A study on the foreign direct investment in the telecommunications sector in lao PDR

ADB Asia Development Bank AFTA ASEAN Free Trade Area ASEAN Association of South East Asian Nations BCC Business cooperation contracts BDS Business Development Services BMO Business Membe

The author would like to express his sincere gratitude to the supervisor Assoc Prof

Dr Bui Anh Tuan for this precious guidance, fully supported and valuable suggestionsthroughout the research study

Thanks are due to and advisor: H.E Hiem Phommachanh, Dr ThansamayKommasith, Assoc Prof Dr Lai Phi Hung, Assoc Prof Dr Hong Van Cuong, Assoc Prof.Khampheuy Phommachanh, Mrs Phonephet Miphenglavanh MBA, Mrs KhamkiengPhothirath, Mr Phakavanh Phothirath, Mr Ketsavanh Phothirath, Mr.BounsaleumxayKhennavong MBA, Mr Oudasack Lasoukanh MSc, Mr Somlith Phouthonsy, Mr SnithXaphakdy MSc, Mr Hoang Quoc Khanh, Mr Phung Huy Tam, Mr Doan Hieu, Miss.Phuong Tran Linh for their valuable contribution in serving as committee members, aswell as for precious suggestions and comments on the research study

Thanks are also extended to committee council of the national level as: Prof Dr.Tran Tho Dat, Assoc Prof Dr Ta Van Loi, Prof Dr Nguyen Thi Thanh Minh, Assoc Prof

Dr Bui Huy Nhuong, Dr Nguyen Thi Nguyet, Assoc Prof Dr Le Quoc Hoi

Thanks General Director and Deputy Director of The National University of Laosare also extended to professors and General Director and Deputy Director of The NationalEconomics University of Vietnam, and are also due General Director and Deputy Director

of Telecommunications in Laos and Vietnam

Special thanks are expressed to the Minister of Education and Training of SRVietnam and Minister of Education and sports of Lao PDR for providing access todifferent departments and different companies to support and collect data

Lastly, the grateful the Laos and Vietnam Government, for giving cooperationprogram to upgrade our knowledge furthermore and to obtain a prestigious Ph.D degreefrom two Universities as the National Economics University of Vietnam, Hanoi, Vietnam

SR and the National University of Lao, Vientiane capital, Lao PDR

1

ADB Asia Development Bank

AFTA ASEAN Free Trade Area

ASEAN Association of South East Asian Nations

BCC Business cooperation contracts

BDS Business Development Services

BMO Business Membership Organization

BOT Build, operate and transfer

BPO Business Process Outsourcing Industry

BTA Bi-lateral trade agreement

CSA Civil Society Associations

CPI Consumer Price Index

EBS Enterprise Baseline Survey (2005)

ES Enterprise Survey (2007, 2009, 2011)

ETL Enterprise of Telecommunications Lao

EXIM Export-Import Bank

FDI Foreign Direct Investment

HRDME Human Resource Development for a Market Economy

GDP Gross Domestic Product

GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GmbHGoL Government of Lao PDR

GNI Gross national income

ISIC International Standard Industry Classification

ICT Information and Communications Technologies

IPT Institute of Posts and Telecommunications

ISP Internet service provider

IT Information Technology

ITU International Telecommunications Union

IXC Internet exchange carrier

Lao PDR Lao People’s Democratic Republic

LeG Lao PDR e-Government

LTC Enterprise of Joint Venture of Lao Telecommunications

LDC Least developed country

LBF Lao Business Forum

LNCCI Lao National Chamber of Commerce and Industry

MPT Ministry of Posts and Telecommunications

MST Ministry of Science and Technology

MOT Ministry of Trade

MPI Ministry of Planning and Investment

MDGs Millennium Development Goals

MNE Micro and Nano Engineering

MAI Multilateral Agreement on Investment

MoES Ministry of Education and Sports

MoIC Ministry of Industry and Commerce

NGPES National Growth and Poverty Eradication Strategy

NSEDP National Socio-Economic Development Plan

NUoL National University of Laos

NIPTS National Institute of Post and Telecommunications StrategyNPEP National Poverty Eradication Programme

NICTA National ICT Association

OoG Office of Government

OSP On-line service provider

OECD Organization for Economic Co-operation and DevelopmentSME Small and medium sized enterprises

SOE State owned enterprise

SMEPDO The National Small and Medium-Sized Enterprise Promotion and

Development OfficePPP Provincial Public-Private

TRIMS Trade Related Investment Measures

TFP Total Factor Productivity

TNC Trans National Corporations

USD United States Dollar

VAS Value added services

VoIP Voice over Internet Protocol

WTO World Trade Organization

IIA international investment agreement

IPA investment promotion agency

LISTS OF TABLE

Table 1.1: Internalization advantages 29

Table 1.2: different types of FDI can be distinguished 29

Table 2.1: ICT spending on services and hardware, 2013 87

Table 2.2: Fixed-line subscribers and market share in 2014 90

Table 2.3: Mobile subscribers and annual growth, 1995-2014 91

Table 2.4: Postpaid and prepaid mobile subscribers by operator, 2014 93

Table 2.5: ICT Development Index results for LAO PDR 103

Table 2.6: FDI’s Telecommunications sector by partner, up to 2014 108

Table 2.7: Telecommunications sector Revenue Summary year 2008 to year 2014 109

Table 2.8: Telecommunications sector Revenue Summary year 2014 to 2020 110

Table 2.9: The Company’s establish of FDI 120

LISTS OF FIGURE Figure 1.1: Porter’s National Competitive Advantage Theory 13

Figure 2.2: The international connection point 79

Figure 2.3: Fixed lines in service, 1995 – 2014 82

Figure 2.4: Fixed-line subscribers and market share in 2013 83

Figure 2.5: Mobile subscriber’s growth, 2014 85

Figure 2.6: Mobile subscribers and market share, 2014 86

Figure 2.7: Internet users, 1998 – 2014 89

Figure 2.8: Overview of the ICT Development Index 95

Figure 2.9: FDI’s Telecommunications sector by partner, up to 2013 101

Figure 2.10: The companies’ share of FDI 114

Figure 2.11: Telecommunications sector facility 122

Figure 3.3: Strategic human resource development serves as the key link between the overall strategic plan and human resource management 146

1. Rational of the research

The Lao People’s Democratic Republic (Lao PDR) is developing country, it is facingcritical changes Recently, this has evolved to the stage of adopting a so-called “NewEconomic Mechanism” for economic reform that attempts to transform its centrally-planned economy toward a market-oriented one Foreign Direct Investment has played avery important role in the development of the telecommunications sector in Lao PDR butinflow of Foreign Direct Investment still small and going down in the period from 2000-2010

Party focuses on enhancing its leadership role (Choummaly Sayasone, Party SecretaryGeneral of Lao revolution people) Party Secretary General will focus on bolstering theleadership of the Party and closely monitoring the country’s top priorities to realize theresolution of the 9th Party Congress approved in March, 2011 The commitment was made

at the 2nd session of the 9th Party Central Committee convened in Vientiane from 16-20May, 2011 chaired by Party Secretary General Choummaly Sayasone The leaders haveseen the need to boost Socio-Economic development based on the potential of variousareas The session proceeded as the entire Party, army and society are focusing onformulating action plans to realize the Resolution of the 9th Party Congress and the Seventh(7) Socio-Economic development plans for 2011-2015 and all these efforts can lay thefoundation for Lao PDR to rise above least developed country status in year 2020 [14].Foreign Direct Investment (FDI) has played a very important role in the development

of the Lao’s telecommunication sector in Lao PDR The Government has formulatedpolicies to attract FDI to this sector But FDI inflow to Lao’s telecommunications sector isnot enough as expected This issue has affected the development of the sector as well asthe economic development of the country The results, starting from an extremely lowbase, were striking - growth averaged 6% per year from 1988-2008 except during theshort-lived drop caused by the Asian financial crisis that began in 1997 Laos' growthexceeded 7% per year during 2008-13 Despite this high growth rate, Lao PDR remains acountry with an underdeveloped infrastructure, particularly in rural areas It has a basic, butimproving, telecommunications system, and limited external and internal land-linetelecommunications Laos' economy is heavily dependent on capital-intensive natural

resource exports The economy also has benefited from high-profile foreign directinvestment in telecommunications, logging, and construction though some projects in theseindustries have drawn criticism for their environmental impacts Lao PDR is in the process

of implementing a value-added tax system Simplified investment procedures andexpanded bank credits for small companies and small entrepreneurs will improve Laos'economic prospects The government appears committed to raising the country's profileamong investors, but suffered through a fiscal crisis in 2013 brought about by public sectorwage increases, fiscal mismanagement, and revenue shortfalls The World Bank hasdeclared that Laos' goal of graduating from the UN Development Program's list of least-developed countries by 2020 is achievable, and the country is preparing to enter theASEAN Economic Community in 2015

