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
i

DECLARATION

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.

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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

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
v
ABBREVIATIONS

AFTA Asean Free Trade Area
AGOA
APTA
ASEAN
ATIGA
BIT
BOP
CAP
CEPEA
EAFTA

ISCED
ISIC
Lao PDR
International Standard Classification of Education
International Standard Industrial Classification
the Lao People’s Democratic Republic
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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


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

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LIST OF TABLES

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

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

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.)
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

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
5
capital inflows, transfer of technology, augmentation of human capital, and other

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.
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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

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.
CHAPTER 2. LITERATURE REVIEW ON THE IMPACT OF FDI ON
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.
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CHAPTER 2. LITERATURE REVIEW ON THE IMPACT OF FDI ON
ECONOMIC DEVELOPMENT

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
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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,

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
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capital. To do this, policies are needed to encourage saving and/or generate

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.

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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,