DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES IN LAO PEOPLE’S DEMOCRATIC REPUBLIC OPPORTUNITIES AND CHALLENGES

In ChinaSMEs account for 99% of total sales and 75% of the labor force In the economy in Lao PDR now, small and medium-sized enterprises accountfor over 90% of the total number of busine

MASTER THESIS

DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES

IN LAO PEOPLE’S DEMOCRATIC REPUBLIC:

OPPORTUNITIES AND CHALLENGES

Specialization: International Economics

PHONETHIP SENGVILAY

Hanoi - 2020 MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

MASTER THESIS

DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES

IN LAO PEOPLE’S DEMOCRATIC REPUBLIC:

OPPORTUNITIES AND CHALLENGES

Specialization: International Economics

Code: 1806022067

Full name: Phonethip SengvilaySupervisor: Dr Nguyen Binh Duong

Hanoi - 2020

STATEMENT OF ORIGINAL AUTHORSHIP

I hereby declare that this master thesis is my own scientific research which ismade under the guidance of my supervisor, Dr Nguyen Binh Duong The contentsand results of this research are completely honest The information, data anddocuments which are collected from various sources for analysis and evaluationhave been fully cited in the main content and in the references list of this masterthesis as well

The Author

Phonethip Sengvilayiii

First and foremost, I would like to express my deepest appreciation to bothLaos and Vietnam government to give me a scholarship of study in Hanoi capital,Vietnam country I also would like to thank to my proposal supervisor, Dr NguyenBinh Duong Without her insightful advice and her devotion of time, I would nothave successfully completed this study She is very nice and a great scholarlymentor to me Beside that, I also would like to thank to Foreign Trade Universityfor giving me the opportunity to study as a graduate student and obtaining mymaster’s degree I would like to extend my thanks to all people who helped me tocollect data, because without them, I would not have been able to complete myresearch I am truly grateful for your time, insights, thoughtfulness, and openness.Finally, I would like to thank my family for their support, understanding, andencouragement Their overwhelming love and constant support have been thedriving force in the completion of my master’s degree

STATEMENT OF ORIGINAL AUTHORSHIP i

ACKNOWLEDGEMENT ii

CONTENTS iii

LIST OF FIGURES v

LIST OF TABLES vi

ABRREVIATIONS viii

SUMMARY OF THESIS RESEARCH RESULTS ix

ABSTRACT x

CHAPTER 1 INTRODUCTION 1

1.1Background 1

1.2Aim of objectives of the research 5

1.3Literature review 5

1.4Research question 11

1.5Research Methodology 12

1.6The structure of the thesis 12

1.7Limitations and difficulties in implementing the research 12

CHAPTER 2 SITUATION OF SMALL AND MEDIUM ENTERPRISES IN LAO PDR 14

2.1Definition of small and medium enterprises 14

2.1.1Definition of European Commission (EC) 15

2.1.2Definition of World Bank (WB) 16

2.1.3Definition of China 17

2.1.4Definition of Vietnam 19

2.1.5Definition of Lao PDR 20

2.2Small and Medium Enterprises in Lao PDR 21

CHAPTER 3: OPPORTUNITIES AND CHALLENGES ON

DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES IN LAO

PDR 48

3.1 Development of Small and Medium Enterprises under Socialist Market Development in the Lao PDR 48

3.1.1The perspectives and policies on SME development in Lao PDR 48

3.1.2Development of Small and Medium Enterprise in Regional and InternationalIntegration in Lao PDR 52

3.1.3Strategy for Small and Medium Enterprise Development in the Lao PDR under the Context of Regional and International Economic Integration 58

3.2 Opportunities and challenges of development of Small and Medium Enterprises under a Socialist-oriented market economy in the Lao PDR 60

3.2.1Opportunities on Development of Small and Medium Enterprises 60

3.2.2Challenges on Development of Small and Medium Enterprises 61

CHAPTER 4 Policies of regional countries and recommendation for Lao PDR 67

4.1.Policies of regional countries 67

4.1.1Government policy of promotion of SMEs in China 67

4.1.2Government policy of promotion of SMEs in Thailand 70

4.1.3Government policy of promotion of SMEs in Vietnam 75

4.2 Recommendations for Lao PDR 78

CONCLUSION 85

REFERENCES 86

LIST OF FIGURES

Figure 1.1: A RB Approach to Strategy Analysis: A Practical framework 6

Figure 1.2: Business growth model framework 11

Figure 2.1: Share of Employment by Enterprises, 2013 24

Figure 2.2: Access to Finance of Enterprises, 2013 46

Figure 2.3: Source of Borrowing 47

Figure 3.1: The competitiveness of the Lao PDR in 5 smallest value ranking 63

LIST OF TABLES

Table 1.1: Economic Performance of Lao PDR in 1990-2017 3

Table 2.1: Definition of Small and Medium Enterprises with European Union standard 15

Table 2.2: Definition of Small and Medium Enterprises by World Bank standards 16 Table 3.1: Definition of Small and Medium Enterprises in China 18

Table 2.4: Definition of SMEs in Vietnam 20

Table 2.5: Definition of Small and Medium Enterprises in Lao PDR 21

Table 2.6: Sizes of Enterprises by the Number of Employees, 2013 22

Table 2.7: Distribution of Enterprises in Domestic and Foreign Markets, 2013 (%) 23