This dissertation needs to be fulfilling the following tasks: to analyses thedevelopment of the telecommunications of Lao PDR from 2003 to 2013; to analyses andevaluate the role of FDI to develop the telecommunications sector in Lao PDR in theperiod 2003-2013; to investigate the main drivers of improve FDI to thetelecommunications sector in Lao PDR in the period 2003-2013; to give the solutions toattract FDI to develop the telecommunications sector in Lao PDR in the period is better of

2015 to 2020

This study aims to analyses the current situation of FDI in the sector in the period from

2000 to 2010 and to set up solutions to attract FDI to the sector in the period from 2011 to

2015 in the new context of international economic integration

2. Literature Review

The Lao’s Telecommunications development, since then government has encouragedthe expansion of foreign direct investment (FDI) The liberalization measure in 1994 haschanged with foreign investments radically The inflows will allow multiple benefits such

as technology transfer, market access, improvement in voice and data quality andorganizational skills It increases the flow of foreign currency and helps in maintainingharmonious relationship with the country from which the investment is made It has beendecided to enhance the FDI in telecom services in areas like basic telecom, cellular unifiedaccess services, internet and intranet, long distance vast, public mobile, radio service andradio frequency services

The above services would be subject to licensing and security requirements, whereverrequired The FDI is limit increase, any change of investment flowing into Lao PDR andhave a magnanimous effect on the telecom sector by way of economic reforms and wouldalso affect the economy as a whole, and would likely have a chain reaction on variousother sectors It has been proclaimed by the Finance Minister of Lao PDR that the decisionabout increasing the FDI in the Lao telecom market has been taken as telecom sector isperceived as the capital intensive and thus the aim is to draw more and more capitalinvestment in this sector Moreover the aim was also to make the whole system in thetelecom market lucid and methodical.

FDI in services responds well to openness especially when it comes to the telecomssector This is quite evident looking at the recent boom in the Lao Telecoms sector Furtherliberalization of services involves potential advantages for Lao economy Benefits canarise from increased competition, lower prices, and better quality of services FDI inservices like telecommunications provide key inputs to other productive activities that lead

to further investment and competitiveness of an economy Efforts should be made towardsattracting efficiency seeking FDI through a right policy that expands operation, improvelocal skills, establish linkages and upgrade technology

However, precautions should be taken to avoid the risk of foreign investors competing domestic investors especially in case of infrastructure services liketelecommunications Services where domestic investors are not able to cater to the growingdemand, or where domestic service-providers do not have the ability or capacity to providethe required quality of services

out-To circumvent such spirals it is important for the region to have appropriate domesticregulations or enabling environment in place, which will assure better quality of services ataffordable prices Clear domestic regulations increase transparency in the system andencourage FDI To sustain the momentum of growth in services trade in the region,conscious efforts should be made to improve the competitive advantage of the region as awhole Inclusion of trade in services may help attract FDI in services and lead to greaterintra-regional trade Access to more efficient services could lead to higher growth inproductivity in other sectors, which, in turn, could improve the overall competitive strength

of the region

Thus it can be concluded that the recent upward swing in the telecommunication sector

in Lao PDR is due to the introduction of FDI in this sector by the Lao Government since

1991 but at the same time we must also be careful and not get carried away by thisdevelopment and should have proper regulations in place to actually utilize this situation toour advantage

Laos and Vietnam will struggle strive target for a 20 percent trade growth in two-waytrade next year, up from the US$1Billion expected for the year ending on December, 2012.Two-way trade between Laos and Vietnam over the first 10 months of 2013 reachedUS$817Million In addition, Vietnamese enterprises have invested in 412 projects in Laostotaling US$5Billion, which rank the country second after China [31]

To circumvent such spirals it is important for the region to have appropriate domesticregulations or enabling environment in place, which will assure better quality of services ataffordable prices Clear domestic regulations increase transparency in the system andencourage FDI To sustain the momentum of growth in services trade in the region,conscious efforts should be made to improve the competitive advantage of the region as awhole Inclusion of trade in services may help attract FDI in services and lead to greaterintra-regional trade Access to more efficient services could lead to higher growth inproductivity in other sectors, which, in turn, could improve the overall competitive strength

of the region

Thus it can be concluded that the recent upward swing in the telecommunication sector

in Lao PDR is due to the introduction of FDI in this sector by the Lao Government since

1991 but at the same time we must also be careful and not get carried away by thisdevelopment and should have proper regulations in place to actually utilize this situation toour advantage

3. Research of objectives and tasks.

The objectives of this study and research aims to identify the important role of FDIrelated to improve and success of the telecom business performance in the Lao PDR inorder to recommend some solution to attract FDI into Lao PDR and suggestions for newpotential foreign direct investors The Lao PDR is still young country andtelecommunication market is small too, but really wants to be successful in doing business

in the world new market management for improving to best for Lao’s economic

To meet above objects, this dissertation needs to be fulfilling the following tasks:

- To analyses the development of the telecommunications of Lao PDR from 2003 to 2013

- To analyses and evaluate the role of FDI to develop the telecommunications sector in LaoPDR in the period 2003-2013

- To investigate the main drivers of improve FDI to the telecommunications sector in LaoPDR in the period 2003-2013

- To give the solutions to attract FDI to develop the telecommunications sector in Lao PDR

in the period is better of 2015 to 2020

- What are factors to improve the FDI inflow into Lao’s telecommunications sector?

- What and how to improve FDI in to Lao’s telecommunications sector in the period 2015-2020?

5. Research Methodology.

Overall, the section of this paper is concerned with the social construction anddisbursement of rationality and the way in which this rationality affects the power andpolitical structure of organizational functioning through a variety of organizational andsociological theories The organizational and sociological theories utilized are referred to

as interpretive perspectives, which also draw from the organizational decision-makingperspective Exclusively, a number of organizational and social theories includinginstitutional theory, resource dependency theory, political perspectives, and the sociology

of professions are looked at to examine the relevance of interpretive perspectives Insummary, "interpretive perspectives of managerial accounting have begun to seemanagerial accounting practices and information as socially constructed phenomena withthe full implications of the power and politics of social construction rather than as atechnically rational function driven by and serving the internal operations of

organizations." Managerial accounting is seen as being implicated in the socialconstruction of reality rather than as being passively reflective of the reality as depicted incontingency theory Main research methods will be used in this study are desk study andfield study, comparative study with figures The field study includes interview,questionnaires and observations.

6. Expected Results

The economic reforms that the Lao PDR has undertaken from 2011 to 2015 haveproduced significant progress Over this period, gross domestic product (GDP) in realterms grew by about 8.3% per annum on the average Foreign Direct Investment (FDI) hascontributed greatly to changing the economic landscape of the country Thetelecommunications is also very fast growth and first economic in Lao PDR And also alltelecom operators will be convergence to the centralization in the one gateway and alsowill be develop well for the future

Foreign Direct Investment (FDI) plays an extraordinary and growing role in globalbusiness It can provide a firm with new markets and marketing channels, cheaperproduction facilities, access to new technology, products, skills and financing For a hostcountry or the foreign firm which receives the investment, it can provide a source of newtechnologies, capital, processes, products, organizational technologies and managementskills, and as such can provide a strong impetus to economic development The directinvestment in buildings, machinery and equipment is in contrast with making a portfolioinvestment, which is considered an indirect investment In recent years, given rapid growthand change in global investment patterns, the definition has been broadened to include theacquisition of a lasting management interest in a company or enterprise outside theinvesting firm’s home country, such as a direct acquisition of a foreign firm, construction

of a facility, or investment in a joint venture or strategic alliance with a local firm withattendant input of technology, licensing of intellectual property, in the past decade, FDI hascome to play a major role in the internationalization of business

7. Structure of Dissertation.

1 Introduction

2 Chapter 1: FDI Theories framework and the important of FDI attraction intotelecommunication sector in Lao P.D.R

3 Chapter 2: Situation of FDI attraction into telecommunication sector in Lao P.D.R

4 Chapter 3: Solutions and recommendations in FDI attraction into telecommunicationsector in Lao P.D.R

5 Conclusion

CHAPTER 1 FDI THEORIES FRAMEWORK AND THE IMPORTANT OF

FDI ATTRACTION INTO TELECOMMUNICATION

SECTOR IN LAO P.D.R

1.1 The theory of FDI

There are two main categories of international investment- Foreign Portfolio Investment and Foreign Direct Investment: Foreign Portfolio investment refers to the

investment in a company’s stocks, bonds, or assets, but not for the purpose of controlling

or directing the firm’s operations or management Typically, investors in this category arelooking for a financial rate of return as well as diversifying investment risk through

multiple markets Foreign direct investment (FDI) refers to an investment in or the

acquisition of foreign assets with the intent to control and manage them

(1) Porter’s National Competitive Advantage Theory.

