Laos is the land-locked with small economy, to enhance export’s competitiveness and sustainability is now being criticized the capacity of exports at present and in future. There seems less incentives for investors to produce the products and services for supplying the domestic market. Exporting their products overseas is a more attractive option. Due to the trade costs particularly for exports are still high as a result from the low infrastructure development and there is a lack of policies on specific potential products. Thus it induced a large proportion of FDI flow into only mining and hydropower sectors and changing export structure recently in Laos.
This paper hence focused on the investigation of the impacts of trade cost and export specialization on the export performance of Laos by applying two specific models, namely the aggregated model from 1986 to 2010 and the disaggregated model from 2001 to 2010. The augmented gravity model and unbalanced panel data were used with the GLS-SUR approach.
The findings confirmed that the level of infrastructure development (one of proxies represents the trade costs) in both trading countries is accelerating export activities in Laos. However, the magnitude of the importing country’s infrastructure development has a stronger effect than that of the home country. Additionally, the transaction cost and geographical distance are also significant with negative effects on export. More importantly, export specialization is statistically significant such that a 10% change in specialization can potentially stimulate around 43% export growth.