Table 2.8: Location of Enterprises by Region and Province 25

Table 2.9: Location of Enterprises by Area Types 26

Table 2.10: Share of Enterprises by Economic Activities 27

Table 2.11: Ownership and Legal Status of Enterprises (%) 29

Table 2.12: Establishment Types of Enterprises (%) 30

Table 2.13: Nationality of Owners 30

Table 2.14: Ethnic Group of Owners 31

Table 2.15: Age of Owners 32

Table 2.16: Gender of Owners 33

Table 2.17: Education of Owners 34

Table 2.18: Opening of accounts in foreign countries 35

Table 2.19: Type of Accounts Opened in Foreign Countries 35

Table 2.20: Accounting Practices (%) 36

Table 2.21: Business Registration License 37

Table 2.22: Total Registered Capital 38

Table 2.23: Fixed Costs of Capital Stocks 39

Table 2.24: Variable Costs 40

Table 2.25: Adding Fixed Costs in Total Costs 41

Table 2.26: Type of Business Registration and Tax Certificate 42

Table 2.27: Anticipation of Business Trends 42

Table 2.28: Computer Use to Run Businesses 43

Table 2.29: Number of Computer used in Enterprises 44

Table 2.30: Enterprises with Internet 45

Table 2.31: Enterprises with Internet Accesss 45

Table 3.1: Development Directions and Strategic Development Plans of the Lao PDR under Regional and International Integration Framework 59

(2016-2020) 59

Table 3.2: The competitiveness ranking of Lao PDR and ASEAN countries 61

Table 3.3: Issues affecting the competitiveness of the Lao PDR 62

Table 3.4: Comparison of Competitiveness Index between Lao PDR and ASEAN (10 smallest value ranking) 62

ABRREVIATIONS

SUMMARY OF THESIS RESEARCH RESULTS

Thesis research with topic: “Development of Small and Medium Enterprises inLao People’s Democratic Republic: Opportunities and Challenges” First of all, thisresearch are represented the overview of economics in Lao PDR, the definition ofSMEs in different countries in the world and explore how SMEs in Laos PDRimportant to economics at present In addition, thesis explain in details the situation

of SMEs in Lao PDR such as the quantity of size, criterion of enterprises scale andother numerous datas in order to analyze, assessment on SMEs as well as theeconomics growth on the important and the way in development of SMEs

On the other hand, the author would bring opportunities and challenges forLao the way in development of SMEs The last but not least, providing someexperience learn from China, Thailand and Vietnam country specialized in theirpolicies on supporting SMEs It would be good suggested lessons for Lao PDR bylearning from neighboring country so author could be summarized and offered thebest solution even the policies to promote the development of small and mediumenterprises in Lao PDR

Recognizing the importance of small and medium-sized enterprises, mostcountries has paid attention to the development of SMEs by enacting policiesspecific policies, strategies and plans to support SMEs So in many countries, SMEshave a great role and importance For example, SMEs account for 99.7% of totalenterprises, 70.2% of total employees and 51.1% of total products in Japan In ChinaSMEs account for 99% of total sales and 75% of the labor force

In the economy in Lao PDR now, small and medium-sized enterprises accountfor over 90% of the total number of businesses across the country, which is reflected

in the one of the growth engines of the economy as well as a positive contribution inensuring social security

To ensure the implementation of the Socio-Economic Development Strategy

as well as Industrialization and Modernization Strategy toward the year 2020,especially to achieve the expected of growing economic and eradication of poverty,the government of Lao PDR emphasis to development of Smes as well as drivingthe economic growth

Meanwhile, the Lao government has defined policies to support SMEsbecause SMEs have an important role in enhancing economic development in Laos

In summary of National Socio-Economic Development Plan accept the expansions

of SMEs that is crucial for reducing poverty and exiting status of undevelopedcountry Although, the development of SMEs contributes to create jobs, add value,improve innovation and strengthen the ability of domestic entrepreneurs andeconomic expansion, but Lao PDR still lack of treatment and information,difficulties related to transformation of ideas into achievable project, fundamentals

to support domestic market in the country etc In order to overcome these problemsthere is a need of worldwide supportive policies to create positive enterprise climatewhich would make possible the development of new businesses and those which areexisting businesses In this respect, it is very important to analyze and see the othercountries’ experiences Based on this aspect, this research will present atheoretical aspect and practical experiences in the development of businesses inLao PDR and abroad

In a theoretical aspect, I am going to present the definitions and classification

of enterprises and also the role and the importance of businesses in the development

of economy by creating new jobs The practical aspect will be presented by theexperiences of developed businesses in some places, also dynamic and development

of businesses in Lao PDR recently

From this analysis, I will tell in detail problems and difficulties whichbusinesses face in Lao PDR during their development, possibilities to overcomethese difficulties and other challenges of creating conditions for consistenteconomic development

I hope this study will be a reference for the relevant sector, local authoritiesand all reader which interesting in this field that becomes a lesson and know how toimplement the real sector and its local I hope it will be served in the plan, programand project development sector which lead participant of society operate the correctplan, consistent guidelines and government policies In the long term, it will besupported to the government policy to develop the economic, stable, sustainable andtowards achieving the goal of exiting the status of LDC in 2020, stepped up themedium income in 2030, and achieving Sustainable Development Goals (SDGs) atthe United Nations issued

Overall, the study shows that despite limitations in development of enterprises

In particular infrastructure, the economy, trade and service of local enterprises andlocal produce also have limited, no resources enough to use to produce, lack ofcapital and technology to produce goods The quality of services of logistics systemremains low