In the continuing evolution of international trade theories, Michael Porter ofHarvard Business School developed a new model to explain national competitiveadvantage in 1990 Porter’s theory stated that a nation’s competitiveness in an industrydepends on the capacity of the industry to innovate and upgrade His theory focused onexplaining why some nations are more competitive in certain industries To explain histheory, Porter identified four determinants that he linked together The four determinantsare (1) local market resources and capabilities, (2) local market demand conditions, (3)local suppliers and complementary industries, and (4) local firm characteristics [39]

1 Local market resources and capabilities (factor conditions) Porter recognized the

value of the factor proportions theory, which considers a nation’s resources (e.g., naturalresources and available labor) as key factors in determining what products a countrywill import or export Porter added to these basic factors a new list of advanced factors,which he defined as skilled labor, investments in education, technology, andinfrastructure He perceived these advanced factors as providing a country with asustainable competitive advantage

2 Local market demand conditions Porter believed that a sophisticated home market is

critical to ensuring ongoing innovation, thereby creating a sustainable competitiveadvantage Companies whose domestic markets are sophisticated, trendsetting, anddemanding forces continuous innovation and the development of new products andtechnologies Many sources credit the demanding US consumer with forcing USsoftware companies to continuously innovate, thus creating a sustainable competitiveadvantage in software products and services

3 Local suppliers and complementary industries To remain competitive, large global

firms benefit from having strong, efficient supporting and related industries to providethe inputs required by the industry Certain industries cluster geographically, whichprovides efficiencies and productivity

4 Local firm characteristics Local firm characteristics include firm strategy, industry

structure, and industry rivalry Local strategy affects a firm’s competitiveness Ahealthy level of rivalry between local firms will spur innovation and competitiveness

Figure 1.1: Porter’s National Competitive Advantage Theory

Source: Theory of International Trade and Investment International Business, the challenge of global competition, twelfth edition Dolnald A.Ball, J.Michael S.Minor,

Jeanne M.McNett

In addition to the four determinants of the diamond, Porter also noted that governmentand chance play a part in the national competitiveness of industries Governments can, bytheir actions and policies, increase the competitiveness of firms and occasionally entireindustries.

Porter’s theory, along with the other modern, firm-based theories, offers an interestinginterpretation of international trade trends Nevertheless, they remain relatively new andminimally tested theories

(2) Product Life Cycle

Figure 1.2: Product Life Cycle Theory

Source: Wild, John J., K L Wild, J C Y Han (2000), International Business: An Integrated Approach, Prentice–Hall, Inc., Angelo Francesco Rossi (2013).

Product Life Cycle: The product life cycle is defined as the period that starts with theinitial product design (research and development) and ends with the withdrawal of theproduct from the marketplace It is characterized by specific stages, including research,development, introduction, maturity, decline, and finally obsolescence as the product isremoved from the market (discontinued) Each stage is often linked with changes in theflows of raw materials, parts and distribution to markets as production (input costs) is

adjusted to face increasing competition Conventionally, four main stages compose a product's life cycle:

 Introduction This stage mainly concerns the development of a new product, from the

time is initially conceptualized to the point it is introduced on the market The greatmajority of ideas do not reach the promotion stage The corporation having aninnovative idea first will often have a period of monopoly until competitors start to copyand/or improve the product (unless a patent is involved as it is the case in industriessuch as pharmaceuticals) Generally, associated freight flows take place withindeveloped countries and/or close to markets where to product is likely to be adopted

 Growth If the new product is successful (many are not), sales will start to grow and

new competitors will enter the market (by replicating the product or developing newfeatures on their own), slowly eroding the market share of the innovative firm Theproduct starts to be exported to other markets and substantial efforts are made toimprove its distribution since competition mainly takes place more on the innovativecapabilities of the product than on its price This phase tends to be associated by highlevels of profits and a fast diffusion of the product

 Maturity At this stage, the product has been standardized, is widely available on the

market and its distribution is well established Competition increasingly takes placeover cost and a growing share of the production is moved to low cost locations,particularly for labor intensive parts Associated freight flows are consequentlymodified to include a greater transnational dimension

 Decline As the product is becoming obsolete, production essentially takes place in low

costs locations Production and distribution economies are actively sought as profitmargins decline Eventually, the product will be retired, an event that marks the end ofits life cycle

Conventionally, as a product went through its life cycle the least profitablefunctions were relocated to lower costs locations, notably in developing countries Thisdichotomy is being challenged since it is becoming more common, even for hightechnology products, that the manufacturing of a new product immediately takes place in alow labor cost location Multinational corporations have global production networks that

enable them to efficiently allocate design, production and distribution according to globalfactors of production This also relies on outsourcing and subcontracting.

(3) Imperfect competition and price discrimination

Competition emerges when different people recognize similar opportunities and set

up firms to exploit them The classic forum for competition is the final product market,where producers confront consumers Competition based on freedom of entry into industrydiscourages the exploitation of consumers because any attempt by a firm to raise priceswill attract entry, increase supply, reduce prices and restore profits to their normal level.Likewise, competition for free labor will ensure that labor is not exploited either

It is widely held that monopoly is not only inequitable, but also inefficient It isargued that monopolized industries produce too little output because the price is so highthat it restricts consumer demand Strictly speaking, however, it is only differences in thedegree of monopoly between industries that reduce efficiency If all prices were raised inthe same proportion, then relative prices would be unchanged and consumer purchasingdecisions would not be distorted (although other decisions might be distorted instead)(Lerner, 1944)[45] The argument against monopoly also assumes that the monopolist mustcharge the same price to all customers This ignores the possibility of discriminatorypricing (Phillips, 2005)[46] If the monopolist knows the maximum amount that eachcustomer (or type of customer) is willing to pay, then they can charge different prices todifferent customers depending on how much they value the product The main requirement

is to prevent the consumers from reselling to each other, or joining forces, to form abuyer’s club If these conditions are satisfied, the marginal consumer pays no more thanmarginal cost and so the scale of output in each industry is efficient

The efficiency of monopolistic price discrimination is widely used to supportintellectual property rights (IPRs) that confer monopolies for the creation or discovery ofknowledge IPRs promote private enterprise in the creation of knowledge, but the argumentagainst them is that they discourage dissemination by charging for access However, if theowners of IPRs implement discriminatory pricing, then no one is asked to pay more thanthey are willing to pay and so dissemination is not impaired (Casson,1979)[47] Indeed,private ownership encourages the active marketing of knowledge, so that more people mayuse the knowledge than before On the other hand, the administrative costs of collectingpayment may mean that people with low valuations are denied effective access

These arguments apply not only to final product markets but to intermediateproduct markets too They suggest that efficient markets are either competitive, or involvediscriminating monopoly There are two main mechanisms by which competition issustained One involves a large number of suppliers confronting a large number of sellers,and the other involves a small number of buyers and sellers, but with potential entrants oneither side waiting for an opportunity to join in (Baumol et al., 1982)[44] Intermediateproduct markets for agricultural products, linking farms to food processors, are a goodexample of competitive markets with large numbers of traders Markets for mineral oresexemplify competition from potential entry; at any one time, only a small number of largemines may be in operation, but there are usually other mines ready to be opened (or morelikely re-opened) if price increases Competitive entry and re-entry is easiest when the sunkcosts of entry are small.

