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«Published Annually Vol. 6, No. 1 ISBN 978-0-979-7593-3-8 CONFERENCE PROCEEDINGS Sawyer School of Business, Suffolk University, Boston, Massachusetts ...»

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Almost 70% of this mountainous country is forested. The country has a rising population of nearing 7 million but is still one of the least densely populated countries in Asia. Laos is rich in natural resources and much remains untapped due to lack of capital and technology. The resources include wood, gold, copper, tin, aluminum, rattan, coffee, and hydroelectricity. However, the country remains poor and underdeveloped due to lack of infrastructure and human capacity. (Bhasin, 2010) Conference papers © Knowledge Globalization Institute, Pune, India, 2012 Figure 1 - Map of Laos in Southeast Asia Source: CIA World Factbook 2011 Background th Laos emerged from the domination of Thailand in the 18 century and remained part of French Indo China until the Second World War when it was occupied by the Japanese. In 1946, the French reoccupied Laos but had to grant full sovereignty after their defeat by the Vietnamese and the subsequent Geneva Peace Conference in 1954. (US Dept of State, 2010) The country saw little stability as a civil war ensued between the Royalists, the Communists and the Neutralists. The 1961-62 second Geneva conference finally provided for the neutrality and independence of the country. Laos, one of the few remaining oneparty communist states began decentralizing control and encouraging private enterprise only in 1986. The country had remained mostly closed with the government controlling all industrial sectors since declaring independence as the Lao People’s Democratic Republic (LPDR) on December 2, 1975. (World Factbook, 2010) The Lao government started encouraging private enterprise in 1986 and is transiting now to a market economy but with continuing governmental participation. Prices are generally determined by the market, and import barriers have been eased and replaced with tariffs. The private sector is now allowed direct imports and farmers own land and sell their crops in the markets. From 1988 to 2009, the economy has grown at an average 6-8% annually. Despite being rich in natural resources the country remains underdeveloped and around 70% of the population lives off subsistence agriculture, which contributes to roughly 30% of GDP. In addition to rice, the main crops are sweet potato, corn, coffee, sugarcane, tobacco, cotton, tea, ginger, soybeans, vegetables, and peanuts. Animal husbandry includes rearing of cattle, pigs, water buffalo, and poultry. Industry is a growing sector (11%) and contributes 33% of the GDP. The main activity is in the extractive industry with mining of tin, gold, and gypsum. Other industries are timber, electric power, agricultural processing, construction, garments, cement, and tourism.

The services sector accounts for around 37% of GDP as illustrated in Figure 2. Four new banks have opened in the last two years. Laos operates a managed exchange rate and the kip has been strengthening. (Bhasin, 2010) Poverty has reduced substantially from 46% in 1992 to 26% in 2009. Exports in 2009 included copper, gold, clothing, hydropower, wood and wood products, and coffee, and were mainly to Thailand (35%), Vietnam (16%), and China (9%) as illustrated in Figure 3. Imports were mainly machinery and equipment, vehicles, fuel, and consumer goods. The country is rich in hydropower generation, which provides almost 90% of electricity. There are no indigenous sources of oil and natural gas but PetroVietnam is exploring for oil and gas jointly with Laos. There are considerable deposits of minerals and these are largely untapped. There are also ample sources of gemstones, especially high quality sapphires, agate, jade, opal, amber, amethyst, and pearls. (World Factbook, 2010)

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Figure 3 - Major Trading Partners of Laos Source: Asian Development Bank, 2010 Conference papers © Knowledge Globalization Institute, Pune, India, 2012 Infrastructure development, streamlining business regulations and improving finance have been identified as the main priorities for the government. Construction of roads and buildings for the Southeast Asian Games in December 2009 and for th the celebration of the 450 anniversary of Vientiane as the country’s capital in 2010 has helped infrastructure development. A mini construction boom is being experienced around Vientiane. The manufacturing and tourism sectors are seen as the key sectors for private sector growth. The garment sector has created employment for over 20,000. There is a need to focus attention on improving transportation and skill levels of workers. Laos continues to remain dependent on external assistance to finance its public investment. Table 1 illustrates the official financial flows of the Lao economy in comparison to the other Southeast Asia Countries. In 2009, it launched an effort to increase tax collection and included value added tax, which is yet to be imposed. It also simplified investment procedures and expanded bank facilities for small farmers and entrepreneurs.

