DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES IN LAO PEOPLE’S DEMOCRATIC REPUBLIC OPPORTUNITIES AND CHALLENGES. DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES IN LAO PEOPLE’S DEMOCRATIC REPUBLIC OPPORTUNITIES AND CHALLENGES. DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES IN LAO PEOPLE’S DEMOCRATIC REPUBLIC OPPORTUNITIES AND CHALLENGES. DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES IN LAO PEOPLE’S DEMOCRATIC REPUBLIC OPPORTUNITIES AND CHALLENGES. DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES IN LAO PEOPLE’S DEMOCRATIC REPUBLIC OPPORTUNITIES AND CHALLENGES.
INTRODUCTION
Background
Laos, officially known as the Lao People's Democratic Republic, is a landlocked and mountainous country covering 236,800 square kilometers It shares borders with Cambodia, China, Myanmar, Thailand, and Vietnam Approximately 80% of its terrain is hilly or mountainous, while only 20% consists of lowland areas that house over half of the population The country is administratively divided into 17 provinces and Vientiane Capital, with a total estimated population of 7.17 million in 2019 Economic growth is projected to rebound to 6.5% in 2019, driven by the construction sector and a resilient services sector The government is focused on fiscal consolidation to manage public debt, although risks from global trade tensions could impact growth Enhancing the business environment, especially for small and medium-sized enterprises, is crucial for achieving macroeconomic stability, job creation, and poverty reduction.
The introduction of the New Economic Mechanism (NEM) in 1986 generated an initial step in moving the economy towards a more market-oriented economy.
Major reforms in Lao PDR have included the removal of price controls, the abandonment of socialist cooperative farming, and the unification of the exchange rate system Additionally, the government has ended its monopoly on trade, reduced the number of state-owned enterprises, and promoted the establishment of private firms, alongside implementing fiscal and banking reforms These economic changes aim to enhance incentives for the private sector, ultimately increasing productivity across various industries, boosting domestic demand, and attracting foreign direct investment (FDI) As a result, these reforms have successfully driven robust economic growth over the past two decades.
Lao PDR is one of the fastest-growing economies in East Asia and the Pacific, with a remarkable annual GDP growth rate of 7.62% from 2011 to 2015, nearly double the regional average of 4.1% Despite stable monetary supply and prices, concerns over economic instability persist due to low international reserves and a high fiscal deficit (World Bank, 2019; IMF, 2018) The inflation rate remained in the single digits, and the exchange rate showed low volatility This rapid GDP growth and stable macroeconomic environment significantly enhanced the economic welfare of the Lao population, with real GDP per capita increasing by 182%, from US$613 in 1998 to US$1,000.
The high fiscal deficit increased public debt from 59% of GDP (US$9 billion) in 2016 to approximately 60% in 2017, with 80% of this debt attributed to external sources External borrowing is primarily sourced through three channels: multilateral borrowing, bilateral borrowing, and bond issuance Notably, bilateral borrowing represents the largest portion of external debt, with key creditors including China, Thailand, and Japan, which together account for 56% of total external public debt In contrast, multilateral creditors, such as the Asian Development Bank and the International Development Association, contribute 18%, while bond issuance constitutes 15% of external debt.
Table 1.1: Economic Performance of Lao PDR in 1990-2017
Exchange rate (kip per US$)
Source: World Bank and Asian Development Bank
According to the 2018 triennial review by the Committee for Development Poicy,
For the first time, the United Nations Economic and Social Council has recognized Lao PDR for passing two out of three graduation criteria for least developed countries (LDCs), specifically in gross national income (GNI) per capita and the Human Assets Index (HAI) GNI per capita increased from $1,232 in 2015 to $1,996 in 2018, surpassing the graduation threshold of $1,230 Similarly, the HAI rose from 60.8 to 72.8 during the same period, exceeding the threshold of 66, with significant improvements in adult literacy, gross secondary enrollment, and under-five mortality rates However, the Economic Vulnerability Index (EVI), which assesses resilience to shocks, remains below the required criteria, improving from 36.2 to 32.7 but still not reaching the threshold of 32.12 Key improvements in EVI include a reduction in the share of agriculture in GDP, fewer victims of natural disasters, and decreased export concentration, while challenges persist in agricultural instability, remoteness, and export instability If Lao PDR can maintain its development progress, it may meet all graduation criteria by 2021.
Lao PDR has prioritized enhancing its SME policy by improving the legal and regulatory framework to foster SME growth Since the early 2000s, the country has been implementing targeted policies for SMEs, supported by a solid institutional framework and a dedicated development fund Additionally, there is a growing focus on initiatives aimed at boosting SME productivity.
Small and medium-sized enterprises (SMEs) are crucial for economic growth in Laos, currently contributing 4% to the GDP and 1% to employment These private producers and exporters are essential for the country's economic development and will continue to be key drivers of growth, similar to trends observed in other developing nations Moreover, SMEs represent the largest employment source and are poised to play a vital role in poverty reduction in the near future.
SMEs in Laos lag behind their ASEAN counterparts due to unclear business practices and insufficient adherence to legal and regulatory frameworks The primary challenges include a lack of strategic planning, limited access to loans, inadequate workforce skills, and poor infrastructure These weaknesses hinder SMEs from effectively collaborating with foreign investors, which is essential for boosting productivity, conducting market assessments, expanding market capacity, adopting modern technologies, and improving access to market information.
Understanding the role, growth trajectory, and challenges of small and medium enterprises (SMEs) is crucial for socio-economic development within the socialist market system of Lao PDR This study aims to investigate effective strategies for SME development, review recent research, address pertinent issues, and summarize relevant policies for SME advancement in Laos, drawing insights from neighboring countries.
Aim of objectives of the research
The research aims to assess the development of SMEs in Laos PDR by analyzing the conditions, defining small and medium enterprises, and establishing criteria for their classification It highlights the crucial role of SMEs in economic development and job creation within the country.
This article provides an in-depth analysis of business development in Lao PDR, highlighting the challenges and opportunities faced by local enterprises Additionally, it examines successful policies from developed countries that have effectively supported small and medium enterprises (SMEs) The thesis aims to offer practical solutions to enhance the growth of SMEs in Laos PDR, drawing insights from international best practices.