Under monopoly, market failure reflects the inability to discriminate Consider, forexample, the licensing decision A technology owner serving the global market may prefer

to license different firms in different countries because of their local knowledge, but it may

be difficult to partition local markets in this way If licensees can export, then they caninvade each other’s territories; this threat will reduce the value of the licenses, andultimately reduce the technology owners’ rents The technology owner may therefore beobliged to use a single licensee for all markets, who will be less effective in each marketand generate fewer rents for the licensor

Inability to discriminate can also be an issue for ordinary intermediate productmarkets where production at certain stages exhibits economies of scale Within a multi-stage production system (a “value chain”), one stage (say the upstream stage) may exhibitsubstantial economies of scale, so that industry production is in the hands of a single firm,while the downstream stage may exhibit constant return to scale, so that many small firmsare involved If the upstream firm sets a uniform monopoly price, then downstreamdecisions will be distorted by the artificial scarcity of the intermediate input (e.g excessivecosts will be incurred in avoiding wastage) (Warren-Boulton, 1978)[43] On the otherhand, if the upstream firm charges all the downstream firms a two-part tariff, comprising alump sum payment for the right to purchase and a unit price equal to upstream marginalcosts, then distortion will be eliminated The efficiency gain will accrue to the monopolist,whose profits will increase as a result However, if the downstream firms can re-sell, then

the system will be undermined, as they can form a buyers’ co-operative and pay the lumpsum only once Furthermore, with a downstream buyer’s co-operative confronting anupstream monopolist, a bilateral monopoly may develop; competition breaks down, andexchanges of threats may ensue.

(4) Economic globalization.

Economic globalization went along with booming FDI in developing countries,which attracted a rising share of world-wide FDI flows in the 1990s In various developingcountries, FDI plays a more significant role than in developed countries The good news isthat FDI is anything but a zero-sum game, in which one particular country could attractFDI only at the expense of another country Additional FDI is likely to take place whennew investment opportunities emerge in countries opening up to FDI Essentially, alldeveloping countries have the chance to become attractive to foreign investors, not onlylarge and fairly advanced countries

When competing for FDI, policy-makers have to be aware that various measuresintended to induce FDI are necessary, but far from sufficient to do the trick For example,this applies to the liberalization of FDI regulations and various business facilitationmeasures Other reforms, such as privatization, tend to be more effective in stimulatingFDI inflows, but need to be complemented by reform in further areas (e.g competitionpolicy), in order to ensure that FDI inflows are beneficial Still other determinants of FDI,which were sufficient in the past, may prove to be less relevant in the future The size oflocal markets appears to be the most important case in point

Globalizations can be expected to induce a shift from market-seeking FDI toefficiency-seeking FDI International competitiveness of local production by foreigninvestors will, then, turn out to be a decisive factor shaping the distribution of future FDI.This involves major challenges for policy-makers in developing countries In generalterms, the task is to create (immobile) domestic assets that provide a competitive edge andattract internationally mobile factors of production This task has various dimensions,ranging from human capital formation and capacity-building (in order to be able to absorbadvanced technologies applied by foreign investors) to the provision of efficient business-related services

Furthermore, the policy agenda includes critical trade policy choices: liberalizingtrade in capital goods and intermediate products is essential in competing for efficiency-

seeking FDI There is some bad news as well Promotional efforts will help little, if at all,

to attract FDI if economic fundamentals are not conducive to FDI Fiscal and financialincentives offered to foreign investors may do more harm than good, especially ifincentives discriminate against small investors and local firms Policy-makers should notignore the direct and indirect costs of discretionary FDI incentives

Finally, policy-makers should not expect too much from FDI inflows The recentboom of FDI notwithstanding, capital formation continues to be a national phenomenon inthe first place Strongly positive growth effects of FDI cannot be taken for granted FDI issuperior to other types of capital inflows in some respects, particularly because of its risk-sharing properties, but not necessarily in all respects The nexus between FDI and overallinvestment as well as economic growth in host countries is neither self-evident norstraightforward, but remains insufficiently explored territory

- The theory of internalisation was long regarded as a theory of why FDI occurs

- By internalising across national boundaries, a firm becomes multinational

- Some economists have suggested that even though ownership specific advantages andinternalisation advantages are necessary for FDI to occur, it is still not a sufficientexplanation

- Under what circumstances is it likely that a firm would want to replace the open marketand instead use an internal transaction?

- Ensure product quality (forward integration)

- Ensure stable supply of raw materials (backward integration)

- Market for knowledge?

(5) Internalization theory

Internalization theory focuses on imperfections in intermediate product markets.Two main kinds of intermediate product are distinguished: knowledge flows linkingresearch and development (R&D) to production, and flows of components and rawmaterials from an upstream production facility to a downstream one Most applications ofthe theory focus on knowledge flow Proprietary knowledge is easier to appropriate whenintellectual property rights such as patents and trademarks are weak Even with strongprotections firms protect their knowledge through secrecy Instead of licensing theirknowledge to independent local producers, firms exploit it themselves in their ownproduction facilities In effect, they internalize the market in knowledge within the firm

The theory claims the internalization leads to larger, more multinational enterprises,because knowledge is a public good Development of a new technology is concentratedwithin the firm and the knowledge then transferred to other facilities.

(6) Eclectic Market or Market power.

The eclectic paradigm is a theory in economics and is also known as the Model or OLI-Framework It is a further development of the internalization theory and

OLI-published by John H Dunning in 1980 [48]

Internalization theory itself is based on the transaction cost theory This theory saysthat transactions are made within an institution if the transaction costs on the free market

are higher than the internal costs This process is called internalization.

For Dunning, not only the structure of organization is important He added 3 morefactors to the theory:

 Ownership advantages (trademark, production technique, entrepreneurial

skills, returns to scale) Ownership specific advantages refer to the competitiveadvantages of the enterprises seeking to engage in Foreign direct investment(FDI) The greater the competitive advantages of the investing firms, the morethey are likely to engage in their foreign production

 Location advantages (existence of raw materials, low wages, special taxes or

tariffs) Locational attractions refer to the alternative countries or regions, forundertaking the value adding activities of MNEs The more the immobile,natural or created resources, which firms need to use jointly with their owncompetitive advantages, favor a presence in a foreign location, the more firmswill choose to augment or exploit their O specific advantages by engaging inFDI

 Internalization advantages (advantages by own production rather than

producing through a partnership arrangement such as licensing or a jointventure) Firms may organize the creation and exploitation of their corecompetencies The greater the net benefits of internalizing cross-borderintermediate product markets, the more likely a firm will prefer to engage inforeign production itself rather than license the right to do so

Table 1.1: Internalization advantages

Source:

Dunning (1981)

Categories of advantagesOwnership

advantages Internalizationadvantages advantagesLocation

Form of market entry

 Theory

Source: Dunning (1981)

The idea behind the Eclectic Paradigm is to merge several isolated theories ofinternational economics in one approach Three basic forms of international activities of

companies can be distinguished: Export, FDI and Licensing The so-called OLI-factors

are three categories of advantages, namely the ownership advantages, locational advantages and internalization advantages A precondition for international activities of a company are the availability of net ownership advantages These advantages can both be material and immaterial The term net ownership advantages is used to express the

advantages that a company has in foreign and unknown markets [48]

According to Dunning two different types of FDI can be distinguished While like

raw materials or other input factors, market seeking investments are made to enter an

existing market or establish a new market A closer distinction is made by Dunning with

the terms efficiency seeking investments, strategic seeking investments and support investments.

Table 1.2: different types of FDI can be distinguished

Trade and FDI patterns for industries and

countries.

