Economy, FDI and Hydropower Sector in Laos

Economy, FDI and Hydropower Sector in LaosBackgroundGenerally speaking, hydropower has sundry(a) economical, environmental and social and strategic advantages. The hydropower is the largest renewable resource used for electric automobileal energy and Hydropower is a sanitary source of electricity worldwide and will likely continue to grow specially in the violateing countries. Thus it plays an essential component part in economical development particularly in many developing countries.Like many countries the Lao Peoples Democratic Republic (Lao PDR) or Laos is in course of instruction in receiving extraneous enthronization chief(prenominal)ly in hydropower welkin which comparing by sector from 2000-2010 hydropower sector account more than than 33% in everlasting(a) investing (MPI, Laos). Laos nature and climate provide mammoth opportunities for the country to develop hydropower sector which in recent year in that attitude has been change magnitude demand for elec tric power in the region of South-East Asia, however less than 2 part of the hydropower potential has been developed in Laos over the past 30 historic menses (Laos National Statistic in 2007). During the last few eld, the hydropower sector has played an chief(prenominal) role in the speedy economic growth of the country recently has experienced, more than 70 hydropower projects be under development, and the hydropower sector makes up an significant part of the exporting industry in Laos.As the establishment strike out the economic wit from now the year 2020, the National Development Vision to the Year 2020 is to graduate from the status of existence a least developed country and become sustainable development nation. To reach and achieve such vision, Laos needs the capital and invests in the human resource capacity, as Laos Government lack of these things. Thus, the contrary investment especially in hydropower sector is playing an important role in change magnitude th e governments revenue (capital generation), job creations and new business system introducing.The hydropower sector is playing the significant role in the Laos economic and social development, the investment law in 1994 introduced the huge incentives mainly evaluate incentives in order to attract more investment, the disbelief is that are these incentives really employ and attract more investment into Laos? Or how did the investment incentive policies effect to hydropower sector in Laos? Thus, the objective or thesis statement of this paper is to analysis the effective of incentive policies offered by government of Laos in attracting investment mainly hydropower sector into Laos. The scope of this paper is not go back beyond the investment law introduced in 1994, but it starts to introduce some basic info about Laos such as the basic information about population, land area, religions and so on (See the Laos at Glance in the table 1 below) and the investment incentive policies p rovided by the government of Laos.Many scholars explained that, market size and cost of production is the key in attracting investment. Krugman (1991a) argues that the interaction of market, transport costs, and fixed investment costs determines the location of industry. In the Morissets article (2003, p. 253), the impact of revenue enhancement incentives on FDI is not obvious that it can help in promoting investment. In the past few decades the numerous studies of international investors stimulate indicated that the investment incentive policies are not major factor in their investment location decision. More important factors such as infra complex body part, political stability, labor and the cost of production, however in this study is going to explain and provide evidences that investment incentive policies provided by government are the key factor in attracting investment in the encase of Laos.Most of the data and information using in here are mainly from the concerning mi nistries in the Laos as essential. Thus, once again, the scope of this thesis is not covert all aspects of the economic development in country it will focus only on the laws and regulations applied to foreign investment especially in hydropower sector. Furthermore, there is no any hypothesis test in this paper, as the objective of the paper is to analyze and examine the effective of the Strategic Investment Promotion for Laos. The main study shall be identifying the issues of using incentive policies and drawing out the strategic policies for recommendations.In order to make this paper easy to read and complete, this paper is developed into four chapters. The chapter one is the introduction chapter, where the general information, thesis statement and scope of this paper are drawn. The second chapter is literature reviews related to the foreign investment policies. The third base chapter will focuses on overview of Laos economy, FDI and Hydropower Sector in the economic and social development in Laos. In this chapter, the data and figures are illustrated in order to see how changing in hydropower sector in Laos through the policies and incentives offering, plus more specific study on the comparative study, which will focuses on the analyzing of the incentive and disincentive on foreign direct investment. The last chapter is