Therefore, I chose the topic "Development of Small and Medium Enterprises

in Lao People's Democratic Republic: Opportunities and Challenges" as myresearch topic

CHAPTER 1 INTRODUCTION

1.1 Background

The Lao PDR is a land-locked and mountainous country The country has a totalarea of 236,800 square kilometres1 and borders with the Kingdom of Cambodia, thePeople’s Republic of China, the Republic of the Union of Myanmar, the Kingdom

of Thailand and the Socialist Republic of Vietnam Some 80 percent of the land area

is hilly or mountainous terrain (“midland” or “upland”), including areas that areremote and difficult to access Lowland areas account for only 20 percent of theland area, but accommodate over half the country’s population (56 percent) Onlyone-quarter of the country’s land area is considered cultivable Administratively, thecountry is divided into 17 provinces and Vientiane Capital, with 145 districts and8,600 villages In 2019, the population of Laos is estimated at 7.17 million, whichranks 105th in the world Economic growth in Lao PDR is projected to rebound to6.5 percent in 2019, up from 6.3 percent in 2018 This pick up is expected to bedriven by growth of the construction sector supported by investments in largeinfrastructure projects, and a resilient services sector, led by wholesale and retailtrade growth The Government has remained committed to fiscal consolidation tocontain public debt in the medium term by tightening public expenditure andimproving revenue administration The medium-term outlook remains broadlyfavorable, but subject to downside risks from heightened uncertainty in the globaland domestic environments Prolonged trade tensions among major economiescould dampen growth prospects in Lao PDR’s major trading partners, and spillover

to the domestic economy through lower trade and investment, and reduced pricesfor key export commodities Additionally, improving the business environment andreversing the decline in the global ranking of the ease of doing business, particularlyfor small and medium-sized enterprises, could also contribute to greatermacroeconomic stability, job creation and poverty reduction

The introduction of the New Economic Mechanism (NEM) in 1986 generated

an initial step in moving the economy towards a more market-oriented economy

14

Major reforms have been done by: removing price control, abandoning socialistcooperative farming, unifying the exchange rate system, removing the government’smonopoly on trade, reducing the number of SOEs, promoting private-firmestablishment, fiscal reform and banking and fianancial reform The economic reform

in Lao PDR aim to provide better incentives for private sector, and as a result, toincrease the productivity of various industrial sectors, boost domestic demand,increase exports and foreign direct investment (FDI), and infrastructures and humanresources Such reforms successfully generated robust economic growth for the pasttwo decades

As shown in table 1.1, Lao PDR is one of the fast growing economic in EastAsia and the Pacific The growth rate of the Lao PDR economy, measured by theannual growth of real GDP, recorded at 7.62% over the period 2011-2015, whichwas almost twice higher than average growth rate of GDP (4.1%) for economies inthe region over the same period Monetary supply and prices remained stable, whilethe low international reserve and high fiscal deficit raised concern over economicinstability (World Bank, 2019, IMF, 2018) The inflation rate had an average rate at

a single digit and the exchange rate was less volatile Rapid GDP growth andrelatively stable macroeconomic environments improved economic welfare of Laopeople Real GDP per capital rose by 182% from US$613 in 1998 to US$1, 730

in 2017

The high fiscal deficit raised the level of public debt from 59% of GDP (US$9billion) in 2016 to about 60% in 2017 (World Bank, 2017c) 80% of the total publicdebt was accounted for by external debts to finance the fiscal deficit There are threemain channels of externals borrowing: multilateral borrowing, bilateral borrowingand bond issuance Among these things, bilateral borrowing made up of the largestsource of total external debt Bilateral creditors, mainly China, Thailand and Japan,accounted for 56% of the total external public debt Multilateral creditors, mainlythe Asian Development Bank and the International Development Association,accounted for 18% while bond issuance accounted for 15%

Table 1.1: Economic Performance of Lao PDR in 1990-2017

Macroeconomic

Indicator 2017 2016

2011-15

10

2006-05

External debt stock

(% of GDP) 113.7 104.5 93.1 101.1 129.9 153.0 160.3Budget deficit (% of

Exchange rate (kip

per US$) 8,35 8,18 8,07 9,06 10,16 4,09 727.00

Source: World Bank and Asian Development Bank

According to the 2018 triennial review by the Committee for DevelopmentPoicy, United Nations Economic and Social Council, Lao PDR for first time passedtwo out of the three graduation criteria for the least development countries (LDC),gross national income (GNI) per capita and Human Assets Index (HAI) GNI per

capita rose from $1232 in 2015 to $1996 in 2018, which passed the graduationthreshold of $1230 The HAI increased from 60.8 in 2015 to 72.8 in 2018, whichexceeded the graduation threshold of 66 The largest improved element of HAI wasthe adult literacy rate, followed by the gross secondary enrolment rario and the under-five mortality rate But the Economic Vulnerability Index (EVI), measuring thecountry’s resilience to shocks and instability, is still to be under the criteria EVIimproved from 36.2 in 2015 to 32.7 in 2018, which has not yet passed thegraduation thershold of 32.12 The key improved elements of EVI include the share

of agriculture in GDP, victims of natural disasters and export concentration Thelimited improved elements of EVI include agricultural instability and remotenesswhile the lack of improved elements was export instability Nonetheless, if LaoPDR can sustains development gains and meets the criteria in 2021

