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

MINISTRY OF EDUCATION AND TRAINING FOREIGN TRADE UNIVERSITY MASTER THESIS DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES IN LAO PEOPLE’S DEMOCRATIC REPUBLIC: OPPORTUNITIES AND CHALLENGES Specialization: International Economics PHONETHIP SENGVILAY Hanoi - 2020 MASTER THESIS DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES IN LAO PEOPLE’S DEMOCRATIC REPUBLIC: OPPORTUNITIES AND CHALLENGES Specialization: International Economics Code: 1806022067 Full name: Phonethip Sengvilay Supervisor: Dr Nguyen Binh Duong Hanoi - 2020 iii STATEMENT OF ORIGINAL AUTHORSHIP I hereby declare that this master thesis is my own scientific research which is made under the guidance of my supervisor, Dr Nguyen Binh Duong The contents and results of this research are completely honest The information, data and documents which are collected from various sources for analysis and evaluation have been fully cited in the main content and in the references list of this master thesis as well The Author Phonethip Sengvilay ACKNOWLEDGEMENT First and foremost, I would like to express my deepest appreciation to both Laos and Vietnam government to give me a scholarship of study in Hanoi capital, Vietnam country I also would like to thank to my proposal supervisor, Dr Nguyen Binh Duong Without her insightful advice and her devotion of time, I would not have successfully completed this study She is very nice and a great scholarly mentor to me Beside that, I also would like to thank to Foreign Trade University for giving me the opportunity to study as a graduate student and obtaining my master’s degree I would like to extend my thanks to all people who helped me to collect data, because without them, I would not have been able to complete my research I am truly grateful for your time, insights, thoughtfulness, and openness Finally, I would like to thank my family for their support, understanding, and encouragement Their overwhelming love and constant support have been the driving force in the completion of my master’s degree CONTENTS STATEMENT OF ORIGINAL AUTHORSHIP i ACKNOWLEDGEMENT ii CONTENTS iii LIST OF FIGURES v LIST OF TABLES vi ABRREVIATIONS viii SUMMARY OF THESIS RESEARCH RESULTS ix ABSTRACT x CHAPTER INTRODUCTION 1.1 Background 1.2 Aim of objectives of the research 1.3 Literature review 1.4 Research question 11 1.5 Research Methodology 12 1.6 The structure of the thesis 12 1.7 Limitations and difficulties in implementing the research 12 CHAPTER SITUATION OF SMALL AND MEDIUM ENTERPRISES IN LAO PDR 14 2.1 Definition of small and medium enterprises 14 2.1.1 Definition of European Commission (EC) 15 2.1.2 Definition of World Bank (WB) 16 2.1.3 Definition of China 17 2.1.4 Definition of Vietnam 19 2.1.5 Definition of Lao PDR 20 2.2 Small and Medium Enterprises in Lao PDR 21 CHAPTER 3: OPPORTUNITIES AND CHALLENGES ON DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES IN LAO PDR 48 3.1 Development of Small and Medium Enterprises under Socialist Market Development in the Lao PDR 48 3.1.1 The perspectives and policies on SME development in Lao PDR 48 3.1.2 Development of Small and Medium Enterprise in Regional and International Integration in Lao PDR 52 3.1.3 Strategy for Small and Medium Enterprise Development in the Lao PDR under the Context of Regional and International Economic Integration 58 3.2 Opportunities and challenges of development of Small and Medium Enterprises under a Socialist-oriented market economy in the Lao PDR 60 3.2.1 Opportunities on Development of Small and Medium Enterprises 60 3.2.2 Challenges on Development of Small and Medium Enterprises .61 CHAPTER Policies of regional countries and recommendation for Lao PDR 67 4.1 Policies of regional countries 67 4.1.1 Government policy of promotion of SMEs in China 67 4.1.2 Government policy of promotion of SMEs in Thailand 70 4.1.3 Government policy of promotion of SMEs in Vietnam 75 4.2 Recommendations for Lao PDR 78 CONCLUSION 85 REFERENCES 86 LIST OF FIGURES Figure 1.1: A RB Approach to Strategy Analysis: A Practical framework Figure 1.2: Business growth model framework .11 Figure 2.1: Share of Employment by Enterprises, 2013 24 Figure 2.2: Access to Finance of Enterprises, 2013 .46 Figure 2.3: Source of Borrowing 47 Figure 3.1: The competitiveness of the Lao PDR in smallest value ranking .63 LIST OF TABLES Table 1.1: Economic Performance of Lao PDR in 1990-2017 Table 2.1: Definition of Small and Medium Enterprises with European Union standard 15 Table 2.2: Definition of Small and Medium Enterprises by World Bank standards 16 Table 3.1: Definition of Small and Medium Enterprises in China 18 Table 2.4: Definition of SMEs in Vietnam 20 Table 2.5: Definition of Small and Medium Enterprises in Lao PDR 21 Table 2.6: Sizes of Enterprises by the Number of Employees, 2013 .22 Table 2.7: Distribution of Enterprises in Domestic and Foreign Markets, 2013 (%) 23 Table 2.8: Location of Enterprises by Region and Province 25 Table 2.9: Location of Enterprises by Area Types 26 Table 2.10: Share of Enterprises by Economic Activities 27 Table 2.11: Ownership and Legal Status of Enterprises (%) 29 Table 2.12: Establishment Types of Enterprises (%) .30 Table 2.13: Nationality of Owners 30 Table 2.14: Ethnic Group of Owners .31 Table 2.15: Age of Owners 