

26
openness of the economy. However, MNCs emerging in the transition economies
with the government as main stakeholder are limited in the natural-resource –
seeking activity of foreign investors. This situation especially contains
characteristics of rent – seeking countries (Filippov, 2008). The rent-seeking
empires of the oligarchs become monopolist on the domestic resources market. As a
result, foreign investors should seek labor and efficiency and form horizontal FDI
patterns. This may partially explain the predominance of horizontal FDI pattern in
transition economies.
The Theory of New Economic Geography
According to the theory of new economic geography (Krugman, 1991,
1999), the ‘home market effects’ interprets agglomeration as the outcome of the
interaction of increasing returns, trade costs and factor price differences. If trade is
largely shaped by economies or sales, as Krunman’s theory argues, then those
economic regions with most production will be more profitable and will therefore
attract even more production and FDI. In other words, instead of spreading evenly
around the world, production will tend to concentrate in a few countries, regions or
cities, which will become densely populated but will also have higher levels of
income.
In line with Krungman and Vendables (1994), Damijan and Kostve (2008)
find very strong evidence that in most of the transition countries analyzed, trade
liberalization has caused a declined and divergence in relative regional wages, but
the relative wages then adjusted toward the stock mainly through economic
geography factors. For instance, in Central and Eastern European countries,
important inter-regional relocation of manufacturing activity have taken place after
trade liberalization with the EU, and inward FDI mostly to the capital and border
regions has help to the foster these adjustment processes. However, since economic
integration with EU provides important opportunities for individual regions, it can
also have severe polarization effects. In fact, such a polarization can be observed in
Luận Văn A-Z
0972.162.399

27
all transition countries. For example, Ledyaeva, and Linden (2006) note that the
central region of Russia has a rather high value of accumulated FDI per capita
compared with other regions. In fact, it accumulated almost 40 percent of total FDI
stocks in Russia and has the highest FDI per capita.
According to Pan – European Institute estimate (Pan – European Institute
report, 2004 ), out of the 20 Russia receiving the most FDI; 11 of them have cities
of more than a million inhabitants. Hence, big city advantages like high levels of
business infrasture and large market size are important factors of inward FDI.
Ledyaeva and Mishuna (2006) analyze FDI distribution in Russian regions and
show that only a fraction of aggregated profit in a particular region is robustly
related to regional distribution of investment in Russia, which is unfavorable and
only high profit can compensate for the risks and attract investors.
Suggesting regional homogeneity of FDI factors for transaction economies,
Deichmannetal (2003) examine the extent to which none-spatial determinants of
FDI are affected by spatial proximity. Thus, within the group of transition factors,
we can also distinguish some regional subgroups according to historical, economic
and cultural conditions.
Diversified FDI and risk diversified model
A large stream of empirical contributions have analyzed the role of risk
factors on explaining FDI patterns and MNCs, incentive to invest abroad (Miller
and Pras, 1980; and Caves, 1996). Faeth (2009) noted that while horizontal and
vertical patterns of FDI can be explained well by the transaction- cost approach and
knowledge – capital model, diversified FDI, which is growing in importance,
cannot be explained, as it is considered a minor factors of MNCs’ desire to spread
investment risk. Firms’ risk aversion, which has been considered a minor factor of
FDI, is gradually emerging as one of the main determinants of FDI. Rugman’s
diversification to hypotheses has been widely supported by empirical evidence. In
Luận Văn A-Z
0972.162.399

28
contrast to horizontal and vertical patterns, conglomerates arise as a response to
high risk business environments. Kopites was the first to describe this form of MNC
in 1979. Bettis (1981) suggested that firm achieved better performance because of
openness to the possibility of differentiation and segmentation based on identified
risk factors.
Policy determinants of FDI
The earliest study by Bond Samuelson (1986), Black and Hoyt (1986),
Haufler and Wooton (1999), and Haland and Wooton (1999) argued that there are
strong links between MNC strategy and government policy in the host countries.
Empirical studies show that an MNC’s decision to invest can be influenced by
factors such as information asymmetry, structure of the host economy, market size,
market evolution, openness, the level of infrastructure and the level of
political, economical and financial risk (e.g. see Resmini, 2000).
Altomonte (1998) obtained evidence by including variables measuring the
Institutional and economic uncertainty under which the investment is made. In the
context of institutional and risk factors, we can identify a dual role of
government in transition countries. The government is not only interested in
attracting FDI but can also provide large support for domestic MNCs, being a key
stakeholder in them. This phenomenon has been explored in a wide empirical
literature (Brouthers & Bamossy, 1997; Cass, 2007; Drahokoupil, 2008).
Deicmann, studying the origins of FDI in Poland (2004) and in the
Czech Republic (2010) finds that origin effects and government promotion
abroad play an implicit contradictions that complicate FDI into transition
economies. Using political leverage (an administrative resource like close ties to
the government or lobbying in Parliament) and domestic media leverage, emerging
MNCs protect and promote their business, but also successfully compete with
Luận Văn A-Z
0972.162.399

29
foreign companies within the host market and regional markets (Khanna & Yafeh,
2008).
Changes in the determinants of FDI.
The way that FDI affects growth and development depends, for an important
part, on the type and volume of FDI. Thus, when understanding the impact of FDI,
it is importance to understand what attracts FDI, how this has changed over time,
and what these changes in determinants and type of FDI mean for differential
growth prospects. The main determinants of inward FDI can be divided in to several
categories, and relate to:
- General policy factors (e.g. political stability, privatization)
- Specific FDI policies (incentives, performance requirements, investment
promotion, international trade and investment treaties)
- Macro economic factors (human resources, marketing size and growth)
- Firm specific factors (e.g., technology): For instant, ICT development have
had a profound impact on the way companies structure their international activities.
Most importantly, it has facilitated a more competitive environment for any given
activity.
There have been treads in all of these factors over the past decades and
between them. They can explain large parts of why FDI has gone more to some
countries and regions than others. There has also been changes in their relative
importance. The main point is that, and we will also see later, factors that have
become increasingly important in attracting FDI (building up appropriate and good
quality, local capabilities are also increasingly important in marketing FDI work for
economic development).
Luận Văn A-Z
0972.162.399

30
2.2.2 Impact of FDI on Economic Development
FDI has been considered to be one of the most important drivers in
upgrading the country-specific resources as well as the firm-specific capabilities of
host countries. FDI’s contributions to the development of host countries can be
implemented through several channels such as transferring financial resources
directly to the FDI recipient countries, technological and managerial spillovers to
local firms of the host countries, and/or helping host countries join the global
trading, investment and technology networks of foreign MNEs. The importance of
FDI to the development of host countries has recently increased due to the role
‘flagship’ of MNEs, who are considered the main FDI implementors (cf., Lee &
Rugman, 2009).
In the following sections, first the author review previous studies on the
impact of FDI on economic growth and some other aspects of economic
development, mainly in the context of developing countries. After that, a review of
the studies on the impact of FDI on economic development through human capital
and technology is provided. Finally, the author presents FDI and its spillover
effects.
2.2.2.1 Impact of FDI on economic growth and other economic development
aspects
New growth theorists, Levine and Renelt (1992) have identified investment,
including FDI as one of the main determinants of economic growth (Adegbite &
Ayadi, 2010. According to UNDCTAD (1999), much have been written about
relationship between FDI and development. The author reviews the main impact
areas and suggest there have been major changes within these, with an emphasis on
FDI relates to economic growth (we do not deal separately with equality and
poverty). There are several areas through which FDI affects development
(UNCTAD, 1999), including: Employment and incomes, capital formation, market
Luận Văn A-Z
0972.162.399

31
access, structure of skills, technology and skills, fiscal revenues, political, cultural,
and social issues.
FDI affects economic growth through all of the above channels. FDI can
raise economic growth by increasing the amount of factors or production (by
increasing capital or employment, directly in local suppliers and competitors), in the
traditional growth accounting context, or increasing efficiency by which these
factors are using (by using superior technology, or locating in high productivity
areas, or through productivity spillovers), as expressed in the literature in
endogenous growth (e.g. Aghion and Howitt, 1988) where FDI represents the port
through which new ideas are gained. In the long-run, FDI induced productivity to
local capabilities, while FDI induced building up of factors may only raise growth
temporarily (e.g. by establishing a garment assembly factory).
Those countries whose local capabilities have been enhanced because of FDI
(e.g. in Singapore and island, where local suppliers have become global exporters)
have also been able to benefits most from FDI in the long- term. However, those
countries that attracted FDI in the apparel sector because of trade policy distortions
(due to the multi Fiber Arrangement quotas which governed world trade in textiles
and clothing until 2005) without building up local capabilities or linkages, may have
derives fewer long – term benefits from FDI. For instance, there are now fears that
investors in Lesotho would withdraw, at a time that much apparel capacity is
relocated to China.
It has been argued that FDI enhances long run economic growth via
technological progress, capital accumulation and human capital augmentation (Chee
& Nair, 2010). Gao (2005) investigated the interrelationship between FDI and
growth. Using a two-country model in which FDI and growth are endogenous, he
found that both FDI and growth respond endogenously because of the change in the
world economic integration.
Luận Văn A-Z
0972.162.399

32
Zhang (2001) studied the link between FDI inflows and economic growth
in developing countries. Using a sample of 11 countries in Asia and Latin America
with estimation and cointegration tests, the research found that, depending on
countries' characteristics, FDI can be growth-enhancing when they have liberalized
economies, sufficient human capital derived from education system
improvements, export-oriented policy, and macroeconomic stability.
Balasubramanyam et al. (1996) examined the role, which FDI plays in the
growth process in countries characterized by different trade policy regimes. Using
regression analysis on determinants of growth rate of real GDP on cross-section
data relating to a sample of 46 developing countries, research suggested that the
beneficial effect of FDI in terms of enhancing economic growth is stronger in
those countries that pursue an export promoting policies than it is in those
countries adapting an import substituting policies.
In the context of developing countries, it has been suggested that FDI can
bring benefit if the countries have the capabilities to absorb advanced
techonologies. A recent study by Agrawal and Khan (2011) has showed that FDI
has significant impact on economic growth in China and India. Specifically, they
found that 1% increased in FDI would results in 0.07% increase in GDP of China
and 0.02 increased in GDP of India. So, FDI can have different affects on economic
growth in different countries.
Similarly, a study by Kotrajaras et al. (2011) have examined the impact of
FDI on economic growth in groups of 15 East Asian countries classified by level of
economic development. The results suggested that the impacts of FDI depend on
complementary factors, particularly each host country’s economic conditions such
as levels of financial market development, institutional development, better
governance, and appropriate macroeconomic policies.
Luận Văn A-Z
0972.162.399

33
In India FDI is considered to play an important role in the development of
the Indian economy. In many ways, FDI has enabled India to achieve a certain
degree of financial stability, growth and development (Prasad & Sharma, 2012).
The sudy by Adegbite and Ayadi (2010) investigates the relationship
between FDI flows and economic growth in Nigeria. The study became necessary
because as never before, the civilian governments since 1999 have employed
several strategies to ensure increased flow of FDI into Nigeria because of its
perceived benefits as lauded in the theoretical literature as the panacea for economic
underdevelopment. The study utilized simple OLS regression analysis and
conducted various econometrics tests on the model so as to obtain the best linear
unbiased estimators. The study confirmed the beneficial role of FDI in growth.
However, the role of FDI on growth could be limited by human capital. The study
concluded that indeed, FDI promotes economic growth, and hence the need for
more infrastructural development, ensuring sound macroeconomic environment as
well as ensuring human capital development is essential to boosting FDI
productivity and flow into the country.
The research by Mengistu & Adams (2007) has examined the dynamic
relationship between FDI, domestic investment, institutional environment, and
economic growth in developing countries. The results indicate that the two most
important determinants of economic growth over the study period were FDI and
institutional infrastructure. The study also found that FDI’s effect on economic
growth was more through its efficiency effects than through its augmentation of
domestic investment. Accordingly, developing countries need to focus on policies
that promote institutional development and become attractive destinations for FDI
to sectors that lead to increasing returns to domestic investment and production.
In a comparative analysis, Nataliya Ass and Matthias Beck (2005) observe
that a negative relation between FDI and “Trade Balance” which is much stronger
for the Central Asian countries, co-exists with a positive relationship between FDI
Luận Văn A-Z
0972.162.399

34
and “Export per capita” for this region. This appears to indicate that resource
centered FDI is likely to increase per capita export. However, these gains are wiped
out by excessive public and private spending which negatively affects the country’s
overall trade balance.
The relationship between FDI and some other economic indicators provide
further evidence. Thus, EU accession countries are the only group for which FDI is
negatively correlated with inflation. By contrast, in all post Soviet states, FDI
inflows are not associated with the reduction of the rated of inflation. Moreover, in
case of the post soviet European states (Belarus, Moldova, Russia and Ukraine) FDI
shows a strong positive relationship with “debt per capita”, while for all other
groups this relationship is weakly negative. This indicates thast this region attracts
riskier and lower quality debt- increasing investment.
The opposite situation can be observed for ‘unemployment’. The EU
accession countries are the only group for which unemployment reveals strong
enough (in comparison to all other cases) positive relationship with FDI vis-avia
post Soviet countries where FDI is negatively related with unemployment. This
finding, through contradictory to the original argument on lower FDI quality in
post- Soviet states, indicates that EU accession countries are now attracting FDI
which is not contributing to the increase of employment in the region. The inference
can be made that, after reaching a certain level of development by transition
countries, FDI changes its quality from being unemployment reducing to not
contributing to the increase in employment. Negative relationship between
unemployment and FDI in case of post-Soviet European countries, in turn, can be
explained by the high levels of underreporting figures on unemployment in these
states.
In their regional study on the Arab World Economic Development and
Growth over the past four decades, Sala-i-Martin and Artadi (2003) have related
the lack or the slow economic growth in that region to the inefficient public
Luận Văn A-Z
0972.162.399

35
investment, which requires heavy tax revenues but has minimal positive impact
on the national productivity due to the wrong sector choice, or the intention to
attain just political or private gain. In addition, the negative rate of growth in the
Arab World can be tied to several other factors: The Inefficient financial sector
and its negative role played in the productive investments, the excessive reliance
on public investment, the political instability represented by the wars, violence,
and social conflicts, the excessive government intervention and complex
overregulation for business licensing, which creates environment for bribery and
high level of corruption, the lack of transparency, and the inadequate, unqualified
human capital.
Based on Frederick Mmieh, Nana Owusu-Frimpong research paper on “State
Policies and the Challenges in Attracting Foreing Direct Investment: Areview of the
Ghana Experience” (Septemeber, October 2004), effects of FDI are at the center of
a continuing controversy in the economic transformation of Ghana. Many Ghanaian
economists believe that the impact of such investment is positive, since it brings to
the country a package of capital, foreign exchange, technology, managerial
expertise, skills, and other inputs typically in short supply locally. It is also being
argued that while FDI and participation in the global market might bring about a
higher growth rate, it is often at the expense of economic stability, employment,
income distribution, and even political freedom, with minimal technological
transfer. In the 1970s and 1980s, Ghana became heavily indebted and, finding it
difficult to raise new foreign loans to mobilize domestic resources, FDI looked
increasingly attractive, not as an additional source of capital but for the technology
and market access such investment brings.
This study takes the view that without FDI the country would not have been
able to achieve the progress it has made so far, resulting in a modest increase in FDI
flows into the country. This article, however, recognizes that countries such as
Nigeria and Angola are able to attract higher returns of FDI in the extractive
Luận Văn A-Z
0972.162.399

36
industries to compensate for political instability, even though they abandoned the
reform program in the early 1990s. It is acknowledged in this study that as long as
foreign business organizations are confident of being able to operate profitably in a
business environment without undue riskto their capital and personnel they will
continue to invest. Evidence demonstrates that under the SAP, the deterioration of
the economy has at least halted, and a modest growth rate of around 4% has
transpired evidence of a remarkable recovery” (Debrah, 2002). The SAP’s limited
success also includes the lowering of inflation, promotion of an environment of
financial stability, elimination of licensing requirement, opening of previously
closed sectors, removal of tariff barriers that prohibit FDI inflows, abolishing
exchange controls, and reducing opportunities for the foreign exchange black
market. In spite of the limited degree of success of the SAP, there are still problems
that impede the attraction of high value-added FDI into Ghana. Some of these
problems include bribery and corruption, which are deeply rooted in the political,
socioeconomic systems, thus confirming the findings of Wei (1998) and Van
Vuuren (2002) on the subject. This article suggests that it might be worthwhile for
the government to embark on a nationwide campaign to tackle this endemic
problem head-on among people in positions of authority.
Alfaro et al. (2004) investigated the impact of the financial market
development on the FDI attraction to achieve economic development using cross-
country data between 1975 and 1995 for multiple developing and developed
countries. Empirical analysis through growth regressions showed that the role of the
FDI in economic growth alone is ambiguous. The research suggested that the
development of strong financial market could increase an economy's ability to
absorb and efficiently manage FDI capital inflow and take advantage of potential
FDI benefits.
FDI has been considered to have a substantial influence on social and
infrastructure development as well as technology transfer. It helps in stimulating
Luận Văn A-Z
0972.162.399

37
employment, raising wages, and replacing declining market sectors, consequently
having cultural and social impact if the investment is directed toward non-
traditional sophisticated products (Earth Summit, 2002).
FDI are always involved in research and development that bring new
products and manufacturing techniques that would benefit and augment the local
industry. Additionally, technology spillover can occur from the labor turnover from
foreign to domestic firm. Additionally, the FDI spillover of technology and its
significant financing capability should be the desired outcome of attracting foreign
investors to achieve economic growth. FDI can also create linkage for local market
for supplying needed inputs, which will enable local firms to achieve economy of
scale (Alfaro et al., 2004).
Mody and Murshid (2005) examined the relationship between long-term
capital inflows and domestic investment for 60 developing countries from 1979 to
1999. Regressions on data showed a declined impact of the foreign capital,
including portfolio and FDI flows, on the local investments. The reason for this
decline was due to either (a) the capital was not the binding solution for the desired
development, or (b) the inability of some economies to absorb the capital inflows.
Results also suggested that proper market policies and investment environment are
the keys to enhance the capital inflows- investment relationship. Capital control for
example, can intensify this relationship by directing capital inflows to specific
investment projects or restricting domestic capital outflows.
Rodriguez-Clare (1996) investigated how MFs affect underdeveloped
countries through the generation of backward and forward linkages (Backward
linkages refer to technology transfer through supply chains from downstream
multinationals to local suppliers, while Forward linkages exist when increased
production by upstream firms provides positive pecuniary externalities to
downstream firms). Using a two-country model, the research found that MFs can
generate a positive linkage in the host country when the demand for intermediate
Luận Văn A-Z
0972.162.399

38
inputs increases as a result of (a) the production of complex goods, (b) the
increase of communication cost between the production plant in the host country
and MFs headquarter, and (c) the difference in culture, social, and legal system.
The linkage coefficient is higher when the host market is more developed.
FDI is often seen as an important catalyst for the economic transformation of
the ECE transition economies. Its importance is seen to be not only in providing
finance for the acquisition of new plants and equipment, but also in the transfer of
technology and organizational forms from relatively more technologically advanced
economies. FDI can also result in positive “spillovers” to the local economy through
linkages with local suppliers, competition, imitation and training. It can also result,
however, in negative spillovers if it forces domestic enterprises to close down
because they cannot obtain the necessary financing for upgrading their technology.
Moreover, it is possible that spillovers to the rest of the economy may not occur at
all if there are institutional obstacles or deficiencies in the absorptive capacity of
domestic enterprises (Djankov & Hoekman, 1993).
The National Bureau of Economic Research, Working paper no 5057,
Borensztein et al. (1998)’s research results suggest that FDI is in fact an important
vehicle for the transfer of technology, contributing to growth in larger measure than
domestic investment. Moreover, they find that there is a strong complementary
effect between FDI and human capital, that is, the contribution of FDI to economic
growth is enhanced by its interaction with the level of human capital in the host
country. However, their empirical results imply that FDI is more productive than
domestic investment only when the host country has a minimum threshold stock of
human capital. In their research paper, they also investigated the effect of FDI and
domestic investment, namely, whether there is evidence that the inflow of foreign
capital “crowds out” domestic investment. In principle, this effect could have either
sign: by competing in product and financial markets, MNS’s may displace domestic
firms; in contrast, FDI may favour the expansion of domestic firms by
Luận Văn A-Z
0972.162.399

