The Concept of Foreign Direct Investment in Laos

Laos has an economic freedom score of 53.6 (International Monetary Fund n.p). The presented aspect makes the region’s economy the 138th freest one on the index outlined in 2018. The overall score of the outlined destination has declined by a 0.4 point. A steep decline has been noted on its trade freedom. The outlined aspect has not been fully offset by the improvement noted in the monetary freedom as well as judicial effectiveness. In Asia-Pacific region, Laos takes the 34th position. Its overall score falls below that of the world and regional averages (International Monetary Fund n.p). Laos is known to be one of the poorest nations on Asia. The region significantly relies on foreign donors based on its weak economic outlook. The region’s GDP per capita is estimated at $3000 (Avakov n.p). According to the finding of the United Nations, Laos is considered as a least developed nation. The region is known to have a lack of diversified industry and infrastructure. Most people in the region relies on subsistence farming to generate an income. Only two firms are listed on the fledgling stock market in Laos. The firms were opened in 2011 (Roberts 151). The economic influence of Chinese is rapidly on the rise on Laos. The region has business links with areas such as Vietnam. Additionally, it is also known to have strong political ties in the presented destination.

            Laos is one of the limited one-party communist states. The region’s growth went beyond 7% on an annual basis during the year 2008-12 (Reeves 139). Although the presented destination markets a desirable growth level, the region is still a nation with underdeveloped infrastructure, especially in the rural regions. The road system is basic but it is still developing. Landline telecommunications in the region are limited internally and externally. Approximately 75% of the outlined destination is powered by electricity (Reeves 139). The economy of the region greatly relies on capital-intensive ordinary resources. Despite this, the labour force is reliant on agriculture which is dominated by rice plantations available on the lowlands. The presented aspect accounts for 75% of the total employment and 30% of the region’s GDP (Wacker 1980).

            The economy of the outlined destination has greatly benefited from the high level of foreign direct investment in copper, hydropower, and gold mining in the past. Despite this, the projects carried out in some of the outlined industries have been criticised for their environmental impact. In 2004, Laos obtained a Normal Trade Relations tag in America. Drawing from the fiscal perspective, a VAT tax system was established in 2010 in Laos (Wacker 1982). Enhanced bank credits and simplified means of investment for small entrepreneurs and farmers have the ability to enhance the economic prospects of the region. The government seems to be focused on the raising the profile of the destination among the stakeholders. The firm managed to take part in the regional economic cooperation initiatives in 2011 (Wacker 1988).

The concept of Foreign Direct Investment and Laos’ current status

            The concept of foreign direct investment (FDI) is vital to the international economics within the globalization era. FDI refers to the investment net inflows which focuses on acquiring a lasting interest in the management of a business operating in an economy rather than that of the stockholder. Also, FDI refers to the total of the equity capital, earning reinvestment, short-term capital and long-term capital as presented within the balance of payments (Wattanakul and Watchalaanun 55). The advantage of FDI to the host economy can be achieved through varied channels. For instance, closing the gap between the domestic savings and the desired investment, achieving the set fiscal objectives, enhancing local market competition, and Balance of Payments progress are some of the examples to consider. Hydropower and mining has remained to be the factors leading in FDI in Laos, alongside accounting for approximately half of the licenced projects and over 60% of the exports carried out in 2017 (Reeves 139).

            FDI has a positive impact to the economy of Laos. The government of the outlined destination declared the law focused on promoting foreign investment management in the region on 1988. The presented move ensured that firms were unable to take part in 100% investment ownership since the beginning. During the outlined time, the investment terms of foreign investment businesses relied on the size, nature and circumstances of the business project. Despite this, the business could not go beyond 15 years for 100% foreign ownership and 20 years if the mode of market entry was a joint venture (Phommahaxay 9). In 2009, the investment promotion law was further revised. According to the amendments, the investor could now invest in three major types of investments such as concession business, general business, and the activities focused on the development of special economic zones as well as specific economic zones (Phommahaxay 10).