32 Table 2.16: Gender of Owners .33 Table 2.17: Education of Owners 34 Table 2.18: Opening of accounts in foreign countries 35 Table 2.19: Type of Accounts Opened in Foreign Countries 35 Table 2.20: Accounting Practices (%) 36 Table 2.21: Business Registration License 37 Table 2.22: Total Registered Capital 38 Table 2.23: Fixed Costs of Capital Stocks .39 Table 2.24: Variable Costs .40 Table 2.25: Adding Fixed Costs in Total Costs 41 Table 2.26: Type of Business Registration and Tax Certificate 42 Table 2.27: Anticipation of Business Trends 42 Table 2.28: Computer Use to Run Businesses .43 Table 2.29: Number of Computer used in Enterprises 44 Table 2.30: Enterprises with Internet .45 Table 2.31: Enterprises with Internet Accesss .45 Table 3.1: Development Directions and Strategic Development Plans of the Lao PDR under Regional and International Integration Framework .59 (2016-2020) .59 Table 3.2: The competitiveness ranking of Lao PDR and ASEAN countries 61 Table 3.3: Issues affecting the competitiveness of the Lao PDR 62 Table 3.4: Comparison of Competitiveness Index between Lao PDR and ASEAN (10 smallest value ranking) 62 ABRREVIATIONS Abbreviations Full name ADB Asian Development Bank AEC ASEAN Economic Community ASEAN Association of Southeast Asian Nation BoL Bank of Lao PDR CA Core Competency DOSMEP Department of Small and Medium Enterprise Promotion FDI Foreign Direct Investment GDP Gross Domestic Product GMS Greater Mekong Subregion GTZ German Agency for Technical Cooperation ICT Information and Communication Technology IMF International Monetary Fund Lao PDR The Lao People’s Democratic Republic LAK Lao Kip LNCCI Lao Nation Chamber of Commerce and Industry MIH Ministry of Industry and Handicraft MNC Multinational Corporation MoF Ministry of Finance MOIC Ministry of Industry and Commerce NERI National Economic Research Institute OECD Organization for Economic Coperation and Development PBC People’s Bank of China SMEs Small and Medium Enterprises SMEPDO SME Promotion and Development Office/MOIC UNIDO United Nations Industrial Development Organization WB World Bank WTO World Trade Organization Beside the general support discussed above, the SME Support Law also provides for other support to SMEs on accounting regimes; ground spaces for production; technology, incubators, technical facilities and co-working spaces; information access; etc 2) Support for the SMEs in conversion from household businesses An SME that converts from a household business shall be supported for free consultancy and direction for establishment of enterprises SMEs shall further be exempted from enterprise registration fees and other fees For the purpose of receiving such support, SMEs that have converted from a household business must satisfy the following conditions: (i) the household business is legally registered and operated before the conversion; and (ii) the household business has been operating continuously for at least one year by the day on which the first Enterprise Registration Certificate (ERC) is issued 3) Support for the start-up SMEs A start-up SME that has operated for less than five years from the date of issuance of its first ERC and has not made any public offer in the case of joint stock companies shall be supported by the government in terms of technology (ie, technology application and transfer, use of equipment at a technical facility, coworking space participation support, etc), training (ie, in-depth practical training on product construction and development, investment attraction, etc) and other forms of support The SME Support Law provides the legal framework for investment in startup SMEs The investor in a start-up SME includes venture capital funds and domestic and foreign organisations and individuals Such investors shall be exempted from corporate income tax for a limited period of time However, the investment in a start-up SME is limited to not more than 50 percent of charter capital 4) Supporting SMEs in participating in industry clusters and value chains Under the SME Support Law, the contents of support for SMEs in industry clusters and value chains shall comprise in-depth training in production technology and techniques; information on the need for connection, production and business of the SME; support for brand development and for expansion; etc SMEs shall be entitled to support on satisfaction of either the following conditions: (i) creating products with competitive advantages in terms of quality and prime cost; and (ii) creative innovation in technological processes, materials, components, machinery and equipment SMEs are eligible for multiple support measures, they are allowed to choose their preferred support measures SMEs can also receive support in human resource development and legal consultancy Priority will be given to SMEs, which are women-owned or have higher female share in employment Moreover, in 2018, Vietnam’s government recently issued two regulations in an attempt to incentivise SMEs to grow One such regulation involves the subsidisation and provision of a network of consultants for SMEs The consultant network is defined as a group of consultants and consultancies specialised in a broad range of fields to meet the needs of SMEs, recognised by regulatory agencies for supporting SMEs Another regulation