39
complementarity in production or by increasing their productivity through advanced
technology spill over effects.
While the explosion of FDI flows is unmistakable, the growth effects remain
unclear. Theories provide conflicting predictions concerning the growth effects of
FDI. The economic rationale for offering special incentives to attract FDI frequently
derives from the belief that foreign investment produces externalities in the form of
technology transfers and spillovers (Romer, 1993).
FDI may boost the productivity of all firms, not just those receiving foreign
capital. Thus, transfer of technology through FDI may have substantial spillover
effects for the entire economy (Maria Carkovic, Ross Levine, 1994). Other
researchers argue that FDI is only growth enhancing in countries with low
educational attainment (Maria Carkovic, Ross Levine, 1994).
FDI remains significantly and positively linked with growth when
controlling for inflation or government size. However, FDI becomes insignificant
once we control for trade openness, the black market premium, or financial
development (Maria Carkovic, Ross Levine, 1994).
In the transition economies, Hungary and Estonia showed early signs of FDI-
led growth. In Hungary, there were significant inflows of FDI in the early 1990s,
before GDP started to recover (from the transition recession) in 1994. The output of
FIEs was already expanding in 1992-1993 while that of domestic firms continued to
decline (it was only later that the FIEs dominated economic performance). In
Estonia, too, relatively large FDI inflows preceded the economic upturn in 1995. A
similar pattern may be observed somewhat later in Latvia. In both cases, the
governments’ strategies involved an early infusion of FDI through the sale of
strategic state assets. On the other hand, in Poland an economic recovery (starting in
1992) preceded the surge in FDI by several years. Due to its size, location, etc.,
Luận Văn A-Z
0972.162.399

40
Poland was from the very beginning of the transition considered one of the most
attractive countries for foreign investment.
However, despite this and its early favourable economic performance,
foreign direct investors essentially held off until 1996, when the country’s large
external debt was reduced in agreements with London and Paris Club creditors.
Subsequently, FDI inflows and high rates of economic growth appear to have joined
in a virtuous circle (as has probably also been the case in Hungary and the Baltic
states). The fact that in Croatia, Slovakia and Slovenia there were extended periods
of fairly rapid growth without attracting much FDI is explained by domestic
policies (as already noted). The experiences of Croatia and Slovakia underline the
fact that FDI will only begin to flow after a commitment has been made to reform
(including a privatization programme) and investor friendly policies are in place.
Over the past decades, there have been several major shifts in relation to the
impacts of FDI. First, in parallel to shifts in the nature and composition of FDI, the
time and direction of impacts have changed. Secondly, the literature on the macro
effects of FDI has evolved and become more sophisticated over time. Thirdly,
governments have increasingly involved. They can influence the types and direction
of impact through appropriate mix of policies, and they have increasingly made use
of such policies. At the same time, some policies used in the past are now regulated
in various international treaties.
2.2.2.2 Impact of FDI on economic development through human capital
The human capital stock has a very significant value in the process of
economic development. It is required to acquire new skills and benefit from the
technology diffusion. Labor has to be sufficiently educated and trained to absorb
technology and to be an infrastructure for FDI investment in the host countries. In
modem economies, human capital is the prime engine of economic growth, while
during the industrial revolution physical capital was the focus.
Luận Văn A-Z
0972.162.399

41
Becker et al. (1990) indicated that human capital is the economic growth
backbone that goes hand in hand with technology and science acquisition. They
emphasized that investing in human capital would lead to a rise in production in
the future, opposing the notion by other scholars that with population growth
resources would diminish (Aguirre, 2002)
The FDI possess more advanced knowledge, pioneering as lower-cost
new product producers. However, human capital stock in developing countries
becomes a prerequisite to take advantage of and absorb such advanced technologies
to achieve economic growth. FDI in tum should work on stimulating technological
progress for the developing countries, rather than increasing the total capital
accumulation (Borensztein et al., 1998).
Labor has to be sufficiently well educated and trained, and domestic non-
reproducible inputs have to satisfy minimal quality standards, to justify investment
and technology transfers into the host country. The latter leads to human capital
augmentation in the presence of FDI, given that the host country has passed the
development threshold needed for the existence of basic labor skills and
infrastructure (Blomstrom et al., 1994; Borensztein et al., 1998).
Galor (2004) argued that human capital has become the prime engine of
economic development, replacing the physical capital and altering the qualitative
impact of income inequality on economic development. In the beginning of the
Industrial Revolution, the physical capital was the focus since development relied
on the people with higher saving rates. This shift and replacement was due to the
import of capital and technology.
Saving is a crucial factor in economic growth. As society pays attention to
the birth of children, investment in each child along with long-term physical capital
provides human capital abundance. Consequently, the rate of return on human
capital investment becomes high compared to the rate of return on the number of
Luận Văn A-Z
0972.162.399

42
children. Countries with limited human capital usually have large families with less
investment in each child, while those with abundant human capital have smaller
number of children with a higher human and physical capital (Becker et al., 1990).
Rosenzweig (1990) confirms Becker's research in that high-income countries
have been characterized by low fertility and high level of human capital, while low-
income countries have high fertility and low level of human capital. The countries
that have experienced high rates of per capita income growth in the last four
decades have also experienced relatively rapid declines in fertility and increases in
human capital levels.
Analyzing the role of decisions about the human capital accumulation in
determining the rate of growth, Stoket (1991) concluded that international trade
affects growth by influencing the incentives for schooling or other investments in
human capital.
Investment in research and development (R&D) and human capital is also
essential to produce higher quality goods. It was found that the growth per capita in
countries like Japan, Korea, and Hong Kong was associated with the rapid
expansion in the volume of exports, investment in education, and the composite of
output (Stoket,1991).
2.2.2.3 Impact of FDI on economic development through technology
Technology was defined by many scholars as the increase in the output
using a fixed amount of labor and capital. Literature on technology relationship
with economic growth had focused primarily on diffusion and transfer of know how
and processes from technologically advanced FDI to developing countries, and as
an infrastructure to attract FDI. Education and R&D are two main elements of the
technology infrastructure.
Bartel et al. (2005) studied the relationship between technological change in
the world today and it effect on outsourcing. They indicated that the revolution in
Luận Văn A-Z
0972.162.399

43
the computer and information technology has resulted in a significant rate of
technological change, therefore, an increase in outsourcing. Additionally, these
technologies have reduced the sunk cost incurred by firms' activities around the
world.
Kim and Lee (1999) investigated the effects of the change in technology
on income growth rate and human capital. Using an overlapping generations
model, they concluded that the increase in the technology uncertainty will
decrease the income growth rate and human capital due to the decrease in
creating new knowledge and adopting newer technology and consequently, low
economic growth. Economic principles hold that the higher the expected rate of
technology, the higher the human capital investment, and the higher the uncertainty
of a technology, the lower the income and human capital.
Hogler and Strobl (2003) examined whether the presence of FDI has an
effect on the survival of both domestic and foreign plants in the high-tech and low-
tech sectors in the Republic of Ireland market. Cox hazard-rate regression model
was used on plant- level data for a sample of 17,789 plants. Results showed that
had a positive impact only on plants in high-tech industries through technology
spillover. They also had a negative impact on plant survival through the reduction
in output price, or through crowding out domestic rivals by raising the average
wage rate in the domestic market. Research also found no evidence for effect on
the survival of domestic low-tech plants. That could be related to the lack of
absorbing capability in low-tech plants of the knowledge spillover from the FDI.
Glass and Saggi (2002) assessed the role of labor mobility as a mechanism
of technology transfer from FDI to host country firms, and the implications of this
transfer for host country policy toward FDI. By constructing an oligopoly model
where an FDI possesses a superior technology compared to local firms in the host
country, the research concluded that technology spillover to the host firms might
occur when local firms hire workers who were exposed to a high-tech knowledge
Luận Văn A-Z
0972.162.399

44
working for an FDI. For that reason, FDI would pay premium wages for these
workers to prevent technology spillover to the host firms
Using panel data on 4000 Venezuelan plants between 1979 to 1989, Aitken
et al. (1999) investigated the impact and the benefits gained from FDI in Venezuela.
Regression analysis showed that there was a positive relationship between
increased foreign equity participation and local firm productivity, suggesting a
benefit from FDI. However, the effect was only on smaller firms with less than 50
employees, while no effect found on larger enterprises. In general, the productivity
gained from technology transfer in domestic plants declined when FDI increased,
suggesting a negative spillover from foreign to domestic firms. Balancing between
the small firms and large enterprises, the absolute impact of FDI technology
spillover on the local plants productivity is quite small.
Yifi Lin (2003) argued that after the World War II many underdeveloped
countries put extensive efforts toward technology to industrialize and improve their
economies to achieve high level per capita. However, small number of them was
successful in catching up with the developed nations. He attributed the failure to
achieve economic performance to inappropriate development strategies. The
research suggested that because of their lack of capital and the abundance of
labor, most LDCs should pursue labor-intensive technology instead of capital-
intensive technology to alleviate poverty. This strategy will create more jobs
and increase wage level to share the fruits of the economic growth. Capital-
intensive strategy on the other hand will reduce jobs, decrease wages, and hinders
sustainable economic growth. To benefit from imported technology, LDCs
should focus on increasing labor skills through human capital accumulation and
training; otherwise, a mismatch will create a significant difference in output per
worker and total factor productivity.
Luận Văn A-Z
0972.162.399

45
Chung (2001) investigated the effect of FDI presence on both host and
source nations. The target study was the United States manufacturing industries
from 1987 through 1991. The reason for selecting the US was attributed to the
availability of data needed on FDI, and the relative large size of the FDI inflows
received by the US in the last 2 decades. Researcher used price-cost markup to
measure industry competitiveness. Regression analysis showed that the increase
in FDI presence would decrease the price- cost markup, therefore, an increase in
competition will be expected. With FDI introducing competition and technology
spillover, incumbent's cost will be reduced, and markup compression will be
offset. It was also found that close proximity of FDI investment has less effect on
industry markup compression than distant FDI.
2.2.2.4 Foreign direct investment and spillovers
Although there have been many studies examining the effect of FDI on host
economies (see Lall, 1993 for a review), arguments over their possible costs and
benefits are still inconclusive. On the one hand, stories of the economic growth and
success of Asian NIEs (newly industrializing economies) such as Taiwan,
Singapore, Hong Kong, and South Korea suggest that their industrialization
trajectories are geared toward open-economic, trade, and investment policies that
are related to FDI’s activities. On the other hand, FDI is viewed as a new form of
foreign imperialism creating patterns of economic and political dependency (Hart-
Ladsberg and Burkett, 1998). Natural resources as well as economic surplus are
exploited by MFs through transfer pricing, transfer of inappropriate technologies,
etc. In addition, some have argued that even though FDI may contribute to a
developing country’s economic growth, the benefits are spatially concentrated in a
few locations leaving other regions behind. In other words, critics charge that
economic growth is uneven. However, MFs’ social and political impacts on host
economies are beyond the scope of this research. Instead, this dissertation will
Luận Văn A-Z
0972.162.399

46
evaluate FDI’s impact in terms of its spillover effects (technological as well as
backward linkages) which occur between foreign-owned firms and local firms.
On balancing the success of Asian NIEs in the 1980s, it appears to have
created a literature that is positive regarding FDI investment in developing countries
particularly in aspects of technology transfer, development of local enterprises, and
increased export performance (Lall, 1985, Poon and Thomson, 2003, Zhou and Xin,
2003). Many developing countries have tried to replicate Asian NIEs’ industrial and
trade policies that are based on inward FDI. Blomstrom and Kokko’s (1996) review
of the empirical evidence of the effects of FDI on host countries in terms of
technology transfer and spillovers from MFs, trade performance, and the effects on
competition and industry structure indicate that MFs may promote host countries’
economic development in terms of productivity growth and export performance.
Graham and Wada (2001) also studied the impact of FDI on China economic.
Their results confirm that FDI positively contributes to economic growth in
China, especially in those provinces which have been major recipients of FDI.
Nevertheless, not all types of FDI enhance steady economic growth; and there are
many ways to classify FDI. Within international business literatures, there are four
types of FDI, which are (i) natural resources seeking FDI, (ii) market seeking FDI,
(iii) efficiency seeking FDI, and (iv) strategic asset seeking FDI (Dicken, 2003;
Rugman and Verbeke, 2001). The first two types of FDI can be perceived as
motivations that are associated with physical resources, human resources, domestic
and regional markets. The next two types of FDI are sequential-motive FDI which
usually aim to increase the efficiency and to sustain core competencies of FDI in
regional as well as global markets.
One of the earliest papers on the effect of origin-of-country effect on FDI is
that of Kojima’s (1978) who argued that Japanese outward investment to Asia is
explained by (i) resource-seeking, (ii) labor-seeking, and (iii) market-seeking.
Kojima terms these factors to be more trade-oriented FDI or “Japanese-type” FDI.
Luận Văn A-Z
0972.162.399

47
He claims that Japanese FDI in developing countries aimed to complement the
comparative advantage position of Japan; and it “plays the role initiator and tutor in
the industrialization of less developed countries” (p.16). In contrast to Japanese-
type FDI, Kojima pointed out that “American-type” FDI is anti-trade oriented since
it seeks for competitive advantage or oligopolistic type of market oriented FDI
which is described by Hymer’s firm-specific advantage and Vernon’s product cycle
models.
Based on Kojima’s theory, Poon and Thompson (1998) tested the effect of
FDI from the US and Japanese on the economic growth of Asia and Latin America.
The results of their analysis indicate that Japanese’s manufacturing FDI had
contributed Asia’s economic growth during 1987 to 1994, while US service FDI
positively contributed to Latin American countries’ economic growth. However,
Thompson and Poon (1998) also pointed out that Kojima’s theory (developed in the
1970s) may not be applicable when Japanese industries become more mature. Their
results suggest that Kojima’s argument may still be partially correct. In addition,
they also recommend using micro level firm data for further research instead of just
macro level data.
A more detailed discussion of FDI and technological spillovers may be
examined within the context of firms’ internationalization process. Lall (1993)
points out that MFs exist to capture monopolistic power. Their internationalization
process can be explained by the eclectic theory or ‘OLI’ (ownership, locational,
internalization) theory of Dunning (1981, Chapter 2). Here, the impact of FDI on
economic development can be explained in terms of firms choosing to directly
invest instead of licensing to other firms so as to capture the internalization
advantages of its subsidiaries in host countries. Further, internalization advantages
may in turn generate ownership advantages. Firms may choose not to serve the local
market that they are not familiar with. They may want to set up export platforms
and capture locational advantages through securing of natural resources, cheap
Luận Văn A-Z
0972.162.399

48
labor, etc. FDI’s impact on the host country arises from the combination of assets
invested by FDI and the multiplier effects generated through their spending, tax,
local supplier’s linkages, technology spillovers, and employment. However, FDI’s
effect on the economic growth and development of host countries depend on many
factors such as technology absorption, local entrepreneurs, level of development of
the host country, relevant institutional structures, and so on.
Technology can be defined in many ways. The United Nations (1987)
defines it as technical knowledge or know-how, with respect to the methods and
techniques of production of goods and services. Typically, technology is extended
to capital goods such as tools, machines, equipment, and the entire production
system. The literature divides technology into embodied technology (technology
that is embodied to capital goods) and disembodied technology (technology that is
accessed through external relationships).
Within this broad definition, technological knowledge may be codified or
tacit (Nelson and Winter, 1982). Drawing on the idea of the locally bounded nature
of knowledge, Malmberg, Solvell, and Zander (1996) propose a conceptual model
to explain the process of local knowledge accumulation. They emphasize the
various barriers to the diffusion of knowledge that limit knowledge spillovers from
one local milieu or cluster to another. Whether knowledge mobility is high or low
will depend on the types of knowledge.
Knowledge can be embedded in physical capital, human capital, and social
capital. With this framework, they conclude that the diffusion of knowledge within
a local cluster is faster than between two clusters since most knowledge is locally
embedded. Further, large groups of middle- and lower-level managers and workers
responsible for knowledge formation are locally bounded. They also explain further
that the operation units of MFs can be characterized as insiders just like other local
firms within a local cluster (for example see Yeung, 2000). These operation units
are also formally and informally linked to local firms, local research and education
Luận Văn A-Z
0972.162.399

49
facilities, and government agencies. Their knowledge accumulation process
depends on the strength of local clusters, where they are located, to maintain long-
run competitiveness. In addition, the transfer of knowledge to a host economy is not
only driven by non-local firms or FDI, but it also largely depends on local actors
tapping into outside knowledge (Bathelt, Malmberg, and Maskell, 2004). In
addition to regional systems of innovations, there are also national innovation
systems (Lundvall, 1992) which frames the geography of knowledge formation and
diffusion in a national than regional context.
The economic success of Japan and other East Asian countries has been
linked to their national innovation systems (Parayil and Sreekumar 2004). The
technologically absorptive capacity of a nation depends mainly on investments in
scientific and technical training as well as sound industrial and economic policies
that promote competition among domestic firms (Mowery and Oxley, 1995). For
example, the study of Sedgwick (1999) on the internal process of technology
transfer within subsidiaries of Japanese MFs in Thailand suggests that Japanese
managerial skill cannot be easily transferred: “…the social milieu of
multinationals…matters to the organization of production and the quality of
managerial technology transfers” (p.177). At the same time, low educational levels
and the relatively low technological level of Thailand’s local industries also make
technology transfer more difficult. Other geographers have suggested that local host
economies can gain competitive advantage by connecting themselves to the global
networks of FDI (Park, 1998). The results from Park’s survey show that firms in the
new industrial districts in Korea can remake their competitive advantages by
intensifying local and global networks. These benefits are also confirmed by Zhou
and Xin (2003). They find that local firms in a high-tech cluster in Beijing, China,
can develop their market networks and innovative capacity through technological as
well as organizational training and collaboration with FDI. Finally, technology
transfer depends on the role of FDI’s subsidiaries in host economies. Poon and
Thompson (2003) distinguish between developmental and quiescent subsidiaries.
Luận Văn A-Z
0972.162.399

50
Developmental subsidiaries are more likely to engage in technological transfers
because their objective is to produce technologies sourced from local host markets.
Briefly, FDI has been suggested as a determinant of economic development
in both developed and developing countries. Its important role in promoting
economic growth and bringing many benefits to the econmy is especially
emphasized in the context of developing countries. However, the literature also
provides mix findings pertaining to the effects of FDI and there has been suggested
that the link between FDI and economic development may be country and period
specific. Therfore, it is important and meaningful to examine the impact of FDI
inflows on economic development in Laos, a developing country which has
received very modest research attention up to date.
Luận Văn A-Z
0972.162.399

51
CHAPTER 3. OVERVIEW OF ECONOMIC DEVELOPMENT AND
FDI IN LAOS
3.1. Overview of Laos’ Economy
The government of Laos began decentralizing control and encouraging
private enterprise in 1986. The results, starting from an extremely low base, were
striking - growth averaged 6% per year from 1988-2008 except during the short-
lived drop caused by the Asian financial crisis that began in 1997. Laos' growth
exceeded 7% per year during 2008-2012. Despite this high growth rate, Laos
remains a country with an underdeveloped infrastructure, particularly in rural areas.
It has a basic, but improving, road system, and limited external and internal land-
line telecommunications. Electricity is available in urban areas and in many rural
districts. Laos' economy continues to rely on subsistence agriculture, dominated by
rice cultivation in low land areas, which accounts for about 30% of GDP and 75%
of total employment. Economic growth has reduced official poverty rates from 46%
in 1992 to 26% in 2010.
The economy also has benefited from high-profile FDI in hydropower,
copper and gold mining, and construction though some projects have drawn
criticism for their environmental impacts. Laos gained Normal Trade Relations
status with the US in 2004. On the fiscal side, Laos initiated a VAT tax system in
2010. Simplified investment procedures and expanded bank credits for small
farmers and small entrepreneurs will improve Laos' economic prospects. The
government appears committed to raising the country's profile among investors,
opening the country's first stock exchange in 2011 and participating in regional
economic cooperation initiatives. Laos was admitted to the WTO in 2012. The
World Bank has declared that Laos' goal of graduating from the UN Development
Program's list of least-developed countries by 2020 is achievable.
Luận Văn A-Z
0972.162.399