Lao PDR has focused its SME policy on improving the legal and regulatoryenvironment to support SME development It has been developing targeted SMEpolicies since the early 2000s and benefits from a relatively good institutionalframework and a dedicated fund for SME development It is increasingly interested

in policies to enhance SME productivity

SMEs playing the main part of driving economic growth At the present time,SMEs in Laos contributed to 4% of GDP and 1 % of employment, so the privateproducers and exporters play a very important role in the economic development ofLaos and will be the main sources of driving economic growth in the future as in theother developing countries Besides that, SMEs are the largest source ofemployment and will be the appropriate instrument of poverty reduction in the nearfuture

SMEs in Laos were not good enough to compare with ASEAN nationsbecause the quality of running businesses was not clear to follow up law and termconditions to build up strength Furthermore, the main cause of weakness running abusiness is no strategic plan due to limited access to the loan, lack of workers’skills, low quality of infrastructure Weakness of SMEs can be seen in promotingentrepreneur to cooperate with foreign investors in order to increase productivity,market assessment

as well as expanded markets capacity, using modern technologies, and accessibility

to market information, etc

Therefore, it is necessary to know the role, growth direction and challenges ofsmes for social economic development under the socialist market system of Lao PDR

In addition, this study will explore the ways to development Smes, the recentresearch, issues related to development Smes, and summarize policies fordevelopment Smes in Laos from neighboring countries

1.2 Aim of objectives of the research

The aims of research is providing general assessments of the development ofSmes for Laos PDR through analysis of conditions, definition of SMEs and criteriafor classifying small and medium enterprises, and emphasis on their situation andimportance in the economic development of a country and the creation of jobs foremployment

It will also focusing on a more detailed analysis business development in LaoPDR, identifying the problems that businesses face: challenges and opportunitiesBeside that, this thesis also intends to bringing policies from some developedcountries, how those countries have been able to support and encourage thedevelopment of small and medium enterprises and offering the most effectivesolutions for promoting the development of Smes in Laos PDR

1.3 Literature review

In the current situation, due to increased integration of production andexchange goods in regional and international under the globalization and morebusiness competitiveness which leading the theory of development of Smes should

be adapt with the world change situation There are several international theoriesthat explain the growth of SMEs as follows:

•Resources-Based Theory of Competitive Advantage: The Resource-Based

Theory of Competitive Advantage: Implications for Strategy Formulation – RobertGrant (CMR 1991) The strategic development process starts by looking at the

relative position of a firm in a specific industry This start by considering the firm’senvironment and then try to assess what strategy is the one that may maximize thefirm’s performance The Resource-Based (RB) Theory, by contrast, can be seen as

an “inside-out” process of strategy formulation Starting by looking at whatresources the firm possesses Next, assessing their potential for value generation andend up by defining a strategy that will allow them to capture the maximum of value

in a sustainable way

Figure 1.1: A RB Approach to Strategy Analysis: A Practical framework

Source: The RB Theory of Competitive Advantage: Implications for

strategy Grant, Robert M.California Management Review

In summary, the resource-based theory stems from the principle that the strength

of firm’s competitive advantage in their internal resources, as opposed to theirpositioning in the external environment This theory as a basis that resources,capabilities and core competencies are essential for a firm’s competitive advantage.Therefore, adequate resource support and policies to create capability are critical forSMEs’ growth as they are small in size and need assistance Resource based theory

provides a framework to explain how business can identify suitable measures toovercome growth obstacles, have better access to technology resources, manpowerresources, financial resources, natural, and infrastructure, and access to the market(Robert Grant, 1991).

•Survival based theory: This theory was also introduced in the field of economics.

Researchers such as Schumpeter (1934), Alchian (1950), Harrod (1939) andMarshall (1949) were among the first who introduced the idea of evolutionarythinking and natural selection into the concept of economics Hence it is being used

to analyzed how firms thrive and compete in industries, and also to explain changes

in economy (Nelson & Winter, 1982) The concept of survival-based theory or somemight call it as “survival of the fittest’ theory was originally developed by HerbertSpencer (Miesing & Preble, 1985) It was him who synthesized Darwin’s theory ofevolution and natural selection with Adam Smith’s invisible hands to come up withthe idea of Social Darwinism This theory emphasized on the notion that byfollowing the principle of nature, only the best and the fittest of competitors willwin, which in the end would lead to the improvement of the social community as awhole Social Darwinism assumed it is normal for the competition to behave inhedonistic ways to produce the fittest business, who survived and prospered bysuccessfully adapting to its environment or become the most efficient and economicproducer of all The survival-based view in strategic management emphasized onthe assumptions that in order to survive, organizations has to deploy strategies thatshould be focused on running very efficient operations and can respond rapidly tothe changing of competitive environment (Khairuddin, 2005), since the one thatsurvive is the one that is the fittest and most able to adapt to the environment.However, the primary objective of run a company to make the organization runefficiently in order to better adapt to the environment, improving its profitabilityand to achieve the ultimate goal of surviving the competitive market in which itoperates In brief, the survival-base theory is the strategy that firm uses to avoidbeing exterminated by competitors One process- sensing, intuition, feeling,thinking- must be developed by a business manager in order to succeed in

innovativeness and high intellectual and practical capacity to run his company withbold jump and should be ready to accept the uncertainty (Gibcus, 2003) Basically,the underpinning of survival strategy is that organization needs to continuouslyadapt to its competitive environment in order to survive.

