Foreign Direct Investment in Laos

Foreign Direct Investment (FDI) is a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in, and retains a significant degree of influence over an enterprise resident in another economy. Foreign Investment involves capital flows from one country to another, granting the foreign investors extensive ownership stakes in domestic companies and assets. Foreign investment denotes that foreigners have an active role in management as a part of their investment or an equity stake large enough to enable the foreign investor to influence business strategies.

Land-locked Laos, bordered by Myanmar, Cambodia, Thailand, Vietnam, and China was one of the fastest growing economies in the world prior to the Covid-19 pandemic, averaging growth of around 8% per year1. Since the country reopened its borders in 2022 it has faced a number of financial challenges, witnessing high levels of inflation, with year-on-year inflation reaching 40% early in 2023, as well as reduced economic growth rate predictions from the World Bank.

As Laos emerged from a period of International isolation, normalising ties with China in the late 80s and with the United States of America (USA) in 1992, it became a member of The Association of Southeast Asian Nations (ASEAN) in 1997 and the World Trade Organization (WTO) in 2013.

With this, the country opened up to foreign investment seeing initial growth from 2005, with more significant growth occurring from the early 2010s. This growth has been driven by investment in the energy sector, particularly hydropower projects, and significant investment in the mining industry.

Whilst Laos is land-locked without access to an ocean or sea it has attempted to use this status to its advantage, shifting the narrative to that of a ‘land-linked’ nation, through investments such as the China’s Belt and Road Initiative (BRI). The landmark building of the Lao-China Railway is planned to extend connections to Thailand, Malaysia, and Singapore2.

Whilst Laos is succeeding in attracting foreign investment there remains barriers and issues that hamper economic progress. This includes a shortage of workers with technical skills, weak education and health care systems, and poor transportation infrastructure, although this is slowly improving.

Laws and Regulations

Introduced in 2009 the Law on Investment Promotion was amended in November 2016, with 32 new articles introduced and 59 existing articles revised.These amendments clarified investment incentives and revised restrictions on capital requirements for opening a business.
Although foreign investors are able to invest in any sector or business, the reality is the sectors or industries considered as a potential national security risk are restricted from investment. Whilst foreign investors are able to attain full ownership of businesses in some instances it is more likely to see investors partnering with local businesses and enterprise partners, or in instances of large projects, such as in mining or hydropower, investors are likely to seek partial government ownership. This is due to, what is perceived to be, the complicated official and unofficial processes of obtaining the rights to invest.

Main Investors

China, Thailand, France, Vietnam, and Japan are the largest sources of foreign investment, with China accounting for a significant share of all investment in Laos. With the introduction of SEZs in the Vientiane and Savannakhet regions attracting investors from Europe, North America, and Japan, China. Thai investors are developing plans for additional SEZ projects. The total foreign investment in Laos increased from $5.7 billion in 2016 to $10 billion in 2019, though the U.S Department of State notes that reliable figures are difficult to attain and verify. As such, the official data released by the Laotian government indicates that foreign investment currently stands at $20.5 billion in the year of 2021, with the top three investors over the period covering 2010 to 2021 being China with a total investment of around US$12 billion, Vietnam with a total investment of around US$2.8 billion, and Malaysia with a total investment of around US$564 million. Over a period covering 1989 to the end of 2021, the top three investments are China, Thailand, and Vietnam.

Made with Flourish

Investment Industries and Sectors

Over the past decade exploitation of natural resources, i.e., the mining of gold, silver, copper, iron and bauxite, and the development of hydropower has driven economic growth in the country, mainly as a result of foreign investment. These investments have sparked energy-related projects and infrastructure that subsequently drive foreign investment as well, but Laos also prioritises investments in agriculture, light manufacturing, and tourism.

Special Economic Zones (SEZs) have increased in popularity as a means of attracting foreign investment across the Lower Mekong region, typically through beneficial policies and regulations, such as, tax-free or low tax rates. The introduction of SEZs in the Vientiane and Savannakhet regions have stimulated investments targeted at increasing the appeal for manufacturers to base their production in Laos. This shows the fruits of attracting investors from Europe, North America, Japan, and China. Thai investors have additional plans for SEZ projects in the country for industrial manufacturing and processing for export, tourism, and trade and logistics expansions.

Yet, counter to large foreign-owned investments the Lao government still maintains ownership stakes in key sectors of the economy such as, telecommunications, energy, finance, airlines, and mining.

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Significant Foreign Investments

Several large scale foreign investment projects are worth highlighting due to their significance in size and monetary value, along with the controversy they have generated throughout the life of their development. Although many contribute significantly to the Laos economy they are often characterised with many social and environmental harms which continue to raise negative publicity throughout the region.

Hydropower has been a significant drawer for foreign investment since the mid 20th century. The Nam Ngum Dam was the first hydroelectric dam built in Laos. It is located on the Nam Ngum River, a major tributary of the Mekong River. Construction on the dam started in 1968 with the final stage of construction finishing in 1984, taking place over 3 phases. Funding for the project came from numerous sources, including Japan (phases 1 and 3), the United States of America (phases 1 and 3), the World Bank (phases 1 and 2), and the Asian Development Bank (phases 2 and 3). The total cost of the project is estimated at $97 million and the gross power revenues of the dam are approximately US$36 million annually with 70-80% of the generated power exported to Thailand.

 

Nam Ngum 1 Dam

The Nam Ngum Dam, a hydroelectric dam on the Nam Ngum River in Vientiane Capital, Laos. Photo by Chaoborus , taken on 1 December 2011. Licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.

The Hongsa Power Station is a coal fired power station in the Xayaboury Province of Laos. The Hangsa Power Station incorporates an open face mine and a 1878 MW coal fired power station. The power station was developed by Hongsa Power Company. Hongsa Power Company is a consortium comprising the Thai company RATCH Group Public Company Limited, Banpu Power (itself a subsidiary of the Thai coal-mining company Banpu), and Lao Holding State Enterprise. Ratch and Banpu each have a 40% stake in the project and Lao Holding a 20% stake. It is speculated to have cost around $4 billion to construct. The power station began operating in 2015, generating at least 1878-megawatts (MW) of electricity, 1,473 MW of which is exported to Thailand, with the rest for on-site and domestic usage3. A planned expansion of the power plant is currently on hold in the face of opposition and also, potentially, due to uncertain energy policies.

Both of these projects have faced criticism from local residents, and Civil Society Organisations (CSOs). Concerns include the ecological impact of the projects, both in terms of pollution, and in the instance of hydropower dams, the impact on flood control, irrigation, and fish populations, and the impact on local communities, such as the relocation of communities living in affected areas.

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