Literature review
In today's globalized economy, the heightened integration of production and exchange of goods, coupled with intensified business competition, necessitates that the development theories of small and medium-sized enterprises (SMEs) adapt to evolving global conditions Various international theories provide insights into the growth and sustainability of SMEs in this dynamic environment.
•Resources-Based Theory of Competitive Advantage: The Resource-Based
The Theory of Competitive Advantage emphasizes the importance of analyzing a firm's position within its industry to formulate effective strategies that enhance performance This process begins with an assessment of the external environment, aiming to identify strategies that maximize outcomes In contrast, the Resource-Based (RB) Theory adopts an "inside-out" approach, focusing on the firm's existing resources, evaluating their potential for value creation, and ultimately developing strategies to sustainably capture that value.
Figure 1.1: A RB Approach to Strategy Analysis: A Practical framework
Source: The RB Theory of Competitive Advantage: Implications for strategy Grant, Robert M.California Management Review
The resource-based theory emphasizes that a firm's competitive advantage primarily derives from its internal resources rather than its external positioning This theory highlights the importance of resources, capabilities, and core competencies in fostering competitive advantage For small and medium-sized enterprises (SMEs), effective resource support and policies to enhance capabilities are crucial for growth The resource-based theory offers a framework for businesses to identify strategies to overcome growth challenges and improve access to essential resources, including technology, manpower, financial assets, natural resources, infrastructure, and market opportunities (Robert Grant, 1991).
The survival-based theory, rooted in evolutionary thinking and natural selection, was introduced in economics by early researchers like Schumpeter and Alchian This theory, also known as the "survival of the fittest," was developed by Herbert Spencer, who integrated Darwin's principles with Adam Smith's ideas, leading to the concept of Social Darwinism It posits that only the most efficient competitors thrive, ultimately benefiting society In strategic management, the survival-based view emphasizes that organizations must implement strategies focused on operational efficiency and rapid adaptation to competitive changes to survive The primary goal of a company is to operate efficiently, enhance profitability, and withstand market competition To succeed, managers must cultivate skills in sensing, intuition, and decision-making, embracing uncertainty while continuously adapting to their environment.
The Small is Beautiful theory, proposed by Schumacher in 1973, advocates for small-scale economic systems, cooperatives, and greater decentralization, emphasizing that the modern economy is unsustainable He argues that natural resources, such as fossil fuels, should be regarded as capital rather than expendable income due to their non-renewable nature and eventual depletion Schumacher highlights the limited capacity of nature to withstand pollution and insists that government efforts must focus on sustainable development, as minor improvements like technology transfer to developing countries will not address the core issues of an unsustainable economy His philosophy of "enoughness" values human needs and limitations while promoting appropriate technology use, drawing from his studies on village-based economics and the impact of technology on land, industry, and nuclear energy.
Research indicates that the size of small retail firms is linked to horizontal differentiation and complexity levels Schumacher's influential book, "Small is Beautiful," argues that the global economic system is flawed not merely due to the credit crisis but because it is built on unsustainable resource consumption without acknowledging scale limitations He advocates for appropriate technology and a return to small-scale operations that respect human values Additionally, recent government policies have aimed to support the growth of small and medium-sized enterprises (SMEs), recognizing their potential to evolve into larger businesses and contribute significantly to the economy Arrow's theory suggests that smaller businesses tend to be more productive, particularly in competitive environments where they can innovate more effectively than monopolies Ultimately, the "Small Business Beautiful" theory highlights the resilience of small businesses in adapting to the changing global economy while enhancing product diversity and quality for society.
The Ownership Theory posits that the ownership structure, whether concentrated or diffused, should align with profit-maximizing interests In small and medium-sized enterprises, the skills of the owner-manager are vital for the firm's long-term success, as they serve as the primary strategist and decision-maker responsible for developing and implementing the enterprise's vision, mission, and strategies Conversely, in larger corporations, the role of the capitalist is often more diffused The owner-manager's attitude towards strategic issues is crucial for effective strategy implementation, as their personal goals, traits, and strategic orientation significantly influence the overall enterprise strategy.
•Smes Business Growth Model: This theory made by Li JK, H-H and Tan,
K.H (2004), they described medium-sized manufacturing firms (SMEs) in transforming themselves into large firms (MNCs) both regionally and globally.Given the relative rarity of the typical small business making substantial growth,academics, management experts and governments in many countries have been keen to discover ways in which small business growth can be encouraged and seeking for strategies to make successfully SMEs growth Basically, these business models could be summarised into a framework, consisting of following three approaches:
1) Breadth-on-Top-of-Depth
The BTD strategy encourages firms to contextualize their developing expertise by emphasizing both breadth and depth Visualized as a capital 'T', the vertical stem symbolizes depth while the horizontal arms represent breadth Achieving depth in technical or research areas is crucial for business success, particularly for SMEs, who aim to avoid being "a mile wide and an inch deep."
In a transformation strategy, companies proactively plan and act beyond their current market position, showcasing both their ambition for growth and their preparedness to achieve it As small and medium-sized enterprises (SMEs) contemplate expansion, they should start adopting practices typically employed by multinational corporations (MNCs) even while they remain in the SME phase.
In the diversify strategy, firms expand their product range and production capabilities based on their core competence.
Breadth-on-Top-of-Depth Transformation Diversify
Figure 1.2: Business growth model framework
Source: Li JK, H-H and Tan, K.H (2004) ‘SMEs business growth model: a medium to big effort’, Int J.Management and Enterprise Development
Research question
This research is trying to finding the way to development Smes in Laos as well as development economic This is also some main questions to find out the information.
•What are the definitions and the important of SMEs for Lao PDR?
•What are the challenges faced by Small and Medium Enterprises?
•How do Smes contribute to national and economic development?
• Build on core technology/competence
• Expand market and customer base
• Conduct R & D on the chosen path
•What are the supportive Lao’s SMEs policies learned from developed countries and some counties in region?
Research Methodology
This section outlines the qualitative methodology employed to achieve the study's objectives, utilizing analysis, synthesis, and comparison of statistical data gathered from various secondary sources These include both published and unpublished data from organizations, institutes, and government offices such as the Ministry of Industry and Commerce in Laos and the Department of Small and Medium Enterprises Promotion Key sources of secondary data for social science research, such as censuses and organizational reports, were also utilized, particularly data from the 2013 Economic Survey, the Enterprise Survey by the Lao Statistics Bureau, and SMEs surveyed by GIZ in 2013.