conclusion and recommendations approaches. In this chapter, the policies recommendations are drawn. Then the last part of the paper is the references.Lao PDR at a Glance ( dishearten 1) prognosticateLao Peoples Democratic RepublicSurface Area Population make out 236,800 sq km, land 230,800 sq km, water 6,000 sq km 1995 census 4,574,848 (2007 estimate 6,677,534)Density25 lot per sq kmLand Boundariestotal 5,083 kmBordersMyanmar 235 km, Cambodia 541 km, China 423km, Siameseland 1,754 km, Viet Nam 2,130 kmLanguagesLao (official), French, English, and various ethnic languagesClimateTropical monsoon rainy inure (May to November) dry season ( December to April)ReligionBuddhist 65 percent , animist 32.9 percent , Christian 1.3 percent, other and unspecified 0.8 percent (1995 census)Time ZoneUTC+7 propertyKip (LAK)Exchange RatesAs of October 6th, 2008 1 Dollar 8560 Kips 1 Euro 11680 Kipsgross domestic product39,284 billion Kips (Nominal, 2007 estimate) 4.1 US$ billionGDP per Capita604 USS (2006)Source frugal question Department, MPI, Laos, 2007Chapter II Literature Review abroad Direct Investment PolicyRecently, many scholars try to explain and excite out the factors for foreign investment location decision in developing countries. On the other hand there are many studies and articles related the FDI and its policies in developing countries. The developing countries try to develop their investment policies and strategic plan in order to attract the foreign investmentIn the article of Shaukat Ali and Wei Guo (2005) explained the behavior of MNCs in China, with its huge potential market size as the most important factor for attracting FDI to China, with its large population, steady economic growth, trade integrations are the perfect combination in attracting FDI. The authors further point out that the Chinese Government incentive policies are another important factorIn the article of Ekrem Tatoglu (2002), it is was found that market size, openness of the economy, and infra social system of the troops country had positive effect, but the lack of exchange rate and economic stability had negative effect but not significant, however to some extent, it has slowed complicate its efforts to receive much higher volume of foreign investment.In the Morissets article (2003, pp. 253) point out that the relation between investment form _or_ system of government such as tax incentives and FDI is not the most significant whether it can help the host country in gaining the foreign investment. Over the past few decades they are numerous studies from the international investors have indicated that investment poli cy such as tax incentives are not the most important factor for investment locations, more important factors such as infrastructure, labor and political stability. However it doesnt mean that the investment policy has no effect on attracting foreign investment, one of the level-headed examples is the Irelands tax incentives which have been recognized as key in attracting foreign investors over the past two decades. Moreover, there has been growing support evidence that investment policy influence the location decisions of companies within regional economic groupings, such as the European Union, North American Free Trade Area, and Association of Southeast Asian Nations.No doubt that market size is important to foreign investment in deciding location but other factors such as the investment policy and institutional framework, are essential in influential a countrys attraction to FDI. There are three forms of investment incentive policies tax incentives, subsidies, export processing zones (EPZs). The investment policy can be favorable to foreign investment or unflavored to foreign investment in order to protect local industriesThe effect of FDI will depend, in part, on the form that FDI takes. FDI directed to heavily protected industries or attracted by very costly incentives may have a low, or even negative, effect on growth and productivity, Attitudinal and empirical research on the effect of tax incentives on FDI has been inconclusive.In the article of Hearnest (2007, pp.25-30) commit that if the investment policy such as tax incentives may be good for a country. This is so if some conditions are contents. First, the investment policy mustiness lead to an increased of in go in FDI into that country by attracting FDI that would not come without the front end of the incentives. Second, these FDI should contribute to the countrys development by offering returns to the country that more than offset (the returns) the foregone tax revenue in form of tax incen tives granted to the investors. When trying to find out who should qualify for the tax incentives in Tanzania therefore, the work will focus on some types of investments that would not come to Tanzania without the presence of the incentives, but have the potential of contributing positively to the development of the country. As for who should not qualify, a focus will be on those investments that would come in any circumstance (in this case the absence of tax incentives).FDI determinants that MNEs look for are the presence of economic, political and social stability and rules regulating entry and operations of businesses. Others are standards of treatment of foreign affiliates business facilitation (including, inter-alia, investment incentives and thereby tax incentives market size, growth, structure and accessibility raw materials, low cost but efficient labour force and physical infrastructure in form of ports, roads, power and telecommunication. Specific incentives may not be mai n determinants of a countrys attractiveness to FDI. A countrys general economic and political conditions, domestic market, subjective and other resources may be more important than some specific incentives. However various incentives have been found to influence investments.Since specific incentives may not be main determinants of a countrys attractiveness to FDI. A countrys general economic and political conditions, domestic market, natural and other resources may be more important than some specific incentives. However various incentives have been found to influence investments.In the conclusion for the literature reviews, there are both advantages and disadvantages by offering the investment incentives policy from the host countries to the foreign investors. However, most of the articles presented in there seem to support the investment incentives policy (tax incentives) offered by many developing countries. There is no doubt that this form of investment incentives are dominated in many developing from now and in the future, especially the ASEAN nations, particularly Laos. In this context, this paper will lead through the itinerary that investment incentives are really strategic tools for FDI attracting in Laos.CHAPTER III Overview of Economy, FDI and Hydropower Sector in Laos3.1 Current Laos Economic SituationAs the Lao government set their development goal which aiming to large-minded the country from being least developed country by the Year 2020, it ultimate goal is to graduate from the status of being a least developed country and become sustainable development nation. To achieve the goal, Laos needs the capital and human resource capacity, as Laoss lack of these things. Thus, the Foreign investment especially in hydropower and mining sector are playing an essential role in increasing the governments revenue (capital generation), job creations and so on.Since the Laos government started their economic liberalization, the new economic mechanism (NEM) in 1986, the Government of Laos has made the development of private sector and attraction of the foreign investment as the strategic priority, thus the implementation of investment policies are very important to investment especially in attracting foreign direct investment.With the advantages such as political stability, natural resources, low labor costs, strategic location and incentive investment policies, both domestic and foreign investment has notably evidenced its contribution to the Laos Social Economic Development. Generally the total (public and private) investment mobilized rose significantly from 21.3 percent of GDP in 2001 to about 29 percent in 2005, and averaged at 27.8 percent for the five-year period which mainly from FDI1. The foreign investment has provided further drive to Laos economic growth. The government of Lao PDR provided good climate for investment, such as infrastructures, telecommunication, political stability, stable macroeconomic condition and law an d regulation related to investment.With the Laos National Social and Economic Development Plan (NSEDP), Laos government had achieved to maintain the economic prospect with an average GDP from year 2000 to 2010 approximately about 7.73 percent (see figure 1), mainly benefiting from expanding natural resources within the country. By encouraging Foreign Direct Investment, Laos economy has been gradually increased in many sectors, especially industry sector and services sector, which by 2009 had reached 70 percent of GDP. (See embodiment 2 and 3)Industrial sector has grown in recent year with rapid rate, accounted an average rate about 11.3 percent per year. The mining industry increased by 33.87 percent tobacco 20.75 percent nutrient processing 9.17 percent textiles 20.11 percent and garments 11.15 percent. The services sector has been positively meet the requirements of production and trading, from 2001to 2005, the growth rate in total revenues from services sector accounted an aver aged at 10 percent per year.2According to National Social and Economic Development Plan, in general Government of Laos (GoL) has performed well with its ambitious economic target and strong economic growth which grounding to free the country from the status of least-development country by 2020.Figure 1 Laos real GDP growth in personaSource International Monetary Fund (IMF), earth Economic Outlook 2010Figure 2 Laos GDP composition by sectorSource CIA World Fact BookFigure 3 Laos GDP per capita compared by continentSource International Monetary Fund (IMF), World Economic Outlook 2010In recent year the Government of Laos (GoL) continue to work hard and try to boost its foreign trade with the aim to increase more in export, the structure of their economic changed with the shares of the private sector and Foreign Investment in the economy have increased. In particular, Foreign Direct Investment has facilitated the creation of new products and increasing size of the markets including t he entry of new markets. The number of foreign direct investments and private