Location advantages

Ownershipadvantages

Strong Exports Outward FDIWeak Inward FDI Imports

Source: Dunning (1981)

The eclectic paradigm also contrasts a country's resource endowment and

geographical position (providing locational advantages) with firm’s resources (ownership

advantages) In the model, countries can be shown to face one of the four outcomes shown

in the figure above In the top, right hand box in the figure above firms possess competitiveadvantages, but the home domicile has higher factors and transport costs than foreignlocations The firms therefore make a FDI abroad in order to capture the rents from theiradvantages But if the country has locational advantages, strong local firms are more likely

to emphasize exporting The possibilities when the nation has only weak firms, as in mostdeveloping countries, leads to the opposite outcomes These conditions are similar to thosesuggested by Porter's diamond model of national competitiveness

 Application in practice

In dependence of the categories of advantage there can be chosen the form of the

international activity If a company has ownership advantages like having knowledge

about the target market abroad, for example staff with language skills, information aboutimport permissions, appropriate products, contacts and so on, it can do a licensing Thelicensing is less cost-intensive than the other forms of internalization If there areinternalization advantages, the company can invest more capital abroad This can beachieved by export in form of an export subsidiary The FDI is the most capital intensive

activity that a company can choose According to Dunning, it is considered that locational advantages are necessary for FDI This can be realized by factories which are either

bought or completely constructed abroad

1.2 FDI and role of FDI

1.2.1 Definition of FDI

Investment has different meanings in finance and economics In Finance

investment is putting money into something with the expectation of gain that uponthorough analysis has a high degree of security for the principal amount, as well as security

of return, within an expected period of time Investment is related to saving or deferringconsumption Investment is involved in many areas of the economy, such as businessmanagement and finance whether for households, firms, or governments To avoidspeculation an investment must be either directly backed by the pledge of sufficient

collateral or insured by sufficient assets pledged by a third party A thoroughly analyzedloan of money backed by collateral with greater immediate value than the loan amountmay be considered an investment A financial instrument that is insured by the pledge ofassets from a third party, such as a deposit in a financial institution insured by agovernment agency may be considered an investment.

Investment Casting (1) Casting metal into a mold produced by surrounding, orinvesting, an expendable pattern with a refractory slurry coating that sets at roomtemperature, after which the wax or plastic pattern is removed through the use of heat prior

to filling the mold with liquid metal Also called precision casting or lost wax process (2)

A part made by the investment casting process

Return on Investment (ROI) is the amount of profit or cost saving that will berealized in return for a specific expenditure of money, usually express as a percentage ofthe original monetary outlay The ROI ratio compares the net benefits of a project to itstotal costs Examples: After a 30-day test, it was estimated that the average ROI for digitalsignage in a 20,000 square foot grocery store would be 29%

Investing in Stocks: There are many different ways you can invest in stocks,including common stock, preferred stock, convertible stock and restricted stock Theseresources will help you learn the difference between each and help you understandderivatives such as stock options and warrants Investing Strategies: It's important to findthe right investing strategy or style to meet your needs, resources, risk-management goals,temperament, and time horizon By building a great portfolio, grounded in solid mathcoupled with a strong intellectual framework, and consistently sticking with it overdecades, you can improve your chances at amassing significant wealth

Investing in Exchange traded funds (ETFs): Exchange traded funds, also known asETFs funds, are a special type of mutual fund that trades on an exchange just like a stock.There are benefits to ETFs, or exchange traded funds, over traditional mutual funds Aprofessional investor can short ETFs or borrow against ETFs in a portfolio to come up withcash quickly Plus, ETFs sometimes provide small discounts to underlying net asset value

in volatile markets that can allow you to get more bang for your investing buck

Foreign investment (FI) means the importation of capital which includes assets,

technology and expertise by foreign investors for business purposes Foreign InvestmentFlows of capital from one nation to another in exchange for significant ownership stakes in

domestic companies or other domestic assets Typically, foreign investment denotes thatforeigners take a somewhat active role in management as a part of their investment.Foreign investment typically works both ways, especially between countries of relativelyequal economic stature.

Advantages: 1 Causes a flow of money into the economy which stimulateseconomic activity; 2 Employment will increase; 3 Long run aggregate supply will shiftoutwards; 4 Aggregate demand will also shift outwards as investment is a component ofAggregate demand

Disadvantages: 1 Inflation may increase slightly; 2 Domestic firms may suffer ifthey are relatively uncompetitive; 3 If there is a lot of FDI into one industry e.g theautomotive industry then a country can become too dependent on it and it may turn into arisk that is why countries like the Czech Republic are "seeking to attract high; value-addedservices such as research and development (e.g.) biotechnology)" 4 Foreigninvestment creates employment, and can lead to technological development throughtechnology transfers

Types of Foreign Investment: When it comes to investment, many people turn toforeign companies to invest in People want to invest in other countries’ businessesbecause of their economies You may find that another nation’s economy is much betterthan your own, and you can see a larger profit by investing in their businesses Businesseswant foreigners to invest in their companies because it helps their business grow andspread to other nations If you are interested in foreign investment, you should consider thefour different types and decide which type of investment you will use Companies such asGreat Plains Lending can help give you information and even issue loans

Loan Investments: There are two different types of foreign loan investments,including commercial loans and official loans A commercial loan is a loan granted for theuse of a business, rather than for personal use Commercial loans are generally short-termloans issued to foreign businesses

Foreign Direct Investment (FDI) plays an extraordinary and growing role in

global business It can provide a firm with new markets and marketing channels, cheaperproduction facilities, access to new technology, products, skills and financing For a hostcountry or the foreign firm which receives the investment, it can provide a source of newtechnologies, capital, processes, products, organizational technologies and management

skills, and as such can provide a strong impetus to economic development FDI in itsclassic definition is defined as a company from one country making a physical investmentinto building a factory in another country The direct investment in buildings, machineryand equipment is in contrast with making a portfolio investment, which is considered anindirect investment In recent years, given rapid growth and change in global investmentpatterns, the definition has been broadened to include the acquisition of a lastingmanagement interest in a company or enterprise outside the investing firm’s home country.

As such, it may take many forms, such as a direct acquisition of a foreign firm,construction of a facility, or investment in a joint venture or strategic alliance with a localfirm with attendant input of technology, licensing of intellectual property, in the pastdecade, FDI has come to play a major role in the internationalization of business Reacting

to changes in technology, growing liberalization of the national regulatory frameworkgoverning investment in enterprises, and changes in capital markets profound changes haveoccurred in the size, scope and methods of FDI New information technology systems,decline in global communication costs have made management of foreign investments fareasier than in the past

Advantage of FDI: (1) Integration into global economy - Developing countries,

which invite FDI, can gain access to a wider global and better platform in the world

economy (2) Economic growth - This is one of the major sectors, which is enormously

benefited from foreign direct investment A remarkable inflow of FDI in various industrial

units has boosted the economic life of country (3) Trade - Foreign Direct Investments

have opened a wide spectrum of opportunities in the trading of goods and services both interms of import and export production Products of superior quality are manufactured by

various industries due to greater amount of FDI inflows in the country (4) Technology diffusion and knowledge transfer – FDI apparently helps in the outsourcing of

knowledge especially in the Information Technology sector Developing countries byinviting FDI can introduce world-class technology and technical expertise and processes totheir existing working process Foreign expertise can be an important factor in upgrading

the existing technical processes (5) Increased competition - FDI increases the level of

competition in the host country Other companies will also have to improve on theirprocesses and services in order to stay in the market FDI enhanced the quality of products,services and regulates a particular sector Linkages and spillover to domestic firms-

Various foreign firms are now occupying a position in the market through Joint Venturesand collaboration concerns The maximum amount of the profits gained by the foreign

firms through these joint ventures is spent on the market (6) Human Resources Development -Employees of the country which is open to FDI get acquaint with globally valued skills (7) Employment - FDI has also ensured a number of employment

opportunities by aiding the setting up of industrial units in various corners of country

