The Integration of Laos into the International Economy: Global Production Sharing, Landlockedness, and Trade Costs Buavanh Vilavong Crawford School of Public Policy Australian National University A thesis submitted for the degree of Doctor of Philosophy at the Australian National University March 2018 Declaration I declare that this is my own original work except where otherwise indicated or acknowledged in the thesis. _____________________ Buavanh Vilavong March 2018 i Acknowledgments This thesis has not been completed without support and encouragement from many people. I am intellectually indebted to my primary supervisor, Dr Shiro Armstrong, for his invaluable guidance, helpful discussions, and constructive suggestions throughout the course of my PhD journey. This has not only improved my research ability, but his detailed reviews have taught me to go more deeply into the topics. I wish to express my exceptional gratitude to Professor Peter Drysdale and Professor Prema-Chandra Athukorala, who provided insightful guidance and comments that contributed significantly to refining and improving the quality of the thesis. I feel very fortunate to have had this combination in the supervisory panel for my PhD studies. I benefited from valuable comments and suggestions on my seminar presentations and chapter drafts, including by Professor Hal Hill, Professor Peter Warr, Professor Kaliappa Kalirajan, Professor Raghbendra Jha, Associate Professor Blane Lewis, Adjunct Associate Professor Ross McLeod, Dr Paul Burke, Dr Arianto Patunru, and Dr Keith Barney. Overall, the Crawford School of Public Policy provided me with an inspiring intellectual environment, which contributed to the success of my research in a substantial way. I profited greatly from helpful discussions with my PhD colleagues during my seminars and other occasions, including Paul Wyrwoll, Anna Falentina, Deasy Damayanti Putri Pane, Deni Friawan, Moh Widodo, and Barli Suryanta. Special gratitude is also owed to my office mates Daulet Taimagambet, Paul Hubbard, Hoai Bao Nguyen, Yashodha Senadheera Pathirannehelage, and Wuttisak Pathomsart from discussions on various occasions and good friendship. I also benefited from discussions with many people outside the ANU. Thanks to Dr Mana Southichack, Director of Lao Intergro, Dr Sitthiroth Rasphone of the National Economic Research Institute, Phouthavanh Nanthavong, Deputy Director General of the Cabinet Office in the Ministry of Industry and Commerce, Dr Bounthanongsack Chanthalath, Deputy Director General of the Asia and Pacific Department in the Ministry of Foreign Affairs, Souknilanh Keola, Institute of Developing Economies of Japan External Trade Organization, and Simon Hess, Enhanced Integrated Framework Executive Secretariat at the World Trade Organization, for their valuable views on diverse aspects of the research. I am extremely grateful to the Australian Government for awarding me the Australian Awards Scholarship to complete my PhD program. I appreciate the funding from the ii Australia Awards Scholarship and travel grants from the ANU Vice-Chancellor’s Office to support my attendance at various conferences at the United Nations Economic and Social Commission for Asia and the Pacific in Bangkok, the University of South Australia, National Taiwan University, the University of Nottingham, and in my home country Laos. My thanks also go to the Crawford School of Public Policy for financing part of my fieldwork in Laos. I owe a great deal to my bosses in the Ministry of Industry and Commerce: Minister Khemmani Pholsena and Director General Banesaty Thephavong for granting me study leave. My thanks also go to the Lao Embassy to Canberra and many staff members for making me feel at home. I appreciate very much the friendship forged with Lao students during my time in Canberra, in particular Vanaxay Soukhaseum, Sulathin Thiladej, Isala Souvannasing, and Kanya Souksakoun. Thanks also go to those who provided valuable support during my fieldwork in Vientiane and Savannakhet, Laos, including Souliphone Kongxengchith of the Industry Department, Phine Keomixay of the Lao Garment Industry Association, Phanomkone Dararatsmy of Savannakhet Special Economic Zone, and Boungnong Sounthone of Champasack Special Economic Zone, along with Thongkhanh Vongphachanh, Thongthip Phannoulath, and Bounleuth Serichampa of Vientiane Industry and Trade Area Park. I especially appreciate Dr Megan Poore for her time and efforts in reviewing and providing detailed feedback on the various drafts of my thesis chapters. I also wish to thank Karin Hosking for editing the thesis. Most importantly, none of my achievements would have been possible without the support of my family, especially my lovely wife Latthana and daughter Vibhada, who gave me emotional support and encouragement that helped me to overcome any difficulties during that period. I would like to thank my mother Khamphone and relatives too for their support. This PhD expedition has been long and tiring, yet extremely rewarding. Not only I have grown intellectually but more essentially I have learned a great lesson about academic life. iii 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. iv Table of Contents Declaration ................................................................................................................... i Acknowledgments ........................................................................................................ ii Abstract ....................................................................................................................... iv Table of Contents ......................................................................................................... v List of Tables .............................................................................................................. ix List of Figures ............................................................................................................. x List of Abbreviations ................................................................................................... xi 1 Laos’ Trade and Development Challenges............................................................... 1 1.1 Export diversification and global production sharing .................................... 2 1.2 The costs of being landlocked .......................................................................... 3 1.3 Research questions ........................................................................................... 5 1.4 Structure and overview .................................................................................... 6 2 Understanding Global Production Sharing ............................................................. 9 2.1 Introduction ..................................................................................................... 9 2.2 Global production sharing