Written by Mekong Institute

Foreign Direct investment (FDI) is considered to be significant capital sources to support social economic development in Laos, and it becomes a crucial factor to stimulate an economic growth. The aim of this research is to access the impact of FDI for both aggregate and disaggregate levels and some macroeconomic variables on real economic growth. The multiple linear regression is applied to estimate the significant factors influence on economic growth, during the period from 1990-2011. Last two decades Lao government has highly attempted to improve Investment law in order to attract large amount FDI inflows to Laos.

As evidenced by allowing 100% foreign ownership of investment in 1988, it followed by extending of investment concession from 20 years in 1999 to 99 years in 2009, establishing the special economic zones, granting import duties free and income taxes exemption, which depends on promoting zones and investment areas. As a consequence cause FDI inflows to Laos has rapidly increased from US$ 58.54 million in 1991 to US$ 1.16 billion in 2011, the FDI inflows to Laos is dominated by hydropower and mining sectors, which accounted for 70% of total FDI during the period 2006-2011. While major sources of foreign investors are from China, Vietnam and Thailand, the three countries covered for 78.26% of the total FDI in during period 2001-2011.

The findings suggest that FDI inflows in manufacturing sector have played a crucial role to support economic growth. Then, the higher real trade openness and labor force are important components to stimulate economic growth. In addition, we also find that a booming of FDI inflows in mining sector can lead to the issues of Dutch disease. Real exchange rate might be makes domestic production costs increase and lead to a slowly economic growth.