Potential Impact
Any company considering investment in the Lao market will have to take into consideration economic factors such as low disposal income, weak currency and high inflation rates. However there are many opportunities to be exploited in the Lao economy and their priority focus on international trade is extremely encouraging.
While the Lao economy remains the smallest in Southeast Asia, it has been drawing the attention of foreign investors for a number of reasons, including its abundant natural resources, low-cost labor force, and proximity to China and the fast-growing markets of ASEAN.
Laos’s neighbors – China, Thailand, and Vietnam – continue to dominate the investment landscape, accounting for more than half of all foreign investment. China surpassed Vietnam last year, with licensed projects valued at more than $5 billion. But Laos is broadening its appeal to other investors as well. Japanese investment increased by nearly 15 percent in 2013, to more than $400 million, attracted by improvements in the country’s infrastructure and the prospect of an alternative production base to Thailand.
Mining and hydropower remain the leading foreign investment sectors, together accounting for about half of licensed projects and more than 60 percent of exports last year. Tourism has grown at an annual rate of 18 percent since 2008, and is one of the nation’s leading sources of foreign exchange, generating about half the revenue of mining exports.
But the story of Laos’s impressive growth is accompanied by a long list of challenges.
The prominence of extractive industries highlights that rapid GDP growth does not necessarily translate into broad economic advancement and infrastructure improvement.
The mining sector has been hit by falling global commodity prices. Despite achieving record production last year, the Sepon mine in southern Laos, one of the nation’s largest, saw earnings fall 19 percent as a result of lower copper prices.
Although hydropower exports, primarily to Thailand, generate tremendous revenue, they remain a source of tension between Laos and its neighbors, and a lightning rod for criticism from environmental and other non-governmental organizations.
While investors are attracted by low labor costs, businesses find it difficult to hire and retain qualified employees. Poorly funded schools have failed to produce enough skilled workers to fill manufacturing and other technology-driven jobs, and those with qualifications frequently pursue higher paying work in Thailand.
Like other developing countries, Laos is handicapped by an immature judiciary and legal system, and was ranked 159 out of 189 economies in the 2014 World Bank Ease of Doing Business survey, which measures the effect of business regulations and their enforcement.