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


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
Code: 1806022067

Full name: Phonethip Sengvilay
Supervisor: Dr. Nguyen Binh Duong

Hanoi - 2020


3

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 1. INTRODUCTION........................................................................... 1
1.1 Background.......................................................................................................... 1
1.2 Aim of objectives of the research........................................................................ 5
1.3 Literature review.................................................................................................. 5
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 2. 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 4. 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.................6
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 5 smallest value ranking.........63


LIST OF TABLES
Table 1.1: Economic Performance of Lao PDR in 1990-2017...................................3
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


SUMMARY OF THESIS RESEARCH RESULTS
Thesis research with 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 PDR, the definition of
SMEs in different countries in the world and explore how SMEs in Laos PDR
important to economics at present. In addition, thesis explain in details the situation
of SMEs in Lao PDR such as the quantity of size, criterion of enterprises scale and

other numerous datas in order to analyze, assessment on SMEs as well as the
economics growth on the important and the way in development of SMEs.
On the other hand, the author would bring opportunities and challenges for
Lao the way in development of SMEs. The last but not least, providing some
experience learn from China, Thailand and Vietnam country specialized in their
policies on supporting SMEs. It would be good suggested lessons for Lao PDR by
learning from neighboring country so author could be summarized and offered the
best solution even the policies to promote the development of small and medium
enterprises in Lao PDR.


ABSTRACT
Recognizing the importance of small and medium-sized enterprises, most
countries has paid attention to the development of SMEs by enacting policies
specific policies, strategies and plans to support SMEs. So in many countries, SMEs
have a great role and importance. For example, SMEs account for 99.7%. of total
enterprises, 70.2% of total employees and 51.1% of total products in Japan. In
China SMEs account for 99% of total sales and 75% of the labor force
In the economy in Lao PDR now, small and medium-sized enterprises account
for over 90% of the total number of businesses across the country, which is reflected
in the one of the growth engines of the economy as well as a positive contribution in
ensuring social security.
To ensure the implementation of the Socio-Economic Development Strategy
as well as Industrialization and Modernization Strategy toward the year 2020,
especially to achieve the expected of growing economic and eradication of poverty,
the government of Lao PDR emphasis to development of Smes as well as driving
the economic growth.
Meanwhile, the Lao government has defined policies to support SMEs
because SMEs have an important role in enhancing economic development in Laos.
In summary of National Socio-Economic Development Plan accept the expansions

of SMEs that is crucial for reducing poverty and exiting status of undeveloped
country. Although, the development of SMEs contributes to create jobs, add value,
improve innovation and strengthen the ability of domestic entrepreneurs and
economic expansion, but Lao PDR still lack of treatment and information,
difficulties related to transformation of ideas into achievable project, fundamentals
to support domestic market in the country etc. In order to overcome these problems
there is a need of worldwide supportive policies to create positive enterprise climate
which would make possible the development of new businesses and those which are
existing businesses. In this respect, it is very important to analyze and see the
other countries’ experiences. Based on this aspect, this research will present a
theoretical aspect and practical experiences in the development of businesses in
Lao PDR and abroad.


In a theoretical aspect, I am going to present the definitions and classification
of enterprises and also the role and the importance of businesses in the development
of economy by creating new jobs. The practical aspect will be presented by the
experiences of developed businesses in some places, also dynamic and development
of businesses in Lao PDR recently.
From this analysis, I will tell in detail problems and difficulties which
businesses face in Lao PDR during their development, possibilities to overcome
these difficulties and other challenges of creating conditions for consistent
economic development.
I hope this study will be a reference for the relevant sector, local authorities
and all reader which interesting in this field that becomes a lesson and know how to
implement the real sector and its local. I hope it will be served in the plan, program
and project development sector which lead participant of society operate the correct
plan, consistent guidelines and government policies. In the long term, it will be
supported to the government policy to develop the economic, stable, sustainable and
towards achieving the goal of exiting the status of LDC in 2020, stepped up the

medium income in 2030, and achieving Sustainable Development Goals (SDGs) at
the United Nations issued.
Overall, the study shows that despite limitations in development of enterprises. In
particular infrastructure, the economy, trade and service of local enterprises and local
produce also have limited, no resources enough to use to produce, lack of capital and
technology to produce goods. The quality of services of logistics system remains low.
Therefore, I chose the topic "Development of Small and Medium Enterprises in
Lao People's Democratic Republic: Opportunities and Challenges" as my research
topic.


