Laos, officially the Lao People’s Democratic Republic (Lao PDR), is a rapidly growing developing economy at the heart of Southeast Asia, bordered by Burma, Cambodia, China, Thailand, and Vietnam. Laos’ economic growth over the last decade averaged just below eight percent, placing Laos amongst the fastest growing economies in the world. According to the World Bank, Laos’ GDP growth fell from 6.3 percent in 2018 to 4.8 percent in 2019 due primarily to natural disasters that affected the agricultural sector. The COVID-19 outbreak is expected to further intensify the country’s macroeconomic vulnerabilities in 2020, with limited fiscal and foreign currency buffers constraining the ability of the Government of Lao PDR to mitigate the economic impacts of the pandemic. Over the last 30 years, Laos has made slow but steady progress in implementing reforms and building the institutions necessary for a market economy, culminating in accession to the World Trade Organization (WTO) in February 2013. The Lao government’s commitment to WTO accession and the creation of the ASEAN Economic Community (AEC) in 2015 led to major reforms of economic policies and regulations aimed at improving the business and investment environment. Nonetheless, within ASEAN Laos ranks only ahead of Burma in the World Bank’s “Ease of Doing Business’ rankings. The Lao government is increasingly tying its economic fortunes to the economic integration of ASEAN and export-led development and is seeking to move toward greener growth and sustainable development.
The exploitation of natural resources and development of hydropower drove the rapid economic growth over the last decade, with both sectors largely led by foreign investors. However, the Lao government recognizes that growth opportunities in these industries are finite and employ few people, and has therefore recently began prioritizing and expanding the development of high-value agriculture, light manufacturing, and tourism, while continuing to develop energy resources and related electrical transmission capacity to export to neighboring countries.
The Lao government hopes to leverage its lengthy land borders with Burma, China, Thailand, and Vietnam to transform Laos from “land-locked” to “land-linked,” thereby further integrating the Lao economy with the larger economies of the countries along its borders. The government hopes to increase exports of agriculture, manufactured goods, and electricity to its more industrialized neighbors, and sees significant growth opportunities resulting from the China-Laos Railway, which will connect Kunming in Yunnan Province with Vientiane, Laos. The railway is expected to be completed and operational by 2021. Some businesses and international investors are beginning to use Laos as a low-cost export base to sell goods within the region and to the United States and Europe. The emergence of light manufacturing has begun to help Laos integrate into regional supply chains, and improving infrastructure should facilitate this process, making Laos a legitimate locale for regional manufacturers seeking to diversify from existing production bases in Thailand, Vietnam, and China. New Special Economic Zones (SEZs) in Vientiane and Savannakhet have attracted major manufacturers from Europe, North America, and Japan.
Economic progress and trade expansion in Laos remain hampered by a shortage of workers with technical skills, weak education and health care systems, and poor—although improving—transportation infrastructure. Institutions, especially in the justice sector, remain highly underdeveloped and regulatory capacity is low. Despite recent efforts and some improvements, corruption is rampant and is a major obstacle for foreign investors.
Corruption, policy and regulatory ambiguity, and the uneven application of laws remain disincentives to further foreign investment in the country. The Lao government, under the administration of the new Prime Minister Thongloun Sisoulith is making efforts to improve the business environment. Its current five-year plan (2016 – 2020) directs the government to formulate “policies that would attract investments” and to “begin to implement public investment and investment promotion laws.” The Prime Minister’s publicly-stated goal is to see Laos improve its World Bank Ease of Doing Business ranking, and in February 2018, he issued a Prime Minister order laying out specific steps ministries were to take in order to improve the business environment. These efforts are having some impact – for example, it now takes to less than 40 days to obtain a business license, whereas just 4 years ago it took 174 days, and other nonessential steps were eliminated. The current administration remains active against corrupt practices, with the government and National Assembly in 2019 disciplining hundreds of officials for corruption-related offenses. Despite these efforts, the Laos’ Ease of Doing Business ranking has fallen from 139 in 2016 to 154 in 2019. Furthermore, the multiple ministries, laws, and regulations affecting foreign investment into Laos create confusion, and thus, require many potential investors engage either local partners or law firms to navigate the confusing bureaucracy, or turn their efforts entirely toward other countries in the region.