52
3.1.1. Economic Growth
On average, the Gross Domestic Product (GDP) during the Sixth Plan period
was 219,853 billion kip, approximately 43,970 billion kip per year. GDP grew at an
annual rate of 7.9%, which was higher than the Sixth Five-Year Plan target (the
plan target was 7.5%). In FY 2009-2010, the value of GDP was 54,282 billion Kip
which was 1.89 times higher than FY 2004-2005. The growth in share of agriculture
in GDP was 4%, of industry was 12.6%, and of services was 8.4% (the growth in
share of sectors in GDP is shown in Table 1). The reason for this satisfactory
growth was the overall economic direction guided by the Party; peaceful and secure
political, social and economic stability; and global and regional economic
integration. Moreover, laws such as the Investment Promotion Law on private
domestic and foreign investment have been updated which has attracted foreign
capital and boosted competition. When compared to other countries in the region,
Lao PDR‘s economic growth has been considerably higher.
Table 1. Comparison between actual and targeted GDP growth rate in
the Sixth Plan (2006-2010)
Sector
Target (%)
(2006-2010)
Target
( Average %per
annum)
Actual
(Average % per
annum)
Agriculture and
forestry
3~3.4 3.2 4.0
Industry 13~14.0 13.7 12.6
Services 7.5~8.0 7.3 8.4
Total 7.5~8.0 7.6 7.9
Sources: National Socio-Economic Development Plan 2006-2010, and
Annual Statistics Yearbooks (2005-2008).
For fiscal year 2005/2006 to 2007/2008 is implementation, for 2008/2009
and 2009/2010 is estimated 10 GDP per capita in both Kip and US Dollar has
increased considerably, exceeding the target of the Sixth Five-Year Plan. GDP per
capita reached USD 818 in the year 2007-2008, USD 906 in 2008-2009 and USD
Luận Văn A-Z
0972.162.399

53
1,069 in 2009-2010, which was an increase of approximately18% from the year
2008-2009. These figures indicate that there has been an increase in the Household
Consumption Index per month, which doubled from 1.1 million Kip in 2002-03 to
2.2 million Kip in 2007-08, in which consumption increased from 1.7 to 2.9 million
Kip in urban areas, and increased from 900,000 to 1.8 million Kip in rural areas. In
summary, average household consumption per month has risen by14.8% per year.
Table 2. GDP per capita (plan vs. actual)
Period
Plan ( USD per
capita per annum)
Actual ( USD per
capita per annum)
Difference
between actual and
plan ( %)
2005/2006 556 573 3.1
2006/2007 619 687 11.0
2007/2008 682 818 19.9
2008/2009 752 906 20.5
2009/2010 823 1069 29.8
Source: Department of Statistics, Ministry of Planning and Investment
3.1.2 Economic Structural Changes
The economic structure has changed as an economy transforms from a
subsistence agriculture economy based on raw materials to a market-oriented
economy based on processing. There has been also a positive impact on Lao
economy from the domestic potentials and neighbouring countries. Economic
structure and value added in each sector has shown an increase, which is in
accordance with the set direction. In 2008-2009, the share of agriculture and
forestry sector in GDP accounted for 30.4% with value added at 14.36 trillion Kip;
the industrial sector accounted for 24.9% with value added at 11.74 trillion Kip; and
services contributed to 38.4% with value added at 18.14 trillion Kip. In 2009-2010,
it is projected that agriculture and forestry sector will account for approximately
29%, industrial sector 26% and services sector 39% of the GDP.
Luận Văn A-Z
0972.162.399

54
In summary, over the past five years, the sectoral composition of GDP
suggests that agriculture and forestry sector accounted for 30.4%, industry 26.1%
and services 37.2%.
Figure 1: Economic structure 2006 – 2010
Sources: Department of Statistics, Ministry of Planning and Investment
(from 2005-2006 to 2007-2008 the information is based on actual calculations; for
2008-2009, the figures are projections; and for 2009-2010, the figures are initial
projections based on preliminary data).
3.1.3 Financial Sector Growth
During the past five years, the banking sector has contributed to financial
stability, and the foreign exchange rate has remained stable. This is reflected in the
money supply growth at 23% per year which contributed to19.6% of GDP. Foreign
exchange grew and contributed to approximately 35% of GDP in 2009-2010. An
increase in the money supply or M2 was contributed by the increasing numbers of
foreign investors. Narrow version of the money supply (i.e. finances outside the
banking system and daily savings in Kip) accounts for approximately 30% of the
total money supply, while the rest of the money supply accounts for 70%. Of this,
an estimated 80% of the total savings were in foreign currency during the period
Luận Văn A-Z
0972.162.399

55
2006-2008 (increased 3% compared to 2005). Both net foreign and domestic assets
have increased. Foreign exchange reserves have increased, and the country holds
enough stock of foreign currencies to pay for import goods and services for
approximately six months. In short, the banking and finance sector is stable.
3.1.4 Banking Sector Development
The banking sector is one of the sectors that grew rapidly and distinctly
during the period of the Sixth Five-Year Plan. This is because the government made
efforts to create better conditions for promoting the ease of conducting business. In
particular, laws and regulations have been amended to increase business
competition in global markets to encourage economic development and growth. In a
short time, a number of new banks have been established which have benefitted
society; particularly, businesses have more alternatives in banking services and have
access to world-class banking services and modern technologies at lower service
charges. Moreover, the government strived to open a stock market. The Lao Stock
Exchange opened in early 2011. The loans to the business sector increased by
approximately 85% at the end of 2008 and increased by 82.3% in March 2009 when
compared to March 2008. These achievements suggest that the society has
increased confidence in the banking system. At the same time, non-performing
loans (NPL) have significantly decreased, from 10.52% in 2006 to 3.84% in July
2009. This is lower than the plan projections of approximately 5% of the total
credit. However, the rural poor still have only limited access to institutional loans.
In sum, the quality of services and access to loans have both improved and the
banking system has been modernised.
3.1.5 Inflation has been effectively managed
The inflation rate decreased from 8% in 2005-2006 to 4.1% in 2006-2007,
increased to 7.9% in 2007-2008, and decreased to 0.74% in 2008-2009 (inflation
has decreased to negative inflation in the last six months, the lowest in recorded
history since 1990). In 2010, inflation was likely to increase by approximately
Luận Văn A-Z
0972.162.399

56
4.71%. However, the overall consumer prices remain stable and the inflation rate
during the period of the Sixth Plan was an average of 5.09%, which remains at a
one-digit level per year, and lower than the economic growth rate.
3.1.6 The Appreciation of the Kip Currency
In 2005-2006 the dollar Kip exchange rate (average) was 10,411.0 Kip/USD;
it shifted to 9,679 Kip/USD in 2006-07; 8,980 Kip/USD in 2007-2008; and 8,532
Kip/USD in 2008-09. In 2009-2010, the exchange rate was 8,372 Kip/USD. The
difference between the bank rate and market rate was about 0.25% in December
2005, which reduced to 0.01% in November 2009. In terms of Baht, the figures
were 0.14% and 0.15% respectively. The appreciation of the Kip is in line with the
depreciation of the USD and the influx of foreign investment into country. The
appreciation of the Kip is only minimally affecting the country's exports, because
exports to an extent still depend on natural resources whose costs and prices are not
subject to exchange rates. On the other hand, the Kip is still depreciating relative to
other currencies, particularly Baht. This depreciation is partly because of the
extensive trading between Lao PDR and Thailand.
3.1.7 Workforce and Employment Balance
The workforce structure in the economic sectors has changed in
correspondence to the economic restructuring and the industrialisation and
modernisation strategy that has taken place. Capacity building of the workforce,
improvement of the curriculum at the vocational level, the government coordination
mechanism, and the employment opportunities and outside the country have all
progressively improved. Labour intensive sectors have collaborated with both
public and private training centres with a view to provide training to unskilled
workers. Training is especially for those workers who have just finished lower and
upper secondary school levels in order to prepare them for real jobs. The number of
those who have participated in vocational training and obtained adequate skills has
increased from 5,070 in 2006 to 5,374 persons in 2007, and further increased to
Luận Văn A-Z
0972.162.399

57
16,158 persons in 2008 and to 29,766 persons in 2009. In the last four years,
training has been provided to 56,368 persons, an achievement of 81.33% compared
to the Sixth Plan target. Taking into account the target for 2010 (currently being
implemented), the total number of trainees will reach 74,069 persons, which will
have exceeded the target of the Sixth Plan by 6.88% (the target in the Sixth Plan
was 69,300 persons). Looking at each sector, those trained in the agriculture and
forestry sector will total 16,152 persons, industry and construction 27,856 persons
and services 30,061persons. Jobs have been created through improving the
government coordination mechanism in accordance with the current market
demand. Moreover, there has been collaboration between relevant parties (in both
public and private sectors) to provide information on demand and supply. The
number of employment agencies is gradually expanding; employment agencies and
their affiliates have expanded from three in 2005 to nine. These agencies placed
6,404 workers in jobs in 2006; 21,099 workers in 2007; 74,992 workers in 2008;
and 241,949 in 2009.
Overall, 317,444 workers found jobs during the Sixth Plan, which is
equivalent to 58.35% of the target (the target was 544,000 workers, with an annual
average of 108,800 workers). New jobs are expected for 325,440 workers in 2010,
which will result in a total of 642,884 workers employed, exceeding the Sixth Plan
target by 18.2%. Of these, domestic employment will be assured for
626,691workers: 584,589 workers in the agricultural and forestry sector, 38,435
workers in the industrial and construction sector, and 3,667 workers in the service
sector. Job opportunities outside the country will be provided for 16,193 workers:
1,042 workers in the agricultural and forestry sector, 13,396 workers in the
industrial and construction sector, and 1,755 workers in the services sector. The
government also made attempts to collect data and register people who need jobs.
The number of people in need of work totalled 298,775, of which 192,904 wished to
work in the agricultural and forestry sector, 74,194 in the industrial and construction
sector, and 29,677 in the services sector. While the Sixth Plan targeted 390,000
Luận Văn A-Z
0972.162.399

58
persons for employment, the actual employment rate was 76.6% of the target. In
cooperation with the employment agencies of other countries, it was identified that
there was an estimated demand for 10,434 positions in Thailand (152 for women),
300 positions per year in Japan and 1,000 positions per year in Malaysia.
Cooperation was also sought with the Ministry of Labour in the Republic of
Korea, in order to prepare for the export of Lao labour to Korea. The labour
structure by economic sector has been slowly transformed towards industrialisation
and modernisation, in the same direction as the economic structure. The share of
labour in the agriculture and forestry sector has slightly declined, from 78.5% in
2005 to 75.1% in 2010, and correspondingly the share has increased in the industrial
and construction sector from 4.8% to 5.5%, and in the service sector from 16.7% in
2005 to 19.5% in 2010 (see Table 3). The proportion of labour shifted from the
agricultural sector to the non-agricultural sectors is 0.7% annually. The services
sector accounted for larger numbers of those who shifted from the agricultural
sector when compared to the industrial sector.
Table 3. Share of labour by sectors
No. Sector Year Estimate
2005 (%) 2010 (%) 2006-2010 (%)
1 Agriculture and forestry 78.5 75.1 73.9
2 Industry 4.8 5.5 9.3
3 Service 16.7 19.5 16.9
Source: Calculations based on Population Censuses 2005 and NSEDP VI
(2006-2010)
3.1.8 Balancing the Sources of Funds for Development
Public investment. The implementation of Public Investment Programmes
(PIP) during the last five years suggests that funds for PIPs in each sector and
locality has been effectively allocated for the government‘s priority 11 programmes
and 111 projects. In total, 24,747 billion Kip was invested. Of this, 3,982 billion
Kip was from domestic sources which accounted for 98.7% of the five-year
Luận Văn A-Z
0972.162.399

59
approval (2,150 billion Kip was invested in the economic sector, 956 billion Kip in
the social sector and 876 billion Kip in other sectors) and 20,765 billion Kip from
foreign sources.
These figures are based on the last Population Census in 2005, so would be
different in the Sixth Plan (2006-2010) (Jobs in the agricultural sector 76.6%,
industry 7.7% and service 15.6% in 2005). Attracting Official Development
Assistance (ODA) During the last five years, given the difficult economic
circumstances worldwide, Official Development Assistance (ODA) globally and in
some regions marked a declining trend. However, development partners and those
partner countries with close ties to Lao PDR that have promised to assist the nation,
have continuously provided assistance to support the socio-economic development
policies of the Party and the Government. During these five years, funds from ODA
were used for 2,251 projects in total, and as reported in the annual Foreign Aid
Report of the ODA implementation, these funds amounted to USD2,443 million, or
on an annual average USD 488 million. Moreover, a national contribution fund
(public fund) contributed USD 88.66 million (an annual average of USD 17.73
million). The implementation of grant projects has considerably contributed to the
socio-economic development of the country. In general, the ODA funds have been
effectively used.
Attracting Foreign Direct Investments (FDI). The economy has attracted a
total of 1,022 private (domestic and foreign) investments projects during the last
five years. The approved projects during the plan period were valued at USD 11.01
billion, of which domestic investors made investments worth USD 2.2 billion. The
largest share of approved funds was in the electricity sector with USD 3.44 billion
(31.24 %), followed by the mining sector with USD2.88 billion (25.82%), the
services sector with USD1.48 billion (13.44%) and the other sectors with USD3.21
billion (29.15%). During 2008-2009 alone, approved projects amounted to USD4.3
billion. The largest investment in-flows are from China, Vietnam and Thailand.
Luận Văn A-Z
0972.162.399

60
Table 4. Private domestic and foreign investment from 2006-2010 (USD
billion)
Fiscal year Total investment Local investment
Total 11.01 2.2
2005-2005 2.70 0.4
2006-2007 1.14 0.2
2007-2008 1.22 0.3
2008-2009 4.31 0.9
2009-2010 1.64 0.3
Source: Investment Promotion Department, Ministry of Planning and
Investment.
Foreign investment has significantly contributed to economic growth and
reform of the economic structure, commercial production, job creation and
provincial development. Moreover, support has been provided to strengthen the
private sector. Overall, the achievements were made due to the strong measures and
policies put in place by the government for attracting funds; for example, the
Investment Promotion Law has been amended, the investment approval process has
been improved with the one-window approach, the power of local authorities in
approving and managing foreign investments has been strengthened, based on types
of projects and values of investment. The government sets up meetings with local
and foreign investors and entrepreneurs on an annual basis in order to monitor
progress and discuss difficulties and solutions. Moreover, promotional activities
abroad for investment promotion have been carried out to attract more foreign
investors to the country.
3.1.9 Balancing the State Budget
The Sixth Plan targeted the share of state revenue at 14-16% of GDP and
public expenditure at approximately 20-22% of GDP. Budget deficit was to be
limited at approximately 6-8% of GDP. Through the implementation of the Sixth
Plan, the status of the public budget has gradually improved. Revenue collection has
exceeded the target for three consecutive years. The increase in revenue is due
Luận Văn A-Z
0972.162.399

61
largely to taxes and customs, which accounted for approximately 70% of the total
revenue. During 2006-2010, the estimated total revenue was 38.05 trillion Kip,
which accounted for 17.31% of GDP, equivalent to 105% of the Plan. Of this, the
domestic revenue was 32.31 trillion Kip. The total budget expenditure was 49
trillion Kip, which accounted for 22.29% of GDP and is equivalent to 103% of the
Sixth Plan target. This has resulted in a budget deficit of 10.95 trillion Kip (after
including the grants), which is an average budget deficit of 4.98% of GDP, (the Plan
target was 6.1% of GDP). Overall, the main expenditure item was the recurrent cost
of public sector salaries, which is the first priority of government. The salary index
rose during the three subsequent years at an annual average rate of 18.66%. At the
beginning of 2007, the amended version of the State Budget Law was put into
effect. The main purpose of the amendment was to improve the budget management
mechanism, by centralising three sectors, namely treasury, customs and tax, in the
national budget. In mid-2007, the Audit Law was enforced. The State Audit
Organisation can now directly report to the National Assembly. In general, the
government‘s financial status has gradually improved.
3.1.10 Balancing Imports and Exports
The Sixth Plan aimed to benefit from trade and to stimulate economic growth
through competition and effective use of the country‘s absolute advantage,
international economic commitments (under the ASEAN Free Trade Area (AFTA),
and the bilateral and multilateral trade agreements, including WTO accession.
Expansion in international trade has boosted domestic trade by opening up trade
between cities and rural areas. In addition, the government has made efforts to
promote commercial production and increase exports, promote cross-border trade,
and promote production for both domestic consumption and export. Expansion in
trade has improved human development. The living conditions of the ethnic people
have improved in many ways, through employment creation, labour migration,
cross-border trade, rural electrification and others. The overall priorities of the Sixth
Luận Văn A-Z
0972.162.399

62
Plan were to increase the share of export goods that have high added value and
therefore contribute to economic growth; moreover, the Plan aimed to integrate
exports into each sector in order to increase employment opportunities and generate
higher income to benefit the people as well as the country. During the period 2006-
2010, the export value of Lao PDR‘s goods was USD 5.69 billion which accounts
for 23.4% of GDP. This demonstrates an increasing trend each year, especially the
export value in 2009, which is expected to reach USD 1,005.3 million. This was a
slight decrease compared to the value in 2008. It is anticipated that exports will
reach USD 1,789 million in 2010, which is double the target of the first year of the
Sixth Plan. The majority of the export commodities are mining products (silver,
gold and copper), garments, agricultural products (coffee, corn, tea, peanuts, rice,
livestock etc.), electricity, and wood and wood products. In 2009, the largest
proportion of export earnings came from mining, 45% of the total export of which
copper had the largest share (33% of total exports), while the share of gold and
silver combined was 9.28%. The second largest share was of garments, accounting
for 12.7%, which declined by 10-11% when compared to exports in 2008.
Electricity accounted for 9.97% of exports, which was a slight increase compared to
the 2008 figures. In addition, wood products constituted 4.9%, and coffee 2.25%.
The details are shown in Table 5.
Table 5. Export structure of Lao PDR by commodities 2005-2009 (%)
Commodities 2005 2006 2007 2008 2009
Wood products 14.13 11.09 9.71 6.02 4.90
Coffee 1.35 1.11 3.13 1.69 2.25
Agricultural
products /NTFP
3.65 2.52 1.80 4.82 9.06
Others 3.74 2.72 2.52 2.60 15.43
Garments 20.04 14.45 13.69 23.45 12.70
Electricity 17.81 11.47 9.13 9.89 9.97
Mining 39.16 56.55 59.94 51.44 45.26
Gold and silver 15.69 12.47 10.06 7.38 9.28
Copper 20.40 41.99 47.89 40.85 33.51
Other 3.07 2.08 1.99 3.21 2.47
Luận Văn A-Z
0972.162.399

63
Fuel 0.13 0.09 0.09 0.09 0.44
Total export FOB 100.00 100.00 100.00 100.00 100.00
Source: Bank of Lao PDR.
Imports to Lao PDR during the period 2006-2010 had a value of USD6.61
billion, which accounted for 27.3% of GDP and shows an increasing trend. In 2009,
the total value of imports was approximately USD 1,413.5 million, which was a
slight increase compared to 2008. It is estimated that imports will further increase to
USD 1,670.97 million by 2010. The imported products were largely for
investments; machinery and equipment, for activities ranging from production to
construction and electricity generation (for example in 2008, these items of import
accounted for 40% of the total imports, which further increased to 69.61% in 2009).
Imported products also included goods for consumption such as food, medicines
and clothing (for example in 2009 those imports constituted 21.87% of the total
imports, which was a decrease by half compared to that in 2008). Finally, the share
of raw materials and equipment for the garment sector was 4.72% of the total
imports (their share fell three times compared to that in 2008). Details are shown in
the table below:
Table 6. Import structure of Lao PDR by commodities 2005-2009 (%)
Commodities 2005 2006 2007 2008 2009
Import for
investment
44.14 46.75 55.69 40.45 69.91
Machineries and
production
equipment
14.35 13.44 16.62 22.46 47.23
Vehicles
( 50% of total )
5.33 5.65 10.91 3.92 11.10
Fuel
(50% of total)
9.75 9.16 16.31 10.65 6.28
Construction /
electronic
equipment
14.71 18.50 11.85 3.42 5.00
Import
consumption
45.20 41.52 33.93 43.57 21.87
Luận Văn A-Z
0972.162.399