•The Small is Beautiful theory: The Small is Beautiful theory is a classic theory

advances the promotion of small-scale economic markets and systems, operatives and greater decentralization (Schumacher, 1973) Schumacher arguesthat the modern economy is unsustainable Natural resources (like fossil fuels), aretreated as expendable income, when in fact they should be treated as capital, sincethey are not renewable, and thus subject to eventual depletion He further arguesthat nature's resistance to pollution is limited as well He concludes that governmenteffort must be concentrated on sustainable development, because relatively minorimprovements, for example, technology transfer to Third World countries, will notsolve the underlying problem of an unsustainable economy Schumacher'sphilosophy is one of "enoughness", appreciating both human needs and limitations,and appropriate use of technology It grew out of his study of village-basedeconomics and education as the greatest resource, and discusses Land, Industry,Nuclear Energy and the human impact of Technology In a similar vein, Paulson(1980) found that the relative size of the small retail firm is associated withhorizontal differentiation and levels of complexity Also, Fullerton (2008)appreciated the observation of Schumacher‟s lead in his best-selling book, Small isBeautiful-Economic as if People Mattered, with the opinion that the global system

co-is broken not because of the credit crco-isco-is; it co-is broken because it co-is predicated onperpetual, resources driven with no recognition of scale limitation It points out veryskilfully what is exactly wrong with the modern industrial society, and offers analternative; appropriate technology, respect for human values, and especiallybringing things back to the small scale The theory of economic development–place

of small business argues that government has begun to initiate new policies andsupports for SMEs growth and development that later turn them into largeenterprises following the agitation and needs for SMEs involvement in an economy.The alternative theoretical perspective of Arrow (1962) contends that

smaller businesses are more productive The author argued that in the presence ofcompetition (such as when a number of smaller firms are competing with eachother), the monopolist tends to lose out in innovating, since the rents extracted bymaintaining the monopoly power exceeds the benefits of the lower prices broughtabout by innovation However, smaller firms will be able to benefit by innovatingunder these conditions, because the lower prices and costs resulting from innovationleads to competitive advantages in the marketplace To sum up, the Small BusinessBeautiful theory describes the resilience of small businesses, especially therestructuring of production to the current changing world economy; In addition,small businesses contribute to the price diversification and quality of their products

to society

•The Ownership Theory: The ownership theory explains that the ownership

structure whether concentrated or diffused ought to be influenced by the maximizing interests At the level of small and medium scale enterprises, the skills

profit-of the owner manager are critical to the long-term success and survival profit-of the firmwhile the role of the capitalist is usually diffused at the corporate level for largecompanies Owner’s manager is the enterprise main strategist and decision maker,developing the vision, mission and strategies, and also implementing them.However, the role of the owner-manager and his attitude towards strategic issues aretherefore often critical for implementation of strategy Likewise, the personal goals,traits and strategic orientation will have significant impact on enterprise strategy

K.H (2004), they described medium-sized manufacturing firms (SMEs) intransforming themselves into large firms (MNCs) both regionally and globally Giventhe relative rarity of the typical small business making substantial growth,academics, management experts and governments in many countries have beenkeen to discover ways in which small business growth can be encouraged andseeking for strategies to make successfully SMEs growth Basically, these businessmodels could be summarised into a framework, consisting of following threeapproaches:

1) Breadth-on-Top-of-Depth

In the BTD strategy, firms seek to place their developing expertise in a broadcontext One way to look at the concept is to imagine a capital ‘T’ Here, depth isrepresented by the stem of the ‘T’, and breadth by the horizontal arrows BTDmeans breadth in addition to depth Developing depth, be it in a technical/researcharea, is essential to business success The last thing that SMEs want is to be ‘a milewide and an inch depth’!

3) Diversify

In the diversify strategy, firms expand their product range and productioncapabilities based on their core competence

Breadth-on-Top-of-Depth Transformation Diversify

Figure 1.2: Business growth model framework

Source: Li JK, H-H and Tan, K.H (2004) ‘SMEs business growth model: a medium

to big effort’, Int J.Management and Enterprise Development

1.4 Research question

This research is trying to finding the way to development Smes in Laos as well

as development economic This is also some main questions to find out theinformation

•What are the definitions and the important of SMEs for Lao PDR?

•What are the challenges faced by Small and Medium Enterprises?

•How do Smes contribute to national and economic development?

• Identify core competence

• Identify product platform

• Conduct R & D on the chosen path

• Shift in customer base

• Build on core technology/competence

• Increasing product

• Expand market and customer base

•What are the supportive Lao’s SMEs policies learned from developed countries and some counties in region?

1.5 Research Methodology

This section sets out the qualitative methodology that was used to achieve theobjective of the study This thesis research uses methods of analysis, synthesis andcomparison the statistical data collected from secondary sources includingpublished and unpublished data collected from different organizations, institutes,agencies and government offices such as: Ministry of Industry and Commerce inLao, Department of Small and Medium Enterprises Promotion, Lao NationChamber of Commerce and Industry and a number of other sources mentioned inthe content of the article Furthermore, common sources of secondary data for socialscience include the censuses, organizational report Especially, the data have beencollected from economic survey 2013, Enterprise survey by the Lao StatisticsBureau, and SMEs surveyed by GIZ, 2013

1.6 The structure of the thesis

This thesis consist of four chapters as follow:

Chapter 1 Introduction

Chapter 2 Situation of Small and Medium Enterprise in Lao PDR

Chapter 3 Opportunities and challenges on development Small and MediumEnterprise in Lao PDR

Chapter 4 Policies of regional countries and recommendation for Lao PDR

1.7 Limitations and difficulties in implementing the research

The limitations and difficulties in the research

1) Restrictions on use the methodology cause of limited ability to conduct a thoroughanalysis of the results such as: econometric model, interview or questionaire

2) Restrictions on access to information required: contact coordinate secondary data,especially the balance sheet and report the results as expenses in the foreigncompanies from both the government and the foreign companies It is very difficultand can not cover all.