involves subsidies for training courses for women-owned SMEs The latest incentives will further allow for a thriving environment for SMEs given their importance However, the government will need to continue to provide support and reforms to SMEs if it wants to meet its target of one million firms by 2020 from the current 600,000 Issued by the Ministry of Planning and Investment, Circular gives guidelines and instructions on rules around the network of consultants providing advice to SMEs and support through a network of consultants The government is also expected to launch an online platform for organisations and individuals to register and be automatically admitted to the consultant network SMEs will then be able to look up information on the consultant network, including the name, registration number, and other details on the websites of the National Portal as well as the local ministry websites, such as the Government Inspectorate Circular on the other hand will have the government providing subsidies for the human resources of SMEs how by women A women-owned SME as defined by the government is one or more women who own at least 51 percent of its charter capital With this regulation, the government will provide 100 percent subsidy for expenses for training in entrepreneurship, business administration, and advanced business administration for women at women-owned SMEs 4.2 Recommendations for Lao PDR In order to development of SMEs to operate according to the economy market and socialist development plan and through SMEs supportive policies that learned from regional countries, this study provides some recommendations to resolve issues of development of SMEs under the market economy based on the social and economic environment in the Lao PDR Encourage development integration  Enhance efficient and co-operative international economic cooperation under the ASEAN / AFTA and WTO frameworks Particularly, pay special the attention in economic and trade cooperation with all countries in the world under the mutual respect, non-interference in each other’s internal affairs, equality and mutual benefit Building the economic integration in the bilateral and multilateral frameworks becomes the driving force for the production, trade and administration to be stronger in Lao PDR Supporting businesses could access to new markets and more competitive Moreover, accessing to modern techniques in production, resources, producer and buyers  Strengthening and scientism gain maximum benefit to the country under negotiation between the national and international economic cooperation framework Expanding the number of countries that granting trade privileges to Lao PDR and maintaining existing trade privileges  Publish information on trade privileges that the Lao PDR currently receives in both forms of magazine, newspaper, radio, television and internet access At the same time, there should be a consulting and technical assistance unit for the business sector in order to maximize benefits of trade privileges  Apply special incentives to small and medium enterprises to grow in quality, withstand global economic changes, building businesses be able integrate into the region and be able to unite production and become a strong manufacturing in order to supply domestic and could be exportable Promote development in business environment  Establish and improve the legal, law and regulatory framework in line with international principles in which the Lao PDR is a member of party and ratification to promote trade competition fairly, transparent and verifiable  Modernize the ICT system (E-government) using in industry and trade services for the private sector to the local area, which facilitate faster trade transactions, save inappropriate costs and enhance business competitiveness In addition, it also helps businesses access to trade information in different areas  Along with the importance of promoting trade electronic valid to laws of Laos to developing and growing This sector could support producers and users reduce unnecessary costs between trading such as transport costs and lost opportunity and they are encouraged to use more electronic in services sectors  Develop a special promotion policy on clean production and environmentally friendly production especially of green products that the Lao PDR has the potential competition as an alternative to diversify the country's exports  Expand trade networks to all districts, villages and government-specific development areas Encourage product distribution market, supermarket and shopping mall for serving as domestic market in distribute goods and more facilitate for price management of some items in categories that have price sensitivity to social and quality goods management  Encourage small and medium entrepreneurs and new entrepreneurs to improve the quality of products and services by facilitating the process of filing form registration, fee, and accessing the control and inspection agencies Moreover, integrate production innovation, promote and create social value for the purchase and using domestic goods The government (government organizations) should be leader on consumption and using products and services of domestic businesses, community businesses, manufacturing groups and households Encourage development capacity