            When Georgia Power makes the decision to invest in Laos, it is likely to derive three major benefits, such as internationalization advantage, ownership advantage, and locational advantage (Araujo 426). Ownership advantage is likely to arise in the presented case as a result of the fact that the business will have three dominated assets such as managerial skill, production technology and marketing technique. The outlined assets are vital factor which assures Georgia Power that foreign firms have a desirable international competitive advantage with a high frequency when it comes to production. According to Tolentino (191), internalization advantage is the second aspect of the eclectic framework which is obtained in situation where the firm considers it better to internalize their advantage of ownership when they make the choice to set up new outlets in a new international destination rather than through franchising and licencing. Locational advantage is the third framework available under the Eclectic framework derived from the notion that when businesses discover can be obtained when some parts of their countries rely on attractive factor endowment in the destinations hosting them (Dunning 173).

Macroeconomic Status

            Georgia Power should consider investing in Laos based on the general macroeconomic outlook of the outlined destination. Evidently, the region’s $7.5 billion economy is suppressed by that of its neighbours which is considered to be 790 times smaller than that of China (Boonlua 4). In comparison to Vietnam, the presented region is a 14th its size and almost 2% that of Thailand. However, since 2006, the region’s size has doubles with its GDP value increasing from $600 to $ 1,200 (Boonlua 4).

            Laos is also known to have a desirable culture and ethics which investors should consider to invest in the outlined destination. The culture of Lao is almost similar to that of the Americans, for instance, in the outlined destination, business partners have the ability to build mutual trust through the process of engaging in social activities which creates an opportunity of taking part in face-to-face meetings. The people of Lao are also known to be direct, punctual and frank when engaging in conversations. They have little regards to one’s social life and appearance which enables them to bond. Despite the fact that the country is rich in culture, it has a strong ability to adapt to the environment and its surrounding engaging in business ventures with people from different destinations.

Porter’s Five Forces outlook and the Hydropower Sector in Laos

            Looking at the hydroelectric sector in Laos, it is evident that the competitive rivalry noted in the sector is low. Evidently, the region does not have strong players within the sector, having in mind that most firms rely on foreign investors to be able to participate in the sector. As a result, the region is still not dominated by strong players who are likely to significantly influence the performance of the organisation in the sector (Vanthana and Idris 110). Looking at the matter of the threat of new entrants, it is evident that the force attached to the presented element is medium. The presented factor stems from the notion that firms, particularly foreign investors, are set on Laos’s natural resources as well as all the desirable outputs offered by the region.

            The threat of substitutes in the country is low. The presented aspect is considered as low since other power providers such as biogas or solar have the potential of investing in the hydroelectricity in the region. Despite this, the value is low since most consumers in the region still prefer hydroelectric power at the expense of the other available ones (Nolintha and Idris 110). Looking at the bargaining power of the suppliers in the sector, the value is estimated as low. Wacker (1980) notes that Laos recently encouraged the need of the use of unions. As a result, most suppliers in the sector embraced the need of becoming unionized in the sector. The presented move has granted the suppliers with an enhanced power in the region. Despite this, the provided stakeholders are still under control. The bargaining power of the buyers in the outlined case is estimated as one with a medium power. The buyers in the presented case are less likely to exert power as a result of traditional concerns on the matter of concentration.

Challenges and Issues

            Laos is faced by various challenges and issues which can be resolved by Georgia Power’s FDI in the outlined region. For instance, Lao is known to be vulnerable to natural calamities. The region is underdeveloped with a poor transportation system. Lao is also known for its big hydroelectric power potential. Despite this, the villages in the region rarely have pure running water or electricity despite the fact that the outlined geographic destination exports the presented resource to Thailand (Duijster 2). Based on the fact that Lao lacks a national power grid, the region is forced to purchase power again from Thailand for the cities available across River Mekong (Duijster 2).  Besides the presented factor, Lao is prone to Malaria, malnutrition, dysentery, and parasites since the health facilities in the presented destination is limited. Laos literacy rates is estimated as 45% with men being highly literate that the females in the outlined region. The presented aspect is as a result of the limited numbers of trained teachers and financial resources (Hatcher 323). Additionally, the poverty rates of the outlined destination are also high, stemming from the fact that the literacy levels are also limited due to a small number of schools available in the presented destination.

            Laos is also known to suffer from the decline of the global community prices which directly affects the hydroelectricity centre. As a result, tension is likely to arise between the potential investors in the presented destination. The region is also known for its low costs of labour which is highly available. Despite this, the presented aspect does not attract the attention of the investors based on the poor level of education which makes it also impossible for them to deliver quality and qualified services.