64
Materials and
garment machines
7.92 9.31 7.55 12.48 4.72
Luxury products 1.14 0.99 0.95 1.44 1.20
Electricity 1.38 1.23 1.66 1.92 2.45
Fuel 0.23 0.21 0.22 0.13 0.14
Total Import
(CIF)
100.00 100.00 100.00 100.00 100.00
The foreign trade balance of Lao PDR remains in deficit. During the period
2006-2010, the trade deficit amounted to USD 0.92 billion (average deficit:
USD184 million per year), equivalent to 16.17% of the total exports. However, the
improved performance of the trade sector has resulted in the trade deficit as a
proportion of GDP declining from 10.79% during 2001-2005 to 3.8% during 2006-
2010 (the target for 2006-2010 is 5% of GDP).
Figure 2 Export and Imports from 2005-2009.
Luận Văn A-Z
0972.162.399

65
3.1.11. Sectoral Development, Regional and International Economic
Integration
Sectoral Development
Agriculture and Forestry. The Agriculture and forestry sector grew at 4%
and accounted for 30.4% of the total GDP in recent years. Crop and livestock
production grew at 4.07%, which accounted for 88.6% of value added in the sector.
Fisheries production also grew at 4.03%, and accounted for 11.4% of the value
added in the sector. Overall, agriculture and forestry production has improved and
supplies sufficient production for basic domestic needs. The main area for
plantations and agricultural production, particularly rice crops, is located in the
central region of the country, accounting for 55% of sown area, and 57% of sectoral
production. The southern region accounts for 23% (of both sown area and
production) while the northern region accounts for 22% of sown area and 20% of
production. Savannakhet Province has the largest area ofcrops (mainly rice)
accounting for 22% of the area used for growing rice in the country, followed by
Champassack Province (12%), Vientiane Capital (9%), Saravane Province (9%) and
Vientiane Province (8%). The agricultural land per household is approximately 1.6
hectares in the country. Figure 3 presents a map showing the differences in size of
agricultural land per household in different provinces.
Luận Văn A-Z
0972.162.399

66
Figure 3 Average size of agricultural land per household
Source: Socio-Economic Atlas of Lao PDR
Promoting Food and Vegetable Production: The production of some of the
main food and vegetable items has been promoted, namely rice, corn, sugarcane,
Luận Văn A-Z
0972.162.399

67
coffee, tea, tobacco, peanuts, soybeans, green beans, cassava, cotton, and livestock.
Since 2006, locally grown rice has been sufficient for self-consumption and also
enough has been produced to set aside some for sale. On average annual rice
production reached 2.9 million tonnes in 2009 (increased from 2.56 million tonnes
in 2005). This is 88% of the target set by the Sixth Plan (3.3 million tonnes), which
increased by 26.4% compared to the figure in 2005-2006. Paddy rice production per
person as per latest available estimates is 470 kg per person per year. This is
sufficient to meet the basic needs of society. However, the price of rice has
fluctuated seasonally from time to time, due to issues relating to distribution.
Land yield rate increased from 3.49 tonnes per hectare in 2005 to 3.54 tonnes
per hectare in 2008. Rice production was estimated to have reached 3.14 million
tonnes in the planting season of 2009, of which wet seasonal rice was estimated to
account for 78%, irrigated rice 14.4% and upland rice 7%. Between 2006 and 2010,
the wet seasonal rice crop was sown in an estimated 631,000 hectares, yielding 2.3
million tonnes of rice each year; and irrigated rice was sown in an estimated 89,000
hectares, yielding 423,000 tonnes. Irrigated rice production, however, has not met
its target due to both internal and external factors including natural disasters,
environment, oil price fluctuation, production costs and market imperfections.
Areas under upland rice production have reached an estimated 110,000 hectares per
year, yielding 205,000 tonnes. Apart from rice, production of other crops has also
risen significantly compared to recent years, and is able to meet the basic
consumption needs of society. Buying and selling remains stable (in that there is no
panic buying or selling), production is sufficient, and prices are steady. Self
production of vegetables, tacos, cassava and other crops has steadily risen to replace
importing. Along with producing food for domestic consumption, the Sixth Plan
also encouraged agricultural produce to be processed in factories to add value; for
examplecorn (for making animal feed) for domestic markets and exports. Corn
plantation areas increased by 32.7% between 2005 and 2010: from 113.8 thousand
ha to 151 thousand ha. The production of this crop increased 88.3% from 403.5
Luận Văn A-Z
0972.162.399

68
thousand tonnes in 2005 to 760 thousand tonnes in 2010. It is grown mainly in the
Northern provinces: Xayaboury, Bokeo, Huaphanh, Oudomxay, Luang Prabang and
Xiengkhuang. Furthermore, cassava production tripled between 2005 and 2010:
from 51 thousand tonnes to 161 thousand tonnes. It is being exported for processing
to flour factories. Sugarcane production also tripled, from 218 thousand tonnes in
2005 to 703 thousand tonnes in 2010. In addition, coffee, vegetables and organic
vegetables (cabbage, chayote, coriander and other vegetables) are grown in
Pakxong and the Bolevan Plateau, again mainly for export. Livestock and fisheries
production: In order to supply larger quantities of food for consumption, there has
been a shift in the production system from the traditional (natural) methods (of open
grazing or feeding) towards livestock husbandry in captivity, so that the animals are
better reared. Some additional steps being undertaken are: encouraging
community/collective growing, controlling animal migration, supplying vaccines
and expanding veterinary services to villages (coverage of cattle vaccination is
36%, pig vaccination 26% and poultry vaccination 24%). Bird flu is well under
control. The livestock and fisheries sector has modernised to an extent, and
contemporary livestock farms in locales close to big cities, and in mountainous
areas, have begun to emerge. In addition to meeting the urban demand, this trend
has encouraged cross-border trade in livestock (cattle, pigs and poultry) and fish.
The total domestic supply value of livestock and fisheries is USD 102.4 million (the
main production is of cattle and buffaloes: 40,000 cattle and 45,000 buffaloes). In
addition, the production of fish seedlings has been expanded in 32 governmental
stations for supplying these to farmers and to the community as a whole. The supply
is able to meet 46% of the country‘s demand, or approximately 300 million fish
seedlings.
Forest production: This sector is able to supply products domestically worth
USD 31.4 million, and export worthUSD74.4 million. Reforestation and tree
plantation are encouraged among all communities and government agencies, the
private sector, other organisations and citizens. Commercial trees are planted such
Luận Văn A-Z
0972.162.399

69
as eucalyptus, teak, agar wood, and rubber. Foreign investment from Vietnam,
Thailand and China has also steadily increased in the tree plantation sector. These
countries are mainly investing in rubber plantations in the northern, southern and
central provinces, and eucalyptus plantations in the central provinces. Although tree
plantation has increased (with cooperation from all stakeholders), the up-keep of
plants still faces challenges due to lack of funds for supporting technical staff in
local areas.
Wood and Non-Timber Forest Products (NTFP): There are policies, rules,
laws and recommendations to guide implementation. Deforestation and illegal
logging have steadily decreased each year, which has encouraged the private sector
and businesses to concentrate on wood-processing to add value for export, as well
as reforestation, in order to increase the quantity of wood available for production in
the future. Trees may be cut down only when there is a need to construct important
government infrastructure where the trees are located. Additionally, cutting trees is
permitted in pre-surveyed sustainable forests.
Non-timber forest products are collected regularly. Some main products are
rattan (8.1 million lines), bamboo (5.1 million lumps), fence (38 thousand bars),
dried bark (for lighting firewood, 178 thousand lah, a traditional volume measure),
Agarwood (180 tonnes) and other NTFP (wood oil, skin, bark, flowers, roots,
tubers, etc.) 64,667 tonnes. Nowadays, reforesting and forest development has
spread to all communities. Saplings planted increased by 219%, from 36 million to
113 million saplings between 2005 and 2008, used for reforesting 40,000 hectares.
In 2005 14,000 hectares were planted– an increase of 191%. Degraded forested
areas were regenerated in 127,000 hectares in 2008, compared to 57,000 hectares in
2005, recording a 124% increase.
Industrial Sector. During the previous years, the industrial sector grew at
approximately 12.6% per annum. The average (2006-2010) share of mineral
exploration in the value added industrial sector is 35.4%; value-added (processing)
Luận Văn A-Z
0972.162.399

70
activities account for 34.3%, and electricity and water sub-sectors form the rest (see
Figure 4).
Figure 4. Average share of value added in the industrial sector 2006-2010
Source: Statistic Department, Ministry of Planning and Investment, Energy
and Mining Sector, Electricity Sector
• Between 2006 and 2010, average electricity production increased 21.12%
(current price) and increased 9.3% (constant price) which covered 3.1% of GDP and
reached 97% of the Sixth Plan target. Since 2005, five dams have been completed:
Nam Mang 3 (40 MW), Nam Theun 2 (1,088MW), SeSet 2 (76MW), Nam Lik 1/2
(100MW) and Nam Ngeum 2 (615MW) which combined have a capacity of 1,919
Megawatts, which can supply energy of 8,022 GWH per annum, an increase of
approximately three times compared to 2005. Of these, three dams are the
Independent Power Projects (IPPs). Presently, there are 14 dams that have minimum
energy 1 MW, and if small dams are included there are 29 dams across the country,
which have a capacity of 2,583.72MW and can produce energy of 11,514 GWH.
Additionally, there were six hydroelectric dams to be constructed during the Sixth
Five Year Plan which are estimated to have a capacity of 662.2 MW. Of these, the
dam construction that aimed to be completed in 2011 consisted of SeKaman 3, Nam
Ngeum 5, Nam Yon and ThatSalan; those to be completed in 2012 include Theun
Luận Văn A-Z
0972.162.399

71
Hinboun extension phase and NamXong dams. Furthermore, the Hongsa Thermal
Power Plant (1,878MW) is currently under the process of resettling people and
completing the necessary environmental requirements. The plant is expected to be
officially opened in 2011. The length of electricity transmission lines in the country
is 29,601 Km, of which 138 Km are very high pressure lines of 500 kv; 406 Km are
of 230 kv (mostly for export); 2,060.9 Km are high pressure lines of 115 kv;
14,577.2 Km are medium pressure lines of 22 kv, 34 kv, 35 kv; and 12,419 Km are
low pressure lines of 0.4 kv. By August 2010, 98% of all districts, 60.48% of all
villages and 72% of all households had electricity and access to a power connection.
Some power transmission lines are under construction: the NARPD Project in the
north, 1,627 Km in length, is 98% complete; REP1 Project in the south, 2,472 Km
in length, is 93% complete; GMS Project in Pakxong-Jiangxai-Bangyor area is 64%
complete; and Paksan-Thakek-Savannakhet, 285 Km in length, is 18% complete.
Additionally, there are 115 kv transmission lines in NamNgeum 5 which are 142
Km in lenght, 230 kv transmission lines in NamLik-HinHurb-ThaLard-Vientiane
Capital, and 500 kv lines from the NaBong-Thai border which are under
construction. Moreover, there are also medium-low lines in Sukuma District,
Mounlapamok District and Pin District-TadHai area, which are being constructed.
The total private investment in the electricity sector between 2006 to 2009 was
USD2,995.5 million, which is an increase of 88.5% compared that in the plan
period from 2001 to 2005. In total, electricity production increased 9.3% per year.
The electricity sector has shared 15% of total industrial production and accounted
for 3% of GDP. B. Mining Industry.
• The total mining production value amounted to 16,772.47 billion Kip, with
an average annual increase of 19.91% between 2006 and 2010 (at current price),
which is a five-fold increase compared to the last five years (2001-2005). The sector
accounts for 9.5% of GDP. Exploration and production of gold bars during the four
years between 2006 and 2009 reached 33.13 tonnes (2006 produced 12.65 tonnes,
2007 produced 9.2 tonnes, 2008 produced 5.81 tonnes, and 2009 produced 5.47
Luận Văn A-Z
0972.162.399

72
tonnes) while in 2010 the aim is to reach 5 tonnes (the figures show a decline in
production of gold because there have been changes each year in the amount of gold
extracted from the gold ore). During these four years, theproduction of copper
plates was 321,487 tonnes and copper dust 585,607 tonnes; and the total sale of
copper reached USD 3,274 million. As a part of the agreement between the mining
companies and government, the government received its share worth USD 445
million from Sepone gold mining between 2006 and 2009. In 2010, the company is
expected to share USD 148 million with the government. Local level authorities
received USD 500,000 annually for rural development. Additionally, Phubia
Mining shared USD 18 million with the government in 2010 and USD 200,000
annually at the local level, earmarked for spending on rural development. The total
investment value in the mining sector in five years has been USD 2,545.3 million,
which is a five-fold increase compared to the previous five years (2001-2005).
Currently, there are 154 domestic and foreign companies operating in the mining
sector, operating 269 projects, 49 of which are at the exploration stage and 220 of
which are projects are under survey process. The Kali Salt Factory was completed
in Thongmung Village, Saythany District, Vientiane Capital andhas a capacity of
50,000 tonnes per annum and will be expanded to 1 million tonnes per annum in the
future. A similar factory is under construction in Thakek District, Khammouane
Province. Additionally a steel factory is being established in Vientiane Province.
• Geology: The most important activity in this sector is to create geo-mining
and mineral maps, since minerals can be identified best with larger and more
detailed maps. Mining and mineral maps with a ratio of 1:1,000,000 have now been
drawn up for every province. Maps with a ratio 1:200,000 have been completed for
54.86% of Lao PDR‘s total geographic area, and maps having a larger ratio of
1:50,000 have been completed for Sepon, Sanakharm, and along the Mekong River
Bank in the Northern provinces and target areas for exploration. [2]. Manufacturing
This industry and manufacturing sector is important due to having contributed in
terms of value added and job creation. The manufacturing sector has grown quickly
Luận Văn A-Z
0972.162.399

73
with an average of 9.4% per year between 2006 and 2010. Manufacturing is a
relatively low investment sector, having a high rate of job opportunity when
compared to other industrial sectors. Some of the main sectors in manufacturing
have had a steady growth, such as garments and textiles, wood and food processing.
The total number of manufacturing enterprises is 24,331, accounting for 19.2% of
the total number of enterprises (source: Economic Census, 2006).
Textiles and garments: This is one of the sectors which has experienced a
positive growth rate, thereby generating employment opportunities and incomes for
communities. Currently, there are 463 garment factories in the country. Of these, 39
are large sized factories, 18 are medium sized factories and 406 are small sized
factories. Additionally there are some related factories including five laundry
factories, 12 sewn logo factories, 10 print logo factories, and three carton
production factories. The total investment of the private sector in textiles and
garments between 2006 to 2009 was USD 15,715,000 , an increase of 84.9%
compared to the previous five years (2001-2005). There are a number of pressing
issues in the textile and garments sector which need to be addressed including lack
of sufficient funds, lack of connection in production, discontinuous production, high
transportation costs, and production tax. Handicraft sector: Over the previous years,
handicraft products have been gradually developed in terms of decorative design
and skills. Because of the product design, the handicraft market has expanded both
in domestically and globally. In addition, these products have received awards at
handicraft competitions in the region. Currently, handicraft business units - both
individual and joint, -are being established, especially in rural and remote areas.
This sector plays an important role in creating jobs and generating income for
people as well as contributing to poverty reduction which is a policy of the party
and the government. The handicraft group was established due to the government‘s
promotion policy. Presently, the domestic and foreign investment in the handicraft
sector is around 40 units, and selling is able to increase approximately 7-8% per
year. In addition, there are 18 promoted handicraft businesses. Construction
Luận Văn A-Z
0972.162.399

74
materials: This sector has experienced rapid growth resulting from market demand.
Cement production can now supply 80% of the country‘s demand. The production
is of international standards and is widely recognised and acceptable in the domestic
market. Investments in this sector show trends to increase. Presently, there are six
cement factories (there were only two in the last five-year plan period, namely, the
two factories at Vang Vieng). The largest factory now is in Khammuane Province.
Cement production has reached 1.2 million tonnes per year. The planned target was
to produce 1.3 million tonnes by 2010 which increased 44% per year. Additionally,
there are factories that can supply construction materials to meet domestic demand
to an extent. The factories including 24 steel factories which produce steel bars and
processing steel, 10 title factories and 308 concrete factories. Food processing and
beverages: The production of beer, other alcoholic beverages, soft drinks and
cigarettes has experienced steady growth; it now fully meets the domestic demand
and the surplus can be exported. During 2006-2009, beer production achieved
5,180,179 hectolitres with an average annual increase of 14%. A second beer
factory in Champassack Province, a Tiger Beer factory in Vientaine Mulnicipality,
and Savannaket beer were constructed, and are in operation. The Economic Census
of 2006 suggests that the food processing sector had 15,804 business units in 2006,
of which 28 units were large factories, employing more than 100 workers. Another
171 units employed 10-99 workers (classified as medium-sized units). The rest of
the 15,625 units were small, employing less than 10 workers per unit. This sector
has a potential to grow, because of the fertile soil which supports many crops and
livestock. However, food processing still faces difficulties, as most farmers are not
oriented towards producing for the market. In addition, there are difficulties related
to scarce raw materials in some seasons, as the transport system is not adequately
equipped to transport raw material over long distances. There are also market-
oriented issues; many farmers find it profitable to sell their products along the
border, as the price is higher compared to the price paid by the local food-
processing industries. Therefore, in order to compete in the international export
Luận Văn A-Z
0972.162.399

75
market, this sector must improve both product quality and standards. In sum, the
manufacturing sector has the potential to grow and supply adequate quantities of
cement, steel bar/processed steel, natural fertilizer, processed food, beverages, etc.
to the society. Small and medium size enterprises (SMEs) have contributed
appreciably to the manufacturing sector because of an increase in business activities
in manufacturing. According to the Economic Census in 2006, there are 24,331
business units accounting for 19.2% of all businesses.
Services Sector. The services sector has grown at a lower rate than it of the
industry sector; its annual growth rate averaged at 8.4% during 2006-2010.
Development of the services sector is critical for socio-economic development.
During this period (average for 2006-2010), the contribution of the services sector
was 37.2% to GDP. Its major components are wholesale, retail trade and repairing
business, constituting 51%; public services 17.3%; and transport, warehousing, post
and telecommunication 12.5%. The rest of its constituents are financial services,
rental services and public services, including social and private services, hotels and
restaurants, and others.
Figure 5. Structure of service sector 2006-2010
Source: Department of Statistics, Ministry of Planning and Investment.
Luận Văn A-Z
0972.162.399

76
Internal trade During 2006-2010, the trade sector substantially focused on
local market development, and a number of measures have been put in place to
promote the movement of goods across the country to ensure their supply to all of
the society, in both urban and rural areas in order to help build the foundations of a
market economy. Infrastructure for trade facilities such as a market system,
(including cross-border markets), cross-border trade, shopping malls, supply
systems (wholesale and retail), shops, warehousing system, vehicle parking, and
boat landing spots have all improved. The quality of services has also been
continuously improved; for example, the enterprise registration process has been
simplified, by shortening miscellaneous processes to facilitate business persons. In
order to enhance participation,facilitate the private sector to strengthen services,
trade and product circulation have been improved within the country. Trade
exhibitions were arranged, and distribution systems of agricultural products in rural
areas have been established. In all, the domestic market has been widely opened and
developed step by step. Product circulation has been gradually increased. From
2006-2010, the total value of product circulation was 29,395 billion Kip, which has
annually increased 11%. Trade infrastructure has been widely expanded. At present,
there are 628 markets ranging from urban to rural, of which 73 are large sized
markets, 156 are medium sized and 429 are small sized. In addition, shopping malls,
supermarkets, and night-markets have been established in four major provinces
include Vientiane Capital, Luangprabang, Savannakhet and Champasack. The
construction of markets and shopping malls is mostly funded by private (both
domestic and foreign) investors and managed in different forms such as concession
under a certain period assigned by the government and the provincial authorities
according to the regulations. In short, the markets in urban areas have greatly
extended resulting in the ability to distribute products to rural and remote areas.
Moreover, currently there are 17 international checkpoints, 43 domestic
checkpoints, and 63 border-trade areas between people who live in different parts of
the country. At the end of 2009, the number of enterprises, business units, and
Luận Văn A-Z
0972.162.399

