The Study On FDI's Impacts On Laos Industrialiation

Laos, since the reform and opening up in 1986, has gradually liberalized the economy from a planned economy to market economy. Since then, Laos has opened its economies to the foreign direct investment (FDI) in order to enlarge the country's productivity and improve people's living standards. Consequently, FDI has made a significant contribution to the development of the Lao economy over the past 20 years, especially, in the industrial sector as its share of GDP has increased from 14% in 1990 to 28% in 2009, with an annual growth rate of 12%. That shows substantial impacts of FDI on the industrial sector. However, the Lao government's strategic plan on FDI allocation in the industrial sector will be carefully addressed since the obstacles of the current economic backwardness, rudimentary industrialization and the government's lack of experience in the use of FDI are increasingly critical.This paper undertakes the theoretical review of FDI's influences on the host country focusing on how FDI influences the industrial sector in Laos. We use the theoretical and empirical approaches in analyzing the FDI's impacts on the industry, mainly attempting to investigate the impacts of FDI on Laos industrialization and analyse the FDI technological spillovers in the light industry, as well as to investigate the Dutch disease type effect arising from large FDI inflows to the resources sector. And we provide according suggestions for the Lao government in order to effectively apply the FDI into the country's industrialization.The results are as followed: Firstly, we found the statistical and economical impacts of FDI on the industrial sector. FDI is inevitable and needed for the development of the industry in Laos. We also found that Laos possesses huge advantages and development potentials in the light industry in terms of both the development of technology spillovers and creation of employment. Secondly, since most of the FDI are investing in the resources sector, and FDI projects in Laos are natural resources orientated,therefore, massive foreign capital inflows to reasources sector may cause adverse economic effects. This syndrome is called"Dutch disease". We then have the following suggestions for the government: Firstly, Laos will have to carefully apply FDI into the country's development economically, socially and naturally. As most of the FDI are in the natural resources sector, it may benefit Laos some fast track revenues, but in the long run, it could cause unemployment, stagnation of technology spillovers and Dutch disease. Therefore, the FDI structures must be readdressed and regulatory. Secondly, since the gap between natural resources-based heavy industry and labour & technology intensive light industry is gradually widening, apart from the Dutch disease, Laos could also face the tension of rural unemployment and pressure on urban employment due to the decline of agricultural products. Therefore, the promotion of FDI on labour and technology intensive light industry is prior and necessary as Laos has to effectively manage all the resources into the development with higher technology, larger amount of productivity and employment in order to assure the development of the economy undertaking alongside the highly effective allocation of the resources.