Smes Role In Enhancing Economic Development In Laos Economics Essay

Small and moderate-sized endeavors ( SMEs ) play a really of import function in heightening economic development in Laos. However, SMEs in Laos are little and lack fight. The influx of foreign direct investing ( FDI ) and trade liberalisation in Laos bring chances and challenges for SMEs in Laos. Furthermore, issues of SMEs and appraisal of SMEs publicity policy are non good understood for deficiency of surveies. This paper survey provides an overview of the current state of affairs, issues, and policies facing SMEs in Laos. It evaluates the impact of FDI and trade liberalisation on SME development. Although the authorities of Laos has defined policies and scheme to back up SMEs, it lacks specific plans that could flesh out these policies. SMEs are therefore faced with the jobs of high revenue enhancement aggregation, high rising prices, unstable exchange rate, and unequal support. Furthermore, SMEs are confronted with jobs of innovativeness, deficiency of fight, limited market, and networking. FDI provides SMEs with chances to increase their production through farm outing production linkages. The impact of trade liberalisation on SMEs is non good understood but trade liberalisation seems to hold negative impact instead than positive impact on SMEs.

Lao people’s democratic republic joined the Association of Southeast Nations ( ASEAN ) in 1997 and ASEAN Free Trade Area ( AFTA ) in 1998. As portion of its committedness under the AFTA understanding, Laos has to cut down the duty rates to 0 to 5 per centum in 2008. Reducing duty rates would increase imports, and have a negative impact on domestic economic system. Furthermore, increasing FDI is expected to play an of import function in increasing SME productiveness. On the other manus, FDIs may cut down the figure of domestic investings, particularly those of SMEs. Most SMEs in Lao face challenges and restraints, such as deficiency of fiscal support and inadequate skilled labour, and low degree of fight.

It is widely accepted that SMEs play a really of import function in Lao ‘s economic system. In 2004, medium endeavors numbered about 722 and little endeavors, 25,271. In term of employment, SMEs offer more than 60,000 occupation chances, which accounted for 40 per centum of the state ‘s entire employment. To salvage Lao SMEs from the inauspicious impact of globalisation, it is important to place the issues facing SMEs and measure the authorities policies and the impact of trade liberalisation and FDIs on SMEs.

For deficiency of surveies, nevertheless, on SMEs and appraisals of SMEs publicity policies in Laos, bing policies and plans toward SMEs are non good understood. In this respect, this paper provides an overview of SMEs in Laos and assesses SMEs publicity policies in Laos. The specific aims of this paper are:

a. To supply an overview of the authorities policies refering SME development and their present state of affairs in Laos and Vietnam

B. To analyze the innovativeness, market enlargement, fight and networking affecting Lao SMEs compare to neighbour states

c. The impact of trade liberalisation and FDI on SME development

The Lao authorities ‘s Policies ( SMEs )

The Lao authorities began advancing gradual economic liberalisation through the debut of the New Market Mechanism in 1986. This was followed by the Law on Promotion and Management of Foreign Investment and Business Law in July 1994. To advance and supply more inducements to FDI, the Law on Promotion and Management of Foreign Investment was amended in October 2004. In add-on, Lao authorities besides began carry oning the Business Forum in Laos to ease duologues with the concern sector. Government attempts toward SME publicity were expressed in Primary Office Decree No. 42/PM, the ends of which were as follows: a ) better the regulative environment ; B ) enhance the fight of constitution ; degree Celsiuss ) expand domestic and international market entree ; vitamin D ) better entree to finance ; e ) promote the development of concern organisation ; f ) enhance entrepreneurial attitudes and features within the society. The National Small and Medium Sized Enterprise Office ( SMEPDO ) was established by virtuousness of the Prime Minister ‘s Decree No. 42/PM. Its chief aim was to advance the constitution and sustainable development of Lao SMEs.


Since SMEs in Laos are in the early phase of development, innovativeness slowdowns behind adjacent states. Worse, informations coevals on innovativeness is non yet good developed. A figure of establishments exist to supply invention preparation for SMEs, but their attempts are non plenty to raise the degree of SME innovativeness. They had seen the demand for SME proprietors to spread out their merchandise lines.


Among SME merchandises, merely handicrafts appear competitory pricewise. The cost of handcraft merchandise is cheaper than those of other states in the ASEAN part, since labour costs in Laos are really low. The mean pay of Lao worker is around US $ 30 a month while the mean pay of Vietnamese worker and Kampuchean worker is 40 US $ and US $ 35, severally ( ALGI 2002 ) . However, the productiveness of Lao workers is besides lower compared to neighbouring states like Vietnam and Cambodia.

Market enlargement

In the absence of informations on SME market portion in the domestic market, this survey opted to utilize the figure of constitutions as a step of local market enlargement. The figure of new SME constitutions could explicate the enlargement of the domestic market. In 2005 there were 77,651 registered constitutions. Two old ages subsequently, in 2007, SME constitutions, harmonizing to SMEPDO, were estimated to figure about 135,000. This translates to about 73.5 per centum compared to 2005.

With discriminatory GSP intervention from other states, Lao ‘s chance for its SMEs to increase its production and heighten its exports, particularly garments and handcrafts. In 2005, the garment export sum to 142 million US $ . Garment SMEs portion of entire export was about 30 per centum. Export market seems to hold expanded compared to the old twelvemonth.


Past networking between SMEs, contractors, and providers seemed to be really hapless. Many SMEs were run as household concerns. Some succeeded, but some failed. With the coming of trade liberalisation and FDI influx, SME fight was enhanced ; so was networking between SMEs, contractor, and providers. Yet, the deficiency of back uping authorities and private institutes including Bankss do non portend good for SME development in Laos, even where networking is concerned. Hence, external networking of SMEs in Laos remains weak and need more support from authorities.

Impact of FDIs on SMEs

FDIs have played a really of import function in Lao economic system. It can speed up economic growing and income of the people. FDIs besides help SMEs develop by easing the transportation of engineering, bettering cognition and accomplishments, among other benefits.

Impact of Trade Liberalization on SMEs

The authorities of Laos continues to implement assorted trade reforms to increase growing. Duty decrease is being pursued as portion of the AFTA committedness. Furthermore, it plans to fall in the World Trade Organization by 2010. Trade liberalisation has positive and negative impacts on SMEs in four major ways: 1 ) by increasing competition ; 2 ) by take downing production costs due to cheaper imported inputs ; 3 ) by increasing export chances ; and 4 ) by cut downing handiness of local inputs. However, Lao SMEs are really little and non every bit competitory as those in adjacent states. Therefore, trade liberalisation might hold negative impact on SMEs. On the other manus, Lao SMEs could increase their fight by diminishing the cost of input and market enlargement.

In amount, it is non clear if Lao SMEs will profit from trade liberalisation. Furthermore, the benefits of trade liberalisation will hold a negative impact on SMEs if the authorities of Laos disregards to advance SMEs to better their comparative advantage for increasing exports and to reform the domestic revenue enhancement and aggregation system. Furthermore, as Laos is a landlocked state, transit cost is one of the most of import issues environing SMEs ‘ fight. It is of import for authorities of Laos to happen ways to cut down transit costs.

Obstacles of SMEs

Lack of skilled labour, deficient stuff, rigorous ordinances, deficiency of market, expensive natural stuff, rival of the same concern, unstable exchange rate, deficiency of fiscal support, high revenue enhancement, high rising prices

Needs of Government Support