77
entrepreneurs who are registered and received approval to regularly operate their
business activities total 122, 182. This increase has also raised the value added in
trade; as a result, the average annual growth in trade is estimated at 7.6% between
2006 and 2010, contributing about 51% to the value added in services.
Communication, transport, post and telecommunication.
Communication and transport: During 2006-2010, public works and
transport focused on implementing 25 projects to support the priority 11
programmes and 111 projects, especially meant for the Eighth Master Plan on
Communication and Transport. There are two focal projects: (1) construct and
improve communication, transport and networking between sub-regions and
regions; and (2) construct and improve communication, transport and networking
within the country. Currently, the transportation system consists of four types: (1)
mechanised road transport with the length of 37,768 Km, handling 80% of the total
transport volume during 2006-2008 goods transport increased by 5-8%, and
passenger transport by 8-10% annually. This mode of transport has enabled
supplying goods and passenger transport to all districts throughout the country; (2)
water transport with the length of more than 3,000 km, accounting for 18% of the
total transport volume; (3) in the air transport sector, there are 11 airports that
handle 2% of the total transport volume; and (4) transport by train. The road-bridge
construction sector shows a better performance than others. The road network has
increased by 17% between 2006 and 2009, from 33,803 Km to 39,568 Km. On
average, it increased 4.6% annually or about 1,824 Km each year. Paved roads
increased from 4,582 Km to 4,882 Km, or about 7% annually. Bridges across the
Mekong River (Savannakhet – Moukdahan), Road No.1 in Vientiane Capital, Road
No. R3 (Bortan-Houisay), improvement of Road No. 9 (Sevannakhet-Seno), Road
No. 12 (Thakack-Gnommalard) have been completed. The bridge across the
Mekong River at Thakack-Nakonpranom was 40% completed, Road No. 2E
(Meungkoua-Taijang) was 31% completed, and Road No. 14A is under
Luận Văn A-Z
0972.162.399

78
construction. Moreover, a railway station (Dongphousy-Thanalang) 3 km in length
has been completed. An ADB project for small city development has been
completed in 12 cities, and 69% of water supply projects in northern and central
regions have been completed. Despite the vast improvement and construction in the
road systems, the demand for road development is still very high since only a small
proportion of the roads are paved. Most roads are constructed from natural rocks
and earth, especially the provincial, district and rural roads. These roads are risky
for travel in the rainy season. Also, some roads connecting provinces and districts
are not operational throughout the year. The technical standards of a majority of the
national roads that fall within sub-regions and remote regions are low compared to
the quality of the national roads in neighbouring countries. This impairs benefits
which could otherwise be reaped by the country by providing transit transport
services. Basic techniques, material, equipment, and even transport vehicles are not
yet competitive here compared to those in the neighbouring countries. As a result,
coordination between the domestic transportation system and international systems
is weak. In sum, the basic infrastructure for communication and transport, as well as
relevant services, is still insufficient in both quantity and quality. Transport services
between 2006-2010 accomplished the movement of 111.9 million tonnes of cargo,
1% below the plan target. Passenger transport was 210 million persons, below the
target by two percent.
Posts and telecommunication: The post and telecommunication network has
grown and improved. The postal and telecommunication service has been growing,
and is now able to provide services within the country and overseas, such as
domestic and international money orders, EMS/Fedex services within the country
and overseas, domestic and overseas mailing, and collection of domestic and
overseas stamps. Public post boxes are gradually reaching rural areas. There are 119
post offices throughout the country. There are 108 smaller post offices, mainly in
the districts. One office was been added during the plan period. In 2009-2010, it is
estimated that there will be 3 additional offices set up in the districts, adding up to
Luận Văn A-Z
0972.162.399

79
117 offices in the districts. Optical-fibre cables have been laid across 11,500 Km.
There are 99 telecommunication centres at present, 38 government enterprises, 58
Lao corporations, two Star-Telecom centres, and one Milicom Lao centre. All the
telecommunication centres combined provide 3.6 million connections. Of these,
149.3 thousand are for landlines (99.4 thousand have already been subscribed, a
2.7% increase from the previous year); 3.39 million are for mobile phones (2.59
million have already been subscribed, a 53% increase); and 50,000 are for Vin-
phone (wireless landlines) (29.57 thousand are subscribed, a 5% increase). The
2009-2010 plan entails encouraging firms to expand more telecommunication
services to rural areas, providing high quality services, and expanding services from
cities to villages to provide 80% coverage. In 2009-2010, additional optical-fibre
cables will be installed to cover a total length of 13.2 thousand Km, a 15% increase
from the previous year. Thus, 90% of the provinces and 80% of districts can be
reached by telephone. The establishment of the new Base Transceiver Station (BTS)
has enabled 2,000 receiving stations. By the end of 2009-2010, it is forecasted that
three million connections will be subscribed, an increase of 10% from the previous
year. This amounts to 48 telephone connections per100 persons. According to the
projection for 2009-2010, revenue income from postal services will amount to 40.11
billion Kip, an increase by 2% from the previous year. This will contribute 4.4
billion Kip to the budget, an increase by 2% from the previous year, and will
contribute to the total revenue from the post and telecommunication sector at 2,127
billion Kip, exceeding the planned target by 32%. The sector will be able to
contribute 600 billion Kip to the state budget, an increase of 7% over the previous
year.
Service infrastructure has expanded and improved regularly. Roads,
electricity networks, irrigation systems, airports and others, directly and indirectly
support production, transport, trade and investment, improving people‘s lives,
national stability, and peace. Land and air transportation have expanded and
synchronised within the region for supporting tourism and the telecommunication
Luận Văn A-Z
0972.162.399

80
network. In conclusion, communication and transport, warehousing, and post and
telecommunication play an important role in generating revenues and critically
support other sectors to grow. On average, the sector‘s value added has increased by
7.8% per year and its contribution to GDP is approximately 4.6%.
Tourism. Tourism is an important sector, which creates multiple benefits and
generates income for the ethnic people, in both cities and rural areas. It has a direct
and indirect association with other economic sectors. Recently, tourism in Lao PDR
has experienced a rapid growth as indicated by the tourist arrival data. In 2009,
tourist arrivals were 2,008,363; an increase of 15.55% compared to 2008. It is
estimated that this would further increase to 2,216,986 in 2010 (an approximate
increase of 10.39%). Through the period 2006-2010 (combined), the number of
tourists coming to Lao PDR was 8.79 million, or 1.76 million per year. The average
annual increase was 15.8%. This generated USD 258.04 million in revenue. In the
Sixth Five-Year Plan period compared to that of the Fifth Plan, tourist arrival in Lao
PDR increased 44.5% and revenue generated from the tourism sector doubled.
Tourist arrivals to regions and provinces: During 2006-2008, the largest number of
tourists came to the central region -62.4% of the total tourist arrivals. This region
experienced an annual tourist increase of 22.7%. The northern region received the
next largest number of tourist arrival, at 28.2%. This region experienced an annual
increase of 37.5%. The southern region experienced the least number of tourist
arrivals with a share of only 9.4%. This region also experienced an annual increase
of 31.9% in tourist arrivals during 2006-2008. The province receiving the largest
number of tourists is Vientiane Capital, 28.7% of total tourists in the country, which
is 46.1% of all tourists to the central region. This is because Vientiane Capital is
where tourists first arrive, as it is the centre for transport and communication before
travelling to other provinces. The second largest proportion of tourist arrivals is in
Savannakhet province (15.5% of all tourists, and 24.9% of tourists to the central
region). Tourists can now travel to Savannakhet with relative ease, as the second
Friendship Bridge has been built between Savannakhet and Moukdahan (in
Luận Văn A-Z
0972.162.399

81
Thailand). The third largest proportion of tourists goes to Luang Prabang Province;
about 11.3% of all tourists, and 40% of tourists to the northern region (data from
2008).This is because Luang Prabang is a famous world heritage city, and is also an
important eco- and cultural tourism attraction.
In terms of revenue generation from tourism, the largest amounts emerged
from the central region: 62.39% of the total revenue generation in the tourism
sector, equivalent to USD 160,653,188. The increase in revenue from tourism in
this region was 15% between 2006-2010.The northern region generated 28.2% of
the total revenue from tourism, equivalent to USD 72,609,457. The annual increase
in revenues from tourism in this region was 22.5% between 2006-2010.The south
generated 9.42% of the total revenue from tourism, equivalent to USD 24,523,113
million. The annual increase in revenues from tourism in this region was 19.75%
between 2006-2010. From a provincial perspective, Vientiane Capital generated the
largest revenue, contributing 28.7% of the total and rising annually by about 8%.
Next was Savannakhet, contributing 15.53% of the total and rising annually by
about 27%. Third was Luang Prabang, contributing 11.26% of the total and rising
annually by 24.15%. The total number of hotels and guesthouses was 1,385 in 2008.
This was an increase of about 4.1% from 2007. Of these, the number of hotels was
265, an increase of 25.6% from the previous year. The number of guesthouses was
1,120, staying unchanged from 2007. In 2009, the number of hotels and guesthouses
was 1,484, an increase of 7.2% from 2008. Of these, hotels numbered 357, an
increase of 34.7% over 2008. There were 1,127 guesthouses, an increase of 0.6%
from 2008. In 2010, the number of hotels was 383, the number of guesthouses and
resorts was 1,379, and the number of restaurants was 1,389. On average, between
2006-2010, the number of hotel increased by 21% annually, and guesthouses by
5%. Hotels were largely concentrated in Vientiane Capital accounting for 43% of
the total. Next is Champassack Province which accounts for13.2% of the hotels, and
then Luang Prabang Province with 11.7% of the hotels in 2008. Guesthouses and
resorts were also the most in the capital; at 16.5% of the total. They were 16% in
Luận Văn A-Z
0972.162.399

82
Vientiane Province and 14.4% in Luang Prabang in 2008. There were a total of 742
restaurants in 2008, which increased to 1,148 in 2009, a 55%increase. They were
mainly located in the northern region (45.3%), followed by the central region
(44.5%), and then the southern region (10.2%). Vientiane Province had the largest
number of restaurants at 16.4%, followed by Borikhamxay province at 13.5%, and
Oudomxay 11.6%. Vientiane Capital had only 9.3% of the total number of
restaurants. There were 164 entertainment centres in 2008, which was a 20%
increase from 2005, and 7.2% from 2007. The central region has the highest number
of entertainment centres: 70% of the total. The northern region comes next (17.1%),
and then the southern region (12.8%). Vientiane Capital had the highest number of
entertainment centres at 56% of the total, Champassack at 9.1%, and Huaphanh at
4.9%. The number of tourist companies has doubled: there were 64 in 2005, 93 in
2006, 113 in 2007, 143 in 2008, and 169 in 2010. From 2005 to 2010, the number
of tourist companies increased by 105 companies or doubled when compared to
2005. The number of branches has also increased: in 2005 there were 36 branches,
in 2006, 44 branches, in 2007, 49 branches, in 2008, 65 branches and in 2010, 77
branches. Between 2005 and 2008, the number of tourist companies‘ branches
increased by 41 branches (in other words, doubled). Currently there are 1,493
tourist attractions in the country, of which 849 are eco-tourism attractions, 435
cultural tourist attractions, and 209 historical tourist attractions. Of these, 626
tourist attractions have been fully developed and are opened for visitors. There are
141 sites where surveys have been completed but the sites are yet not developed.
230 tourist attractions are currently being surveyed, and 496 have not yet begun the
survey process yet. These tourist attractions have been accorded a high priority in
order to develop them according to the local conditions and the tourist needs.
Collaboration between the National Tourist Authority (NTA) and provincial
authorities is essential for achieving this goal. The above achievements are a result
of the high priority attached to implementing an open door and promotion policy on
tourism. This is discussed in more detail below. Facilities have been established
Luận Văn A-Z
0972.162.399

83
relating to the arrival and departure from the country; for example the new open
international checkpoint at Muengmom Village, Tonpeung District in Bokeo
Province. There are currently 22 international checkpoints, of which 18 checkpoints
issue tourist visas at arrival having 30-day validity, the same as the visa available at
consulates and embassies in abroad. In addition, visa holders can apply for an
extension in every province. In the past, this facility was only available in Vientiane
Capital. Visas are waived for citizens of ASEAN countries, Japan, Russia and
Mongolia. Additionally, it is now possible to obtain a three-month visa, if a person
obtains it at a Lao Embassy abroad, with a proviso to extend it for another three
months. At international checkpoints, a two-month visa can be granted with a
proviso to extend it for another two months.
The government has initiated market advocacy and promotion campaigns,
which include establishing and improving information centres related to tourism at
the NTA and in all provinces. It has also created tourism websites, and additionally
has regularly participated in international tourism expos, for example ITB in Berlin,
Germany, TTM in Bangkok, Thailand, CITM in Shanghai, China, Trade and
Tourism Expo in Nanjing, China, ASEAN Tourism Festival in Singapore, JATA in
Japan, and ITE in Ho Chi Minh City, Vietnam. Lao PDR was the host country for
the World Ecotourism Conference in Vientiane Capital in 2008-2009.
The government has coordinated and collaborated with culture-related
sectors and local authorities to organise events and traditional festivals for
promoting tourism in the country. This includes international stages, such as the
Wat Phu festival in Champassack; Kottabong Stupa Festival in Khammuane; the
Elephant Festival in Xayaboury; Ing Hang Stupa Festival in Savannakhet; Tai Dam
Ethnic Group Festival in Luangnamtha; Tuang Ethnic Group Festival in Oudomxay;
and the Cotton Flower Festival in Bokeo.
In addition to that mentioned above, the business sector is also an important
component in the development of tourism, for example improvement in the quality
of services. This helps attract high-income tourists, and prolong the length of tourist
Luận Văn A-Z
0972.162.399

84
stays in the country. The top 10 countries sending high-spending tourists to Lao
PDR are Thailand, Vietnam, China, the United States of America, France, Britain,
Japan, Australia, Germany and Canada.
Regional and International Economic Integration
Integration of the Lao economy at the regional and international levels, by
implementing open-door economic policies on an independent and mutually
beneficial basis, has progressively increased economic and trade co-operation and
trade negotiations at the bilateral, regional, sub-regional and multilateral levels.
Multilateral trade cooperation, economic cooperation with ASEAN and the Asia
region, and cooperation with ASEAN‘s dialogue partners and APTA have been
highly successful; some examples are described below Multi-lateral trade
cooperation: Despite the fact that Lao PDR has yet to become a member of WTO
(though it was expected in the Sixth Plan), negotiations for entry have so far been
successful, albeit gradual. 700 questions raised by the WTO have been answered,
and meetings with operational units for WTO Entrance‘ have been organised on
five occasions. Field trips were conducted to China and Vietnam to prepare for
WTO entrance. Preparations for WTO entrance have also enhanced capacity in
many sectors: for example, improvements in laws and regulations – Law on Value
Added Tax, Law on Enterprise, Law on Intellectual Property, Law on Standards,
Law on Forestry, Decree on Implementation of Tax Law, Law on Livestock and
Veterinary, Law on Plant Protection, Law on Investment Promotion, National
Policy on Food Safety, Decree on Procedures of Import Approval, Law on
Fisheries, Provision on Fisheries, Presidential Provision on Collection of Fees and
Service Fees, and Decree on Food Safety. Economic cooperation with ASEAN and
the region: Lao PDR has signed the ATIGA, and an agreement with ACIA is under
process, both being pre-conditions for joining AFTA. They will soon be required to
be ratified by the National Assembly. An agreement has been made with the
ASEAN Service Trade Agreement under the ASEAN Agreement on Services for
seven categories of services, and the eighth is being negotiated.
Luận Văn A-Z
0972.162.399

85
Cooperation on the scope of ASEAN and its dialogue partners: For
furthering free trade, ASEAN-China negotiation was recently completed and came
into force on January 1, 2010 (between ASEAN+6 and China). An Agreement of
Economic Cooperation between ASEAN and Japan was made earlier, and its
implementation began on December 1, 2008, wherein predefined import-export
proforma are being used. In 2009, an agreement establishing free trade between
ASEAN, Australia and New Zealand was signed.
Additionally, a Products of ASEAN and India‘ agreement was signed, an
agreement on investment between ASEAN and the Republic of Korea was made,
and a feasibility study was carried out on the establishment of a free trade area
between ASEAN+3 (EAFTA) and ASEAN+6 (CEPEA). These agreements should
form the basis for furthering economic cooperation with ASEAN, and Asia in
general. Implementation of Asia-Pacific Trade Agreement (APTA): Lao PDR is a
member of APTA and has continuously participated, performed and taken part in
negotiations on trade agreements, tax reduction plans, trade and service facilitation,
and so on, in the Asia-Pacific region. Bilateral trade cooperation: This has
expanded, particularly with countries nearby; for example Lao-Vietnam trade
relations, Lao-China trade relations, and Lao-Thailand trade relations. As of now,
Lao PDR has signed bilateral agreements relating to trade and economy with 18
countries, including Bulgaria, Thailand, Myanmar, North Korea, China, Vietnam,
Cambodia, Malaysia, India, Russia, Belarus, Argentina, USA, Turkey and Kuwait.
In short, efforts to negotiate with other countries for finding support for Lao PDR to
join the WTO, and also expand openness in the economy, have made significant
progress. In the last five years, cooperation within ASEAN has been fairly
successful. Economic cooperation with ASEAN has been successfully achieved, as
suggested by the above-mentioned negotiations and agreements. In addition, Lao
PDR has jointly signed an agreement on ASEAN-Republic of Korea economic
cooperation and signed seven agreements related to ASEAN and ASEAN-China
Economic Cooperation. These agreements are to gradually enhance cooperation
Luận Văn A-Z
0972.162.399

86
between the ASEAN and its negotiation partner countries, to achieve the goal of
establishing ASEAN Economic Association, and thus have collective markets in the
future. For implementing APTA, Lao PDR has the account list of reduced import
tariff on 1,803 items (within the scope of APTA), and due to these, other countries
have shown their support to expand free trade within the framework of APTA.
Opening for international trade: Trade cooperation has been enhanced,
creating new markets and enhancing market access in different regions. Export and
import volumes and values thereof, have also increased and the spectrum widened
during 2006-2010 reaching 83%, up from 65% in 2005. However, the trade
proportion (export plus import as a ratio of GDP) in Lao PDR is still low compared
to other ASEAN members, except Myanmar (see Table 7).
Table 7. Inter-Country Comparison on Opened Trade or Integration 2006-
2010
Countries
Opened Trade rate
(Export plus as a ratio of GDP )
Lao PDR 83.2
Vietnam 159.1
Cambodia 105.6
Thailand 151.1
Philippines 85.1
Hong Kong 406.5
Malaysia 205.9
Singapore 443.2
Myanmar 52.8
Source: Department of Statistics, Ministry of Planning and Investment and WTO
Export markets and structure: In 2010, the total value of export was
USD1,789 million and import was USD1,670 million. Of which exporting minerals
covered 58% and exporting energy covered 16% of total export. Import for public
projects was cover 40% of total import. In 2008, Lao PDR had traded with more
than 90 countries. The (import plus export) volume was USD 2,495 million, or
equivalent to 47.28% of the GDP. Lao PDR exported products to over 48 countries
Luận Văn A-Z
0972.162.399