The structure of the thesis
This thesis consist of four chapters as follow:
Chapter 2 Situation of Small and Medium Enterprise in Lao PDR
Chapter 3 Opportunities and challenges on development Small and MediumEnterprise in Lao PDR
Limitations and difficulties in implementing the research
The limitations and difficulties in the research.
1) Restrictions on use the methodology cause of limited ability to conduct a thorough analysis of the results such as: econometric model, interview or questionaire
Access to essential information is limited, particularly regarding secondary data such as balance sheets and expense reports from foreign companies This challenge arises from restrictions imposed by both the government and the companies themselves, making it difficult to obtain comprehensive data.
3) Restrictions on time constraint: it is a limited time to finding more statistical data or more information to demonstrate issue clearly.
SITUATION OF SMALL AND MEDIUM ENTERPRISES IN
Definition of small and medium enterprises
Small and medium-sized enterprises (SMEs) play a crucial role in the economy, contributing significantly to small-scale business activities While SMEs are known for their flexibility and dynamic nature, they can also be vulnerable to various challenges Consequently, it is essential for countries to implement supportive policies, regulations, and measures to foster the growth of these businesses Clearly defining SMEs is vital, as it shapes the management scope, operational environment, and the level of government support they receive.
Currently, two primary groups of criteria are used to classify small and medium-sized enterprises (SMEs): qualitative and quantitative The most widely recognized criterion for distinguishing between large and small businesses is the number of employees Qualitative criteria focus on essential characteristics of the enterprise, including specialization, management complexity, and organizational structure, which accurately reflect the essence of SMEs but are challenging to measure In contrast, quantitative criteria rely on tangible metrics such as regular labor size and total investment capital, representing assets or annual turnover While countries globally utilize these quantitative measures to define the SME sector, the specific thresholds vary by nation, influenced by economic development levels and classification objectives at different times.
There is currently no universally accepted definition of small and medium enterprises (SMEs) globally; however, the significance of defining SMEs is undeniable A clear definition is essential for accurate statistical preparation and effective benchmarking across different economies and regions Various organizations, countries, and regions have proposed their own definitions of SMEs, highlighting the diverse criteria used worldwide.
2.1.1 Definition of European Commission (EC)
The European Commission emphasizes that while the number of employees should be the primary criterion for defining enterprises, incorporating a financial criterion is essential to accurately assess an enterprise's scale, performance, and competitive standing (European Commission, 2003) According to a guide issued by the European Commission, the criteria for defining small and medium-sized enterprises (SMEs) include the number of employees, annual turnover, and annual balance sheet (European Commission, 2005) Compliance with the employee count criterion is mandatory, whereas meeting one of the two financial criteria is optional for enterprises The updated definition of SMEs took effect on January 1, 2005, as detailed in the accompanying table.
Table 2.1: Definition of Small and Medium Enterprises with European Union standard
Annual turnover Annual balance sheet total
According to the European Commission (EC) report has effective on 1st January,
2005 (2003/361 / EU), SMEs are independent enterprises with the number of employees less than 250 peoples and annual turnover or total assets do not exceed
A small business is defined as an enterprise with fewer than 50 employees and an annual turnover not exceeding $10 million In contrast, micro enterprises consist of fewer than 10 employees, with total assets or annual turnover capped at $2 million.
The updated definition supersedes the 1996 EC definition, maintaining the same labor criteria while lowering the annual turnover asset requirements This adjustment in financial criteria reflects economic growth, contributing to rising prices and enhanced labor productivity across European Union (EU) countries.
2.1.2 Definition of World Bank (WB)
The World Bank uses three quantitative criteria for defining SMEs: number of employees, total assets in U.S dollars and annual sales in U.S dollars (IEG: 2008).
A business must meet the quantitative criteria of number of employees and at least one financial criteria to be categorized as micro, small or medium business.
Table 2.2: Definition of Small and Medium Enterprises by World Bank standards
Enterprise indicator Number of employees Total assets Total annual sales
Comparing the criteria for defining businesses reveals notable discrepancies, particularly in employee counts and financial metrics The World Bank sets a higher threshold for medium-sized businesses at 300 employees, while inconsistencies are more evident in financial criteria The EU utilizes annual turnover and balance sheet totals, whereas the World Bank focuses on total assets and annual sales, leading to a lack of comparability between the two institutions Additionally, the World Bank's definitions are more minimalist; for instance, it classifies micro businesses as those with annual sales not exceeding $100,000, compared to the EU's €2 million threshold Furthermore, the EU distinguishes medium businesses from large ones with a maximum turnover of €50 million, while the World Bank sets this threshold at only $15 million.
The definition of small and medium-sized enterprises (SMEs) often varies across different sources, with the most common criterion being the number of employees, typically ranging from 0 to 250 (Ayyagari et al., 2003) The European Union's definition is widely used in SME research, yet it has not been fully adopted by state governments and policymakers While the EU recommends this definition, it is only mandatory for institutions and businesses applying for EU funding (Carter and Jones-Evans, 2006).
In 2003, China introduced the Interim Categorizing Criteria for Small and Medium-sized Enterprises (SMEs), establishing a framework for classifying these businesses in accordance with the SME Promotion Law This new set of guidelines replaced the previous standards that were implemented in 1988, along with the supplementary criteria introduced in 1992.
Table 3.1: Definition of Small and Medium Enterprises in China
Category Industries Employmen t based Total assets Business revenue
Source: SME promotion law of China, 2003.
The study mainly cover the payrolls, revenue and total assets of enterprises.
In the industrial sector, specific criteria define the classification of small and medium-sized enterprises (SMEs) For an enterprise to be considered medium-sized, it must employ a maximum of 2,000 people, with annual revenue not exceeding RMB 300 million and total assets capped at RMB 400 million Additionally, medium-sized enterprises should have a minimum of 300 employees, while their annual revenue and total assets should not surpass RMB 30 million and RMB 40 million, respectively Any business that does not meet these thresholds is categorized as a small enterprise.