domestic in the past five years stood at 9.7 billion USD, in which foreign direct investments accounted for 8 billion USD3. Thus, the private sector has become more and more essential in the economy of the Laos.The Lao PDR has been headed for business in regional and global economic integration. It is vital to Laos economic with its potential in domestic and foreign investors to guarantee the benefits from the liberalization of trade. Being the member of ASEAN, ATFA and WTO applicant providing fortune for the country in trade and attracting foreign direct investment increasing the market entry by reduced 98 percent of its tariffs (zero to five percent in 2008). However Laos faced the problem of trade imbalance, in the year of 2007 to 2008 the total trade was 2630.9 gazillion USD which number of export only 822.7 million USD (see Table 2)3.2 Foreign Direct Investment and Hydropower Trends in LaosForeign d irect investment is playing crucial role in Laos economy, with the implementation of Investment police force in 2004 which the Government of Laos (GoL) given huge investment incentive to foreign investors especially tax incentive, as the resulted in 2005 onward the FDI inflow has been significantly increased especially in mining sectors and hydropower sectors. In 2006 the FDI inflow raised up to 2,699 million USD and in 2009 increased more than 4,312 million USD (see figure 4 and figure 5).Figure 4 Foreign Direct Investment in LaosSource Raw data from Ministry of Planning and Investment, LaosFigure 5 Foreign Direct Investment by Sector 2000-2010(Jun)Source Raw Data from Ministry of Planning and Investment, LaosNot yet complete3.3 Analysis Study of Investment Incentives and Disincentives in Laos3.3.1 Investment Incentives in Laos tax revenue claims from some major industrial nationsLao receive the trade privileges from European Union such as GSP privilege. Currently, the receiving GSP is from 42 countries from EU, Japan, Canada, Switzerland, Vietnam and etc. Thus, the garment investment sector is still having comparative advantages in attracting many textile companies to invest in Laos. Mostly, investors are from Taiwan, Japan and Thailand. Furthermore, Laos has sign the Normal Trade Relations (NTR) with USA in December 2004. This is the signal for Laos to join the world trade system (membership of WTO is underway). Such membership leads confident for foreign investors doing business in Laos.Land-linked countryThis is going to be trade hub in the Southeast Asia region, which has access to ASEAN market with more than 500 million. Inhabitants including southern part of neighboring China, which adds up together reaching nearly 1 billion people, this is going to be the huge market in the world. Currently, the main roads reaching every corner of the international border pointed have been built. In the next five year, Laos can be the transit goods and connect South east Asia to the Northeast and Central Asia.Abundant water resources, rich in mineral resources, and affluent of productive land Laoss government still enjoys receiving the application for the development of the hydropower dams and mining concession from foreign investors. These two sectors are main attractive sectors for foreign investors near the world. The abundant water resources help Laos to gain more major foreign investors to invest in the hydropower project, which lead Laos to be the electricity supplier or shelling of Asia. Furthermore, unexploitations of mining areas are still existed and waiting for right foreign investors to invest in this sector.Most of the mines are gold, copper, coal, tin, Zink and others. Thus, this is another sector that the Lao governments use to campaign and attract foreign investors for investing. Moreover, there are plentiful of productive land for foreign investors to do the plantation projects for the industrial plantation such as sugar, thread trees, eucalyptus, and so on. Currently, many big paper companies are investing for the industrial plantation in Laos such as Oji paper factory (Japan), and Birla Pulp club (India).Laos Economic ZoneSavannakhet Province is a hub of trade and services in the Greater Mekong Sub-region (GMS). The province is linking Lao PDR with Thailand, and Vietnam on the lane No.9. It is also all on the Road No.13 which runs through Lao PDR, leading north into China and South into Cambodia. The construction of Road and bridge will progress develop Savannakhet as a trade and services zone in near future and will bring an expansion of markets which will create further business opportunities for all the economic sectors in Savannakhet province, thus Savannakhet Special Economic Zone (SSEZ) which linking neighboring countries in the Asian region with a total population of more than 500 million people and thus is a main centre for trade and services. The categories of business activities planne d to be developing in the Savannakhet Special Economic Zone (SSEZ) let in the followingExport Processing ZoneFree Trade ZoneFree Service and Logistic Centre including tourism, banking and other activities.3.3.2 Disincentive of Investment in LaosGeographic condition (land locked country) and poor infrastructure Laos has no border with the sea, thus this is only obstacle for the point. The cost of transport goods from Laos to the sea port