87
within the region and outside, totalling USD1,091.91 million, or equivalent to
20.69% of the GDP. The main export markets were, Thailand accounting for
59.60% of the total exports (or equivalent to USD650.78 million), Vietnam 13.37%,
Australia 6.19%, and China 1.85% (see Table 8).
Table 8. Export Market Structure with Main Trade Partners, 2008
No. Countries
Value
( Million USD)
Percentage
(%)
1 Thailand 650.78 59.60
2 Vietnam 145.99 13.37
3 Australia 67.59 6.19
4 China 20.20 1.85
5 Switzerland 10.05 0.92
6 Poland 9.61 0.88
7 Republic of Korea 9.50 0.87
8 United States of America 4.04 0.37
9 Germany 5.13 0.47
10 Netherlands 4.37 0.40
11 Others 164.66 15.08
Total 1,091.91 100.00
Source: Calculation of Department of Statistics based on data from Tax
Department, Ministry of Finance and Bank of Lao PDR
In summary, the structure of the export market in the last five years including
the Asia market accounted for 67.54%, EU accounted for 20.40%, Oceania
(Australia) 10%, and South America 2.02%. Of this, ASEAN (10 countries)
accounted for 53.55%, and ASEAN+ 3 63.03%. In the Asia market, 10 ASEAN
countries shared 79.29% of Asia market. Of these, Thailand accounted for 36.09%,
Vietnam 11.37%, Malaysia 5.97% compared with ASEAN+3, China held 6.03%,
Japan 1.07%, and South Korea 9.93%. In the EU market, England accounted for
5.34%, France 2.3%, and Germany 3.34%. Regarding the structure of the import
market during the last five years, 96% was from Asia, 2.3% from EU, and the rest
Luận Văn A-Z
0972.162.399

88
from North America (Canada and America) and Oceania (New Zealand and
Australia). For the Asia market, Lao PDR imported from 10 ASEAN countries
81.34%. Of this, Thailand had highest proportion with 67.26%, followed by
Vietnam 12.25%, China 8.3%, Japan 2.6%, South Korea 1.88% and Malaysia 0.6%.
In the EU market, Germany accounted for 1.04%, France 0.7%, and the rest other
countries .
3.1.12 Infrastructure
During the implementation of the Sixth Five-Year Plan (2006-2010),
construction of infrastructure was brisk. Average annual growth was 11.26%,
contributing to 4.8% of the GDP, through direct and indirect effects, trade and
others investments. Transport of passengers and goods transport has increased,
(agricultural) wood production has also increased, national security and stability has
been demonstrated and seamless year-round transportation ensured. The land and
air transportation network within the region is working better. Mekong River bank
erosion projects have been completed, such as the one in Tonpeung district, the one
Hatsayfong district, and also in other areas. Water supply projects have been
completed in the Dongmakhai area. Currently, there are a number of on-going
projects on small-scale urban development, Phase 1. Water supply and health
services projects in the northern and central parts of Laos, as well as water supply
improvement projects in Kaoliew and Chinaimo area have been instigated.
Construction of Nam Mung 3 hydroelectric project (of 40 MW) was completed in
2005; and Nam Lik 1 and 2 hydroelectric projects were also completed. Moreover,
there are several Projects that are expected to be completed in 2011 including: Nam
Ngum 2, Sekamarn 3, Nam Ngum 5, and Tad Salan. In 2012, several more projects
will be completed, such as the expansion of Theun-HinBoon and Nam Song Dam.
Electricity transmission line projects in the north, central-south region transmission
lines, and medium electricity transmission lines to seven districts in Oudomxay
Province were fully complete, as well as that to Nalae District. Furthermore, several
Luận Văn A-Z
0972.162.399

89
irrigation projects were completed, such as the project in Nam Tin, Xayaboury
Province, and DongPhoSi, Vientiane Capital. In addition, irrigation improvement
projects in those areas hit by natural disasters have been initiated, in addition to
improving a several obsolete irrigation systems. National investment in tourism
facilities, especially those related to accommodation (hotels and guesthouses) has
increased, and during 2006-2010, the investment (only FDI) in tourism was valued
at USD 166 million (approximately USD 33 million was invested in construction
for accommodation (hotels and restaurants)). In addition, investment in various
tourism facilitating sectors, particularly telecommunication and transportation
infrastructure, have been made, valued at USD 34.45 million in 2008 and USD
83.77 million in 2009 which was doubled that of 2008. The government‘s
investment in tourism has mainly focused on improving inter-provincial roads,
water transport and air transport, introducing a number of new and high-technology
vehicles into the transportation system, increasing flights, and expanding bus
services and similar services. Investment in these sectors during 2006-2010 has had
a total value of 2,060 billion Kip, which is an increase of 7.3% compared to 2001-
2005.Of this, 272 billion Kip came from domestic funding (12 % increase), and
1,788 billion Kip from international funding (20% increase).
Luangnamtha Airport has been renovated and improved. R3 Road has been
constructed and this is the road-link to other countries in that region. Additionally,
Road No 12 has been constructed. Lao-Thai Friendship Bridge 2 (connecting
Savannakhet to Moukdahan in Thailand) and other roads have also been officially
opened. Furthermore, infrastructure at tourist sites has been improved, such as at
Konglor Cave and Tad Kuang Xi Waterfall. Work on facilities such as public
toilets, lookout sites, parking lots, and so on has been initiated at many other sites.
Electricity and water supply has also been improved. The basic infrastructure
development has created opportunities for ethnic people to be able to increasingly
access production, education, health care services, and markets. The industry and
commerce sector, investment (private and public), construction of basic
Luận Văn A-Z
0972.162.399

90
infrastructures and rural electricity have been developed. The increased number of
(both domestic and foreign) tourists has led to improved repairs, transportation,
warehouses, telecommunication, hotels andrestaurants; and other services have
expanded.
3.2 Foreign Direct Investment in Laos
Before 1985, there was not any FDI inflow to Lao PDR. After the
government performed the NEM from 1986, issued the investment law in 1988, and
with that a numerous of FDI inflows to Laos, the economy has been growing. The
number of projects and investment values in the period of 1990-1996 were
increased to 571 and US$ 2 billion, respectively. In the 1997-2000 period, as the
FDI inflow was reduced, the number of projects was 235 with the values of
investment reached US$ 428 million, due to the affects of the Asian economic
crisis. Sommala Sisombat (2008) analyzed the trends and patterns of FDI in Laos.
He concluded that FDI has contributed to the development of the Lao economy
during the transition of the country in the market driven economy. FDI has
benefited the exchange earnings, technological advantages, increased gross
domestic product, and employment creation. In addition, FDI flows have assisted
the Laos economy in poverty alleviation. Laos has been learning to encourage FDI
in order to support his economic reforms and achieving significant development.
Over the past decade, FDI flows to Laos have gradually grown. The 1990 saw a
remarkable increase in the world FDI level as a result of liberalization of FDI
regulations in most part of the world. Developing country governments were driven
by the need to attract foreign investment by offering investment incentives and
removing major obstacles to foreign investment.
Bouthavy et al. (2007) analyzed the general situation of Laos FDI based on
the quantitative analysis. The results of the study show that FDI inflows from 1988
to 2005 changed irregularly up and down because of investment constrains such as
infrastructure system, inadequately workforce or knowledge and skills of the local
Luận Văn A-Z
0972.162.399

91
people and regulatory environment. This period also witnessed the FDI volume of
USD 5,724 million in 1,334 projects, investing to 13 priority sectors of the
government especially hydropower electricity, mining, telecommunication, hotel-
restaurant, industry-handicraft and agriculture by the list and there are more than 30
countries to invest as Thailand, Vietnam, Australia, Malaysia, etc.
The result of the study showed that the value of FDI in Lao PDR from 1988-
2006 were USA8, 423 million, spreaded in 1,503 projects and in over 13 sectors.
The most valued investment was the hydropower electricity whichcovered 59.98
percent (2001-2006) of total investment value,which came from more than 30
countries.The biggest investor was Thailand, which accounted for 28.67 percent
(2001-2006). The result showed that movement of FDI was accordance with the
changing of the rate exchange and openness which was the same direction of FDI, it
means the rate exchange and openness can push increasing of FDI inflow to the
country, the study also shows that the Asia economic crisis should decreased the
FDI.
FDI plays very important role in many developing countries in generating
capital, job employment and technology transferring. As a trend of FDI moves
forward to country which rich in natural resources and have advantage in cheap
labor, in the case of Lao PDR it is also no exception.
With the Investment Law in 1994 onward the government of Laos PDR has
paid attention in attracting FDI by improving business environment, political
stability and macroeconomic policy, its commitment to be member of WTO and
AFTA which giving foreign investors in flavor of investment incentive especially in
tax policy and land policy. However with the implementation of Investment Law in
2004 which given huge investment incentive to foreign investors especially tax
incentive, as the resulted in 2005 onward the FDI inflow has been significantly
increased especially in mining sectors and hydropower sectors. In 2006 the FDI
inflow soared to US$187 million and reached a peak at US$323.5 million in 2007.
Luận Văn A-Z
0972.162.399

92
FDI inflows to Lao PDR fell considerably in 2008 due to the impact of the
global economic crisis. The nominal FDI inflow value was decline from about
US$323.5 million in 2007 to US$227.7 million in 2008 (or by about 30 percent) due
to recent delays of new hydropower and mining projects, as well as slow growth in
the non-resource sectors. However, the FDI inflow to Laos has quickly recovered at
around US$300 million in 2009- 2011 period (Figure 6). Assuming the global
economy continues to recover, FDI to Lao PDR is expected to rise considerably in
the medium term, as large resource and non-resource projects resume, compounded
with the expected recovery of regional and global demand.
Figure 6 Foreign direct investment, net inflows (BoP, current US$)
Source: World DataBank (2013)
The majority of FDI goes to natural resource sectors. Foreign investment in
natural resources accounted for more than 80 percent of the total FDI during the
past few years although investment in non-resource sectors has also picked up
substantially but still at a low scale (Figure 7). Private investment in the banking
sector is expected to increase substantially since 2009. Interestingly, while banking
sectors in other countries have been severely affected by the global economic crisis,
several new private banks have been established in Lao PDR this year (Booyoung,
Indo China and ST banks).
Luận Văn A-Z
0972.162.399

93
Figure 7. Distribution of FDI in Lao PDR (US$ m)
Source: MPI and staff estimates and projections.
Major FDI to Lao PDR in recent years comes from the region, mainly from
Thailand, China, Vietnam, Australia, India, Japan, and Korea. In 2009, Thailand was
the biggest foreign investor in Lao accounted for 27 percent of the total FDI inflows,
followed by China (23%) and Vietnam stayed at the third position (Figure 8).
Figure 8. Share of accrual FDI by country (% of total, as of August 2009)
Source: Lao authorities (MPI) and staff calculation.
However, Vietnam now has become the Laos' biggest foreign investor during
the period since the Lao Government first adopted foreign investment incentive
Luận Văn A-Z
0972.162.399

94
policies (1989-2012). Vietnam has so far poured US$4.9 billion into 429 projects
in Laos. It is followed by Thailand with 742 projects worth US$4 billion and China
with 801 projects valued at US$3.9 billion (Figure 9).
The remaining ten biggest foreign investors in Laos include the Republic of
Korea (RoK) with a total capitalization of US$748 million, France (US$490
million), Malaysia (US$430 million), Japan (US$428 million), the US (US$150
million), Singapore (US$134 million), and India (US$61 million).
Figure 9. Ten biggest foreign investors in Laos (1989 – 2012)
Source: Asia News Monitor (2013)
The most popular fields for foreign investors are the mining industry
(accounting for 27 percent), electricity production (25 percent), agriculture,
services, processing, hotels, restaurants, telecommunications, construction, industry,
and banking.
Laos Government offers preferential policies including tax relief to
encourage foreign investors to operate in disadvantaged rural areas, generating
employment and increasing incomes. From 2011 to 2015, Laos aims to attract
approximately US$15 billion in FDI as a means of maintaining annual GDP growth
rates above 8 percent.
Luận Văn A-Z
0972.162.399

95
CHAPTER 4. RESEARCH METHODOLOGY
This chapter describes research methodology used in this study. First,
research questions are briefly presented and the statistical method used to test the
impact of FDI on economic development in Laos. Next, variables and their
measures are provided. Finally, the author presents a detailed description of data
employed for this study.
4.1 Research Questions
In addition to reviewing the relevant literature, this research aims at
identifying the impact of the FDI on economic development in the context of Laos,
a developing country. The FDI inflows serve as a good indicator of the role played
by the MFs in economic development for Laos. The research tried to answer the
question: Does the FDI have a significant contribution to economic development for
Laos?
In particular, the research answers the following specific questions: Does the
FDI have a significant contribution to 1) the GNI per capita in Laos? 2) the
Financial Capital in Laos? 3) the country's level of technology in Laos? 4) the
Human Capital resources? 5) the Energy and Natural Resources availability in
Laos? And 6) the Transportation and Telecommunication infrastructure in Laos?
In this research, the author mainly focuses on the relationships between FDI
and six indicators of economic development in the context of Laos over the period
1990-2012. Specifically, in this study the impact of FDI on economic development
in Laos is tested using correlation analyses.
4.2 Variables and Measures
In this section, the author presents key variables used in this study (i.e. FDI
inflows and economic development) and the indicators measuring them. These
indicators are adopted from World Bank.
Luận Văn A-Z
0972.162.399

96
FDI inflows:
In this study, FDI inflows are measured by BoP (current US$)
Economic developemnt:
In this study, the author focused on six aspects of economic development
including GNI per capita, financial capital, level of technology, human capital,
energy and natural resources, and transportation and communication. The
following presents measures of these aspects of economic development.
A. GNI per capita: constant 2005 US$
B. Financial Capital: Financial Capital is measured by the five following
indicators.
• Gross capital formation (% of GDP)
• Total debt service (% of exports of goods, services and primary income)
• Debt service on external debt, long-term (TDS, current US$)
• Debt service on external debt, total (TDS, current US$)
• Inflation, GDP deflator (annual %)
C. Level of technology: Level of technology is measured by the following
indicator.
• Industry, value added (% of GDP)
D. Human Capital: Human Capital is measured by the five following
indicators.
• Life expectancy at birth, total (years)
• Mortality rate, under-5 (per 1,000 live births)
• School enrollment, secondary (% gross)
• School enrollment, secondary (% net)
• School enrollment, tertiary (% gross)
E. Energy and Natural resources: Energy and Natural resources is measured
by the following indicator.
Luận Văn A-Z
0972.162.399

97
• Oil consumption per capita (bbl/day per 1000 people)
F. Transportation and Communication: Transportation and Communication is
measured by the six following indicators.
• Air transport - passengers carried
• Air transport - registered carrier departures worldwide
• Mobile cellular subscriptions (per 100 people)
• Fixed broadband Internet subscribers (per 100 people)
• Internet users (per 100 people)
• Roads, total network (km)
4.3 Data Description
To serve the analyses, this study employed the secondary data which were
collected from the World DataBank (2013) queries from 1990-2012 and Index Mundi
website (2013). The following presents the specific data and data sources for all the
variables in this study.
Foreign direct investment, net inflows (BoP, current US$)
In this study FDI are the net inflows of investment to acquire a lasting
management interest (10 percent or more of voting stock) in an enterprise operating
in an economy other than that of the investor. It is the sum of equity capital,
reinvestment of earnings, other long-term capital, and short-term capital as shown in
the balance of payments. This series shows net inflows (new investment inflows
less disinvestment) in the reporting economy from foreign investors. Data are in
current U.S. dollars (see Table 9).
Luận Văn A-Z
0972.162.399

98
Table 9. Foreign direct investment, net inflows
Years FDI (BoP, current US$)
1990 6,000,000.00
1991 6,900,000.00
1992 7,800,000.00
1993 29,900,000.00
1994 59,200,000.00
1995 95,100,000.00
1996 159,800,000.00
1997 86,300,000.00
1998 45,300,000.00
1999 51,608,266.56
2000 33,890,000.00
2001 23,904,284.13
2002 4,451,297.03
2003 19,484,000.80
2004 16,917,263.00
2005 27,720,000.00
2006 187,310,641.00
2007 323,520,000.00
2008 227,770,000.00
2009 318,598,209.10
2010 278,805,903.10
2011 300,743,507.10
GNI per capita (constant 2005 US$)
GNI per capita is based on purchasing power parity (PPP). PPP GNI is gross
national income (GNI) converted to international dollars using purchasing power
parity rates. An international dollar has the same purchasing power over GNI as a
U.S. dollar has in the United States. GNI is the sum of value added by all resident
producers plus any product taxes (less subsidies) not included in the valuation of
output plus net receipts of primary income (compensation of employees and
property income) from abroad. Data are in current international dollars (see Table
10).
Luận Văn A-Z
0972.162.399

99
Table 10. GNI per capita
Years (constant 2005 US$)
1998 332.393
1999 355.0242
2000 359.7052
2001 375.4565
2002 393.3467
2003 403.4122
2004 429.7741
2005 461.0561
2006 476.1567
2007 513.0877
2008 535.1629
2009 574.5031
2010 587.8386
2011 626.9571
Financial Capital
Gross capital formation (% of GDP). Gross capital formation (formerly
gross domestic investment) consists of outlays on additions to the fixed assets of the
economy plus net changes in the level of inventories. Fixed assets include land
improvements (fences, ditches, drains, and so on); plant, machinery, and equipment
purchases; and the construction of roads, railways, and the like, including schools,
offices, hospitals, private residential dwellings, and commercial and industrial
buildings. Inventories are stocks of goods held by firms to meet temporary or
unexpected fluctuations in production or sales, and "work in progress." According
to the 1993 SNA, net acquisitions of valuables are also considered capital
formation. The data on gross capital formation are presented in Table 11.
Luận Văn A-Z
0972.162.399

100
Table 11. Gross capital formation (annual % growth)
Years Gross capital formation (annual % growth)
2001 7.263822
2002 31.79453
2003 3.239344
2004 43.96516
2005 2.781682
2006 27.38054
2007 35.54247
2008 1.632811
2009 1.325829
2010 -12.8377
2011 21.86036
Total debt service (% of exports of goods, services and primary income).
Total debt service is the sum of principal repayments and interest actually paid in
foreign currency, goods, or services on long-term debt, interest paid on short-term
debt, and repayments (repurchases and charges) to the IMF. The data are presented
in Table 12.
Debt service on external debt, long-term (TDS, current US$). Debt service
payments are the sum of principal repayments and interest payments actually made
in the year specified. Long-term external debt is defined as debt that has an original
or extended maturity of more than one year and that is owed to nonresidents by
residents of an economy and repayable in foreign currency, goods, or services.
Datas are in current U.S. dollars (see Table 12).
Debt service on external debt, total (TDS, current US$). Total debt service is
the sum of principal repayments and interest actually paid in foreign currency,
goods, or services on long-term debt, interest paid on short-term debt, and
repayments (repurchases and charges) to the IMF. Data are in current U.S. dollars
(see Table 12).
Luận Văn A-Z
0972.162.399

101
Inflation, GDP deflator (annual %). Inflation as measured by the annual
growth rate of the GDP implicit deflator shows the rate of price change in the
economy as a whole. The GDP implicit deflator is the ratio of GDP in current local
currency to GDP in constant local currency. The data are presented in Table 12.
Table 12. Financial capital
Years
Total debt
service
(% of exports of
goods, services
and primary
income)
Debt service on
external debt,
long-term
(TDS, current
US$)
Debt service on
external debt,
total
(TDS, current
US$)
Inflation, GDP
deflator (annual
%)
1990 8.549713 8,372,000 8,943,000 37.90738
1991 6.140886 8,285,000 8,456,000 12.97176
1992 4.753507 9,358,000 9,488,000 5.993841
1993 8.300263 28,196,000 28,362,000 11.18258
1994 4.935452 19,698,000 19,727,000 7.700596
1995 6.123103 23,357,000 25,417,000 19.68536
1996 6.52406 25,162,000 28,471,000 13.72521
1997 6.27068 22,107,000 27,290,000 19.35282
1998 6.214372 24,018,000 30,699,000 84.50446
1999 7.790892 28,496,000 37,295,000 127.974
2000 7.964774 32,095,000 40,880,000 24.79778
2001 8.912686 33,994,000 43,798,000 8.868074
2002 19.56713 84,654,000 94,217,000 6.318459
2003 21.88249 92,628,000 102,067,000 13.4501
2004 22.69304 115,587,000 123,921,000 10.69043
2005 17.40619 126,057,000 132,695,000 8.640322
2006 16.2447 178,242,000 182,215,000 10.8051
2007 15.27935 186,529,000 190,149,000 7.438286
2008 13.60248 202,986,000 207,520,000 8.863451
2009 14.75069 214,170,000 220,032,000 -2.93207
2010 13.23698 299,686,000 305,468,000 10.01846
2011 276,144,000 281,236,000 3.461741
2012 3.503319
Luận Văn A-Z
0972.162.399