14

CHAPTER 1. INTRODUCTION
1.1 Background

The Lao PDR is a land-locked and mountainous country. The country has a
total area of 236,800 square kilometres1 and borders with the Kingdom of
Cambodia, the People’s Republic of China, the Republic of the Union of Myanmar,
the Kingdom of Thailand and the Socialist Republic of Vietnam. Some 80 percent
of the land area is hilly or mountainous terrain (“midland” or “upland”), including
areas that are remote and difficult to access. Lowland areas account for only 20
percent of the land area, but accommodate over half the country’s population (56
percent). Only one-quarter of the country’s land area is considered cultivable.
Administratively, the country is divided into 17 provinces and Vientiane Capital,
with 145 districts and 8,600 villages. In 2019, the population of Laos is estimated at
7.17 million, which ranks 105th in the world. Economic growth in Lao PDR is
projected to rebound to 6.5 percent in 2019, up from 6.3 percent in 2018. This pick
up is expected to be driven by growth of the construction sector supported by
investments in large infrastructure projects, and a resilient services sector, led by

wholesale and retail trade growth. The Government has remained committed to
fiscal consolidation to contain public debt in the medium term by tightening public
expenditure and improving revenue administration. The medium-term outlook
remains broadly favorable, but subject to downside risks from heightened
uncertainty in the global and domestic environments. Prolonged trade tensions
among major economies could dampen growth prospects in Lao PDR’s major
trading partners, and spillover to the domestic economy through lower trade and
investment, and reduced prices for key export commodities. Additionally,
improving the business environment and reversing the decline in the global ranking
of the ease of doing business, particularly for small and medium-sized enterprises,
could also contribute to greater 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 have been done by: removing price control, abandoning socialist
cooperative farming, unifying the exchange rate system, removing the government’s
monopoly on trade, reducing the number of SOEs, promoting private-firm
establishment, fiscal reform and banking and fianancial reform. The economic
reform in Lao PDR aim to provide better incentives for private sector, and as a
result, to increase the productivity of various industrial sectors, boost domestic
demand, increase exports and foreign direct investment (FDI), and infrastructures
and human resources. Such reforms successfully generated robust economic growth
for the past two decades.
As shown in table 1.1, Lao PDR is one of the fast growing economic in East
Asia and the Pacific. The growth rate of the Lao PDR economy, measured by the
annual growth of real GDP, recorded at 7.62% over the period 2011-2015, which
was almost twice higher than average growth rate of GDP (4.1%) for economies in
the region over the same period. Monetary supply and prices remained stable, while

the low international reserve and high fiscal deficit raised concern over economic
instability (World Bank, 2019, IMF, 2018). The inflation rate had an average rate at
a single digit and the exchange rate was less volatile. Rapid GDP growth and
relatively stable macroeconomic environments improved economic welfare of
Lao people. Real GDP per capital rose by 182% from US$613 in 1998 to US$1,
730 in 2017.
The high fiscal deficit raised the level of public debt from 59% of GDP (US$9
billion) in 2016 to about 60% in 2017 (World Bank, 2017c). 80% of the total public
debt was accounted for by external debts to finance the fiscal deficit. There are three
main channels of externals borrowing: multilateral borrowing, bilateral borrowing
and bond issuance. Among these things, bilateral borrowing made up of the largest
source of total external debt. Bilateral creditors, mainly China, Thailand and Japan,
accounted for 56% of the total external public debt. Multilateral creditors, mainly
the Asian Development Bank and the International Development Association,
accounted for 18% while bond issuance accounted for 15%.