In China, the definition of a Small and Medium-sized Enterprise (SME) is complex and can encompass relatively large firms Within APEC economies, SME definitions vary but typically focus on employee count, with most SMEs employing between 100 to 500 people However, approximately 70 percent of SMEs consist of businesses with five or fewer employees or are operated by self-employed individuals The classification of SMEs in China is influenced by industry category and is determined by factors such as the number of employees, annual revenue, and total assets of the company.
An industrial SME is characterized by its employee count, with medium-sized businesses employing between 301 and 2,000 individuals, while small businesses have fewer than 300 employees This definition indicates that what constitutes an SME in China can be significantly larger compared to SMEs in other countries.
From 2001 to 2009, the definition of Small and Medium Enterprises (SMEs) was outlined in Decree 90/2001 ND-CP, which stated that an SME is an independent business entity with registered capital not exceeding 10 billion VND (approximately US $600,000) or an average annual workforce of no more than 300 permanent employees.
In 2009, Decree 56/2009/ND-CP defined small and medium-sized enterprises (SMEs) as business establishments registered according to the law, categorized into three levels: micro, small, and medium Micro enterprises employ 10 or fewer individuals, while small enterprises have total capital of less than 20 billion VND and employ between 10 to 200 people (or less than 10 billion VND with 10 to 50 employees in the commercial and service sectors) Medium enterprises possess total capital ranging from over 20 billion VND to 100 billion VND and employ between 20 to 300 individuals (or over 10 billion VND to 50 billion VND with 50 to 100 employees in trade and services).
Table 2.4: Definition of SMEs in Vietnam
MICRO- ENTERPRISE SMALL-ENTERPRISE MEDIUM-ENTERPRISE
TRADE AND SERVICE No more than
According to the newly established Law on Facilitating the SME sector (No 04/2017/QH14), effective from January 1, 2018, an enterprise qualifies as a Small and Medium-sized Enterprise (SME) if it meets either of the following criteria: total capital must not exceed VND 100 billion or total turnover in the previous year must not exceed VND 300 billion Additionally, the definitions of micro, small, and medium enterprises vary across different sectors, including agriculture, construction, trade, and services.
Small and Medium Enterprises in Lao PDR
Small and medium-sized enterprises (SMEs) play a crucial role in the economy of Lao PDR, as highlighted by the Lao Statistics Bureau's 2013 Economic Census, which recorded 124,873 enterprises, a slight decrease from 126,913 in 2006 The census categorizes these enterprises into various sizes based on employee count, including large (311, 0.25%), medium (373, 0.30%), small (10,829, 8.67%), and micro enterprises.
(113.360, 90.78%) enterprises Among other things, SMEs accounted for 99.75% of total enterprises in the Lao PDR economy, which follows a similar pattern of neighbouring countries: 99.80% in Cambodia; 99.40% in Myanmar; 98.00% in
Vietnam; 99.70% in Thailand; and Indonesia (OECD and ERIA, 2018).
Table 2.6: Sizes of Enterprises by the Number of Employees, 2013
Enterprise size Units Percent of total (%)
Large Enterprise (more than 99 staff) 311 0.25
Second, SMEs produce goods and services, accounting for 16% of GDP The contribution for SMEs to GDP was more than 50% in Indonesia, 30% in Malaysia,
64% in the Philippines, and 37% in Thailand (Iqbal and Rahman, 2015) Although the contribution in Lao PDR is lower than that in other countries (World Bank,
The ongoing development and promotion of small and medium-sized enterprises (SMEs) are vital to the long-term national development strategy SMEs play a crucial role in job creation, effectively utilizing surplus labor from the agricultural sector Additionally, they are anticipated to foster technology transfer and innovation over time.
Small and medium enterprises (SMEs) play a crucial role in both domestic and international markets, with 98.31% of micro, 93.18% of small, and 77.48% of medium enterprises primarily serving domestic markets Only a small fraction, less than 3% of micro and small enterprises, and about 20% of medium enterprises engage in exports In contrast, large enterprises show a more balanced approach, with 59.49% serving domestic markets, 22.83% exporting goods, and 17.68% operating in both markets.
Table 2.7: Distribution of Enterprises in Domestic and Foreign Markets,
Markets Micro Small Medium Large
Unit Share Unit Share Unit Share Unit Share
(2013) Fourth, SMEs generate a greater number of jobs than large enterprises.
Micro and small enterprises accounted for 76% of employment in the private sector and 14% of the national workforce, reflecting their significant role in the economy Their share of employment has risen compared to larger enterprises due to their strong past performance.
As of 2013, the workforce in enterprise-based employment reached 536,087 individuals, with a significant 76% (408,645) employed by micro and small enterprises This figure indicates that employees in micro and small enterprises outnumber those in large enterprises by nearly threefold and exceed those in medium enterprises by fifteen times Notably, the proportion of employees in micro and small enterprises increased from 8.5% of the total national workforce in 2006 to 14% in 2013.
Figure 2.1: Share of Employment by Enterprises, 2013
The central region of Lao PDR hosts a higher concentration of small and medium enterprises (SMEs) compared to the northern and southern regions Specifically, 32.86% of micro enterprises are located in the central region, with Vientiane Capital accounting for the largest share at 26.92% In contrast, only 15.78% of micro enterprises are found in the south Small enterprises follow a similar trend, with 27.14% in the central region and Vientiane Capital leading at 39.91% Medium enterprises also show a preference for the central region, with 25.2% located there, and Vientiane Capital dominating at 49.60% Large enterprises are predominantly situated in Vientiane Capital, which holds 53.70% of the total, highlighting the central region's significant role in the SME landscape of Lao PDR.
Table 2.8: Location of Enterprises by Region and Province
Unit Share Unit Share Unit Share Unit share
Xiengkhuang 3,931 3.47 265 2.45 13 3.49 2 0.64 Vientiane 10,452 9.22 766 7.07 24 6.43 16 5.14 Bolikhamxay 4,645 4.10 367 3.39 19 5.09 11 3.54 Khammuane 5,558 4.90 465 4.29 17 4.56 17 5.47 Savannakhet 12,659 11.17 1,076 9.94 21 5.63 33 10.61 Total 37,245 32.86 2,939 27.14 94 25.20 79 25.40
The majority of enterprises, 65.9%, are located in urban areas, benefiting from superior infrastructure and market access Notably, medium and large enterprises predominantly operate in urban settings, representing 79.09% and 81.35% of total enterprises, respectively In contrast, micro and small enterprises are more commonly found in rural areas, accounting for 21.4% and 34.2% of total enterprises This trend is largely driven by the high living costs and rental fees in urban areas, prompting these smaller businesses to remain close to their production sites to minimize expenses.