Inflation is in check and has averaged at around 5%, and the currency, the Lao kip has been rising steadily against the US dollar.

In practice, the Lao economy is highly dollarized. Laos’ oil import bill remains large.

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Note. Adapted from UNCTAD 2011. Retrieved May 10, 2011 from http://unctadstat.unctad.org/TableViewer/tableView.aspx The country’s international reserves have been strengthened through investments in hydropower and mining. The government maintains controls of the price of gasoline and diesel. The economy is expected to continue to grow by around 7-8% annually.

(Bhasin, 2010)

SME Policy Evolution in Laos

Subsequent to the proclamation of the Lao PDR in 1975, it remained a socialist centralized planning economy till 1986 when President Kaysone Phomvihane initiated “Chintanakanmay” (New Imagination) as the pragmatic way forward. The market economy was called “New Economic Mechanism” and trade liberalization began in 1987. Tax system was structured. Export taxes were eliminated and replaced with profit taxes. By 1989 a new tax system was implemented. By 1995 there was unification of exchange rates and a floating rate was adopted. Deregulation measures included reduction of public employees, autonomy and rationalization of public enterprises and privatization. (Nouansavanh, 2005) Laos joined the Association of Southeast Asian Nations (ASEAN) in 1997 and the ASEAN Free Trade Area (AFTA) in 1998. The net result of this has been the requirement for Laos to reduce tariffs. This, in turn, makes it imperative that business and industry needs to become more productive and competitive. This burden falls mainly on the SMEs as they are the mainstay of the national economy. In 2004, the Prime Minister issued Decree No. 42 defining directions and policies for development of SMEs in Laos. In October 2005, the National Assembly approved a new Enterprise Law was enacted. It intent was to create a level playing field for private businesses by simplifying regulations and procedures.

A four-dimension definition of SMEs was created. It takes into account the number of employees, the turnover or total assets amount, the business registration, and the independency of the business: SMEs are business units that are independent and legally registered in accordance with the law of Lao PDR, and which sizes are determined by the following criteria as illustrated

in Table 2:

Conference papers © Knowledge Globalization Institute, Pune, India, 2012 Small enterprises are those with an annual average number of employees not exceeding 19 persons or total assets not exceeding 250 million kip or annual turnover not exceeding 400 million kip.

Medium-sized enterprises are those with an annual average number of employees not exceeding 99 persons or total assets not exceeding 1.2 billion kip or an annual turnover not exceeding 1 billion kip.

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Note. Adapted from SMEPDO 2004.

Retrieved May 10, 2011 from http://www.smepdo.org/info/9/?lang=en Although the private sector in Laos remains small, it dominates the economy in terms of the number of enterprises. In 2005/6, 85% of all enterprises were privately owned, 79% were small, 16% were medium and 5% were large. There were a total number of 126,913 enterprises and employed 245,000 of which SMEs accounted for 99.8% and 83% respectively. (Phoumilay, 2008) At an Asian Development Bank (ADB) meeting in Tokyo in 2008, the Laos Government presented a Country Paper on Laos covering “Best Practices on SME Development and Management” and provided details of its SME policy and plans. (Phoumilay, 2008)

The objectives of SME development are:

Contribution to sustainable growth of the economy Contribution to employment creation Raising living standards of the people Laying the foundation for gradual industrialization and modernization

The government decree of 2004 contains ‘statements of intent’ for the development of the SME sector covering 6 main areas:

Creating an enabling regulatory and administrative environment by coordinating relevant line ministries and interested parties to review regulations and implementation tools that are hindering the establishment and expansion of businesses; improving existing regulations and issuing new ones ensuring that they are relevant, simple, clear and enforceable; disseminating information on regulations relevant to SMEs.

