Appendix II Foreign Direct Investment

Ichiro Otani, and Chi Pham
Published Date:
May 1996
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The reform strategy implemented in the Lao P.D.R. since 1985 has recognized the importance of external resources—both official and private—in accelerating economic transformation and in emulating the growth performance in the region, In particular, the improved climate for foreign investment that has prevailed since 1989 has brought several beneficial effects, including an increase in the level and efficiency of domestic investment through direct transfer of capital and technology, the development of new export industries, the dissemination of technological and managerial skills, and increased domestic competition. These favorable developments are expected to facilitate the further growth of the Lao economy in the coming years.

Changes in the Regulatory Framework

The opening of the Lao P.D.R. to foreign investment began in 1987–88, when barriers to external trade were significantly reduced, private enterprises were placed on an equal footing with state-owned enterprises, and a new Foreign Investment Code was promulgated, offering incentives and guarantees to potential investors. Three forms of foreign investment were authorized: business by contract, joint ventures, and wholly owned foreign enterprises. The Foreign Investment Code guaranteed that capital and other associated foreign-owned assets would not be nationalized or otherwise confiscated through administrative procedures, profits from foreign investment could be freely repatriated, and reinvested earnings would be exempt from taxes. In 1989, the Foreign Investment Management Committee was established to implement the Foreign Investment Code.

In May 1994, in an effort to create a legal framework for foreign investment at least as competitive as those in certain neighboring countries, the Law on the Promotion and Management of Foreign Investment in the Lao P.D.R. was promulgated as a replacement for the already liberal 1988 Foreign Investment Code. The new law streamlines foreign investment regulations and the tax structure and is consistent with other legislation passed after the adoption of the new Constitution in 1991.

Although the 1994 foreign investment law consolidates the principal elements of the 1988 Foreign Investment Code, it also includes several new elements that are expected to further stimulate foreign investment. According to the new law, foreign investment will be allowed in all areas not stipulated in a “negative list.” This short negative list is likely to include such areas as national security, public health, the environment, and certain cultural activities. Moreover, the tax regime for foreign investment has been simplified, and a single 20 percent tax rate will be applied to profits (compared with the 15–50 percent tax rates provided in the 1988 code). As a result, profit taxes will be lower than those for domestically owned businesses, and, as in the past, reinvested earnings will not be subject to taxes.

For investments of particular importance to the country's socioeconomic development, the Lao Government may grant exemptions from profit taxes and import duties. Tax holidays for foreign investment can be granted for a period of up to seven years from the date of approval but are effectively limited to four years of tax-free operation after the start-up period. Import duties on production inputs and capital goods are reduced to 1 percent, and goods for reexport are exempt from duties. Import-substituting production can also be exonerated. However, companies involved in import activity will remain subject to normal customs duties. Finally, the visa procedures for foreign investors (and their families), including those on long-term visits, will be simplified, and all individuals associated with foreign investment will enjoy full freedom of travel within the Lao P.D.R.

Recent Developments and Prospects

Information on foreign direct investment in the Lao P.D.R. is based on statistics collected by the Foreign Investment Management Committee on approved foreign investment. By the end of 1993, the cumulative value of authorized investment projects with foreign participation reached $607 million, and about half of these projects were registered in 1992–93, By the end of September 1994, the total cumulative value of authorized foreign direct investment is estimated to have reached about $1 billion, indicating continued strong foreign interest, owing in part to the introduction of the more liberal law on foreign investment early in the year. Foreign capital accounts for about 80 percent of approved projects in 1993, for example, of the total authorized amount of $159 million, some $133 million represented contributions from abroad.

Until 1993, the capital inflow associated with foreign direct investment was estimated to be quite small. However, these inflows increased from $9 million in 1992 to $60 million in 1993. The capital inflow estimate for 1993 takes into account the cumulative impact of past authorizations, the capital transfer associated with the registration of six new foreign banks ($17 million), the proceeds from the privatization of four state-owned enterprises ($13 million), and the likely underestimation of reinvested earnings. Most foreign investment (based on license approvals) is, in order of importance, from Thailand. Hong Kong, Taiwan Province of China, and Australia; it is concentrated in services (including tourism) and manufacturing, including the garments and wood-based industries.

The most promising prospects for foreign investment are in the mining and hydroelectricity sectors, which have the strongest export potential. A number of foreign companies and joint ventures have been granted licenses for mineral exploration. Petroleum and natural gas exploration involving U.S. and British companies has yielded promising results, and economic reserves of gas could be targeted for exploitation in some areas. Several Australian and U.S. companies have been given concessions to explore and exploit gold ore fields, and a company from New Zealand has already begun to exploit precious stones in the province. Concessions have also been granted for exploration and exploitation of coal and lignite deposits.

Four agreements for large-capacity projects to generate energy have been signed. Three hydroelectric power plants will be developed with the direct participation of the Lao Government. The Nam Theun 1 project will feature a plant with 210-megawatt capacity and is targeted for completion by 1998. The Nam Theun 2 project will require an investment of $1 billion and will have a capacity of 600 megawatts. The Houay Ho project (150 megawatts) will be developed by the Daewoo Corporation of Korea. Finally, a Thai company will be a major contributor to the development of the 600-megawatt Hongsa Lignite Power Project. All of these projects will be joint ventures with substantial foreign participation. After these and some other smaller projects are completed, it is estimated that, by the year 2000, the total installed capacity will have expanded by a factor of 14, while net electricity exports could be 17 times the 1994 level.

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