Table 1.1: Economic Performance of Lao PDR in 1990-2017
Macroeconomic Indicator

Population growth (%)

GDP growth (%)
GDP

per

2011-

2006-

2001-

1996-

15

10

05

00

1.41

1.54

2.16

1.58

2.07

2.71

6.89

7.02

7.62

7.98

6.24

6.17

6.28

1,730

1,643

1,452

841

371

302

243

5.3

5.5

6.1

5.9

4.6

4.0

3.4

12.9

10.9

23.9

38.3

20.2

66.0

30.9

0.8

1.5

3.8

5.0

10.3

57.0

15.3

-4.8

-7.1

-1.0

-0.6

-10.4

-17.0

-13.0

113.7

104.5

93.1

101.1

129.9

153.0

160.3

-4.8

-4.6

-3.4

-2.5

-4.1

-4.9

-8.0

8,35

8,18

8,07

9,06

10,16

4,09

727.00

2017

2016

1.47

1990-95

capita (constant

2000
US$)
GDP

per

capita growth

(%)
Broad

money growth

(%)
Inflation of CPI (%)
Trade balance (% of GDP)

External debt stock (% of
GDP)

Budget deficit (% of GDP)

Exchange rate (kip per US$)

Source: World Bank and Asian Development Bank
According to the 2018 triennial review by the Committee for Development Poicy,
United Nations Economic and Social Council, Lao PDR for first time passed two
out of the three graduation criteria for the least development countries (LDC), gross
national income (GNI) per capita and Human Assets Index (HAI). GNI per


capita rose from $1232 in 2015 to $1996 in 2018, which passed the graduation
threshold of $1230. The HAI increased from 60.8 in 2015 to 72.8 in 2018, which
exceeded the graduation threshold of 66. The largest improved element of HAI was
the adult literacy rate, followed by the gross secondary enrolment rario and the
under- five mortality rate. But the Economic Vulnerability Index (EVI), measuring
the country’s resilience to shocks and instability, is still to be under the criteria. EVI
improved from 36.2 in 2015 to 32.7 in 2018, which has not yet passed the
graduation thershold of 32.12. The key improved elements of EVI include the share
of agriculture in GDP, victims of natural disasters and export concentration. The
limited improved elements of EVI include agricultural instability and remoteness
while the lack of improved elements was export instability. Nonetheless, if Lao
PDR can sustains development gains and meets the criteria in 2021.
Lao PDR has focused its SME policy on improving the legal and regulatory
environment to support SME development. It has been developing targeted SME
policies since the early 2000s and benefits from a relatively good institutional
framework and a dedicated fund for SME development. It is increasingly interested
in policies to enhance SME productivity.
SMEs playing the main part of driving economic growth. At the present time,
SMEs in Laos contributed to 4% of GDP and 1 % of employment, so the private

producers and exporters play a very important role in the economic development of
Laos and will be the main sources of driving economic growth in the future as in the
other developing countries. Besides that, SMEs are the largest source of employment
and will be the appropriate instrument of poverty reduction in the near future.
SMEs in Laos were not good enough to compare with ASEAN nations
because the quality of running businesses was not clear to follow up law and term
conditions to build up strength. Furthermore, the main cause of weakness running a
business is no strategic plan due to limited access to the loan, lack of workers’
skills, low quality of infrastructure. Weakness of SMEs can be seen in promoting
entrepreneur to cooperate with foreign investors in order to increase productivity,
market assessment


as well as expanded markets capacity, using modern technologies, and accessibility
to market information, etc.
Therefore, it is necessary to know the role, growth direction and challenges of
smes for social economic development under the socialist market system of Lao
PDR. In addition, this study will explore the ways to development Smes, the recent
research, issues related to development Smes, and summarize policies for
development Smes in Laos from neighboring countries.
1.2 Aim of objectives of the research

The aims of research is providing general assessments of the development of
Smes for Laos PDR through analysis of conditions, definition of SMEs and criteria
for classifying small and medium enterprises, and emphasis on their situation and
importance in the economic development of a country and the creation of jobs for
employment.
It will also focusing on a more detailed analysis business development in Lao
PDR, identifying the problems that businesses face: challenges and opportunities
Beside that, this thesis also intends to bringing policies from some developed

countries, how those countries have been able to support and encourage the
development of small and medium enterprises and offering the most effective
solutions for promoting the development of Smes in Laos PDR.
1.3 Literature review