102
Level of technology
Industry, value added (% of GDP). Industry corresponds to ISIC divisions
10-45 and includes manufacturing (ISIC divisions 15-37). It comprises value added
in mining, manufacturing (also reported as a separate subgroup), construction,
electricity, water, and gas. Value added is the net output of a sector after adding up
all outputs and subtracting intermediate inputs. It is calculated without making
deductions for depreciation of fabricated assets or depletion and degradation of
natural resources. The origin of value added is determined by the International
Standard Industrial Classification (ISIC), revision 3. Note: For VAB countries,
gross value added at factor cost is used as the denominator.
Table 13. Industry, value added (% of GDP)
Years Industry, value added (% of GDP)
1990 14.50836
1991 16.8156
1992 17.7566
1993 17.74331
1994 18.14074
1995 19.24144
1996 21.14757
1997 21.04775
1998 22.4988
1999 22.63418
2000 16.60577
2001 17.14755
2002 19.47779
2003 21.31875
2004 20.51281
2005 24.61259
2006 27.73479
2007 26.90575
2008 28.55519
2009 26.66212
2010 31.80166
2011 34.66597
Luận Văn A-Z
0972.162.399

103
Human Capital
Life expectancy at birth, total (years). Life expectancy at birth indicates the
number of years a newborn infant would live if prevailing patterns of mortality at
the time of its birth were to stay the same throughout its life. The data on this
indicator in Laos are presented in Table 14.
Table 14. Human capital
Years
Life
expectancy
at birth, total
(years)
Mortality
rate, under-5
(per 1,000
live births)
School
enrollment,
secondary
(% gross)
School
enrollment,
secondary (%
net)
School
enrollment,
tertiary
(% gross)
1990 54.11956 162.9 23.67283 1.15008
1991 54.8978 158.9
1992 55.69654 154.7 20.64435 14.19396
1993 56.50129 150.5 22.44351 14.69705 1.35537
1994 57.2991 146.2 24.34807 17.42835 1.34623
1995 58.08146 141.7 25.01681 1.68337
1996 58.84141 137.2 25.26427 2.43978
1997 59.58039 133 27.24104 21.13922 2.60333
1998 60.2959 128.7 29.62516 23.41179 2.06232
1999 60.98544 124.4 32.75423 26.17126 2.36587
2000 61.64446 120 34.90986 28.03597 2.70686
2001 62.27 115.7 36.83383 29.66322 3.12276
2002 62.86602 111.4 39.62774 30.69899 4.18685
2003 63.43505 107.1 42.42698 34.11909 4.97626
2004 63.97854 102.7 44.27713 35.79461 5.79792
2005 64.50046 98.4 44.6944 36.05104 7.87845
2006 65.00383 94.2 43.81833 35.22627 9.09025
2007 65.49159 90 44.12082 36.13853 11.62547
2008 65.96878 86.1 44.65939 36.93829 13.41379
2009 66.43639 82.1 45.72139 38.3491 16.44862
2010 66.89844 78.4 47.08383 40.07298 16.62275
2011 67.35495 74.9 45.79744 40.67901 17.67166
2012 71.8
Mortality rate, under-5 (per 1,000 live births). Under-five mortality rate is
the probability per 1,000 that a newborn baby will die before reaching age five, if
Luận Văn A-Z
0972.162.399

104
subject to current age-specific mortality rates. The data on this indicator in Laos are
presented in Table 14.
School enrollment, secondary (% gross). This refers to the total
enrollment in secondary education, regardless of age, expressed as a percentage of
the population of official secondary education age. GER can exceed 100% due to
the inclusion of over-aged and under-aged students because of early or late school
entrance and grade repetition. The data on this indicator in Laos are presented in
Table 14.
School enrollment, secondary (% net). This refers to the ratio of children of
the official secondary school age who are enrolled in secondary school to the
population of the official secondary school age. The data on this indicator in Laos
are presented in Table 14.
School enrollment, tertiary (% gross). This refers to the total enrollment in
tertiary education (ISCED 5 and 6), regardless of age, expressed as a percentage of
the total population of the five-year age group following on from secondary school
leaving. The data on this indicator in Laos are presented in Table 14.
Energy and Natural resources
Oil consumption per capita (bbl/day per 1000 people)
Table 15. Oil consumption per capita
Years
Oil consumption per capita
(bbl/day per 1000 people)
2003 0.46
2004 0.45
2005 0.44
2006 0.46
2007 0.46
2008 0.45
2009 0.44
2010 0.47
2011 0.3
Source: Index Mundi (2013)
Luận Văn A-Z
0972.162.399

105
Transportation and Communication
Air transport, passengers carried. Air passengers carried include both
domestic and international aircraft passengers of air carriers registered in the
country. The data on this indicator in Laos are presented in Table 16.
Table 16. Transportation and communication
Years
Air
transport,
passengers
carried
Air
transport,
registered
carrier
departures
worldwide
Mobile
cellular
subscriptions
(per 100
people)
Fixed
broadband
Internet
subscribers
(per 100
people)
Internet
users (per
100 people)
Roads,
total
network
(km)
1990 115,400 3400 0
1991 115,400 3400 0
1992 118,500 3700 0.00654
1993 118,500 3700 0.007461
1994 118,500 3700 0.01336
1995 124,500 3900 0.032095
1996 124,500 3900 0.077221
1997 124,500 3900 0.097975
1998 124,100 3900 0.126014 0.009657814
1999 197,200 6300 0.231339 0.037780708
2000 210,847 6411 0.238496 0.111044032
2001 210,847 6652 0.546228 0.181664461
2002 219,598 6971 1.003511 0.267899241 32620
2003 218,652 7068 2.011366 0.000448 0.333912466 31210
2004 271,706 8413 3.603124 0.000882 0.36143449 33861
2005 293,442 9002 11.42863 0.005458 0.85035749 35260
2006 326,730 9959 17.28242 0.012685 1.169893428 36831
2007 328,326 9957 24.92519 0.078026 1.64 34994
2008 323,401 10007 33.57909 0.101411 3.55 39568
2009 302,596 9793 52.92157 0.137448 6 32620
2010 443,778 11374 64.56158 0.193924 7
2011 532,707 12262 87.16315 0.663466 9
2012 877,950 15836 101.8523 1.462205 10.74767619
Air transport, registered carrier departures worldwide. Registered carrier
departures worldwide are domestic takeoffs and takeoffs abroad of air carriers
Luận Văn A-Z
0972.162.399

106
registered in the country. The data on this indicator in Laos are presented in Table
16.
Mobile cellular subscriptions (per 100 people). Mobile cellular telephone
subscriptions are subscriptions to a public mobile telephone service using cellular
technology, which provide access to the public switched telephone network. Post-
paid and prepaid subscriptions are included. The data on this indicator in Laos are
presented in Table 16.
Fixed broadband Internet subscribers (per 100 people). Fixed broadband
Internet subscribers are the number of broadband subscribers with a digital
subscriber line, cable modem, or other high-speed technology. The data on this
indicator in Laos are presented in Table 16.
Internet users (per 100 people). Internet users are people with access to the
worldwide network. The data on this indicator in Laos are presented in Table 16.
Roads, total network (km). Total road network includes motorways,
highways, and main or national roads, secondary or regional roads, and all other
roads in a country. A motorway is a road designed and built for motor traffic that
separates the traffic flowing in opposite directions. The data on this indicator in
Laos are presented in Table 16.
Luận Văn A-Z
0972.162.399

107
CHAPTER 5. RESEARCH FINDINGS
This chapter presents the research findings. Specifically, the correlations
results regarding the relationships between FDI inflows and economic development
indicators in Laos are provided. The correlation coefficients (Pearson correlation)
are estimated at significance level of 0.05. In particular, a high level of correlation is
implied by a correlation coefficient that is greater than 0.5 in absolute terms (i.e.
greater than 0.5 or less than –0.5); a midium level of correlation is implied if the
absolute value of the coefficient is greater than 0.2 but less that 0.5; and a low level
of correlation is implied if the absolute value of the coefficient is less than 0.2.
5.1 FDI and GNI per Capita
In 1998-2011 period, GNI per capita of Laos had a regular growth trend
through the years. Although the FDI inflows did not follow the same pattern as GNI
per capita in the early years of the research period, these figures had fluctuated in
the similarly trend in recent years. This fact has been confirmed by analyzing the
correlation of FDI inflows and GNI per capita. Figure 10 presents the graph of
correlation between FDI and GNI per capita and Table 17 presents coefficient of
correlation between FDI and GNI per capita.
Figure 10. Graph of Correlation between FDI and GNI per capita
Luận Văn A-Z
0972.162.399

108
Table 17. FDI and GNI per capita Coefficient of Correlation
GNI per capita (constant
2005 US$)
FDI, net inflows (BoP,
current US$)
Pearson Correlation .881**
Sig. (2-tailed) .000
N 14
As indicated in Table 17, Pearson correlation of FDI inflows and GNI per
capita is 0.881 (> 0.5) at significant level p < 0.05, that confirms a strong correlation
between FDI inflows and GNI per capita. The correlation coefficient also reveals that
this is a significant and positive relationship. It implies the significant and important
role of growth of FDI inflows on the growth of GNI per capita.
5.2 FDI and Financial Capital
The results of correlation analysis between FDI and six indicators of
financial capital are presented in Table 18.
Table 18. FDI and Financial Capital Coefficient of Correlation
Financial Capital
Gross
capital
formation
(% of
GDP)
Gross
capital
formation
(annual %
growth)
Total debt
service (%
of exports
of goods,
services
and
primary
income)
Debt
service on
external
debt,
long-term
(TDS,
current
US$)
Debt
service on
external
debt, total
(TDS,
current
US$)
Inflation,
GDP
deflator
(annual
%)
FDI, net
inflows
(BoP,
current
US$)
Pearson
Correlation
.819** -.167 .173 .820** .812** -.267
Sig. (2-
tailed)
.001 .623 .453 .000 .000 .229
N 12 11 21 22 22 22
FDI and Gross capital formation (% of GDP)
It can be seen from the data of FDI inflows and Gross capital formation (% of
GDP) in 2000–2011 period that, these figures had experienced similar fluctuation
trend. As indicated in Table 18, Pearson correlation of FDI inflows and Gross capital
Luận Văn A-Z
0972.162.399

109
formation (% of GDP) is 0.819 (> 0.5) at significant level p < 0.05, that confirms a
strong correlation between these indicators. The correlation coefficient also reveals
that this is a significant and positive relationship. That means the growth of FDI
inflows have a significant role on the Gross capital formation (% of GDP).
FDI and Gross capital formation (annual % growth)
In 2001 – 2011 period, the Laos’ economy witnessed an unstable fluctuation
trend in Gross capital formation (annual % growth). The Pearson correlation of FDI
inflows and Gross capital formation (annual % growth) is -0.167 at significant level
p > 0.05 (see Table 18), that indicates a weak and negative correlation between
these indicators. The correlation coefficient also reveals that there is no evidence
confirming the role of growth of FDI inflows on the Gross capital formation (annual
% growth).
FDI and Total debt service (% of exports of goods, services and primary income)
In the 1990 – 2010 period, the trend of total debt service (% of exports of
goods, services and primary income) did not correspond to the trend of FDI inflows.
As indicated in Table 18, the Pearson correlation of FDI inflows and Total debt
service (% of exports of goods, services and primary income) is 0.173 (< 0.5) at
significant level p > 0.05, that indicates a weak correlation between these indicators.
The correlation coefficient also reveals that despite of positive correlation between
the growth of FDI inflows and the Total debt service (% of exports of goods,
services and primary income), there is no evidence confirming the role of FDI on
the Total debt service.
FDI and Debt service on external debt, long-term (TDS, current US$)
It can be seen from the data of FDI inflows and Debt service on external
debt, long-term (TDS, current US$) in the 2000 – 2011 period that these figures
had experienced similar fluctuation trend. The Pearson correlation between FDI
Luận Văn A-Z
0972.162.399

110
inflows and Debt service on external debt, long-term (TDS, current US$) is 0.820
(> 0.5) at significant level p < 0.05 (see Table 18), that confirms a strong correlation
between these indicators. The correlation coefficient also reveals that this is a
positive relationship. That means the growth of FDI inflows have a positively
important role on the Debt service on external debt, long-term (TDS, current US$).
Figure 11 presents the graph of correlation between FDI and long-term debt
service on external debt.
Figure 11. Graph of Correlation between FDI and long-term debt service
on external debt
FDI and Debt service on external debt, total (TDS, current US$)
As indicated in Table 18, the Pearson correlation of FDI inflows and Debt
service on external debt, total (TDS, current US$) is 0.812 (> 0.5) at significant
level p < 0.05, that confirms a strong correlation between these indicators. The
correlation coefficient also reveals that this is a significantly positive relationship.
That means the growth of FDI inflows have an important and significantly positive
role on the Debt service on external debt, total (TDS, current US$).
Luận Văn A-Z
0972.162.399

111
FDI and Inflation, GDP deflator (annual %)
In the 1990 – 2010 period, the trend of Inflation, GDP deflator (annual %)
did not correspond to the trend of FDI inflows. The Pearson correlation of FDI
inflows and Inflation, GDP deflator (annual %) is -0.267 (> - 0.5) (p > 0.05) that
indicates a weak and negative correlation between these indicators. This correlation
coefficient also reveals that there is no evidence confirming the role of FDI inflows
on the Inflation, GDP deflator (annual %).
5.3 FDI and Level of Technology
There was a lack of data relating to High-technology exports (% of
manufactured exports) and High-technology exports (current US$). Therefore, the
“Level of Technology” indicator was only measured by “Industry value added”
data. As indicated in Table 19, the Pearson correlation of FDI inflows and Industry
value added (% of GDP) is 0.838 (> 0.5) that confirms a strong correlation between
these indicators. The correlation coefficient also reveals that this is a significantly
positive relationship. That means the growth of FDI inflows has a positive and
important role on level of techonology (the Industry value added, % of GDP).
Table 19. FDI and Level of Technology Coefficient of Correlation
Techonology Industry, value added (% of GDP)
FDI, net inflows
(BoP, current
US$)
Pearson Correlation .838**
N 22
Figure 12 presents the graph of correlation between FDI and level of
technology.
Luận Văn A-Z
0972.162.399

112
Figure 12 Graph of Correlation between FDI and level of technology
5.4 FDI and Human Capital
As indicated in Table 20, in the 1990-2012 period, the FDI inflows of Laos
had strongly positive relationship with the indicators of Human Capital. That is
confirmed by the correlation coefficients, which are all larger than 0.5. This means
that the growth of FDI inflows in Laos have a significantly positive role on the
Human Capital. Interestingly, the more FDI inflows increased the more Mortality
rate, under-5 (per 1,000 live births) declined.
Table 20. FDI and Human Capital Coefficient of Correlation
Human Capital
Life
expectancy
at birth,
total
(years)
Mortality
rate,
under-5
(per
1,000
live
births)
School
enrollment,
secondary
(% gross)
School
enrollment,
secondary
(% net)
School
enrollment,
tertiary (%
gross)
FDI, net
inflows
(BoP,
current
US$)
Pearson
Correlation
.665**
-.705**
.538*
.621**
.856**
Sig. (2-
tailed)
.001 .000 .012 .006 .000
N 22 22 21 18 20
Luận Văn A-Z
0972.162.399

113
Figure 13 presents the graph of correlation between FDI and School
enrollment, tertiary (% gross).
Figure 13. Graph of Correlation between FDI and School enrollment, tertiary
5.5 FDI and Energy and Natural Resources
As indicated in Table 21, the Pearson correlation of FDI inflows and Oil
consumption per capita is -0.271 (> -0.5) (p > 0.05) that indicates a weak
correlation between these indicators. The correlation coefficient also reveals that
there is no evidence confirming the significant role of FDI inflows on the Oil
consumption per capita.
Table 21. FDI and Energy and Natural Resources Coefficient of
Correlation
Energy and Natural Resources Oil consumption per capita
(bbl/day per 1000 people)
FDI, net inflows
(BoP, current
US$)
Pearson Correlation -.271
N 9
Figure 14 presents the graph of correlation between FDI and Natural
Resources (Oil consumption per capita).
Luận Văn A-Z
0972.162.399

114
Figure 14. Graph of Correlation between FDI and Natural Resources
5.6 FDI and Transportation and Communication
As indicated in Table 22, in general, in 1990-2012 period, the FDI inflows of
Laos had strongly positive relationship with indicators of the Transportation and
Communication. That is confirmed by the correlation coefficients, which are all
larger than 0.5 at p < 0.05, except the relationship between FDI and Fixed
broadband Internet subscribers (p > 0.05). This means that in general the growth of
FDI inflows have an important and positive role on the Transportation and
Communication.
Table 22. FDI and Transportation and Communication Coefficient of
Correlation
Transportation and
Communication
Air
transport,
passengers
carried
Air
transport,
registered
carrier
departures
worldwide
Mobile
cellular
subscriptions
(per 100
people)
Fixed
broadband
Internet
subscribers
(per 100
people)
Internet
users
(per
100
people)
Roads,
total
network
(km)
FDI, net
inflows
(BoP,
current
US$)
Pearson
Correlation
.721**
.707**
.833**
.593 .815**
.896**
Sig. (2-
tailed)
.000 .000 .000 .055 .000 .006
N 22 22 22 11 15 7
Luận Văn A-Z
0972.162.399

115
Figure 15 presents the graph of correlation between FDI and Mobile cellular
subscriptions.
Figure 15. Graph of Correlation between FDI and Mobile cellular
subscriptions
In summary, in this study the author employed the method of correlation
analysis to test the relationship between FDI inflows and various indicators
measuring six aspects of economic development in the context of Laos over the
period 1990-2012. The research findings, although are exploratory in nature, in
general provide empirical evidence to support the important and positive role of
FDI inflows on economic development.
Luận Văn A-Z
0972.162.399

116
CHAPTER 6. CONCLUSIONS AND DISCUSSION
This chapter presents conclusions of the research findings and discussion of
the findings. First section presents conclusions. Next, implications for policy
makers are provided. The final section presents limitations of this study and
suggests directions for future research.
6.1 Conclusions
This research aims to explore the role of FDI inflows on economic
development in Laos, a developing country which has received very mosdest
research attention to date. The correlation analysis method was employed to serve
this purpose. The research results show that in general, FDI plays a significant role
on economic development. Specifically, FDI inflows were found to be positively
correlated with almost all indicators measuring six aspects of economic developent.
The research findings are summarized in the following.
• FDI and GNI per capita: The findings suggest an important role of FDI inflows
on GNI per capita by showing a strongly positive correlation between the two
measures.
• FDI and Financial Capital: The findings show that FDI inflows are significantly
and positively correlated with some indicators of financial capital including the
Gross capital formation (% of GDP), the Debt service on external debt, long-
term (TDS, current US$), and the Debt service on external debt, total (TDS,
current US$).
• FDI and Level of Techonology: The findings show that FDI inflows has a
positive and important role on level of technology, based on a strong and
positive correlation between FDI and the Industry value added (% of GDP).
• FDI and Human Capital: The findings show that FDI inflows are significantly
correlated with all five indicators of human capital. All correlation coefficients
Luận Văn A-Z
0972.162.399

117
are positive, except the one between FDI and Mortality rate, under-5 (per 1,000
live births). This results may need to have further study for clarify the
relationship between the two measures. The strongest correlation is the one
between FDI and School enrollment, tertiary (% gross).
• FDI and Energy and Natural Resources: The findings failed to provide empirical
evidence for the significant role of FDI inflows on Energy and Natural
Resources. Perhaps, it is partly due to the measure limittaion of Energy and
Natural Resources with only one indicator - the oil consumption per capita. This
may need further exploration with more comprehensive measure.
• FDI and Transportation and Communication: The findings suggest that in
general FDI inflows have an important and positive role on the Transportation
and Communication, by showing significantly positive correlations between FDI
and five indicators of Transportation and Communication including Air
transport, passengers carried, Air transport, registered carrier departures
worldwide, Mobile cellular subscriptions (per 100 people), Internet users (per
100 people), and Roads (total network - km). The strongest correlations are
those between FDI and Roads (total network - km), Mobile cellular
subscriptions, and Internet users.
6.2 Implications of the Study
Theoretical implications
From theoretical perspective, this study is important because it contributes to
better understanding the relationship between FDI inflows and economic
development in the context of a developing country. This is especially interstesing
and important since the research context in this study is Lao P.D.R., a country that
has received very little research attention from scholars up to date. Therefore, the
findings from this study help to enrich the literature on FDI and its role on
economic development in general and in developing countries, in particular.
Luận Văn A-Z
0972.162.399