3) Restrictions on time constraint: it is a limited time to finding more statistical data ormore information to demonstrate issue clearly

CHAPTER 2 SITUATION OF SMALL AND MEDIUM ENTERPRISES IN LAO PDR

2.1 Definition of small and medium enterprises

Small and medium-sized enterprises (SMEs) has an important part of theeconomy and the small-scale enterprises SMEs are very flexible, dynamic, moredevelopment advantages but sometime they are vulnerable Therefore, almostcountries should have policies, regulations and measurements that could be supportthis type of business development It is important to identify definition of SMEslogically because this will determine the scope of management, the operating withthe environment and the support from the government

Up to present, there are two common Smes groups of criteria have beenestablished, they are qualitative and quantitative criteria The most commoncriterion to distinguish between large and small businesses is the number ofemployees The qualitative criteria group is based on the basic characteristics of theenterprise such as the level of specialization, the number of management clues, thelevel of complexity in the organization and management work This group ofcriteria has the advantage of reflecting the true nature of SMEs, but it is difficult todetermine The group of quantitative criteria is based on the actual regular labor sizeand the total investment capital which represents the total value of assets or turnover

in a year Countries around the world rely on these two quantitative criteria todetermine the size of the SME sector, but in each country has a different level ofquantification The determination of the size of SMEs influenced by factors such as thelevel of development of the economy or classification purposes in certain periods.Currently, there is no unified definition of SMEs in the world Despite the lack

of universality of the definition and the lack of alignment in the criteria, theimportance of SMEs definition is inalienable The definition of small and mediumenterprises is important and useful: in the preparation of statistics or inbenchmarking against other economies and between regions within an economy.These are some definitions of SMEs from organizations, countries and regions inthe world

2.1.1 Definition of European Commission (EC)

European Commission promotes “the criterion of the number of staff as themain criterion, however, introducing a financial criterion is nonetheless a necessaryadjunct in order to grasp the real scale and performance of an enterprise and itsposition compared to its competitors” (European Commission: 2003) EuropeanCommission through a guide determines the criteria for defining enterprises:number of employees, annual turnover and annual balance sheet (EuropeanCommission: 2005) It is determined that meeting the criteria of the number ofemployees is mandatory, while filling another from the two financial criteria is achoice of the enterprise The definition of SMEs that came into effect from 1January 2005 is shown in the following table

Table 2.1: Definition of Small and Medium Enterprises with European Union

Source: European Commission

2005 According to the European Commission (EC) report has effective on 1st

January, 2005 (2003/361 / EU), SMEs are independent enterprises with the number

of employees less than 250 peoples and annual turnover or total assets do notexceed 50 million dollar Small business is an enterprise with the number ofemployees under 50 peoples with annual turnover does not exceed 10 million dollar.Micro enterprises are enterprises with less than 10 peoples and annual turnover or

total assets do notexceed 2 million dollar

This new definition replaces the old EC definition in 1996 and has the samelabor criteria with the old definition, but the criteria for annual turnover of assets arelower The increase in financial criteria could explained the economy growthleading to the increasing in prices and labor productivity in the European Union(EU) countries.

2.1.2 Definition of World Bank (WB)

The World Bank uses three quantitative criteria for defining SMEs: number ofemployees, total assets in U.S dollars and annual sales in U.S dollars (IEG: 2008)

A business must meet the quantitative criteria of number of employees and at leastone financial criteria to be categorized as micro, small or medium business

Table 2.2: Definition of Small and Medium Enterprises by World Bank

standards

Enterprise indicator Number of

Source: Independent Evaluation Group

2008 If we compare the two criteria, “approximations” are observed in

quantitative criteria of number of employees, with the exception that the WorldBank raises the upper threshold for medium-sized businesses to 300 workers.Inconsistencies are most pronounced in financial criteria Besides differences indenomination (EUR/USD) which is understandable, financial criteria used are quitedifferent While the EU uses the criteria of annual turnover and balance sheet total,

WB use the criteria of total assets and total annual sales Financial criteria of the

two institutions have no

basis of comparability; moreover there are substantial differences in definition WorldBank criteria seize more minimalist thresholds than the European Union While forthe EU has a micro business has a turnover of up to two million Euros, for WB itmust not exceed annual sales of up to one hundred thousand dollars EU setsmaximum threshold of fifty million Euros to distinguish medium businesses fromlarge ones, while WB sets it to only fifteen million dollars for the two financialcriteria.