building on competitivenes  To promote the development and upgrade of technical knowledge for both central and local region which could be adapted to the international working system under the economics integration, foreign language skills, apply modern techniques to perform tasks, work relations and service providing  Enhance the competitiveness of state-owned enterprises by revising the management plan, building the capacity of management board to be modern, transparent, auditable and visionary in order to lead the enterprise become a transnational enterprise Establish mechanisms to facilitate joint ventures between state and private enterprises, domestic and international Encourage enterprises to invest in the stock market in order to secure capital growth in variety patterns except government subsidies  Coordinate with research institutes, academic institutions in national and international in order to conduct research that provides the technical information in trade negotiate, businesses innovation, develop and design new products innovative which the Lao PDR has competitive advantage, potential and provide value added to Lao products by processing to avoid raw materials export and ultilize the existing raw materials in a sustainable and efficient way  Coordinate with relevant sectors to upgrade the logistics services, reduce the freight of imports and exports, participate in negotiations on logistics and judicial services between the two or multilateral countries such as: ASEAN, GMS and neighboring countries to support the production, trade and services depend on international co-operation agreement in order to facilitate goods transportation Promote the enhancement of productivity, technology and innovation  Promote to improve the efficiency of production and service management, improve the quality and product standard by providing training and business consulting services to make SMEs has price and quality competitive in both domestic and international markets  Provide a maximum fund investment less than 50% to invest in technology transfer because allmost SMEs are using the old modern of production tools and technologies Therfore, there are some family generation businesses has been failed in operation  Training and dissemination of new information in production management, product design and development and improvement in technology and services  Provide fund support to educational institutions and businesses for the development and transfer of technology of SMEs  Protect the intellectual property of inventors by enabling conditions in register their intellectual property and has strict measures against those who infringe on intellectual property  Support fund and advisory services for SMEs that could be certified for quality and product standard and services  Creating accreditation award system for SMEs which has successful innovations such as design and development of products that are unique in quality and useful, acceptable, modern and advanced technology, and efficiently management for energy saving and environmentally friendly business Support fund access policies  Establishing the necessary conditions for SMEs access to fund sources in a variety of ways including provide credit guarantee and non-guarantee  Upgrade the entrepreneur ability to enhance their skills in business planning and financial accounting management  Improvement of banking mechanism and upgrading credit officer skills in providing credit services to SMEs  Improve the loan offer system of SMEs to has brief short steps and approppriate cost effective  Encourage businesses to set up a non-collateral credit to provide credit for a new Young Startup Project  Create funds to complement young investment projects that have a good business plan but lack of funds and the conditions in bank loan Promote access to business development consulting services  Provides training and consulting services through using quality management methods: 5S, KAIZEN, Good Manufacturing Practice (GMP), Good Agriculture Practice (GAP), International Organization for Standardization (ISO), Hazard Analysis and Critical Control Point (HACCP), in order to have quality productivity and service, be standardized and competitive in both domestic and international markets  Training and upgrading the professionals skills, particularly upgrading the business management skills, business planning, marketing strategic plan, legal, financial accounting and etc  Support the operation of the Lao National Chamber of Commerce and Industry in SMEs Service Center, which was established on February 17, 2017 in Vientiane Capital that provide services and expand to other provinces, starting with preexisting condition provinces and then extending to other provinces  All centers, technical institutes related sector including universities and colleges should be increased the provision of their own technical and the technicians in production role and SMEs business sectors such as farming, production, processing and technology transfer Promote accessing and expanding market  Promote accessing and expanding market domestically and internationally by establishing a base and providing market information  Increasing trade facilitation include goods delivery, customs, and technical certifications such as