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.

(Development Economics)
Code:
62.31.01.05
A dissertation summary submitted to the National Economics University

of the world.

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.
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.)
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.
3
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).
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

• Does FDI have a significant role on the Financial Capital?
• 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
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.
FDI has been suggested as a determinant of economic development
in both developed and developing countries. Its important role in promoting

Chapter 1: Introduction
Chapter 2: Literature review on the impact of FDI on economic
development
Chapter 3: Overview of economic development and FDI in Laos
Chapter 4: Research methodology
6
Chapter 5: Research findings
Chapter 6: Conclusions and discussion
7

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

This chapter reviews the literature on IJVs’ performance and the
factors influencing it. In the first section of the chapter, the literature on the
five common measures of IJV performance were reviewed, followed by the
review of the key determinants of IJV performance. Finally, the proposed
conceptual framework is presented.

2.1 Definition and Indicators of Economic Development
2.1.1 Definition of Economic Development

FDI on economic development in Laos, focusing on some economic
development indicators including:
- Gross National Income (GNI) per capita
- Financial Capital
- Level of technology
- Human Capital
- Energy and Natural resources
- Transportation and Communication

2.1.3 Theoretical Economic Overview
This section review several economic models such as Lewis' Dual
Economy model (1954), Solow's model (1956), the Harrod-Domar growth
model, and Dependency theory (Pool & Stamos, 1990).

2.2 FDI and its Impact on Economic Development
2.2.1 Definition and Determinants of FDI

2.2.1.1 Definition of FDI and reasons for FDI inflows to developing
countries
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
9
the enterprise. Ownership of at least 10% of the voting power, representing
the influence by the investor, is the basic criterion used (OECD, 2012).


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
2.2.2.2 Impact of FDI on Economic Development through Human Capital
2.2.2.3 Impact of FDI on Economic Development through Technology
2.2.2.4 Foreign Direct Investment and Spillovers 11
CHAPTER 3: OVERVIEW OF ECONOMIC DEVELOPMENT AND
FDI IN LAOS
3.1 Overview of Laos’ Economy
This section presents various aspects of Laos’s economy, inclusing
economic growth, economic structural changes, etc.

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%.

3.2 Foreign Direct Investment in Laos
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.

Before 1985, there was not any FDI inflow to Lao PDR. 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
13
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.
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.
The majority of FDI goes to natural resource sectors. Major FDI to
Lao PDR in recent years comes from the region, mainly from Thailand,

4.2 Variables and measures
In this section, the author presents key variables used in this study
and the indicators measuring them.
These indicators are adopted from
World Bank.

FDI inflows: measured by BoP (current US$)
Economic developemnt:
A. GNI per capita: constant 2005 US$
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$)
15
• Debt service on external debt, total (TDS, current US$)
• 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)

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 1 Graph of Correlation between FDI and GNI per capita

0
100
200
300
400
500
600
700
0 50 100 150 200 250 300 350
GNI per capita (constant 2005
US$)
FDI (BoP, current US$mn.)
17
Table 17. FDI and GNI per capita Coefficient of Correlation GNI per capita (constant

Gross
capital
formatio
n (% 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$)

.812**

-
.267

Sig. (2-
tailed)
.001

.623

.453

.000

.000

.229

N
12

11

21

22

22


.838
**

Sig. (2
-
tailed)

.000

N

22As indicated in Table 19, the correlation of FDI inflows and Industry
value added (% of GDP) is 0.838 (> 0.5) that confirms a strong correlation
between these measures.

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.
0
50
100
150
200
250
300
350

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

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

**

Sig. (2-
tailed)
.000

.000

.000

.055

.000

.006

N
22

22

22

11

15

7
a positive and important role on level of techonology, 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 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).
22
• 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

develop appropriate policies to create favorable environment to attract FDI
inflows.

Maximizing the effective impact of FDI on economic development: 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.

Enhancing capabilities of controlling and regulating FDI for better
economic development: 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.

24
Developing an effective mechanism affecting foreign direct investors to
ensure mutual benefits of the foreign investors and the host country’s
development.

6.3 Limitations of the Study and Future Research Direction