In the current situation, due to increased integration of production and
exchange goods in regional and international under the globalization and more
business competitiveness which leading the theory of development of Smes should
be adapt with the world change situation. There are several international theories
that explain the growth of SMEs as follows:
• Resources-Based Theory of Competitive Advantage: The Resource-Based

Theory of Competitive Advantage: Implications for Strategy Formulation – Robert
Grant (CMR 1991). The strategic development process starts by looking at the


relative position of a firm in a specific industry. This start by considering the firm’s
environment and then try to assess what strategy is the one that may maximize the
firm’s performance. The Resource-Based (RB) Theory, by contrast, can be seen as
an “inside-out” process of strategy formulation. Starting by looking at what
resources the firm possesses. Next, assessing their potential for value generation and
end up by defining a strategy that will allow them to capture the maximum of value
in a sustainable way.

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
In summary, the resource-based theory stems from the principle that the
strength of firm’s competitive advantage in their internal resources, as opposed to
their positioning in the external environment. This theory as a basis that resources,

capabilities and core competencies are essential for a firm’s competitive advantage.
Therefore, adequate resource support and policies to create capability are critical for
SMEs’ growth as they are small in size and need assistance. Resource based theory


provides a framework to explain how business can identify suitable measures to
overcome growth obstacles, have better access to technology resources, manpower
resources, financial resources, natural, and infrastructure, and access to the market
(Robert Grant, 1991).
• Survival based theory: This theory was also introduced in the field of

economics. Researchers such as Schumpeter (1934), Alchian (1950), Harrod (1939)
and Marshall (1949) were among the first who introduced the idea of evolutionary
thinking and natural selection into the concept of economics. Hence it is being used
to analyzed how firms thrive and compete in industries, and also to explain changes
in economy (Nelson & Winter, 1982). The concept of survival-based theory or
some might call it as “survival of the fittest’ theory was originally developed by
Herbert Spencer (Miesing & Preble, 1985). It was him who synthesized Darwin’s
theory of evolution and natural selection with Adam Smith’s invisible hands to
come up with the idea of Social Darwinism. This theory emphasized on the notion
that by following the principle of nature, only the best and the fittest of competitors
will win, which in the end would lead to the improvement of the social community
as a whole. Social Darwinism assumed it is normal for the competition to behave in
hedonistic ways to produce the fittest business, who survived and prospered by
successfully adapting to its environment or become the most efficient and economic
producer of all. The survival-based view in strategic management emphasized on
the assumptions that in order to survive, organizations has to deploy strategies that
should be focused on running very efficient operations and can respond rapidly to
the changing of competitive environment (Khairuddin, 2005), since the one that
survive is the one that is the fittest and most able to adapt to the environment.

However, the primary objective of run a company to make the organization run
efficiently in order to better adapt to the environment, improving its profitability
and to achieve the ultimate goal of surviving the competitive market in which it
operates. In brief, the survival-base theory is the strategy that firm uses to avoid
being exterminated by competitors. One process- sensing, intuition, feeling,
thinking- must be developed by a business manager in order to succeed in


innovativeness and high intellectual and practical capacity to run his company with
bold jump and should be ready to accept the uncertainty (Gibcus, 2003). Basically,
the underpinning of survival strategy is that organization needs to continuously
adapt to its competitive environment in order to survive.
• The Small is Beautiful theory: The Small is Beautiful theory is a classic

theory advances the promotion of small-scale economic markets and systems, cooperatives and greater decentralization (Schumacher, 1973). Schumacher argues that
the modern economy is unsustainable. Natural resources (like fossil fuels), are
treated as expendable income, when in fact they should be treated as capital, since
they are not renewable, and thus subject to eventual depletion. He further argues
that nature's resistance to pollution is limited as well. He concludes that government
effort must be concentrated on sustainable development, because relatively minor
improvements, for example, technology transfer to Third World countries, will not
solve the underlying problem of an unsustainable economy. Schumacher's
philosophy is one of "enoughness", appreciating both human needs and limitations,
and appropriate use of technology. It grew out of his study of village-based
economics and education as the greatest resource, and discusses Land, Industry,
Nuclear Energy and the human impact of Technology. In a similar vein, Paulson
(1980) found that the relative size of the small retail firm is associated with
horizontal differentiation and levels of complexity. Also, Fullerton (2008)
appreciated the observation of Schumacher‟s lead in his best-selling book, Small is
Beautiful-Economic as if People Mattered, with the opinion that the global system