certifications of plants and animal health, food and safety standards  Establishing strategics cooperation between large enterprises or foreign direct investment (FDI) and SMEs in order to provide goods and services to large enterprises, including foreign direct investment  Research and identify potential and competitive business sectors and develop the production segments of those businesses to improve the product's quality to meet the market demands  Encourage business group that has a similar types of businesses or closely location to co-operate and share the production in order to has lower costs as well as increase market power and supply factors  Provide fund for SMEs in travelling to joining trade fairs in both domestic and international market  Provide financial and technical assistance to SMEs through all provinces in obtaining the "One District, One Product" (ODOP) to enhance their competitiveness Creating and developing new entrepreneurs  Training those who are interested in starting business to spread new entrepreneurship and develop existing entrepreneurs to increase their business management skills by raising awareness for young people, students that turn to pay attention with professional business career  Continuing to take business courses into the broader education curriculum  Expansion of Business Center or Business Incubator in various faculties at the eligible universities  Organize training, seminars and activities to give young people the opportunity in presenting ideas and business plans that are viable and able to serve society as needed Fiscal and tax policy  SMEs undertaking activities in strategic sectors such those sustainable activities on food security, activities that contribute to the eradication of poverty, and other activities that appropriate with the Party's policies Thus the government should adopt a special tax policy  For newly formed SMEs, they should receive a policy on value added tax to attract new businesses, especially new SMEs which are unique and appropriate with the development conditions under integration To provide financial assistance to the SMEs in terms of receiving professional assistance, technology transfer and technology development and seeking for domestic and international market sourcing CONCLUSION Based on the research of local and foreign literature, the research could summarize that small and medium enterprises play a vital and important role in economic and social development, especially in terms of product development, commercial and service in the social and economic environment in Lao PDR In addition, SMEs have contributed job and income for employee and also improve the people’s livelihoods Small and medium enterprises are also contributing the industrialization and modernization factor to gradually contribute to the growth of the nation's economy All economic sectors will have unifying competition or not, will it be able to support one another, all of them are important signals in the evaluation of the socialist economic market It can be said that when the economic sectors have an unified competition, they support to each others so they could lead the socialist market economy established completely Therefore, struggling to create an environment in which economies competitive can support each other and to build a economy market, that is developing a socialist economy as specified in National Assembly by the government Learning from developed country and neighboring countries such as China, Thailand and Vietnam Small and medium enterprises are recognized as the engine of the economy of each country, in this regard, both developed and developing countries create favorable opportunities, as well as various policies in the support and development of small and medium enterprises In the research, it is clear that these countries use different policies to support and encourage SMEs in order for SMEs to be given the greatest opportunity for development Analyzing the situation of developed countries, as far as SME support is concerned, it is clear that in Lao PDR, even though there are SME support organizations, they are not enough to properly support SMEs because Lao PDR still lack financial fund, the weakness on laws, tax laws and legislation structures Compared with developing countries, Lao PDR must have a primary priority for SME development and create favorable policies for SME development in order to have a decrease in the number of unemployed, eradication of poverty and exiting of LDC status REFERENCES LITERATURES, PUBLICATIONS AND ARTICLES Abosede Adebiyi Julius, Obasan Kehinde Agbolade and Alese 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2019 ... SITUATION OF SMALL AND MEDIUM ENTERPRISES IN LAO PDR 2.1 Definition of small and medium enterprises Small and medium- sized enterprises (SMEs) has an important part of the economy and the small- scale enterprises. .. topic: ? ?Development of Small and Medium Enterprises in Lao People’s Democratic Republic: Opportunities and Challenges? ?? First of all, this research are represented the overview of economics in Lao. .. organizations, institutes, agencies and government offices such as: Ministry of Industry and Commerce in Lao, Department of Small and Medium Enterprises Promotion, Lao Nation Chamber of Commerce and Industry