Disadvantage of FDI: One of the measurements of economic development in a

low-income economy is the increase in the nation’s level of capital stock A developingnation may increase the amount of capital stock by incentivizing and encouraging capitalinflows, and this is done more commonly through the attraction of foreign directinvestments, or FDIs It has been widely discussed and upheld that amongst various formsand modes of capital inflows, FDIs are favored in particular because of its long termdurability and commitment to a host countries economy and would be less susceptible toshort term changes in market conditions, therefore ensuring a certain level of continuityand stability in the money flow However, many developing economies have tried torestrict, and even resist, foreign investments because of nationalist sentiments and concernsover foreign economic and political influence One pertinent reason for this sentiment isthat many developing countries, or at least countries with a history of colonialism, fear thatforeign direct investment may result in a form of modern day economic colonialism,exposing host countries and leaving them and their resources vulnerable to theexploitations of the foreign company While FDIs may increase the aggregate demand ofthe host economy in the short run, via productivity improvements and technologicaltransfers, critics have also raised concerns over the efficacy of purported benefits of directinvestments This theory follows the rationale that the long-run balance of paymentposition of the host economy is jeopardized when the investor manages to recover its initialoutlay Once the initial investment starts to turn profitable, it is inevitable that capitalreturns from the host country to where it originated from, that is the home country The keyimplication is this: While the levels of FDI tend to be resilient during periods of economicuncertainty, it has the potential of adversely affecting the net capital flow of a developingeconomy especially if it does not have a healthy and sustainable FDI schedule It is alsooften argued that FDIs generate negative externalities in the labour market of the hosteconomy Why so? All firms are profit maximizing entities, and one way to achieve this is

often the most direct approach of cost reduction FDIs may enter the host country forunique strategic reasons but there is ultimately the need to achieve returns oninvestments Evidence shows that multinational companies do pay a slight premium overlocal-term wages, but does this really benefit the host economy? Paying a premium for theprice of labor may improve the consumption power of workers, but it also has thedetrimental ability of disrupting the local employment market When prices rise, supplyincreases while demand falls Similarly, when the price of labour increase, wage premiums

in this case, this creates a distortion and creates a disequilibrium in the labour market Jobmatching stops being efficient and may even create unemployment

1.2.2 Role of FDI

Since the mid-1980s, most developing countries have become much more open toFDI, with a view to benefiting from the development contributions which FDI particularlyhigh quality FDI can generate for host countries Since the early 1990s, transitioneconomies have joined in this trend Both groups of countries, often hostile or at bestdistrustful vis-à-vis transnational corporations (TNCs) in the decades that followed theSecond World War, began to perceive TNCs no longer as part of the problem butincreasingly as part of the solution, bringing not only much needed capital to stimulategrowth and development, but also technology, skills and access to foreign markets andcreating employment

Consequently, previous restrictive and controlling policies and institutions werereplaced by new ones aimed at attracting FDI Thus, many developing countries andcountries in transition have reduced to various degrees bans and restrictions on FDI entry,improved the standards of treatment and protection of foreign investors and eased oreliminated restrictions on their operations Finding themselves in increasing competitionwith other countries for attracting FDI, they often also implemented incentive schemes forTNCs Efforts to promote FDI also included the establishment of investment promotionagencies (IPAs) and export processing zones (EPZs) The process of opening up to FDIand establishing enabling frameworks for FDI vastly accelerated during the 1990s andcontinues until today, although more recently there have also been signs of more restrictiveFDI policies in several countries

Generally reluctant to bind their FDI policies in multilateral agreements,developing countries have increasingly submitted some aspects of their investmentframeworks, especially those concerning protection and the role of internationalinvestment agreements in attracting and foreign direct investment to developing countriespolicies for development treatment of FDI to international treaties The result has been anexplosive growth of international investment agreements (IIAs) Until the end of 2008,more than 2,670 bilateral investment treaties (BITs) and more than 270 other IIAs – such

as free trade agreements (FTAs) or economic integration agreements with investmentprovisions had been concluded

All countries are parties to at least one IIA in concluding IIAs, developing countriesseek to make the regulatory framework for FDI more transparent, stable, predictable andsecure and thereby more attractive for foreign investors (UNCTAD 2003a: 84) However, arecurrent issue in the discussions about IIAs is to what degree IIAs Actually fulfill theirobjective of encouraging more FDI The debate on the impact of IIAs on FDI, previouslyperceived as a North–South issue, has recently gained new momentum As a growingnumber of developing countries are becoming FDI exporters, they reconsider the role ofIIAs as not only a device aimed at stimulating inward FDI from developed countries, butalso as a means to encourage and protect their own outward FDI in developed and otherdeveloping countries

The role of IIAs in attracting FDI into developing countries To this end, the studywill start with a brief overview of the overall determinants for FDI Thereafter, the paperwill focus on the role of IIAs as FDI determinants It will review a number of existingeconometric studies on the impact of IIAs on FDI inflows into developing countries Asthe investment provisions of different types of IIAs may differ and so may their possibleimpact on FDI, the discussion will be organized by the types of IIAs, starting with BITs,followed by other IIAs, such as FTAs and economic integration agreements withinvestment provisions

However, the obligations embedded in IIAs can also impose costs on developing countries,which “constrain their sovereignty by entering into treaties that specifically limit theirability to take necessary legislative and administrative actions to advance and protect theirnational interests” [38] They found that BITs do promote FDI flows to developingcountries Moreover, BITs may even substitute for weak domestic institutions, but not for

unilateral capital account liberalization (Busses, ET al.2008: 3–4) The authors useextensive data on bilateral FDI flows collected by UNCTAD and attribute differences infindings in previous studies at least partly to the size of their data sample, which permits, intheir view, avoiding a bias in the sample selection occurring when the sample is restricted

to relatively advanced host countries

1.2.3 FDI attraction theoretical

Wells and Wint [49] describe three types of promotion techniques used byinvestment agencies, namely, (i) primary image building techniques; (ii) primary

investment generating techniques; and (iii) investment service techniques They are to

be used in the communication programs for effectiveness It should be noted that some

countries that have already established a clear image as an FDI destination such as othercountry no longer focus on image building The orientation of investment promotionprograms of the Industrial Development Authority (IDA), Board of Investment (BOI) andEconomic Development Board (EDB) has shifted entirely to investment generation But inwhere the country image as an FDI host is ambiguous and unstated, primary imagebuilding remains crucial

This paper has examined FDI attraction activities in Lao PDR Five key strategicmarketing variables and five marketing steps have been introduced for the purpose oflevelling up FDI attraction Lao PDR has made a significant progress in simplifyingadministrative procedure and narrowing the cost gap between domestic and foreign firms.However, investors wish to see even more aggressive official actions beyond removingcurrent obstacles After receiving investment approval, they expect to be assisted instarting and running business and overcoming any hindrance by responsive post-investment services They are also waiting for realistic and informative industrial masterplans and development strategy for supporting industries to guide their business operation

If the government succeeds in providing them, current investors will surely expand theirbusiness and invite other investors to Lao PDR

1.3 Method of FDI

1.3.1 Some method to encourage FDI

Governments seek to promote FDI when they are eager to expand their domesticeconomy and attract new technologies, business know-how, and capital to their country Inthese instances, many governments still try to manage and control the type, quantity, andeven the nationality of the FDI to achieve their domestic, economic, political, and socialgoals.

• Financial incentives Host countries offer businesses a combination of tax incentives andloans to invest Home-country governments may also offer a combination of insurance,loans, and tax breaks in an effort to promote their companies’ overseas investments

• Infrastructure Host governments improve or enhance local infrastructure in energy,transportation, and communications to encourage specific industries to invest This alsoserves to improve the local conditions for domestic firms

• Administrative processes and regulatory environment Host-country governmentsstreamline the process of establishing offices or production in their countries Byreducing bureaucracy and regulatory environments, these countries appear moreattractive to foreign firms

• Invest in education Countries seek to improve their workforce through education and jobtraining An educated and skilled workforce is an important investment criterion formany global businesses

• Political, economic, and legal stability Host-country governments seek to reassurebusinesses that the local operating conditions are stable, transparent (i.e., policies areclearly stated and in the public domain), and unlikely to change

1.3.2 Some methods to restrict FDI

In most instances, governments seek to limit or control foreign direct investment toprotect local industries and key resources (oil, minerals, etc.), preserve the national andlocal culture, protect segments of their domestic population, maintain political andeconomic independence, and manage or control economic growth A government usesvarious policies and rules:

• Ownership restrictions Host governments can specify ownership restrictions if they want

to keep the control of local markets or industries in their citizens’ hands Some countries,such as negative policy of country, go even further and encourage that

ownership be maintained by a person of country origin Although the country’s ForeignInvestment Committee guidelines are being relaxed.