Table 2.9: Location of Enterprises by Area Types
Micro Small Medium Large Total
Unit Share Unit Share Unit Share Unit share Unit share
• Position of in the private sector
Small enterprises primarily engage in wholesale and retail trade, as well as the repair of motor vehicles and motorcycles, accounting for 30.57% of their activities In contrast, 25.29% of small enterprises are involved in the manufacturing sector However, the share of small enterprises in manufacturing is lower than that of medium enterprises at 33.51% and large enterprises at 37.62%.
Table 2.10: Share of Enterprises by Economic Activities
Micro Small Medium Large Total
Unit Share Unit Share Unit Share Unit share Unit share
D Electricity, gas, steam and air conditioner and supply
E Water supply; sewerage, waste management and remediation activities 94 0.08 66 0.61 5 1.34 6 1.93 171 0.14
G Wholesale and retail trade; repair of motor vehicles and motorcycles
I Accommodation and food service activities 12,631 11.14 1,868 17.25 36 9.65 13 4.18 14,548 11.65
Micro Small Medium Large Total
Unit Share Unit Share Unit Share Unit share Unit share
M Professional, scientific and technical activities 301 0.27 103 0.95 3 0.80 2 0.64 409 0.33
O Public administration and defense; compulsory social security
Q Human health and social work activities 359 0.32 61 0.56 1 0.27 0 0.00 421 0.34
Approximately 98% of small and medium-sized enterprises (SMEs) are domestic sole proprietorships, with small enterprises holding a larger share than medium ones Foreign sole proprietorships represent only 1.25% of all enterprises, while state-owned SMEs account for 0.24%, and state and foreign partnerships make up a mere 0.05% Notably, domestic sole proprietorships dominate micro enterprises at 98.59%, followed by small enterprises at 91.48% and medium enterprises at 66.76% In medium enterprises, the presence of state-owned and private foreign partnerships is more significant, with 6.97% for medium compared to 1.76% for small, and 6.43% versus 1.04% for their respective categories.
Table 2.11: Ownership and Legal Status of Enterprises (%)
Ownership and legal status Micro Small Medium Large
Private domestic and foreign partnership 0.04 0.66 4.02 7.40
Single establishment is the most common form in SMEs: 99.06% of SMEs are single establishment, the major of which are micro and small enterprises Only
0.04% of SMEs are auxiliary while 0.03% are representative offices (Table 2.12).
Table 2.12: Establishment Types of Enterprises (%) Type of establishment Micro Small Medium Large
In Laos, over 90% of enterprises are owned by local entrepreneurs, with micro and small enterprises making up 94.78% and 98.90% of the total, respectively However, the medium and large enterprise sectors have seen significant foreign investment, with Thai, Chinese, and Vietnamese owners representing 9.97%, 9.32%, and 4.82% of large enterprises, respectively.
Nationality Micro Small Medium Large Total
Unit Share Unit Share Unit Share Unit Share Unit Share
The Lao-Tai ethnic group significantly leads in business ownership across all enterprise sizes, holding 85.14% of micro, 86.60% of small, 75.07% of medium, and 59.81% of large enterprises This dominance is attributed to their substantial representation within the Lao population, providing a strong foundation for business activities compared to other ethnic groups.
Table 2.14: Ethnic Group of Owners
Micro Small Medium Large Total
Unit Share Unit Share Unit Share Unit Share Unit Share Lao-Tai 96,511 85.14 9,378 86.60 280 75.07 186 59.81 106,355 85.17
The average age of business owners is predominantly between 31 and 45 years, representing 46.13% of all enterprises This age group shows a positive correlation with enterprise size, indicating that older owners tend to manage larger businesses Specifically, among micro and small enterprises, owners aged 36-45 constitute 31.68% and 32.43%, respectively Additionally, medium and large enterprises are often led by owners aged 46 and above, further emphasizing the link between age and enterprise size.
Enterprises aged 60 years and older represent 47.39% of medium enterprises and 48.56% of large enterprises With increased age comes greater business experience and capital accumulation, enabling these enterprises to expand into larger operations.
Micro Small Medium Large Total
Unit Share Unit Share Unit Share Unit Share Unit Share
Surveys indicate that female entrepreneurs dominate the micro enterprise sector, owning 63.27% of these businesses In contrast, male entrepreneurs hold the majority ownership in small, medium, and large enterprises, with ownership shares of 62.71%, 77.21%, and 87.46%, respectively This trend may be attributed to male owners generally exhibiting greater ability to manage risks and make critical managerial decisions in high-pressure situations.
Table 2.16: Gender of Owners Gender
Micro Small Medium Large Total
Unit Share Unit Share Unit Share Unit Share Unit Share
The educational background of Lao enterprise owners varies significantly between small and large businesses While 74.15% of micro enterprises and 52.03% of small enterprises have completed general education, larger enterprises show a higher level of educational attainment Specifically, 28.95% of medium and 28.62% of large enterprise owners hold a bachelor's degree, with 22.52% of medium and 29.26% of large enterprise owners achieving a master's degree or higher.
Table 2.17: Education of Owners Owner’s education
Micro Small Medium Large Total
Unit Share Unit Share Unit Share Unit Share Unit Share
OPPORTUNITIES AND CHALLENGES ON DEVELOPMENT
The perspectives and policies on SME development in Lao PDR
The Lao PDR is committed to enhancing its role in developing a market-oriented socialist economy, which serves as the foundation for job creation and income growth for its citizens This approach aligns with the government's economic and social development goals A key responsibility of the government is to promote small and medium-sized enterprises (SMEs), including private businesses, cooperatives, and international collaborations To support this initiative, the National Assembly has enacted laws, such as the enterprise promotion law No 011/N.A on December 21, 2011, along with a classification decree for SMEs.
No 25/2017 to promote specific legislation (SMEs) to be more effective The Ministry of Industry and Commerce has also formulated the Development Plan of SMEs for the period 2016-2020, as follow:
1) Promote the enhancement of productivity, technology and innovation.