in Thailand or in Vietnam is quite expensive and may take longer time for the goods to reach the destination due to the documentations and unforeseen events that can happen anytime. Furthermore, the infrastructure in Laos is not quite good especially the road condition in some places or provinces. These cause the transportation cost high and the return on investment or profit is not so high as expected.However, with the support from the international financial organization such as ADB and World Bank, the Lao government has put the budget for the in frastructure development for the main route to the sea ports such as Road R3 connecting Thaiiand-Laos-China, the road No. 9 connecting Thailand-Laos-Vietnam, Road No. 13 run through the whole countries from North to South of Laos. The vision of the government is to change Laos as Land-Locked country to the Land-Linked country. By achieving this goal, the cost of transportation will be reducing for sure.Macroeconomic instability Lao economic is not independent economic system. Directly and indirectly, the economic depends on the changing of the Thai and Vietnamese economic growth. Now, the Lao economic is more likely to depend to the Chinese economic as well now, as the major foreign investors is Chinese investors. The Lao currency (Kip) is none tradable currency, so it depends on the changing of the US dollars and Thai Baht. For instance, when the financial crisis occurred in 1997, supported that Lao can escape from this crisis, however, it fritter away hardly by the crisis as most of the commodities goods import from Thailand. Thus, when the global crisis hit Thailand, it will directly and indirectly hurt Lao economy.However, Lao government has put more afford to monitoring the economic development in Laos and try to not depending on one country economy such Thailand. Now, the free flow of goods leads Laos to escape from the dependent economic from Thailand. Laos can gain access to the Vietnam and China market now.Small market Although the economy sounds goods in recent years, but the total expenditure of the Lao people is still low. Most of the markets in Laos are small in size and number of consumers. Most of the big spending on consumers is in the main city, but not in the rural areas. However, most of people in the city cross the border to Thailand in spending for the commodities goods. In recently, the good economic recovered and increasing in FDI inflow in to the country, Lao people spend more money in commodities and luxury goods. Thus, this is the go od sign in increasing Lao people spending. In the near future, the Lao small market is going to graduate to the big market soon. Thailand. Now, the free flow of goods leads Laos to escape from the dependent economic from Thailand. Laos can gain access to the Vietnam and China market now.3.4 Comparative Study of Investment Law (1994 and 2004)3.4.1 The Investment Law in 1994Not yet complete3.4.2 The Investment Law in 2004Not yet completeLaw on the Promotion and Management of foreign Investment in the Lao PDR (1994)Law on the Promotion of Foreign Investment In the Lao PDR (2004)Formof FDI 2 forms of FDIa) A joint danger with one or more domestic Lao Investorsb) A 100% foreign- owned enterprisesExemption from import duties for intermediate components and raw materials imported for processing and re-export unvaried flat rate of 1% of import value of equipment, means of production, spare parts and other materials used in operation of investment projectsNo export duties on finished produc tsAnnual profit tax at a uniform flat rate of 20%Special privileges, including reduction or immunity from theprofit-tax rate, are given based on the size of investments and the significant positive impacts that such investments have on the socio- economic development of Lao PDR 3 forms of FDIa) demarcation Cooperation by contractb) A joint venture with one or more domestic Lao investors (Foreign equity should not be less than 30% of total investment capital) orc) A 100% foreign- owned enterprise0% of import duties on production vehicles, machinery, equipment and raw materialsNo export duties on finished products Profit tax is classified into 3 groups 20%, 15% and 10% and profit tax exemption is offered for a certain period depending on activities, investment areas and size of investment1) Zone One (area with no economic information infrastructure)7 years profit tax exemptionthereafter a profit tax of 10%2) Zone Two (areas with certain level of economic infrastructures)5 years prof it tax exemption3 years profit tax of 7.5%thereafter a profit tax of 15%3) Zone Three ( areas with good infrastructure)2 years profit tax exemption2 years profit tax of 10%thereafter a profit tax of 20%OtherIncentivesInvestment term is up to 30 yearsFreedom to expatriate their earnings back home or to third countries rightfulness to employ foreign expatriatesPersonal income tax at a flat rate of10%Investment term is up to 75 yearsFreedom to expatriate their earnings back home or to third countriesRight to employ foreign expatriates (not exceed 10% of the enterprises labor)Personal income tax at a flat rate of 10%Source Ministry of Planning and Investment, Lao PDR mooring Study of Foreign Direct Investment on Hydropower Sector in LaosNot yet completeChapter IV ConclusionNot yet complete