Enhancing competitiveness of SMEs through training of potential and existing entrepreneurs and SME workforce; providing technical assistance to improve productivity, quality, technology and management skills; supporting and closely cooperating with organizations, academic institutions, research and technical institutes to this end.

Expanding domestic and international markets by providing information on markets; assisting with market research; promoting Lao products; participating in domestic and international trade fairs; facilitating SME access to public procurement.

Improving access to finance through appropriate and comprehensive loan products; establishing credit guarantee schemes or a specialized SME Promotion Bank to ensure that SMEs are provided with adequate credit according to established norms and practices.

Encouraging and creating favorable conditions for establishment of business organizations by developing regulations to facilitate the establishment of business organizations; issuing regulations to encourage the establishment of business groups, associations, cooperatives and clubs; providing assistance to build capacity of these organizations.

Enhancing entrepreneurial attitudes and characteristics within the society by developing entrepreneurial training curricula and incorporating them into the education system; enhancing the status and characteristics of entrepreneurs within the society in general.

Conference papers © Knowledge Globalization Institute, Pune, India, 2012 An SME Promotion and Development Fund was created to implement the program. Fund is sourced from the national budget,

international grants and loans and fees from any services provided. Management of the program was left to three bodies:

National SME Promotion and Development Office (SMEPDO) Standing Committee of SMEPDO National SME Promotion and Development Committee (SMEPDC) which is a public and private sector partnership and chaired by the Minister for Industry and Commerce.

The SMEPDO reports to the SMEPDC. The SMEPDC advises the government on SME policies, programs and projects. The

Standing Committee is responsible for managing the SMEPDO. Its specific duties are:

Acting as a secretariat for the SMEPDC in the formulation of policies and plans for SME promotion and development Defining SMEs according to socio-economic conditions in each locality Managing the SME Promotion and Development Fund Implementing, monitoring and evaluating SME support projects and annual SME development plans Reporting progress on SME promotion projects to the SMEPDC Disseminating information of legislation and regulations, support projects and Government socio-economic development plans to SMEs Upgrading knowledge and skills of the Government and private sector staff on SME promotion and development Coordinating all parties involved in the implementation of SME promotion and development projects Cooperating with international organizations in SME promotion and development Advising relevant agencies, state-owned enterprises and the private sector in the implementation of SME promotion plans.

At the local level, the government decree allocates responsibility to provincial and municipal authorities to incorporate the SME policies and programs into their own socio-economic development plans. In addition to implementing SME projects at the local level, a Technical and Vocational Education and Training System was started to provide the various skills required. The Integrated Vocational Education and Training System (TVETS) provide 4 levels of vocational training and 3 levels of technical education.

The SME Development Strategy up to 2010 included the following measures:

Developing a sub-contracting exchange to link SMEs to larger companies In collaboration with the Asian Productivity Organization, institute measures to improve productivity and quality of products to achieve competitiveness in local, regional and international markets Development of Business Development Services (BDS) for enterprises Improvement of technical skills for the workforce Setting and benchmarking selectors for compliance with international standards Development of business incubators A Strategic Plan for the TVET Development from 2006-2020 includes realizing privae-public partnership in developing vocational training. The National Training Council (NTC) was established by Prime Minister’s Decrees 35, 142 and 425. The NTCs main

responsibilities are to:

Develop policies and guidelines for development of TVET Develop policies and guidelines for TVET budget Establish the National Training Fund Prepare the master plan for TVET development Develop national vocational training standards, curricula and their assessment Develop plans for establishing TVET institutions in accordance with Ministry of Education rules and regulations Develop plans for teachers pre and in service training Monitor, inspect and evaluate implementation of TVET plan Coordinate activities with domestic and international organizations and secure financial support

The targets for SME development from 2007-2010 were:

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