The productivity of SMEs in the Lao PDR has seen significant improvements due to advancements in technology and a strong emphasis on innovation To sustain and further enhance this productivity growth, several strategic measures need to be implemented.
- Promote cooperation between the public, educational institutions and businesses in the development way and transfer of technology.
- Promote and facilitate the intellectual property registration for SMEs.
- Support accessing the quality and standard certification systems.
-Consulting and training on improving quality and productivity management of SMEs.
- Disseminate quality and productivity in a variety of patterns.
-Build system and undertaking the innovation awards on various aspects of the SMES.
- Contribute funds for improving and upgrading technology to SMEs.
2) Promote accessing to capital sources for small and medium enterprises.
Financial institutions have been promoted and improved, any tools of credit provision have improved, and a variety of financial products have been taken as follows:
- Develop diversified credit service and financial of SMEs.
- Strengthening of banks and financial institutions including microfinance institutions.
- Build capacity on accessing funds for SMEs.
- Upgrade the Promotion and Development Fund to become a specific finance stitution for SMEs.
- Improve the organization strength which facilitates credit access for SMEs.
3) Promote accessing to business development consulting services.
The Business Development Consulting Services has been improved and strengthened with the implemented measures as follow:
- Strengthening of organization, technical units in providing business development consulting services.
- Encourage provinces to establish technical service centers for SMEs.
- Promote the diversification of technical services for SMEs.
- Develop a database of SMEs and a business development consulting service provider.
- Disseminate and facilitate accessing to business development consulting services of SMEs.
4) Promote accessing and expanding the domestic and international market.
Market accessing and integration into the value chain has been developed, and the export capacity of the SMEs has been promoted as follow:
- Support the implementation of export strategy.
- Establish information and supply information on regional and international markets.
- Create opportunities and increasing marketing opportunities for SMEs.
- Trade facilitate of SMEs in accessing regional and international markets.
- Explore the possibility of establishing an SMEs Export Support Fund.
- Promote cooperation between large enterprises and foreign investment enterprises.
- Researching SMEs potential sector and competitive advantages
- Promote the development of Value Chain Development in certain sectors.
- Encourage business groups (Cluster) to strengthen market access.
- Encourage the establishment of SMEs national and regional networks to enhance economic cooperation.
Entrepreneurship courses are embedded in the education system, and human resource development for SMEs have been promoted, especially for women and youth as follow:
-Establishing and implementing entrepreneurship courses into higher education and any education level systems.
- Upgrade business management expertise for SMEs entrepreneurs.
- Support the creation of new entrepreneurs, especially for young people, women and students.
- Encourage educational institutions to have a role in the creation of new entrepreneurs, such as the establishment of a Business Incubator training center, technology transfer and any promotional activities.
- Create compliment system and apply for businesses and entrepreneurs with outstanding performance in various areas.
6) Create a favorable environment for setting up and operating a business
Regulations related to SMEs have been better improved, thus SMEs have greater involvement in the amendment of regulations, and the issue of licenses have amended as follow:
-Improve the rules and regulations of enterprise registration system to be more convenient and easier.
- Improve the rules and licensing system of the parties to be more convenient and easier.
- Research and improve the tax system to be transparent and fair.
- Encourage the establishment consulting forums between public and private sectors at the local level.
Development of Small and Medium Enterprise in Regional and
In today's rapidly evolving global landscape, the integration of fund transfers, goods, and services across countries is accelerating, driven by changing world trade rules Economic clustering fosters free trade and investment cooperation, which are essential for thriving in a globalized economy To succeed, entrepreneurs must adapt and grow their businesses more swiftly than the pace of these changes, while continuously seeking improvement to stay competitive.
In today's rapidly evolving business landscape, entrepreneurs must adapt to changing industry demands and social dynamics when developing products or services To thrive sustainably, both new and established businesses require technical expertise, financial investments, and support from public and private sectors, alongside improvements in the regulations governing small and medium-sized enterprises (SMEs).
The future of business development is increasingly centered on the integration of modern technology with healthier, eco-friendly lifestyles Key areas of focus will include the healthy food and beverage sector, beauty and fashion industries, as well as online shopping and services tailored for seniors and other demographics.
In the dynamic landscape of small and medium enterprises (SMEs), there is an increasing focus on regional and international integration, community engagement, and health and environmental considerations, particularly in online trading To support this evolution, Laos has reviewed its policies and development strategies for SMEs, establishing legislation since 2004, including Decree No 42/PM issued on April 20, 2004 This decree led to the formation of the SMEs Promotion Office and the SMEs Development Promotion Committee Following this, a five-year development strategy (2006-2010) was introduced through Prime Minister Decree No 157/PM on September 9, 2008, marking the first strategic initiative for the development of SMEs in Laos.
Following the announcement of the decree, international cooperation can be leveraged to support the Small and Medium Enterprises Promotion Department and its partners, facilitating access to funding and expert knowledge for effective strategy implementation.
2010, more than $ 12 million had been mobilized for development The main sponsors include GIZ, ADB, EU, UNIDO, governmental and non-governmental organizations.
The implementation of the Small and Medium Enterprise Development Strategy (2006-2010) has yielded initial results that lay the groundwork for enhancing SME self-promotion and policy development Personnel involved in SME promotion have undergone professional training to boost effectiveness In 2011, the government advanced legislation from a decree to a comprehensive law on SME promotion Subsequently, the SME Development Plan (2011-2015) was executed and monitored by the Ministry of Industry and Commerce, ensuring ongoing evaluation and strategic planning for SMEs in Lao PDR.
The Development Plan (2011-2015) aimed to advance seven key policy areas: enhancing the regulatory and governance framework for businesses, improving access to capital, fostering new entrepreneurship, strengthening business support and development services, promoting collaboration between large enterprises and SMEs, boosting productivity to elevate the quality and standards of SME products and services, and facilitating market access and expansion for SMEs.
Under the guidance of the Party and Government, the Ministry has developed a plan for 2011-2015, focusing on mobilizing funds and technical assistance to support the implementation and monitoring of this plan Seven key policy areas have been identified, with various measures and projects initiated to enhance the development of SMEs While most initiatives have remained within their respective sectors and budgets, all measures outlined in the Strategic Development Plan are designed to contribute both directly and indirectly to the growth of small and medium-sized enterprises.