Although being the most common criterion in the definition, the number ofemployees has many variances indifferent sources of SMEs statisticalreporting Thelargest number of sources defines SMEs to have a cut-off range of 0-250 employees(Ayyagari et al.: 2003) Among all SMEs definitions, the one most implemented inSME studies is that of the European Union However, it remains far from beingappropriated by the state governments and policymakers Although recommended

by the EU, that definition is only mandatory for institutions and businesses seekingfunding from it (Carter and Jones-Evans: 2006)

2.1.3 Definition SMEs in China

The Interim Categorizing Criteria on Small and Medium-sized Enterprises(SMEs), published in 2003 and based on the SME Promotion Law of China, sets theguidelines for classifying SMEs It replaced the old guidelines that came into effect

in 1988, and the supplementary criteria of 1992

Table 3.1: Definition of Small and Medium Enterprises in China

Size

Category Industries

Employmen

t based Total assets Business revenue

Small Industry < 300 <¥ 40 million <¥ 30 million

Constructive < 600 <¥ 40 million <¥ 30 million

Hotel &

restaurant

Source: SME promotion law of China, 2003.

The study mainly cover the payrolls, revenue and total assets of enterprises.Specific criteria apply to the industrial sector, construction, transportation,wholesale and retail business, and hotels and restaurants For industrial sectorrequires SMEs to employ a maximum 2,000 people, and to have an annual revenuenot exceeding RMB300 million Their total assets should not exceed RMB 400million Medium- sized enterprises should employ a minimum of 300 people Theirannual revenue and total assets should not exceeding RMB30 million and 40million respectively The rest are classified as small enterprises

The definition of an SME in China is quite complex and can include relativelylarge firms In APEC (Asia-Pacific Economic Cooperation) economies, thedefinition of an SME also varies, but is generally most commonly is based on thenumber of employees SMEs commonly employ 100 to 500 people But the vastbulk of SMEs, comprising around 70 percent, employ five people or less or are run

by self-employed individuals SME definition in China depends on the industrycategory and is defined based on the number of employees, annual revenue, andtotal assets comprising a company

An industrial SME is defined as having up has up to 2,000 employees; while amedium-sized business has between 301 and 2,000 employees; and a small businesshas less than 300 Consequently, what is regarded as an SME in China may be quitelarge relative to an SME in other countries

2.1.4 Definition of Vietnam

From 2001 to 2009, the definition of SME is said in Decree 90/2001 ND-CP

as follow: SME is an independent business establishment with registered capital notexceeding 10 billion VND (about US $600,000) or annual average number ofpermanent workers not exceeding 300

In 2009, the definition of SME is said in Decree 56/2009/ND-CP as follow:Small and medium-sized enterprises are business establishments that haveregistered their business according to law and are divided into three levels: verysmall, small and medium according to the sizes of their total capital (equivalent tothe total assets identified in an enterprise’s accounting balance sheet) or the averageannual number of laborers (total capital is the priority criterion), concretely Microenterprises has the number of employees of 10 or fewer Small enterprises areenterprises with total capital less than 20 billion VND and number of employeesfrom 10 to 200 people (for commercial and service sector, the total capital isdetermined less than 10 billion VND and the number of employees is from 10 to 50people); Medium enterprises are enterprises with total capital from over 20 billionVND to 100 billion VND and employees from over 20 to 300 people (forenterprises operating in trade and services,

the criteria for total capital are determined from over 10 billion to 50 billion VNDand the number of employees from 50 to 100 people).

Table 2.4: Definition of SMEs in Vietnam

MICRO- ENTERPRISE SMALL-ENTERPRISE MEDIUM-ENTERPRISE

Number of employees (Person)

Total capital (VND billion)

Number of employees (Person)

Total capital (VND billion)

Number of employees (Person)

AGRICULTURE,

FORESTRY AND

FISHERIES

No more than 10

No more than 20

From more than 10 to 200

From more than 20 to 100

From more than 200 to 300

INDUSTRY AND

CONSTRUCTIO

N

No more than 10

No more than 20

From more than 10 to 200

From more than 20 to 100

From more than 200 to 300

TRADE AND

SERVICE

No more than 10

No more than 10

From more than 10 to 50

From more than 10 to 500

From more than 50 to 100

Source: Decree No

56/2009/ND-CP In the newly established Law on Facilitating SME sector (No 04/2017/QH14),

which will be in force from January 1, 2018, an enterprise is considered as SME if itmeets either the following criteria: (i) total capital should not exceed VND 100billion; or (ii) total turnover of the preceding year should not exceed VND 300billion The criteria of micro-enterprises, small enterprises, and medium enterpriseswould be identified differently in the fields of agriculture, construction, trade and

services etc

2.1.5 Definition of Lao PDR

The definition for SMEs in various countries are different The criteria forclassifying enterprises into different categories are usually number of employees,value of assets and sales For Lao PDR, the Ministry of Industry and Handicraft(MIH) together with GTZ have, for the survey in 1996, specified that enterpriseswith 1-9 employees are small, with 10-29 are medium, and with 30 or more arelarge

However, in 2000 the National Statistical Center classified enterprises with 1 - 9employees as small, 10-99 as medium, and 100 or more as large Currently, thedefinition used is in accordance with the Prime Minister Decree No 42 officiallyissued in 2004 based on the number of employees, the value of assets and theannual average turnover It states that: “Small and Medium-Sized Enterprises areindependent establishments which are legally registered and are running theiractivities in accordance with the laws of Lao PDR.” The sizes are defined by thefollowing criteria:

1) Small enterprises – those with an annual average number of employees notexceeding 19 persons or total assets not exceeding 250 million kip or an annualturnover not exceeding 4 hundred million kip