• Tax rates and sanctions A company’s home government usually imposes these restrictions

in an effort to persuade companies to invest in the domestic market rather than a foreignone

1.3.3 Methods of FDI attraction ( Home and host countries methods)

There have been many studies for other countries, mostly examining the relation

of firms’ or industries’ foreign production to firm or industry exports While there aresome examples of negative associations, they are not frequent, and positive associationsare more common What is noticeable in a review of past studies, but is not commented on

so often, is the frequency of results indicating no association in either direction Theelements of gravity equations are consistently significant in the expected direction, whilethe influence of FDI production is spotty and varies among host countries, industries, andtypes of parent-company exports

It seems plausible that horizontal FDI should tend to substitute for parent exports,

at least in manufacturing, if not in services, and that vertical FDI might tend to add toparent exports But there is not much evidence for this conjecture It is difficult to classifyactual foreign operations into these theoretically neat categories A firm’s foreignoperations usually include some activities similar to those of the parent, but the industryidentifications in most data do not distinguish among segments of an industry The foreignoperation may omit some parent activities, because they are performed for the affiliate bythe parent And the foreign operation may include some activities that are not performed

by the parent, because they are provided by the home country’s infrastructure or by anetwork of outside suppliers that does not exist in the host country This distinctionbetween horizontal and vertical FDI is more useful for thinking about multi-nationalbehavior or constructing models of it than for empirical research A problem with moststudies of effects of FDI on home-country exports is that the terms “substitution” and

“complementarity” are not clearly de-fined That is partly because no policy measures arespecified as determining the changes in investment or production It is rare to find a clearcounterfactual to which the existing situation is being compared The problem is illustrated

by the example of a host-country tariff on imports that leads to both a reduction and

cessation of imports and the establishment of host-country production owned by the formerexporters Higher local production is accompanied by reduced exports, an apparent case ofsubstitution The implied counterfactual is the original level of exports In fact, thealternative to the establishment or expansion of host-country production may have been noexports and no sales by the parent firm or its country That counterfactual would lead to theconclusion that the production and trade were either not related or were complementary,instead of the apparent substitution that appears in the data A possible interpretation ofthese studies is that foreign production by a firm or industry has very little influence onexports from the parent firm or its home country Mainly, trade is determined by otherfactors, such as countries’ changing comparative advantages in production Directinvestment is mainly about the ownership of production, not its location What moves fromcountry to country when a direct investment takes place is not primarily physical capital orproduction capacity, but rather intellectual capital, or techniques of production, unobservedand unmeasured There may be movements of physical or financial capital accompanyingthe intellectual capital, but there need not be, and they are not the essence of theinvestment.

Host Countries Ownership Restrictions Tax incentives

Performance demands Low-interest loans

Infrastructure improvementHome Countries Differential tax rates Insurance

Tax breaks Political pressure

Source: Wild, John J., K L Wild, J C Y Han (2000), International Business: An Integrated Approach, Prentice–Hall, Inc., Angelo Francesco Rossi (2013).

Explanations detail content of each FDI Methods:

Methods of Restricting FDI: The tortuous vetting proposed, uncertainty and plain

policy discouragement of the stake sales would thoroughly restrict cross-border investmentand expertise To see a plot in the investment behavior of pharm majors abroad andpresume that they would jack up drug prices locally and restrict supplies is simply absurd

Methods of Promoting FDI: Good incentive policy starts with clear goals and an

understanding of corporate motivation Why give incentives? □ Do incentives work (andwhen)? - Changing times; - Managing incentives and government relationships as a risk to

be □ What types of incentives are available? □ What criteria should be used to awardincentives? □ Are there Monitoring and Evaluation Mechanism in place?

Host Countries: Having investigated all the main hosting companies, our expert

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Ownership Restrictions: Foreign government, foreign or domestic corporations

with over 15% of stock held by a foreign government or foreigners cannot hold more than49% of share issued by a facilities-based Lao government

Performance demands: We have been delivering solutions to foreign investor for

many years now It is always great to see new service models, equipped with solutionsfrom investors This latest crossover is an appealing model for combined supplier and goodservices driving The units are designed to meet the demands of many different drivingconditions with high performance and smoothness

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Infrastructure improvement: Through Economic Action Plan, the federal

government is implementing the Community Infrastructure Improvement Fund (CIIF) Theprogram is in effect until the time schedule and will invest on the budget

Home Countries: The home countries are the land countries that surround arealimited The counties generally included in the list are cities

Sanctions: Sanctions are penalties or other means of enforcement used to provide

incentives for obedience with the law, or with rules and regulations Criminal sanctions cantake the form of serious punishment, such as corporal or capital punishment, incarceration,

or severe fines Within the civil law context, sanctions are usually monetary fines, levied

against a party to a lawsuit or his/her attorney, for violating rules of procedure, or forabusing the judicial process.

Insurance: General Insurances is plugged into the databases of every leadingprovider in all states We always have the most up-to-date rates, which are very likely to belower than what you are currently paying The amount of coverage you need for minimumcoverage largely depends on what state you live in By definition, it is the least amount ofcoverage you need to purchase in order to be considered legally insured

Loans: At International Commercial Loan our obligation is to you, the borrower.

Since we are not limited by our affiliation with any one lender, we are able to present yourcommercial loan to a broad spectrum of potential capital sources and secure the best termsand pricing that the market can offer To receive Current Commercial Property Loans,Private Lender Rates, and/or Business Real Estate Financing rates for your project, pleasesubmit your quick loan request With a core focus on commercial mortgage loans, adiverse product mix, an innovative online commercial lending platform, and a staff ofseasoned, experienced professionals, We provides a low cost, single source solution forcommercial business loans, construction loans, and other non-conforming commercialproperty loans

Tax breaks: Many taxpayers do not understand the difference between the twotypes of tax breaks Read on to find out how the two tax breaks differ Tax Deduction is adeduction from gross income that a

Political pressure: Pressure politics generally refers to political action which relies

heavily on the use of mass media and mass communications to persuade politicians that thepublic wants or demands a particular action However, it commonly includes intimidation,threats, and other covert techniques as well

1.3.4 Flowcharts of FDI attraction

An application that satisfies relevant formal requirements as described in thesubject to a substantive examination by the Department to determine whether theapplication establishes a basis on which to grant the application For purposes of theseregulations, a basis is established where the application and evidence contained in theapplication, if not rebutted, would be sufficient to establish all elements required to satisfy

of these regulations, as appropriate

If the Department finds that an application establishes a basis for granting theapplication, it shall notify the applicant and the registrant that the application hasestablished a basis for further review and has been accepted for further consideration inaccordance with these regulations An application that, after substantive examination, fails

to establish a basis shall be refused and both parties shall be so notified The Departmentwill not issue advisory opinions regarding the likelihood that a particular application will

be cancelled or other action taken and will not provide legal advice to applicants regardingthe grounds or types of evidence needed to support applications therefor

Except as otherwise provided, applications to the Department to object to or cancel

a registration shall be subject to the procedures provided Promptly upon receiving noticethat the application has been accepted for filing, the applicant shall serve a copy of theapplication and any accompanying information on the registrant Such notice may beserved at the correspondence address on file with the Department If the applicant isunable to serve a copy on the applicant at such address, service shall be attempted at one ormore of the following addresses:

1) The correspondence address of applicant's representative in the Lao PDR

2) If the registrant is a governmental entity, at an official address associated withsuch governmental entity

3) At any other address at which the registrant may reasonably be expected to bereached, if such address is known to the applicant

The applicant shall thereafter file with the Department a statement that theapplication was served on the registrant, as applicable, together with evidence supportingsuch statement If service has been attempted but is not successful, that applicant shall file

a declaration that it has attempted to serve a copy of the application and its accompanyingmaterial on the registrant, detailing the means it has employed to effect service, but thatafter diligent efforts, the applicant has been unable to accomplish such service Suchdeclaration shall be filed together with supporting evidence

Where the applicant files a declaration that it has unsuccessfully attempted service

as provided, the Department shall examine the evidence to determine whether it appearsthat a reasonable effort has been made to serve the registrant If it finds such efforts to beinsufficient, it shall notify the applicant to correct the deficiency within available days If

it finds such efforts to have been sufficient, the Department shall notify the registrant at the

last correspondence address provided by the registrant that an application has been filedand the nature thereof and require the registrant to provide a response within the days Ifthe Department receives no response within the stated period, it shall publish notice to theregistrant and shall proceed as though the applicant had received actual notice.