Through the strategy implementation and development of SMEs plans throughout 2 periods from 2006-2010 and 2011-2015 could be summarize the success of each area as follow:
1) Improving the regulatory environment and state governance for business operation.
The registration process for small and medium enterprises has been significantly streamlined, reducing both time and costs Previously, registration fees ranged from 100,000 to 200,000 Kip; now, they are lowered to between 50,000 and 150,000 Kip, depending on the business model Additionally, the registration period has been shortened from 60-90 days to just 3-10 business days, making it easier for entrepreneurs to start their businesses efficiently.
The number of required documents for enterprise registration has been significantly reduced from 18 sets to just 2-5 sets, depending on the specific business model Additionally, to enhance the regulatory framework, enterprise registration information is now accessible at local district and provincial levels.
According to the World Bank Report, the enterprise registration system in Lao PDR significantly improved, rising from 93rd in 2012 to 81st in 2013 Additionally, the country's ranking for ease of doing business improved from 155th in 2014 to 148th in 2015 out of 189 member countries.
2) Improving SMEs fund sources access.
Access to financial resources for SMEs has significantly improved over the years In 2006, only four state-owned banks provided funding, contributing about 7% to GDP The establishment of the SME Promotion and Development Fund in 2010 marked a turning point, with an initial loan of 14 billion Kip from the Lao Development Bank in early 2012 Continuous monitoring of SME credit has led to lower borrowing costs and increased competitiveness for businesses By the end of 2013, credit services for SMEs reached approximately 35% of GDP, a notable rise from 21% in 2011 By 2015, over 30 commercial banks were offering loans, supporting business operations that accounted for 40% of GDP.
In mid-2015, a fund of 16 billion kip was provided through the Lao Development Bank, marking the second phase of financial support By the end of 2016, the bank had expanded its credit services to a total of 92 units, maintaining an average interest rate between 7-10% Notably, there were no reports of bad loans or non-performing loans (NPLs) during this period.
3) Capacity building of new entrepreneurs
The ASEAN Entrepreneurship Program has been successfully integrated into the education system, coordinating with various sectors to enhance entrepreneurial skills Training courses have been implemented across provinces such as Khammouane, Savannakhet, Champasak, Oudomxay, and Xiengkhuang, engaging a total of 1,733 participants Additionally, the Providence and Development SMEs Fund supports young individuals under 35 by covering 50% of training costs in educational institutions From 2013 to 2015, 238 young people participated in these programs, including 133 women To further stimulate interest in entrepreneurship, various activities such as business plan contests, workshops, and public forums have been organized.
4) Increasing assistance and business development services
To enhance support for small and medium enterprises (SMEs), a comprehensive database of organizations and professionals offering technical services has been established A business development network comprising 25 members has also been formed to facilitate consulting Additionally, a support and productivity center provides training courses and consulting services aimed at improving quality management, accessing funding, and leveraging technology Furthermore, a joint venture financing project, in collaboration with the World Bank under the Trade Development Facility (TDF 2), has been initiated to bolster business development consulting By the end of 2015, 123 business improvement projects were approved, totaling $692,671, with 101 of these projects (82%) benefiting small and medium enterprises.
5) Increasing business cooperation between large enterprises and small and medium enterprises
Strategy for Small and Medium Enterprise Development in the Lao PDR
Between 2006 and 2015, the government of Laos implemented strategies to enhance small and medium enterprises (SMEs), which saw significant growth For the period of 2016-2020, the government has established a focused development strategy that aligns with international and regional trends, emphasizing six key programs and seven regional policies The overarching goal is to harness the potential of entrepreneurs and prepare for market liberalization, which is essential for modern industrial development, sustainable production, and the establishment of resilient markets.
Table 3.1: Development Directions and Strategic Development Plans of the Lao
PDR under Regional and International Integration Framework
Developme nt of Small and
Directions for Development of SMEs in Lao PDR
6 Development Plans of SMEs in Lao PDR
Strategic Development of SMEs in 7 policy areas in
1 Improve the potential of SMEs entrepreneurs to be strong and sustainable
1 Creating and developing for entrepreneurs
SMEs and expanding international production networks
2 Promote the enhancement of productivity, technology and innovation
3 Promote accessing and expanding the SMEs in domestic market and international market.
2 Increase business cooperation between large enterprises and SMEs.
3 Promote productivity enhancement to improve the quality and products standard and SMEs services.
4.Promote market access and market expansion.
3 Upgrade the SMEs supporting structure for the administration and management development.
4 Promote accessing to business development consulting services
5 Promote accessing to capital sources for small and medium enterprises
6 Create a favorable environment for setting up and operating a business
5 Increase business development assistance and services
6 Improve the environment of regulatory and governance management for doing business
7 Improve accessing to funding sources of SMEs
Source: Department of SMEs Promotion, MOIC, Lao PDR.
Opportunities and challenges of development of Small and Medium Enterprises
3.2.1 Opportunities on Development of Small and Medium Enterprises
Laos SMEs have significant opportunities to access the international market, particularly through foreign direct investment (FDI), which enhances the investment environment and protects intellectual property rights As large international corporations invest in Lao PDR, SMEs can benefit from the global value chain, gaining access to export markets with reduced tariffs and non-discriminatory service sectors Additionally, participation in bilateral and multilateral trade agreements allows SMEs to adopt advanced production technologies, enabling them to innovate and meet market quality standards To thrive in the international arena, SMEs must also focus on improving their workforce quality by investing in employee training and development, ensuring that their human resources align with higher international standards This strategic emphasis on workforce development is essential for the ongoing success and growth of SMEs in Laos.
Lao PDR's integration into the global market presents significant opportunities for SMEs to attract international investment With a vast pool of investors interested in doing business in Laos, SMEs that showcase compelling business models and growth potential can secure essential financing to expand their operations Additionally, these SMEs may benefit from incentives such as reduced or waived land rent, land usage fees, non-agricultural land use taxes, and corporate income tax exemptions for a specified duration, further enhancing their financial viability.
3.2.2 Challenges on Development of Small and Medium Enterprises
Lao PDR faces significant challenges in a market economy, as highlighted by the 2016-2017 Global Competitiveness Index report The country ranks lowest in competitiveness among ASEAN nations and is positioned 93rd out of 138 economies worldwide.