2) Medium-sized enterprises – those with an annual average number of employees notexceeding 99 persons or total assets not exceeding 1.2 billion kip or an annualturnover not exceeding 1 billion kip

Table 2.5: Definition of Small and Medium Enterprises in Lao PDR

Category Average annual

number of employee

Total asset (Lao Kip)

Annual turnover (Lao Kip)

Source: Strategy for SMEs Development Utill 2010, MOIC Lao PDR

2.2 Small and Medium Enterprises in Lao PDR

Firstly, SMEs are the important productive units in Lao PDR economic LaoStatistics Bureau (2013) (2013 Economic Census of Lao PDR) reveals that therewere 124,873 enterprises in Lao PDR, which were slightly smaller than thosereported in 2006 (126,913 enterprises) Table 4-1 presents the unit and percentage

of total across sizes of enterprises based on the number of employees That is thecensus includes large (311, 0.25%), medium (373, 0.30%), small (10.829, 8.67%),and micro

(113.360, 90.78%) enterprises Among other things, SMEs accounted for 99.75% oftotal enterprises in the Lao PDR economy, which follows a similar pattern ofneighbouring countries: 99.80% in Cambodia; 99.40% in Myanmar; 98.00% inVietnam; 99.70% in Thailand; and Indonesia (OECD and ERIA, 2018).

Table 2.6: Sizes of Enterprises by the Number of Employees, 2013

agricultural sector SMEs are alsoexpected to promote technology transfer and innovation in the long run

Third, SMEs serve domestic markets and connect the country to internationalmarkets As shown in Table 4-2, 98,31% (113,360 units), 93.18% (10,091 units),and 77.48% (289 units) of micro, small and medium enterprises respectively servesdomestic markets Less than 3% of micro and small enterprises and about 20% ofmedium ones exported goods to foreign countries While 59.49% of largeenterprises (185 units) served domestic markets, 22.83% (71 units) exported toforeign countries and the other 17.68% (55 units) served both domestic and foreignmarkets

Table 2.7: Distribution of Enterprises in Domestic and Foreign Markets,

2013 (%)

workforce in 2006 to 14% in 2013(Figure 2.1)

Large enterprises 19%

Micro enterprises 53%

Medium enterprises 5%

Small enterprises 23%

Figure 2.1: Share of Employment by Enterprises, 2013

Source: Lao Statistics Bureau (2013)

• Location

More SMEs are in the central region than in the northern and southern regions

of Lao PDR by administrative regions: 32.86% of micro enterprises are in thecentral region of the country, 24.44% are in the north and only 15.78% are in thesouth By individual provinces, the largest share of micro enterprises is VientianeCapital (26.92%), followed by Savannakhet (11.17%) and Champasak (9.25%) Thelowest share of micro enterprises is in Phongsaly (1.29%) and Sekong (1.27%).Similarly, 27.14% of small enterprises are in the central region of the country,20.01% are in the north and only 12.94% are in the south By individual provinces,the largest share of small enterprises is Vientiane Capital (39.91), followed bySavannakhet (9.94%) and Champasak (8.15%) The lowest share of small enterprises

is in Sekong (0.90%) and Phongsaly (0.88%) Moreover, 25.2% of mediumenterprises are in the central region of the country, 13.66% are in the north, and only11.52% are in the south By individual provinces, the largest share of mediumenterprises is in Vientiane Capital (49.60%), followed by Champasak (6.97%),Vientiane province (6.43%), and Savannakhet (5.63%) The lowest share of mediumenterprises is in Oudumxay (1.07%), Sekong (0.80%) and Huaphanh (0.54%) Thesame geographical distribution is the case with large enterprises, 53.70% of whichare in Vientiane Capital, 25.40% are in the central region and 12.23% are in thesouth (Table 2.8)

Table 2.8: Location of Enterprises by Region and Province

Unit Share Unit Share Unit Share Unit share

With respect to area types, majority of enterprises are in urban areas (65.9%)which have good infrastructures and markets: Focusing on the size of SMEs, wefind that medium and large enterprises are in urban areas, which account for 79.09%and 81.35% of total enterprises, respectively While micro and small enterprisestend to be close to their production sites in rural areas with roads, which account for21.4% and 34.2% of total enterprises, respectively, due to high living cost and rentalfees in order to reduce production costs (Table 2.9).

Table 2.9: Location of Enterprises by Area Types

Location

of

Enterprises

Unit Share Unit Share Unit Share Unit share Unit share

Urban 73,260 64.63 8,480 78.31 295 79.09 253 81.35 82,288 65.9 Rural with

road 38,790 34.22 2,322 21.44 78 20.91 58 18.65 41,248 33.03Rural

without

road

Total 113,360 100 10,826 100 373 100 311 100 124,87 100

Source: Lao Statistics Bureau (2013)

• Position of in the private sector

By economic activities, small enterprises operate in the wholesale and retailtrade, repair of motor vehicles and motorcycles, while medium ones mostly operate

in the manufacturing sector: 30.57% of small enterprises operated in wholesale andretail trade, repair of motor vehicles and motorcycles, while 25.29% of smallenterprises operated in the manufacturing sector The share of small enterprises inthe manufacturing sector is lower than that of medium enterprises (33.51%) andlarge enterprises (37.62%) (Table 2.10)

Table 2.10: Share of Enterprises by Economic Activities

Location of Enterprises

steam and air

conditioner and supply

G Wholesale and retail

trade; repair of motor

vehicles and motorcycles