Strategies to Mitigate country-based challenges and other issues

            Based on the presented analysis, it is evident that Laos is composed of various issues and country-based challenges. Economic challenges are one of the factors which have to be addressed. Georgia power can promote the region’s economy through investment potential. The presented aspect can aid in boosting the region’s GDP. The fact that the region has the smallest economy in the Southeast Asia means that George Power should consider investing in the outlined destination since its economic outlook has been attracting the attention of several investors from across the globe. Apparently, the firm can consider focusing on the region’s abundant resources, desirable culture, and a low-cost of labour to advance within the presented market. The noted factor would significantly benefit the region’s economy as well as the economic performance of the business.

            The Georgian Power FDI would result to high growth rates of Laos in that it would enhance the region’s local conditions. Apparently, through the FDI, Laos financial markets would be significantly developed making it possible for new investors to find their way into the outlined destination. The development of the financial markets would also enhance the general competition of the players in the presented destination. Through this, mostly quality products would be delivered to the players in the region, thus boosting the economy of the region even of a global perspective.  Despite this, it is evident that the high growth rate would only be achieved in instances when Laos has minimum threshold of human capital requirement. Apparently, FDI brings about technology which favours a high growth rate in an outlined destination.

            Other than promoting growth, the FDI would also come in handy in promoting a higher level of education in different regions such as Laos. Through foreign direct investment, new knowledge and technology is brought about into the host country. Additionally, FDI also contribute to human capital accumulation in an outlined destination through raining the demand for the skilled labour and at times creating an incentive to participate in the further education.  Lie (6) notes, that the Millennium Development Goals outlined education as a vital factor which drives human development and at the same time promotes economic growth.

            Through the implementation of the economic theory, it is clear that an important link exists between human capital and FDI. The presented aspect can be defined as the skills and knowledge which are embodies in humans and acquired through experience, training and schooling, experience and training (Lie 17). On the other hand, the endogenous theory of growth provides an assumption that enhancing the returns to scale are majorly due to learning by doing effect noted between the human and physical capital. The experience of the workers is enhanced and productivity improved through aspects such as on the job training.

            Human capital and FDI are considered as important factors which favours economic growth. FDI have the ability to contribute directly and indirectly to the growth of the economy by enhancing the level of technical knowhow, improving knowledge and through technical spill overs. The presented concept can also promote the growth of the economy by enhancing the level capital stock in Laos and instigating local consumption and production (Klein, Aaron & Hadjimichael 12). From the human capital perspective, it is apparent that the endogenously accumulated human capital remains specific to a person, leaving innovation in the stock of knowledge as the exogenous aspect. It is regarded as an important aspect of long term growth either because of its positive externalities or its direct input in research. The differences noted in the rates of growth of various destination is due to the varied human capital accumulation differences.

            The FDI can also play an important role in poverty reduction. Foreign investors have the ability to provide social services to the members of the Laos community through insurance schemes or offering basic services such as energy and water. Through this, the noted poverty levels in the identified destination records a negative trend which enhances the security of the presented destination (“United Nations Conference on Trade and, Development” 14).

            Other than focusing on FDI as a desirable strategy to address the outlined concerns in Laos, investing in training and development techniques for the hired staff members would come in handy in addressing the presented concern. Through effective training, the investors will no longer have to worry about the ability of the staff to dispense their duties as expected. Training will focus on educating the labour force on what the company expects and what it considers standard services before being compensated. Development would ensure that the skills of the employed staff members are kept up to date in the current dynamic business environment to avoid losing talent which was costly to develop in the first place.

Conclusion

            Georgia Power should consider taking part in the $ 40 billion investment deal with Laos. The move is focused on assisting the presented destination produce more hydropower power which would ensure that enough power is provided to power even the neighbouring countries. Through the FDI, Laos economic growth would be promoted, more schools would be created and the poverty levels would also significantly decline. Investing in the presented destination is recommended as a result of various desirable factors. For instance, Laos is rich with resources despite it being highly underdeveloped. Laos is a country worth investing in despite its rich culture and tradition. FDI can come in handy in resolving the outlined issues in the region having in mind that the mode of market entry brings about technology and human capital accumulation.

Works Cited

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