is broken not because of the credit crisis; it is broken because it is predicated on
perpetual, resources driven with no recognition of scale limitation. It points out very
skilfully what is exactly wrong with the modern industrial society, and offers an
alternative; appropriate technology, respect for human values, and especially
bringing things back to the small scale. The theory of economic development–place
of small business argues that government has begun to initiate new policies and
supports for SMEs growth and development that later turn them into large
enterprises following the agitation and needs for SMEs involvement in an economy.
The alternative theoretical perspective of Arrow (1962) contends that


smaller businesses are more productive. The author argued that in the presence of
competition (such as when a number of smaller firms are competing with each
other), the monopolist tends to lose out in innovating, since the rents extracted by
maintaining the monopoly power exceeds the benefits of the lower prices brought
about by innovation. However, smaller firms will be able to benefit by innovating
under these conditions, because the lower prices and costs resulting from innovation
leads to competitive advantages in the marketplace. To sum up, the Small Business
Beautiful theory describes the resilience of small businesses, especially the
restructuring of production to the current changing world economy; In addition,
small businesses contribute to the price diversification and quality of their products
to society.
• The Ownership Theory: The ownership theory explains that the ownership

structure whether concentrated or diffused ought to be influenced by the profitmaximizing interests. At the level of small and medium scale enterprises, the skills
of the owner manager are critical to the long-term success and survival of the firm
while the role of the capitalist is usually diffused at the corporate level for large
companies. Owner’s manager is the enterprise main strategist and decision maker,
developing the vision, mission and strategies, and also implementing them.
However, the role of the owner-manager and his attitude towards strategic issues are

therefore often critical for implementation of strategy. Likewise, the personal goals,
traits and strategic orientation will have significant impact on 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

In the BTD strategy, firms seek to place their developing expertise in a broad
context. One way to look at the concept is to imagine a capital ‘T’. Here, depth is
represented by the stem of the ‘T’, and breadth by the horizontal arrows. BTD
means breadth in addition to depth. Developing depth, be it in a technical/research
area, is essential to business success. The last thing that SMEs want is to be ‘a mile
wide and an inch depth’!
2) Transformation

In transformation strategy, firms think ahead, and to some degree act ahead of
the stage they are currently occupying. They not only demonstrate their willingness
to assume the size/market they are seeking, but also their readiness to do so. Just as
other SMEs began thinking about expansion, they need to begin doing some of the
things MNCs do while they are still a SME firm
3) Diversify

In the diversify strategy, firms expand their product range and production
capabilities based on their core competence.


Breadth-on-Top-of-Depth

Transformation

•

Diversify

•

Identify core competence

•

Identify product platform

•

Choose a market

•

Identify niche

•

Increasing

•
•

Establish brand name

•

Increasing production

•

Expand

•

Identify

Acquire

•

research

Build

on

core

technology/competence

capability
potential expansion
• Conduct R & D on the

product
market

and

customer base

chosen path
needed technology/ skill

•
•

Carrying out market

Shift in customer base

Managing performance

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

1.4 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?


• What are the supportive Lao’s SMEs policies learned from developed

countries and some counties in region?
1.5 Research Methodology

This section sets out the qualitative methodology that was used to achieve the
objective of the study. This thesis research uses methods of analysis, synthesis and
comparison the statistical data collected from secondary sources including
published and unpublished data collected from different 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 and a number of other sources mentioned in
the content of the article. Furthermore, common sources of secondary data for social
science include the censuses, organizational report. Especially, the data have been
collected from economic survey 2013, Enterprise survey by the Lao Statistics
Bureau, and SMEs surveyed by GIZ, 2013.
1.6 The structure of the thesis

This thesis consist of four chapters as follow:

Chapter 1 Introduction
Chapter 2 Situation of Small and Medium Enterprise in Lao PDR
Chapter 3 Opportunities and challenges on development Small and Medium
Enterprise in Lao PDR
Chapter 4 Policies of regional countries and recommendation for Lao PDR
1.7 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...