Upon receiving verification that the registrant has been served with a copy of theapplication and accompanying material, the Department shall examine the application forformalities For a cancellation action, the application shall be examined to determine that

it meets the requirements of these regulations

1.3.5 Evaluation criteria of FDI attraction

1) Number of FDI projects over the years by local

This indicator is a measure of the number of FDI projects each year, each periodwith the constant increase in the number of projects; the amount of registered capital showsthe growth of FDI This will help to identify the growth persistency and demonstrate theattractiveness level of local for foreign investors The number of FDI projects gets biggerover year, suggesting FDI attraction level of that local is extremely high to foreigninvestors The increasing number of them over the years shows that the growth of foreigninvestment and increasing trend in size and number, which demonstrates the activities toattract FDI is efficient and attractive to foreign investors

2) Scale and growth rate of the average capital invested in the project over the years

This indicator determines the increase of investment/project, to show the attraction

of investment is not only in capital quantity but also in trust and investment quality ofinvestors Every year, the number of capital projects the project gets larger proved theincreasing investors participation, FDI attraction increased in each project On that basis, itwill assess self-growth of FDI capital project over the years, many phases, rapid growthmeans FDI increased in not only the quantity but also in terms of quality The project thatattracts FDI activities does not only need major capital but also the project’s important andsignificant nature of the investment

3) Structure of investment projects of FDI and foreign investment capital to locality

This indicator assesses FDI accordance with local partners, in professions, in theform of investment and location of the project The rate of FDI on locality depends onlocal goals in each period In addition, this indicator also shows that the level of investment

is spread evenly in each business sector or not; hence, it helps the locality to identifystrategic partners in each sector

Structure of the projects and FDI capital are in the form of investment to evaluatevarious investment types This will show what type of investment is most selected andidentify business type according to each stage of the investment projects, thus helping tomake suitable FDI policy accordingly Based on the objectives and characteristics of eachlocality, the ratio of FDI projects in the industry area and outside the industry area wouldreflect how appropriate the result of local policy making was

4) Contribution of FDI attraction on locality

The attraction of FDI into the locality in any business field is a result of an increase

in interest income, employment, labour productivity in that sector This increase reflectsthe greater the attraction of FDI, has the nature of consent Although it’s difficult toaccurately measure the increasing level of labour productivity, qualifications, employment,and income for workers in each locality; however, the overall estimate of the increase can

be assessed Therefore, this criterion is both quantitative and qualitative

1.3.6 Major opinions of FDI attraction into telecommunication sector in Lao P.D.R

In the dynamic world of economic development, private sector brings with theminvestment, technologies, and managerial expertise when business opportunities arise Theprivate sector communities are key stakeholders that are crucial to success in enterprisepolicy implementation Community participation is also important for a sustainabledevelopment of the private sector While their local contributions may be financial, moreimportantly, their in-kind and intangible contributions such as community participation,human resources upgrading and re-training, need assessment, and others create a sense ofownership

The GOL shall promote enterprise development in the ICT sector This sector willinclude, but not be limited to, basic and value-added telecommunications services, ICTterminal equipment assembly and manufacturing (such as telephones, computers, faxmachines, modems), software development, marketing, and online services Promote local

ICT enterprise development; where possible, government shall give first preference tolocally developed software, hardware and ICT services in procurement The GOL shallpromote this procurement policy in joint projects/initiatives with international developmentagencies, bilateral partners, and the private sector Provide favourable investmentincentives and taxation environment, including but not limited to reducedsoftware/hardware import duties for business and profit taxes levied on ICT relatedenterprises In accordance to Article 18 of the “Law on the Promotion and Management ofForeign Investment in the Lao People’s Democratic Republic”, the government shall grantspecial privileges for tax reduction for foreign investment in ICT related enterprises in theLao PDR Promote and advocate the use of ICT in business enterprises, commercial banks,Government agencies, and civil society entities to enhance business efficiency, improvepublic services and reduce costs of services.

The GOL shall identify and allocate ICT investment zones with appropriate andadequate physical space, infrastructural, facilities, and logistical services The GOL willgive special emphasis and effort in promoting outsourcing businesses in Lao PDR Let’slook at why and how companies choose to invest in foreign markets Simply purchasinggoods and services or deciding to invest in a local market depends on a business’s needsand overall strategy Direct investment in a country occurs when a company chooses to set

up facilities to produce or market their products; or seeks to partner with, invest in, orpurchase a local company for control and access to the local market, production, orresources Many considerations influence its decisions:

- Cost-Is it cheaper to produce in the local market than elsewhere?

- Logistics-Is it cheaper to produce locally if the transportation costs are significant?

- Market-Has the company identified a significant local market?

- Natural resources-Is the company interested in obtaining access to local resources or

- Ease-Is it relatively straightforward to invest and/or set up operations in the country, or

is there another country in which setup might be easier?

- Culture-Is the workforce or labor pool already skilled for the company’s needs or will

extensive training being required?

- Impact-How will this investment impact the company’s revenue and profitability?

- Expatriation of funds-Can the company easily takes profits out of the country, or are

there local restrictions?

- Exit-Can the company easily and orderly exit from a local investment, or are local laws

and regulations cumbersome and expensive?

These are just a few of the many factors that might influence a company’s decision.Keep in mind that a company doesn’t need to sell in the local market in order to deem it agood option for direct investment For example, companies set up manufacturing facilities

in low-cost countries but export the products to other markets

There are two forms of FDI horizontal and vertical Horizontal FDI occurs when acompany is trying to open up a new market a retailer, for example that builds a store in anew country to sell to the local market Vertical FDI is when a company investsinternationally to provide input into its core operations usually in its home country A firmmay invest in production facilities in another country When bring the goods orcomponents back to its home country (i.e., acting as a supplier), this is referred to asbackward vertical FDI When a firm sells the goods into the local or regional market (i.e.,acting as a distributor), this is termed forward vertical FDI The largest global companiesoften engage in both backward and forward vertical FDI depending on their industry

Many firms engage in backward vertical FDI The auto, oil, and infrastructure(which includes industries related to enhancing the infrastructure of a country that is,energy, communications, and transportation) industries are good examples of this Firmsfrom these industries invest in production or plant facilities in a country in order to supplyraw materials, parts, or finished products to their home country In recent years, these sameindustries have also started to provide forward FDI by supplying raw materials, parts, orfinished products to newly emerging local or regional markets

There are different kinds of FDI, two of which Greenfield and Brownfield areincreasingly applicable to global firms Greenfield FDIs occur when multinationalcorporations enter into developing countries to build new factories or stores These new

facilities are built from scratch usually in an area where no previous facilities existed Thename originates from the idea of building a facility on a green field, such as farmland or aforested area In addition to building new facilities that best meet their needs, the firms alsocreate new long-term jobs in the foreign country by hiring new employees Countries oftenoffer prospective companies tax breaks, subsidies, and other incentives to set up Greenfieldinvestments.

A brownfield FDI is when a company or government entity purchases or leasesexisting production facilities to launch a new production activity One application of thisstrategy is where a commercial site used for an “unclean” business purpose, such as a steelmill or oil refinery, is cleaned up and used for a less polluting purpose, such as commercialoffice space or a residential area Brownfield investment is usually less expensive and can

be implemented faster; however, a company may have to deal with many challenges,including existing employees, outdated equipment, entrenched processes, and culturaldifferences

1.3.7 Some experience of FDI attraction in the world

SINGAPORE, April 7, 2014 – Developing countries in the East Asia Pacific

region will see stable economic growth this year, bolstered by a recovery in high-incomeeconomies and the market’s modest response so far to the Federal Reserve’s tapering of its

quantitative easing, according to the East Asia Pacific Economic Update released today by

the World Bank Developing East Asia will grow by 7.1 percent this year, largelyunchanged from 2013, the report says As a result, East Asia remains the fastest growingregion in the world, despite a slowdown from the average growth rate of 8.0 percent from

2009 to 2013 In China, growth will ease slightly, to 7.6 percent this year from 7.7 percent

in 2013 Excluding China, the developing countries in the region will grow by 5.0 percent,

slightly down from 5.2 percent last year “East Asia Pacific has served as the world’s main growth engine since the global financial crisis,” said Axel van Trotsenburg, World Bank East Asia and Pacific Regional Vice President “Stronger global growth this year will help the region expand at a relatively steady pace while adjusting to tighter global financial conditions.”

Larger Southeast Asian economies, such as Indonesia and Thailand, will facetougher global financial conditions and higher levels of household debt Malaysia’s growthwill accelerate modestly, to 4.9 percent in 2014 Its exports will increase, but higher debt