118
In addition, in this study the author empirically examined the relationship
between FDI inflows with a number of aspects of economic development, rather
than just focusing on one aspect as in many previous studies.
Implications for policy makers
On the basis of the findings, this study is also expected to provide a number
of implications for policy makers in Laos with the purpose of making effective use
of FDI for enhancing economic development in this country. Some implications and
suggestions are presented in the following.
Promoting and attracting FDI inflows
Attracting FDI has been becoming increasingly important for developing
countries like Laos. As reported in the previous chapter, FDI inflows in Laos, in
general, show significant and positive role on different aspects of economic
development such as economic growth, financial capital, human capital, level of
technology, and transportation and communication. Therefore, it is important for
policy makers to develop appropriate policies to create favorable environment to
attract FDI inflows.
There are a number of areas that should receive strong attention from policy
makers including institution/policy, infrastructure, labor skills, capabilities of
making use of technology to reduce the risks and increase incentives to attract
foreign investors.
Trade policy reforms and structuring industrial networking known as
"clusters" are important incentives for FDI. "Clusters" are concentrations of firms in
one or a few industries. They are comprised of competitors, buyers, and suppliers
networks. Industrial networking helps in creating efficient and strong local market,
and in turn more advantage of technology spillover from the foreign companies.
Implementing sustainable policy reforms improves investment environment and
increases the country's credit worthiness in the eyes of the foreign investors.
Luận Văn A-Z
0972.162.399

119
Institutional factors of the recipient country are essential elements
determining the type and volume of FDI. Morrissey and Rai (1995) indicated that
the degree of political stability and government intervention in the economy, the
existence of property rights legislation determining the legal rights of foreign firms
and limitations on foreign ownership, the property and profit tax system, and the
extent and severity of bureaucratic procedures are all institutional factors
influencing the type and size of FDI inflow. In addition, international agreements
on trade and investment can significantly influence the volume and patterns of FDI.
Foreign investors calculate the amount of risk involved in their investment
strategy abroad. Expropriation is unlikely to resurface in the near future, and many
developing countries now protect FDI investors from expropriation by introducing
that protection in their law chapters. Developing countries that have liberalized
their economies and privatized their state services are not willing to retract
ownership of these services (Minor, 1994).
Clarke (2001) assessed the effect of institutional quality represented by 'risk
of expropriation' and 'rule of law' on research and development. Using regression
analysis on a panel of data from between 1983 and 1994 for low and middle-income
countries he concluded that the risk of expropriation is more significant than the
'rule of law', and expenditures on R&D is lower in countries having higher risk
of expropriation and weaker rule of law.
Globerman and Shapiro (2003) evaluated the importance of infrastructure
governance (legislations, regulations, and legal system that condition freedom of
transacting, security of property rights, and transparency of government and legal
process) as prerequisite for receiving FDI.
Intellectual property rights and innovation have a significant role in
attracting FDI (Chen & Puttitanun, 2005).
The determinants of FDI have changed over time. While specific policy
interventions (e.g trade barriers) have affected FDI in many countries for long
periods of time, FDI investors have increasingly been looking for “sticky” places,
Luận Văn A-Z
0972.162.399

120
with good economic fundamentals in places: market size and growth, good quality
and appropriate skills and infrastructure. This has implications for how policy
makers can work on attracting inward FDI.
Maximizing the effective impact of FDI on economic development
It has been noted that the impact of FDI will largely depend on the economic
conditions of the specific countries. Domestic investment, savings, the mode of
entry of FDI (e.g. merger, acquisition, or new investment), the sector involved, and
the country's ability to regulate foreign investment are all factors affecting the
impact and the size of the FDI.
Many previous studies have also suggested that the level of infrastructural
development and human factor may limit the effective impact of FDI on the
economic growth (Adegbite & Ayadi, 2010). Therefore, Laos government may need
to put sufficient investment into upgrading infrastructure and developing human
capital so that the country can maximize the techonological spillovers and other
benefits associated with FDI inflows. Policy makers in Laos also need to work on
the necessary activities and developing relevant policies to promote favorable
environment for FDI and enhance the government’s capability to maximize the
benefits of FDI inflows. Laos’government may need to increase their investment in
fundamental infrastructures, human capital development, and facilities for
enhancing international trade and investment climate (Kotrajaras et al., 2011) so
that FDI can effectively promote economic growth.
Enhancing capabilities of controlling and regulating FDI for better
economic developemnt
As indicated in the findings of this study, although FDI generally show
positive relationship with various indicators of economic development in Laos, it
still shows some negative side such as FDI was significantly associated with the
Debt service on external debt, long-term (TDS, current US$), and the Debt service
on external debt, total (TDS, current US$). In order to maximize the positive impact
Luận Văn A-Z
0972.162.399

121
of FDI, policy makers may need to pay attention to the following issues such as
considering the area to attract FDI – not all types of FDI should be given the same
priority. It should be integrated with the national goals and the development strategy
of the country.
Laos government needs to develop its capabilities of controlling and
regulating FDI for better economic development. FDI should be directed to the right
sectors and areas so that the economy can have sustainable development. The
government also needs to have ability to select the appropriate FDI projects,
develop relevant policies toward different types of FDI projects, and have ability to
make decision of rejecting some inappropriate projects.
Developing an effective mechanism affecting foreign direct investors to
ensure mutual benefits of the foreign investors and the host country’s development
In order to ensure the positive impact of FDI inflows on economic
development of the country, at the same time to attract FDI projects, policy makers
need to put effort to develop an effective mechanism that can affect foreign direct
investors, especially the multinational corporations to ensure mutual benefits of the
foreign investors and the host country’s development. It means that the foreign
investors can operate successfully in Laos market for their profit but at the same
time these investors also commit to the development of the host country (i.e. Laos).
This can help ensure sustainable development of the market for the foreign
investors, and thus can bring long-term benefits for them as well as the development
for the local economy.
6.3 Limitations of the Study and Future Research Direction
This study has significant contribution in terms of both theory and practices.
However, it has several limitations that can be explored further in the future studies.
Luận Văn A-Z
0972.162.399

122
First, regardless of the long period of the data collected (1990-2012), some
variables had limited and small number of observations, like the Energy and Natural
Resources data which gave mixed results of the unavailability of that data.
Second, with regard to measurement issue, there is some limitation in terms
of a limited number of indicators measuring some variables in this study. For
example, Level of Techonology and Energy and Natural resources each was
measured by only one indicator. Future research should use more comprehensive
scales with multiple items to increase the validity of the results.
Third, many other aspects of economic developemnt could be affected by
FDI inflows other than the ones selected in this study. The future research could
explore the impact of FDI on more aspects of economic developemnt.
Fourth, in this study the author just explored the role of FDI on economic
development by empirically examined the correlations between FDI inflows and
various indicators of economic development in Laos. It would be desirable for
future research to test the impact of FDI on economic development employing more
advanced technique such as regression.
Another suggestion for future research would be having a micro level
analysis for Laos to come up with a reform strategy for improving their GNI per
capita following the path in accomplishing that goal. Future research could also
examine the factors influwncing the attraction of FDI inflow to Laos.
In conclusion, despite some limitations associated with this study, the author
believes that this study has obtained certain achievements. The findings of this
study on the relationship between FDI and various indicators of economic
development in Laos contribute to better understanding FDI and its role on
economic development in Laos, a relatively new research context. This helps to
enrich the literature on important issues of FDI and economic development in
general and in developing countries in particular.
Luận Văn A-Z
0972.162.399

123
REFERENCES
Adegbite E.O. and Ayadi F.S. (2010). The role of foreign direct investment in
economic development: A study of Nigeria. World Journal of
Enterprenuership, Management and Sustainable Development, 6(1/2), 133-
147.
Agrawal, G. & Khan, M. A. (2011). Impact of FDI on GDP: A comparative study of
China and India. International Journal of Business and Management, 6(10),
71-79.
Aguirre, M. S. (2002). Sustainable development: Why the focus on
population? International Journal of Social Economics, 29(11112),923.
Aitken, B., & Harrison, A. (1999). Do domestic firms benefit from FDI? Evidence
from Venezuela. The American Economic Review, 89(3), 605.
Albuquerque, R. (2003). The composition of international capital flows: Risk
sharing through foreign direct investment. Journal of International
Economics, 61, 353-383.
Alfaro, L., Chanda, A., Kalemli-Ozcan, S., & Sayek, S. (2004). FDI and economic
growth: The role of local financial markets. Journal of International
Economics,64,89-112.
Asia News Monitor
<http://search.proquest.com/docview/1287970695?accountid=134628>
accessed 15 August 2013.
Balasubramanyam, V. N., Salisu, M., & Saosford, D. (1996). FDI and growth in EP
and is countries. The Economic Journal, 106(434), 92-105.
Bartel, A., Lach, S., and Sicherman, N. (2005). Outsourcing and Technological
Change. NBER WorkingPaper No. 11158
Bathelt, H., Malmberg A., and Maskell P. (2004). Clusters and knowledge: Local
buzz, global pipelines and the process of knowledge creation. Progress in
human geography. 28(1) 31-56.
Luận Văn A-Z
0972.162.399

124
Becker, G., Murphy, K., & Tamura, R. (1990). The Journal of Political
Economy, 98(5),S12.
Blomstrom M. and Kokko A. (1996). The impact of foreign investment on host
countries: A review of the empirical evidence. World Bank policy research
working paper no. 1745. Retrieved on February 20, 2005 from
www.worldbank.org/html/dec/
Publications/Workpapers/WPS1700series/wps 1745/wps1745.pdf
Blomstrom, M., Lipsey, R. E., & Zejan, M. (1994). What explains growth in
developing countries? NBER Discussion Paper No. 1924.
Borensztein, E., Gregorio, J., & Lee, J-W. (1998). How does foreign direct
investment affect economic growth? Journal of International Economics,
45, 115-135.
Businessdictionnary.com
Calvo, G., Leiderman, L., & Reinhart, C. (1996). Inflows of capital to
developing countries in the 1990s. The Journal of Economic Perspectives,
10(2),123-139.
Chee, Y. & Nair, M. (2010). The impact of FDI and financial sector development
on economic growth: Empirical evidence from Asia and Oceania.
International Journal of Economics and Finance, 2 (2), 107-119.
Chen, Y., & Puttitanun, T. (2005). Intellectual property rights and innovation
in developing countries. Journal of Development Economics, 78,474-493.
Chung, W. (2001). Mode, size, and location of foreign direct investment and
industry markups. Journal of Economic Behavior & Organization, 45, 185-
211.
Clarke, G. (2001). How the quality of institutions affects technological
deepening in developing countries. The World Bank Development
Research Group.
Dicken, P. (2003). Global Shift: Reshaping the global economic map in the 21st
Century. 4th edition. London: Sage Publications.
Luận Văn A-Z
0972.162.399

125
Dunning, J H. (1981). International production and the multinational enterprise.
London: George Allen & Unwin.
Dunning, J H. (2000). International production and the multinational enterprise.
London: George Allen & Unwin.Durham, B.(1999). Economic Growth
andPolitical Regimes. JournalofEconomic Growth,4(1),81.
Earth Summit (2002). Foreign direct investment: A lead driver for sustainable
development? Paper presented at Economic Summit. Retrieved June 15,
2006, from http://www.earthsummit2002.org/es/issuesIFDIIfdi.htm.
Fields, G. S. (2004). Dualism in the labor market: A perspective on the Lewis
model after half a century. The Manchester School, 72(6), 724-735.
Galor, O. (2004). The demographict ransition and the emergence of sustained
economic growth. Brown University, Providence, RI: Department of
Economics.
Gao, T. (2005). Foreign direct investment and growth under economic integration.
Journal of International Economics, 67, 157-174.
Glass, A. J., & Saggi, K. (2002). Multinational firms and technology transfer.
Scandinavian Journal of Economics, 104(4),495-659.
Globerman, S & Shapiro, D. (2003). Governance infrastructure and US foreign
direct investment. Journal of International Business Studies, 34 (1), 19-39
Graham E M. and Wada E. (2001). Foreign direct investment in China: effects on
growth and economic performance. Institute for international economics
working paper no. 01-03. Retrieved on February 20, 2005 from http://ssrn.
com/abstract=300884.
Heady, F. (1979). Public administration: A comparable perspective (2nd ed.). New
York: Marcel Dekker.
Hogler, G., & Strobl, D. (2003). Multinational companies, Technology
spillover and plant survival. Scandinavian Journal of Economics, 105(4),
581-595.
Index Mundi, Historical Data, Accessed 15th August 2013
Luận Văn A-Z
0972.162.399

126
<http://www.indexmundi.com/g/>.
United Nations Human Development Report (2001) and report research of
bbc.co.uk.
Ito, K., & Rose, E. (2002). Foreign direct investment location strategies in the tire
industry. Journal of International Business Studies, 33 (3), 593-602.
Kim,Y.J., & Lee, J.W. (1999). Technological change, investment in human capital
and economic growth. Working Paper No.29. Center for International
Development at Harvard University.
Kojima, K. (1978). Direct foreign investment: A Japanese model of multinational
business operations. New York: Praeger publishers.
Kokko, A., Kotoglou, K. & Krohwinkel-Karlsson, K. (2003). Characteristics of
failed FDI projects in Vietnam. Transnational Corporations,12, 41-77.
Kotrajaras, Polpat, Bangorn Tubtimtong, and Paitoon Wiboonchutikula (2011).
ASEAN Economic Bulletin,28(2), 183-202.
Lall S. (1985). Multinationals, technology and exports. London: The Macmillan
Press.
Lall S. (1993). Introduction: Transnational corporations and economic development.
In Lall S. (Ed.). Transnational corporations and economic development (pp.
1-27). The United nations library on transnational corporations. Volume 3.
London: Routledge.
Lee, I. H. & Rugman, A.M. (2009). Multinational and public policy in Korea. Asian
Business & Managemnet. 8 (1), 59-82.
Longani, P. & Razin, A. (2001). How beneficial is Foreign Direct Investment?
Finance and Development, 38, 6-9.
Lundvall, B A. (ed.) (1992). National systems of innovation: Towards a theory of
innovation and interactive learning. London and New York: Pinter
Publishers.
Luận Văn A-Z
0972.162.399

127
Malmberg, A., Solvell O., and Zander I. (1996). Spatial clustering, local
accumulation of knowledge and firm competitiveness. Geografiska annaler.
Series B. 78(2) 85-97.
Mankiw, N G., Romer D. and Weil D N. (1992). A contribution to the empirics of
economic growth. The quarterly journal of economics. 107(2) 407-437.
Masina, P. (2002). Vietnam and the regional crisis: the case of a late comer.
European Journal of East Asian Studies, 1, 199-220.
Mengistu, B. & Adams, S. (2007). Foreign direct investment, governance and
economic development in developing countries. Journal of Macroeconomics,
32(2),223-249.
Minor, M. (1994). The demise of expropriation as aninvestment of LDC policy
1980-1992. Journal of International Business Studies, 25 (1), 177.
Mody, A., & Murshid, A. (2005). Growing up with capital flows. Journal of
International Economics, 65, 249-266.
Morrissey, O., & Rai, Y. (1995). The GATT Agreement on Trade-Related
Investment and their relationship with transnational corporations.
Journal of Development Studies, 31(5).
Mowery, D C. and Oxley J E. (1995). Inward technology transfer and
competitiveness: The role of national innovation systems. Cambridge journal
of economics. 19 67-93.
Nelson, R R. and Winter S G. (1982). An evolutionary theory of economic change.
Cambridge, Mass: Harvard University Press.
Nguyen, P. L. (2008). Foreign direct investment and economic growth in Vietnam.
Dissertation at University of South Australia.
OECD (2012). OECD International Direct Investment Statistics (database).
Parayil, G. and Sreekumar T T. (2004). Industrial development and the dynamics of
innovation in Hong Kong. International Journal of Technology
Management. 27(4) 369-392.
Luận Văn A-Z
0972.162.399

128
Park, S O. (1998). Local-Global networks of high-technology industrial districts in
Korea. In Grunsven L V. (Ed.). Regional change in industrializing Asia. (pp
158-172). Singapore: Ashgate.
Phimphanthavong, H. (2012). Economic Reform and Regional Development of
Laos. Modern Economy, 3, 179-186.
Pool, J. C., & Stamos, S. (1990). International economics. Lanham, MD:
Lexington Books.
Poon, J. and Thompson, E. (2003). Developmental and quiescent subsidiaries in the
Asia Pacific: Evidence from Hong Kong, Singapore, Shanghai and Sydney.
Economic geography. 79 (2) 195-214.
Poon, J. P. H. and Thompson, E. R. (1998). Foreign direct investment and economic
growth: Evidence from Asia and Latin America. Journal of economic
development. 23(2) 141-160.
Prasad Bhavani and Hari Prasad Sharma (2012). Impact of FDI on economic
development of India. International Journal of Marketing and Technology
2(6) 131-149.
Rodriguez-Clare, A. (1996). Multinationals, linkages, and economic development.
The American Economic Review, 86(4),852-873.
Rosenzweig, M. (1990). Population growth and human capital investments, theory
and evidence. The Journal of Political Economy, 98(5), S38-S70.
Rostow, W. W. (1960). The stages of economic growth: A non-Communist
manifesto. Cambridge, England: Cambridge University Press.
Rugman, A. M. and Verbeke A. (2001). Location, competitiveness, and the
multinational enterprise. In Rugman A M. and Brewer T L. (Eds.), The
Oxford handbook of international business (pp 150-177). New York: Oxford
University Press.
Sala-i-Martin, X., & Artadi, E. V. (2003). Economic growth and investment in the
Arab world. Colombia University, NBER and UPF and Harvard University.
Luận Văn A-Z
0972.162.399

129
Sedgwick, M W. (1999). Do Japanese business practices travel well? Managerial
technology transfer to Thailand. In Encarnation D J. (Ed.). Japanese
multinationals in Asia: Regional operations in comparative perspective (pp
163-179). New York: Oxford University Press.
Todaro, M.P. (1994). Economic development. Longman Publishing Group.
United Nations (1987). Transnational corporations and technology transfer: Effects
and policy issues. United Nation centre of transnational corporations. New
York: United nations.
Wei, S. J. (1998). Corruption in economic development: Beneficial grease, minor
annoyance, or major obstacle? Harvard University and NBER.
World Databank Accessed on 15th
August 2013
<http://databank.worldbank.org/data/views/reports/tableview.aspx>.
Yehoue, E. (2005). Clusters as a driving engine for FDI. (WP 05/193). IMF.
Yeung, L. (2000). Embedding foreign affiliates in transnational business networks:
The case of Hong Kong firms in Southeast Asia. Environment and planning
A 32(2) 201-222.
Yifi Lin, J. (2003). Development strategy, viability, and economic convergence.
Zhang, K. (2001). Does foreign direct investment promote economic growth?
Evidence from East Asia and Latin America. Contemporary Economic
Policy, 19(2), 175.
Zhou, Y. and Xin T. (2003). An innovative region in China: Interaction between
multinational corporations and local firms in a high-tech cluster in Beijing.
Economic geography. 79(2), 129-152.
Luận Văn A-Z
0972.162.399

La01.005 a study on the impact of foreign direct investment on economic development of lao p.d.r.

More Related Content

Viewers also liked (20)

Similar to La01.005 a study on the impact of foreign direct investment on economic development of lao p.d.r. (20)

More from Luận Văn A-Z - Viết Thuê Luận Văn Thạc sĩ, Tiến sĩ (Zalo:0924477999) (20)

Recently uploaded (20)

La01.005 a study on the impact of foreign direct investment on economic development of lao p.d.r.