Table 3.2: The competitiveness ranking of Lao PDR and ASEAN countries
Lao PDR's low competitiveness ranking is attributed to four key factors: inadequate infrastructure, a challenging macroeconomic environment, issues in health and basic education, and limited technological readiness Additionally, the country faces significant challenges in internet access, shipping services, health care, and production technology, resulting in the lowest competitiveness index among ASEAN nations.
Table 3.3: Issues affecting the competitiveness of the Lao PDR
SGP MYS THA IDN PHL BRN VNM KHM LAO
Infrastructure(2 nd pillar) 6.5 5.4 4.4 4.2 3.4 3.9 3.9 3.2 3.1 Macroeconomic environment (3 rd pillar) 6.1 5.4 6.1 5.5 5.9 4.5 4.9 5 4.3 Health and primary education (4 th pillar) 6.7 6.1 5.5 5.3 5.6 5.8 6.3 5.2 5.2
Table 3.4: Comparison of Competitiveness Index between Lao PDR and
SGP MYS THA IDN PHL BRN VNM KHM LAO
Fixed-broadband internet subscriptions/ 100 pop 26.5 9 9.2 1.1 3.4 8.1 8 0.5 0.5
Business impact of malaria* N/Appl 5.5 5.4 4.3 4.9 4.7 na 4.5 4
Business impact of tuberculosis* 6.1 5.3 4.7 4.1 4.4 4.5 na 4.2 4
Available airline seat kilometers millions/week
Mobile-cellular telephone subscriptions/ 100 pop 146.1 143.9 125.8 132.3 118.1 130.6 108.1 133 53.1
Source: World Economic Forum 2016.Note: *Values are on a 1 to 7 scale (smallest to greatest), the greater value the greater the efficiency.
Figure 3.1: The competitiveness of the Lao PDR in 5 smallest value ranking
According to the World Bank's 2018 Doing Business Report, Laos ranked 9th among ASEAN countries, with only Myanmar performing worse, and dropped to 141 out of 190 globally, down from 139 the previous year The country faces significant challenges, ranking near the bottom in 25 key areas, including company setup costs, construction permits, electricity installation for businesses, intellectual property registration, credit access, and import costs These issues hinder the competitiveness of Lao PDR's businesses in the regional and international markets To address these challenges and enhance the development of small and medium-sized enterprises (SMEs) in Laos, several recommendations will be proposed in the following section.
Lao SMEs face significant challenges due to the country's status as a small landlocked nation, hindering rapid growth and industrialization in the manufacturing and service sectors The government aims to modernize production methods by adopting advanced technologies, yet most enterprises remain small-scale, lacking adequate capital and technical expertise Limited government budgets for promoting domestic businesses further exacerbate the situation, resulting in slow and inconsistent progress toward modernization This imbalance is evident between large, medium, and small enterprises, as well as between foreign investments and local businesses, particularly in sectors reliant on natural resources versus those focused on manufacturing.
The current situation reflects the broader development landscape of our country, highlighting specific issues and challenges faced by small and medium-sized enterprises (SMEs) in Lao PDR.
Productivity in Laos, measured as the output relative to inputs, remains significantly lower than that of its ASEAN neighbors, with an average worker generating goods valued at $6,624 per year Despite encouragement to adopt new technologies, Lao workers continue to rely on outdated methods, leading to a reliance on imitative practices rather than innovation The absence of robust research institutions dedicated to technological advancement further hampers the manufacturing sector, resulting in limitations that affect the country's overall economic sustainability.
Small and medium-sized enterprises (SMEs) face significant challenges in obtaining credit from banks and financial institutions, including a lack of long-term funding, insufficient information and consulting services, and a complex loan application process Additionally, high interest rates, limited financial management expertise, and inadequate assets for securing loans further hinder their access to credit Furthermore, commercial banks offer a limited range of innovative products designed to facilitate credit access for SMEs.
3) Access to business development consulting services
Access to technical assistance for SMEs has been significantly restricted, with only 2.54% of these businesses utilizing business development consulting services, as highlighted by the 2013 GIZ Enterprise Survey This limited access is primarily due to a shortage of professionals in critical areas such as quality improvement, innovation research, and technology Consequently, SMEs have not fully acknowledged the value of technical assistance, which stems from the inadequate quantity and quality of support available in these sectors.
The Lao business population constitutes only 2% of the country’s total population, primarily due to restrictive conditions for establishing businesses Limited knowledge in business setup and management, alongside inadequate entrepreneurial understanding, hampers the growth of startups Furthermore, there is a significant lack of information systems and motivational support for new ventures, including insufficient funding, unfavorable tax policies, and complex legal registration processes Additionally, the promotion of entrepreneurship and support for startups remains limited, further stifling business development in Laos.
5) The environment of doing business
The business environment for SMEs is challenging due to inconsistent policies and legislation, which lack coordination among government sectors The complex procedures for obtaining operating business licenses lead to high costs for SMEs Historically, government support for SME promotion has been inadequate, with policies often being incomplete and unreliable, particularly for local entrepreneurs Although there are established policies, their implementation, including legalization, subordinate legislation, and programmatic planning, remains slow and misaligned with actual business needs.
6) Joint ownership in development of SMEs
Local departments and communities often overlook the promotion of small and medium-sized enterprises (SMEs) as a vital community effort, failing to tap into the intellectual and individual assets available within families and localities This neglect hinders the development of SMEs and their ability to play a significant role in the production process To foster a transition from a natural and semi-natural economy to a commodity and market economy, it is essential to recognize and enhance the potential of this sector, ultimately addressing the challenges faced by various stakeholders.
Small and Medium Enterprises (SMEs) in Lao PDR face significant challenges, including limited promotional resources, insufficient funding for administrative tasks, and a workforce with varying levels of knowledge about SMEs The cooperation between government and related sectors is often fragmented, complicating participation in the ASEAN Economic Community (AEC) This environment leads to serious business obstacles in areas such as technology, manufacturing, finance, marketing, and human resources Furthermore, the high failure rate of SMEs highlights the need for improved policies and regulatory frameworks The perception of vocational education and training in manufacturing occupations remains weak, and the promotion of SMEs requires substantial financial support and technical expertise to overcome existing quality and quantity constraints.