The Integration of Laos into the International Economy: Global Production Sharing, Landlockedness, and Trade Costs

Abstract

Laos is a developing country well-endowed with natural resources that faces development challenges due to high trade costs from being landlocked. This thesis examines the integration of Laos into the international economy, focusing on the role played by global production sharing and trade costs associated with landlockedness. Laos has opened up to the regional and global economy in order to overcome its locational disadvantage and to graduate from its status as a least developed country. As the world is increasingly characterised by the geographical dispersion of production, this offers opportunities for Laos to tap into certain segments of production sharing that are commensurate with its comparative advantage. A framework is developed, which is based on a gravity model, to analyse the factors affecting countries’ participation in global production sharing (or ‘networked trade’), with emphasis on the implications for landlocked countries. Controlling for economic size and geographical factors, landlocked status reduces networked trade (both for trade in parts and components, and final goods). However, reducing services links costs, in particular improved logistics performance and joining regional trade agreements, contributes to the expansion of networked trade. This highlights the importance for landlocked countries to improve services links that coordinate geographically dispersed production processes. In examining the role of firm-specific characteristics in influencing export performance, the findings suggest firm size, foreign ownership, and input imports have positive effects on firms’ export intensity. Larger firms have more resources to exploit economies of scale to enable them to export more. Having foreign equity and using imported inputs also help raise firms’ productivity through foreign expertise and networks. Case studies further reveal that although the Lao garment industry is relatively small compared to regional comparators, the electronics industry shows promising prospects given its recent strong growth. The absence of supporting industries in these sectors highlights the challenge that Laos faces in competing with neighbouring countries given the cost and time penalty associated with being landlocked. The current study makes a strong case for Laos to focus efforts on upgrading trade-related logistics, deepening regional economic integration, and improving the overall business environment. Such measures suggest Laos can overcome its natural disadvantage of being landlocked, which would help the country further integrate into the international economy and facilitate a smooth transition after Laos graduates from least developed country status. Show more