|TI Corruption Perceptions Index||2019||130 of 180||http://www.transparency.org/
|World Bank’s Doing Business Report||2019||154 of 190||http://www.doingbusiness.org/
|Global Innovation Index||2019||Not Ranked||https://www.globalinnovationindex.org/
|U.S. FDI in partner country ($M USD, stock positions)||2019||No Data Available||https://apps.bea.gov/international/
|World Bank GNI per capita||2019||$ 2,450||http://data.worldbank.org/indicator/
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Toward Foreign Direct Investment
The Lao government officially welcomes both domestic and foreign investment as it seeks to keep growth rates high and graduate from Least Developed Country status by 2024. The pace of foreign investment has increased over the last several years. According to Lao government statistics, mining and hydropower account for 95.7 percent of Foreign Direct Investment (FDI), and agriculture accounted for only 2 percent of FDI in 2019 China, Thailand, France, Vietnam, and Japan are the largest sources of foreign investment, with China accounting for a significant share of all FDI in Laos. The government’s Investment Promotion Department encourages investment through its website , and holds an annual dialogue with the private sector and foreign business chambers though the Lao Business Forum process.
The 2009 Law on Investment promotion was amended in November 2016, with 32 new articles introduced and 59 existing articles revised. Notably, the new law, an English version of which can be found at , clarifies investment incentives, transfers responsibility for SEZs from the Prime Minister’s office to the Ministry of Planning and Investment, and removes strict registered capital requirements for opening a business, deferring instead to the relevant ministry. Foreigners may invest in any sector or business except in cases where the government deems the investment to be detrimental to national security, health, or national traditions, or that have a negative impact on the natural environment. Nevertheless, even in cases where full foreign ownership is permitted, many foreign companies seek a local partner. Companies involved in large FDI projects, especially in mining and hydropower, often either find it advantageous or are required to give the government partial ownership.
Foreign investors are typically required to go through several procedural steps prior to commencing operations. Many foreign business owners and potential investors claim the process is overly complex and regulations are erratically applied, particularly to foreigner investors. Investors also express confusion about the roles of different ministries, as multiple ministries become involved in the approval process. In the case of general investment licenses (as opposed to concessionary licenses, which are issued by Ministry of Planning and Investment), foreign investors are required to obtain multiple permits, including an annual business registration from the Ministry of Industry and Commerce (MOIC), a tax registration from the Ministry of Finance, a business logo registration from the Ministry of Public Security, permits from each line ministry related to the investment (i.e., MOIC for manufacturing, and Ministry of Energy and Mines for power sector development), appropriate permits from local authorities, and an import-export license, if applicable. Obtaining the necessary permits can be challenging and time consuming, especially in areas outside the capital.
There are several possible vehicles for foreign investment. Foreign partners in a joint venture must contribute at least 30 percent of the company’s registered capital. Wholly foreign-owned companies may be entirely new or a branch of an existing foreign enterprise. Equity in medium and large-sized SOEs can be obtained through a joint venture with the Lao government.
Reliable statistics are difficult to obtain, yet with the slowdown of the world economy, there is no question that foreign investment has begun to fluctuate in comparison to previous years. According to the United Nations Conference on Trade and Development (UNCTAD), FDI inflows to Laos decreased 17 percent to USD 1.3 billion in 2018 after peaking in 2017 but still 30 percent higher than 2016. Laos received around USD 1.07 billion in FDI from China in 2019. Total FDI stock in Laos has increased from USD 5.7 billion in 2016 to USD 8.6 billion in 2018.
Limits on Foreign Control and Right to Private Ownership and Establishment
As discussed above, even though foreigners may invest in most sectors or businesses (subject to previously noted exceptions), many foreign companies seek a local partner in order to navigate byzantine official and unofficial processes. Companies involved in large FDI projects, especially in mining and hydropower, often either find it advantageous or are required to give the government partial ownership.
Other Investment Policy Reviews
Laos does not have a central business registration website yet, but the Ministry of Industry and Commerce (MOIC) has improved its online enterprise registration site, , to accelerate the registration process. As discussed above, over the last four years the total time for business registration has been reduced significantly. The timelines and the different government agencies involved in the process can still vary considerably, however, depending on locations and the type of business. As a result, many investors and even locals often hire consultancies or law firms to shepherd the labor-intensive registration process.
The Lao government has attempted to streamline business registration using a one-stop shop model. For general business activities, this service is in the MOIC, http://www.erm.gov.la. For activities requiring a government concession, the service is in the Ministry of Planning and Investment. For SEZs, one-stop registration is run through the Ministry of Planning and Investment or in special one-stop service offices within the SEZs themselves (under the authority of the Ministry of Planning and Investment), as is the case at Savan Seno SEZ.
Business owners give the one-stop shop concept mixed reviews. Many acknowledge that it is an improvement but describe it as an incomplete reform with several additional steps that must still be taken outside of the single stop. Businesses also complain that there are often different registration requirements at the central and provincial levels.
The Lao government does not actively promote, incentivize, or restrict outward investment.